[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
HOUSING FINANCE--WHAT SHOULD THE
NEW SYSTEM BE ABLE TO DO?:
PART II--GOVERNMENT AND
STAKEHOLDER PERSPECTIVES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
APRIL 14, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-121
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57-739 WASHINGTON : 2010
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
April 14, 2010............................................... 1
Appendix:
April 14, 2010............................................... 59
WITNESSES
Wednesday, April 14, 2010
Crowley, Sheila, President, National Low Income Housing Coalition 36
Donovan, Hon. Shaun, Secretary, U.S. Department of Housing and
Urban Development.............................................. 6
Gleason, Thomas, Executive Director, MassHousing................. 41
Hopkins, Jack E., President and Chief Executive Officer, CorTrust
Bank, N.A., on behalf of the Independent Community Bankers of
America........................................................ 39
Judson, Rick, Third Vice President, National Association of Home
Builders (NAHB)................................................ 44
Pollock, Alex J., Resident Fellow, American Enterprise Institute. 37
Randazzo, Anthony, Director, Economic Research, Reason Foundation 42
Reed, Anthony T., Executive Vice President, Capital Markets,
SunTrust Mortgage, Incorporated, on behalf of the Financial
Services Roundtable............................................ 34
APPENDIX
Prepared statements:
Kanjorski, Hon. Paul E....................................... 60
Crowley, Sheila.............................................. 61
Donovan, Hon. Shaun.......................................... 67
Gleason, Thomas.............................................. 80
Hopkins, Jack E.............................................. 84
Judson, Rick................................................. 92
Pollock, Alex J.............................................. 100
Randazzo, Anthony............................................ 105
Reed, Anthony T.............................................. 114
Additional Material Submitted for the Record
Written statement of the Manufactured Housing Institute.......... 131
Written statement of the National Association of Local Housing
Finance Agencies, the National Association of Counties, the
National Association for County Community and Economic
Development, the U.S. Conference of Mayors, and the National
Community Development Association.............................. 137
Joint Treasury and HUD press release entitled, ``Obama
Administration Seeks Public Input on Reform of the Housing
Finance System,'' dated April 14, 2010......................... 143
HOUSING FINANCE--WHAT SHOULD THE
NEW SYSTEM BE ABLE TO DO?:
PART II--GOVERNMENT AND
STAKEHOLDER PERSPECTIVES
----------
Wednesday, April 14, 2010
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 9:35 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Velazquez, Watt, Moore of Kansas, Hinojosa, Baca, Lynch, Miller
of North Carolina, Green, Cleaver, Klein, Perlmutter, Donnelly,
Foster, Carson, Adler, Driehaus, Grayson, Himes, Maffei;
Bachus, Castle, Royce, Manzullo, Biggert, Hensarling, Garrett,
Bachmann, Marchant, Posey, Jenkins, and Lance.
The Chairman. The hearing will come to order. This is the
second hearing we are having on the restructuring of the
housing finance system, and I stress that because it is not
just Fannie Mae and Freddie Mac; to do this thoughtfully, we
want to look at the interactivity and interoperability of
Fannie Mae, Freddie Mac, the Federal Home Loan Bank System, the
FHA and Ginnie Mae, and the private sector.
I think there's general agreement to the extent that we can
have the private sector returned to a more vigorous role. We're
all for it. And I will begin. We have a Cabinet officer, so we
have 8 minutes on each side, and I will start off with 4
minutes for myself, so put me to 4 minutes. Thank you.
The consensus is very broad that the existing system of
housing finance has to be changed. The question to me that is
at the heart of it is, what do we put in place of the current
system? That means legislation, and I hope we can proceed to
start drafting that very soon. We had the Secretary of the
Treasury testify and now we have the Secretary of HUD.
Originally, our plan was to have them both together, but I
think this has worked out well.
The Secretary of HUD is always accommodating to us. Having
a second hearing is important, because it also gives us a
chance to hear from a wide range of people. We will have had in
both hearings people from all aspects of the housing field from
the producer side, the Realtors and the homebuilders, and
mortgage vendors as well as the bankers. We will have had
advocates for low-income housing. We will have had academic
commenters on this and all those are relevant.
And it might be contentious to replace the current system,
not simply abolish it, and then figure out what is the mix that
goes beyond that. There will be some public sector entities, I
believe, and some private sector entities. I think one thing
that is clear is that the mix of public and private shareholder
corporations with a public purpose that was embodied in the
Fannie Mae and Freddie Mac model did not work in the end, and
tension between those two contributed to the problem. I
certainly am convinced of that, going forward.
We shouldn't have that kind of a hybrid situation, and,
obviously, there's a lot to be done by the private sector. That
may mean nothing more than for the Federal Government to get
out of the way, but there are questions that have been raised
by Realtors, by homebuilders, by mortgage housers, and others
about whether or not some sort of backup authority is there. We
want to make clear that the Federal Home Loan Banks, which I
think have worked very well, are also squared away in this.
So the task of the committee is to take the lead in
figuring out what the new mix of private and public entities
should be in housing finance, and I think there is agreement
that we need both. We have the FHA. We have Ginnie Mae. We have
the Home Loan Banks. One thing I think is clear now is that mix
should consist of separate institutions, that the hybrid,
private shareholder corporation with a public mission
contributed to this problem and we need to untangle that.
I am pleased to see that the Administration has been
responding to our requests that we get some movement here, and
I know the Secretary will be talking about the statement that
was released today from the Departments of Treasury and HUD,
asking for comments. There were questions that they put out,
and I'm going to ask unanimous consent to put this into the
record. I believe the statement has been distributed. If the
statement has not been distributed to all members, it should
be, and I would ask the staff to distribute it.
So I, at this point, will reserve the minute and 10 seconds
left out of the 5 minutes, and I will recognize the ranking
member for 3 minutes, according to his formulation.
Mr. Bachus. Thank you, Chairman Frank. This is an important
hearing on the future of housing finance and the Federal
Government's role in that. It has been nearly a year-and-a-half
since the bailout of Fannie and Freddie, and the Administration
has just released today what can only be considered as their
plan for housing finance. The chairman referred to it, and that
plan is basically to poll the American people to ask them what
they want to do about housing finance and the GSEs. So they're
simply asking seven questions.
I don't think we need polls. We need leadership. The press
release accompanying this list of questions says their goal is
to be transparent. What's abundantly clear is that the Obama
Administration has no real plan for dealing with housing
finance or the GSEs. During the last year-and-a-half,
Republicans, on the other hand, have introduced a number of
concrete measures to immediately address the failures of Fannie
and Freddie, and have issued a strong set of principles and
proposed reforms to protect taxpayers from further losses and
future bailouts, and to build a stable housing finance system.
One goal I believe we can all agree on is to start with re-
establishing a housing finance market characterized by long-
term stability and to which private capital is a primary source
for mortgage financing. It also means restoring liquidity to
the secondary market for residential mortgages and preventing
significant disruptions to the financial market. We must
encourage innovation and diversity in housing finance that
provides more choices for consumers, not less. Just as
importantly, reform must protect taxpayers from future losses
and future bailouts, and require that taxpayers be made whole
on outstanding loans, guarantees, and capital infusions made by
the government.
Mr. Chairman, it's long since past-due to deal with these
bailout companies, which were the center of the mortgage market
meltdown and cause a financial crisis. It's inexplicable that
the Administration and the Majority in this House have no plans
to deal with Fannie and Freddie and have failed to meet their
self-imposed deadlines to come up with any sort of response
other than to issue seven questions.
So far, the Administration's answer has been to lift the
caps on the bailout of the GSEs, guarantee the GSE's debt, pay
the executives multi-million-dollar salaries, and hide the
cost. So far, the American people have contributed more than
$127 billion to bail out Fannie and Freddie on at least 80
percent of these companies, and have explicitly guaranteed more
than $1.7 trillion of their debt and more than $5 trillion in
their mortgages.
The Chairman. The gentleman's time has expired. If you want
to give yourself more time, it would come out of the other
members' time.
Mr. Bachus. No, that's fine.
The Chairman. The gentleman from California is recognized
for a minute and a quarter, a minute and 15 seconds; is that
right?
Mr. Royce. A minute and a quarter.
The Chairman. Yes, a minute and 15 seconds.
Mr. Royce. Thank you, Mr. Chairman.
The Chairman. 25 means 15--excuse me. I'm doing my math
here--a minute and 15 seconds.
Mr. Royce. Okay. Mr. Chairman, I think going forward, the
mortgage finance system should be based overwhelmingly on
private investment. If it is the will of Congress to continue
subsidizing affordable housing, which I think would be a
mistake, it should be done through direct Federal
appropriations. It should not be done through these
institutions.
I believe that, because I believe that government
intervention was a major contributor to the mortgage crisis and
that Fannie and Freddie were primary culprits in this. And I
think that part of the problem, already, we see these calls for
releasing Fannie and Freddie back into the market as quasi-
private institutions. Part of the problem is that when the
government creates a duopoly like this, it has enormous power,
and it has power to come into the market, but also power to
lobby Congress.
So when Fannie and Freddie did not want to be regulated
with respect to overleverage, what did they do? They came to
Congress and they quashed that legislation, which the Federal
Reserve had requested to allow the Feds to deleverage these
portfolios. They were leveraged a hundred to one, a trillion
dollars was lost.
The Chairman. The gentleman's time has expired. The
gentleman from Pennsylvania is recognized for 3 minutes.
Mr. Kanjorski. Mr. Chairman, we meet today to continue our
discussions about the functions which the new housing finance
systems should perform. I appreciate your efforts to focus the
Financial services Committee on this complex set of issues and
share your interest in these important matters.
Today's hearing is just one of many conversations with
stakeholders that we will need to have before determining what
legislative actions we should take to achieve the end goal of
re-establishing a healthy, stable housing finance system. I
approach these debates with an open mind and no preconceived
notion of what the solution ought to be. Through careful
deliberation, however, I do believe that we can ultimately find
the right policy approach.
In late 2008, then-Secretary Paulson placed Fannie Mae and
Freddie Mac under conservatorship. Since then, the Treasury
Department is committed to the purchase of more than $125
billion in preferred stock of the Enterprises. Government
agencies have also purchased in excess of $1.3 trillion in
mortgage-backed securities. All of these actions have preserved
the availability of housing credit through these difficult
times. The government, however, has further scaled back its
commitments in our mortgage market since our hearing last month
on this same topic. Specifically, on March 31st, the Federal
Reserve ended the program to purchase mortgage-backed
securities.
As our markets recover from this financial crisis, we must
return to the private sector those functions that properly
belong with the private sector. Although we must continue to
carefully monitor what happens to mortgage rates and investor
demand, I am, so far, pleased with the results of this
separation.
In thinking about where we should go, we must also consider
where we have been. In good times and in bad, Fannie Mae and
Freddie Mac have historically proven vital to increasing
liquidity and improving the distribution of capital available
in home markets. Together, these institutions have helped tens
of millions of middle-class families share in the American
dream of owning their own homes. I want the new housing finance
system to continue to achieve these goals.
While I look forward to hearing the testimony of all the
participants today, I am especially eager to learn the thoughts
of the Secretary of HUD. His thoughts would help to guide the
Capital Markets Subcommittee, as we continue with the
explorations begun last June regarding the housing finance
system. In our forthcoming hearings, I anticipate that we will
explore specific questions like the need for mortgage
insurance, the housing finance systems of other countries, and
the structure of guaranteed fees. In sum, Mr. Chairman, these
important matters are ripe for debate and represent the next
big mountain that our committee must climb.
The Chairman. The gentleman's time has expired. The
gentleman from Texas, Mr. Hensarling, is recognized for 1\1/2\
minutes.
Mr. Hensarling. The principal reason we have experienced
economic turmoil is Federal policy that has incented, mandated,
and cajoled financial institutions to loan money to individuals
to buy homes that they could not afford to keep. By most
estimates, \2/3\ of all the bad mortgages in our system today
were either bought by government agencies or required by
government regulations with the CRA, FHA, HUD best practices,
and perhaps, worst of all, the GSE's affordable housing
mandate, all of which combined to wreak havoc in our
residential housing market.
So far, the American citizens can think of 127 billion
reasons to terminate the GSE's government-sanctioned monopoly
status. Clearly, I'm talking about their cost to the taxpayer.
I see no economic, practical historical, compassionate or
reasonable rationale why our housing markets need Government-
Sponsored Enterprises. As they further monopolize our housing
markets and hemorrhage taxpayer money, the Administration wants
to take at least another year or so to monitor them. The Senate
implicitly exempts them from their financial markets'
regulatory bill, and the House explicitly exempts them. Enough
is enough.
That's why I have introduced H.R. 4889, the GSE Bailout
Elimination and Taxpayer Protection Act, that over 5 years
would phase-out their monopoly status, give them a level
playing field, provide market competition, market discipline,
and market innovation. And I would encourage the consideration
of this committee. I yield back the balance of my time.
The Chairman. The gentleman from New Jersey is recognized
for 1\1/2\ minutes.
Mr. Garrett. I thank the chairman for holding this hearing.
I thank the Secretary for your testimony today. I wish I could
also say I would like to thank both of you for actually
presenting a plan to this committee that would actually reform
the housing finance system and end the taxpayer-funded bailouts
of Fannie and Freddie, but I can't do that, because they have
not presented that plan.
After the trillions of dollars that Congress and the
Federal Reserve has committed to the credit crisis to bail out
basically large financial institutions, most Americans who are
watching would probably think that Congress would prioritize
things, and prioritize things by fixing the most significant
problems first. In this case, that would be Fannie and Freddie,
the GSEs, which have cost the taxpayers the most money, and, as
most experts would agree, are the central cause of this crisis.
Fortunately, that's not the case in this instance. The
price tag of bailing out Fannie and Freddie is currently close
to $400 billion and counting, with no limit. This is more than
all of the other bailouts combined, and, yet, this
Administration and this Majority have remained silent and has
not even proposed a plan to end the ongoing bailouts and reform
the housing finance system.
Worse, and some would say, they are using these two
companies as a slush fund, if you will, to support an existing
failed housing policy. Mr. Secretary, this cannot stand. This
is unacceptable. We must end the bailout of these entities
right now. And with that, I yield back.
The Chairman. I will yield myself my one remaining minute
and 15 seconds, and then the gentleman from Alabama has 45
seconds left. And I want to reiterate that we agree that the
system needs to be changed.
Where we have a disagreement between our two sides is that
I agree with the Realtors, the homebuilders, the mortgage
lenders, the low-income housing advocates, and a wide range of
people who are on all sides of the housing industry that simply
ending Fannie and Freddie with no idea of the replacement would
do damage at a time of economic difficulty. We are in the midst
of recovering from a very deep recession, but we are clearly
not fully out of it and have much to do, and the housing sector
is a part of it.
I have read the Republican plan. I read the plan that they
submitted in the bill that we did on financial reform, although
we will note in their recommittal motion, which was the last
vote that they offered in the Financial Reform bill, the
proposed to kill their proposal. That is, they offered a
recommittal motion that if it had passed would have led to no
action in this area. So they have been on again, off again.
I also regret they didn't join us in trying to limit the
salaries, so the key question then is not whether or not we
abolish them, but whether we at the same time work to put
something in their place.
The gentleman from Alabama is recognized for 45 seconds.
Mr. Bachus. Mr. Chairman, it is time to quit asking
questions and introduce legislation. I yield the balance of my
time to Mr. Royce.
Mr. Royce. Well, the other point I would just like to make
is that I am hoping that we learn something, and my worry is
that we erased market discipline in this equation by this
government backing or implied government backing of Fannie and
Freddie. And unless we figure out a strategy that brings the
market back, I don't know how we avoid a situation in which
Fannie and Freddie will again grow into a powerful duopoly,
come up here, lobby Congress to get out from under the
regulators and avoid the kind of regulation of the portfolios
that we saw. Thank you.
The Chairman. Mr. Secretary. And let me say we have the
Secretary here. We do not hold Cabinet officers generally to a
strict 5 minutes. We hope you talk faster than the Chairman of
the Federal Reserve generally talks, but we won't be cutting
you off at 5 minutes.
STATEMENT OF THE HONORABLE SHAUN DONOVAN, SECRETARY, U.S.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Secretary Donovan. I will endeavor to do so, Mr. Chairman.
Thank you.
Mr. Chairman, Ranking Member Bachus, and members of the
committee, thank you for inviting me to talk about Fannie Mae
and Freddie Mac, together often referred to as the GSEs and the
Obama Administration's efforts to reform our housing finance
system.
As Secretary Geithner reviewed during his testimony before
this committee last month, there were many contributing factors
that led to the housing crisis of the past few years. I will
not revisit those factors in detail, but suffice it to say that
there is plenty of blame to go around from Wall Street to
government to consumers and, of course, the GSEs.
The Obama Administration's comprehensive response to the
crisis has helped restore stability to the housing market,
easing the very painful fall in home prices and contributing to
our broader economic recovery. According to the Federal Reserve
Board, stabilizing home prices and lower financing costs
nationwide have supported the recovery of homeowner wealth.
Homeowner equity started to grow again in the second quarter of
2009, and to date has increased over a trillion dollars or
$13,000 on average for the Nation's nearly 78 million
homeowners.
Over 4 million borrowers have refinanced their homes in the
past 15 months, saving an average of $1,800 per year on housing
costs, pumping an additional $7 billion annually into local
economies and businesses, and generating additional revenues
for our Nation's cities, suburbs, and rural communities. And,
just last month, our economy started creating jobs again--
162,000 of them.
At the end of 2009, quarterly economic growth increased at
the fastest pace in 6 years. For all this progress, however, it
is important to recognize that the housing recovery remains
fragile. And, while the current status of Fannie Mae and
Freddie Mac in conservatorship is a temporary one, they are
playing a critical role in these still uncertain times. That is
why as we think through the next steps in reforming our housing
finance system, we must proceed carefully to avoid undermining
the stability that has been achieved.
As we consider housing finance reform and the role of the
GSEs, I would like to speak today in more depth on three
particular subjects. The first is the importance of maintaining
equal access to housing credit. The second is facilitating a
responsible, sustainable form of homeownership that involves
safe, easily understood products. And the third is ensuring
that reform creates a sustainable and stable market for rental
housing, which is directly related to and influenced by the
single family ownership market.
America has a long tradition of leveraging capital markets
to make long run investments that produce significant benefits.
In recent decades, we witnessed a great democratization of
credit. This broadening of access allowed many families who had
previously been shut out to make investments in homeownership,
and we subsequently witnessed the dramatic growth in ownership
among underserved groups. Though the current crisis reminds us
that great care is needed to promote homeownership that is
sustainable over the long term, the Obama Administration will
remain committed to providing access to underserved groups so
that they can make long-term, sustainable investments in
housing.
Responsible homeownership can be a critical foundation upon
which American families build wealth and stability. At the same
time, we must also make sure that our commitment to access does
not encourage the taking of imprudent risks. Consumer behavior
was a contributing factor to the housing crisis, and we have
seen the devastation that such risk-taking has inflicted upon
families and communities across the country.
Many borrowers simply used their homes like ATM machines
without sufficiently considering the risk involved. Ultimately,
we need a housing finance system that will help us once again
see housing, not simply as a tool for investment returns, but
as the platform for stability that it has been throughout our
history. That will mean that for some, homeownership will not
be the right answer. As you have noted on numerous occasions
yourself, Mr. Chairman, while we continue to promote affordable
homeownership, for many Americans, renting will continue to be
the only or the preferred option.
Therefore, the next generation housing finance system must
also facilitate a healthy rental market as part of a
comprehensive, balanced national housing policy that supports
responsible homeownership and affordable rental housing alike.
That requires ensuring that those renting have a real choice,
meaning affordable housing that is close to schools, work, and
amenities. A well-functioning rental market also will be
particularly important in the immediate future as rental
markets will absorb a larger than usual number of families who
owned homes during the bubble, but will be renting in the near
future.
We thus cannot consider reforms to the ownership market
without also factoring in the effects on rental markets. Those
families with the fewest assets and resources, namely those who
rely on the rental market, or are tenuously attached to
homeownership, would potentially be exposed to greater
volatility and turmoil absent a stable rental market
infrastructure. We therefore must be careful to promote
policies that provide countercyclical support for rental
markets as we have for single family ownership markets. All of
these issues point to the need for fundamental, but careful
reform. Transition from where we are today to where need to be,
however, presents several important challenges.
The Administration is committed to supporting the continued
activities of the GSEs in ensuring they have sufficient capital
to honor any guarantees issued now or in the future and the
ability to meet any of their debt obligations. Given the
nascent state of our recovery, the Administration will take
care not to pursue policies or reforms that would threaten to
disrupt the function or liquidity of these securities, or the
ability of the GSEs to honor these obligations.
We recognize the central importance the mortgage finance
market plays in the broader capital markets and we will ensure
that this market is not allowed to be disrupted. Maintaining
the GSEs' current securitization operational flow, TBA
liquidity, secondary MBS market liquidity, and their ability to
issue corporate debt securities during the transition will
remain key priorities for the Administration. In his testimony
before the committee last month, Secretary Geithner announced
that we would be releasing a series of questions to solicit the
public's thoughts on housing finance reform. In keeping with
that commitment, HUD and the Treasury have today released a
copy of these questions, and they will be submitted tomorrow to
the Federal Register to be published for formal public comment.
The questions are as follows:
``How should Federal housing finance objectives be
prioritized in the context of the broader objectives of housing
policy? What role should the Federal Government play in
supporting a stable, well-functioning housing finance system,
and what risks, if any, should the Federal Government bear in
meeting its housing finance objectives? Should the government
approach differ across different segments of the market, and if
so how? How should the current organization of the housing
finance system be improved?
How should the housing finance system support sound market
practices? What is the best way for the housing finance system
to help ensure consumers are protected from unfair, abusive or
deceptive practices?'' And, finally: ``Do housing finance
systems in other countries offer insights that can help inform
U.S. reform choices?'' These questions will help us consider
what functions should be served by different factors in the
system, the structure or structures that they should take, how
they should fit within both our broader housing finance system
and housing policy goals, and the best steps to get from where
we are today to a stronger system.
The public's input will be invaluable as we think through
these difficult and complex issues, so we will take that input
in two forms. First, we will ask the public to submit written
responses to the questions. The Federal Register notice will
contain guidance on where and when the public should submit
their responses. Second, we intend to hold a series of public
forums across the country over the summer, and follow this year
to give the public an additional opportunity to share with us
their thoughts on reform.
Together, these opportunities for input will give the
public the chance to deepen our understanding of the issues and
shape our response as we move forward over the coming year.
This is both in keeping with the Administration's commitment to
openness and transparency and the careful, deliberative way
that we have approached our housing recovery today. We are
committed to ensuring that all the stakeholders around GSE
reform are heard from.
And, so, Mr. Chairman, Ranking Member Bachus, and members
of the committee, the Obama Administration is committed to
building a next generation system of housing finance that meets
the diverse housing needs our country requires while building
on the nascent housing recovery we have established to date:
protecting the taxpayer, and above all, ensuring we prevent a
crisis of this magnitude from ever happening again. Given the
challenges we still face, we must take a responsible approach
to housing finance reform in which transition is not marked by
hasty changes that could threaten another breakdown in the
market, but by care and deliberation as we work with Congress
to develop proposals, to support the institutional structure
for the next generation of housing finance.
In the months to come, I look forward to working with you,
Mr. Chairman and the members of the committee, to make this
charge a reality. Thank you.
[The prepared statement of Secretary Donovan can be found
on page 67 of the appendix.]
The Chairman. Mr. Secretary, as I said, I believe there was
agreement that we should abolish Fannie Mae and Freddie Mac,
and there was reference only to their lobbying power. I would
refer people to Secretary Paulson's book in which he describes
how he became Secretary of the Treasury in 2006. And he then
describes the relationship he had with this committee in
particular from then on, in which Fannie Mae and Freddie Mac
were not successful in efforts to slow things down.
We worked with him, as he noted, and he points out that at
the point when he was determined that they had to be put into
conservatorship because of the serious problems, that he
anticipated they might resist, and he notes that he checked
with Members of Congress, including me, and was reassured that
we would be fully supportive of his efforts. So from the time
he became Secretary, he was in charge of this for the Bush
Administration and as he notes, received pitiful cooperation
other than what he was looking for, and so I think people here
are projecting to an earlier period when they conjure up this
image of an irresistible Fannie Mae and Freddie Mac.
They had a pretty good run for a while, but as Secretary
Paulson points out, in 2006, when he became Secretary, because
of the unhappy consequences the Administration felt it
encountered in the Congress at the time, he said he wanted to
approach the Congress to reengage on this reform effort and
most of the White House advisors said no, but he, at the advice
of Karl Rove, went to the President. Mr. Rove told him that the
President would listen to him. And he went to the President,
got the mandate to make the changes, and was unable, he said,
to make some very real progress that came too late. He was then
obviously--it had been done years earlier.
But from the time he became the Secretary, he was able to
move fairly quickly, so I didn't want to put that one I think
to rest. The question I would have for you is this, and you
talked about it. If we were to abolish Fannie Mae and Freddie
Mac and not do anything else, not legislate for the structure
going forward, what would be the result, in your judgment?
Secretary Donovan. Let me address that question in two
parts, Mr. Chairman. First of all, if we were to do that
quickly and the long run effects of that to the market--I can't
emphasize this enough: I believe, given our strong actions
around housing, we have made significant process, and I have
detailed that progress in my testimony. But this recovery
remains fragile. Let's remember that the loans that have caused
the devastation to the GSEs to taxpayers were loans that were
on the books at the time the prior Administration took them
into conservatorship, and anything that we would do that
threatens this housing recovery that would push housing prices
down again will only increase the losses on those loans. And
hasty action to quickly change the composition of the GSEs or
to eliminate them, I have no doubt would further drive down
this housing market and cause taxpayer losses to increase.
The Chairman. Because we are talking about the sunken cost,
in the current ongoing activities of Fannie Mae and Freddie
Mac, new activities, new communities, are we incurring losses?
Secretary Donovan. Every indicator that we have of new
loans being made, given the increased fees that they have put
into place, the higher underwriting standards, and the fact
that we have seen home prices--Case-Shiller index up or flat, 8
months in a row--has meant that these new loans at this point
appear to be high quality loans that will make money--
The Chairman. So, the ongoing activities are not causing
further losses?
Secretary Donovan. The losses that they are experiencing
are due to loans that were on their books at the time of--
The Chairman. And apologizing does not make that obligation
go away.
Secretary Donovan. That's exactly right. In fact, hasty
action would have the effect of potentially increasing those
losses as well as putting newer loans at risk. So, let's be
very clear here that while there were enormous mistakes made,
that doesn't mean that the GSEs are not playing an important
role in stabilizing the market. One only needs to look at the
difference between the jumbo market today and what is happening
in the market where FHA, Fannie Mae, and Freddie Mac are
providing credits. The enormous difference is in interest rate
costs and availability of credit to see the important role they
are playing.
Let me just add one other thing. Going forward, I also
believe that while there are very difficult complex issues in
balancing the role that the Federal Government takes in the
housing market, if we look at this crisis and imagine if you
will, not having the ability of the FHA or the GSEs or other
institutions to step in to the market, if we eliminated them
entirely or at least eliminated the ability for the Federal
Government to support the market during these times, I would
think that we would have had a much worse housing crisis than
what we have seen today at this point in this market.
The Chairman. Thank you.
There are plenty of seats, so if people would just take a
seat--let me just say there are also seats in the front row.
Some Administration officials who testify need more backup than
others. Secretary Donovan comes to us with some knowledge of
housing. The benefit of that is there are a lot of empty seats
behind him, because he doesn't need 18 people to answer
questions for him. So people should feel free to take all the
seats and that would--let's get everybody in quickly, please,
and take some seats. Well, this is not hard sitting down. Thank
you. The gentleman from Alabama.
Mr. Bachus. Thank you. Secretary Donovan, I think we all
agree that the GSEs will continue to hemorrhage losses as the
government uses them to support expensive foreclosure
mitigation programs and advance other Obama Administration
housing priorities. I think you are aware the Federal Reserve
Chairman, Ben Bernanke, has urged immediate attention to
resolve the GSE's future. Do you agree that there needs to be
immediate action?
I noticed that Secretary Geithner told the Budget Committee
recently that the Administration is not prepared to address the
GSE's long-term future even though Chairman Bernanke told our
committee that he believes the plan for reform should come as
soon as possible, ``The sooner you get some clarity about where
the ultimate objective is, the better.'' Would you like to
comment on his statement?
Secretary Donovan. I would say two things. First of all, if
you look in detail at the way the GSEs are implementing their
loan modification programs or other efforts, it very carefully
looks through the use of net present value tests and other
tools at modifying or reducing principal on loans where that
will have a net present value positive to the GSEs. So I
believe strongly and I think if you look at the details of it,
the actions that they are taking on modifying mortgages are not
only good for homeowners, but they are good for the GSEs and
for the taxpayer as well.
Mr. Bachus. Do you think we need a reform proposal for the
GSEs as soon as possible?
Secretary Donovan. I would say that we need a reform
proposal for the GSEs as soon as possible, given the need to
maintain the stability of the current market. As I said just a
moment ago--
Mr. Bachus. When do you think--right now we just seem to
be--your all so-called plan that was released just today, it
just asks questions. I guess you're hoping that somebody else
will give you the answer but--
Secretary Donovan. I laid out in my testimony, Congressman,
four goals for the housing finance system, nine different
principles that we see as critical. You talked about principles
in your opening statement. We laid out nine principles in my
testimony that we think are important for the system, and we
believe that the public should have the ability to have input
and to learn, to benefit from their knowledge about this
system. We cannot move hastily on an issue as complex as this
or as important as this to the housing market and risk a
downturn that as I said a moment ago, could end up costing the
taxpayer millions of additional dollars if you take a wrong
step.
Mr. Bachus. Well, let me ask you this, and I don't mean to
interrupt you, but it has been 18 months since the Obama
Administration took over, and these questions could have been
asked 18 months ago. Why did it take 18 months to come up with
a group of questions? You look at these questions; one of them
just says, ``Do housing finance systems in other countries
offer insights that can help inform U.S. reform choices?''
Couldn't we have answered that 18 months ago, with just a
``probably'' or ``possibly?''
Secretary Donovan. Congressman, we believe it is time to
engage in a full and thoughtful dialogue leading to a likely
legislative proposal that would get moved through Congress this
year--
Mr. Bachus. Well we have had--
Secretary Donovan. If I could finish answering the
question, please. We believe that--and we have been completely
focused on healing this housing finance system and the housing
market and the economy more broadly. We have made substantial
progress on that and we feel strongly that had we embarked on
this process a year ago, we would have put that recovery at
significant risk. And so, we believe this is the responsible
way to engage in a process on a timeline that is responsible in
terms of making sure that American homeowners and the taxpayer
are not put at further risk.
Mr. Bachus. Okay, well, let me ask you this. There is time
for action, the time for questions and dialogue--we have been
doing this for 18 months. The Republican plan has been out
there for 18 months; we have made our proposals. And here today
to just ask some more questions, don't you agree that the time
for just asking questions is over and the time--
The public has had input for 18 months. You could have
asked them those--and I'm not criticizing you personally, but
let me say--when can we expect legislation? That will be my
last question.
Secretary Donovan. As Secretary Geithner said in his
testimony, our expectation, particularly given the full
legislative calendar that you have, is that we would have full
discussion with the public, with the committee, with the Senate
as well, and that we would move to legislation in the following
year that would reform--
Mr. Bachus. The following year?
Secretary Donovan. I think--I would certainly expect it
will be difficult to move legislation and complete that
legislation this year. And we believe again, that the housing
market at this point is fragile enough that we need to--and let
me just be clear, we have taken substantial actions on the
housing market.
Just as an example, as you know and I very much appreciate
the constructive work that you have done with us around FHA to
improve the underwriting that we have taken--extensive actions,
we have on a number of different fronts, whether it is ensuring
low interest rates, ensuring continued availability of mortgage
capital, keeping homeowners in their homes, helping communities
hurt by this housing crisis. We have taken extensive actions on
the housing crisis and on the housing finance system. We simply
do not feel that moving in a way that could hurt this housing
market further is responsible at this point.
Mr. Bachus. Thank you.
Mr. Kanjorski. [presiding] Thank you, very much. I know the
gentleman from Alabama is careful with his facts and figures,
but I just want the record to reflect that we can't count the
Obama Administration in office for 18 months, unless I am
radically mistaken, as the best I calculate is something like
15 months.
Also, I think we--and the reason I bring it up is that we
have just gone through a horrible example of misrepresentation
of pertinent facts in the healthcare act. Having returned from
my break period, I was overwhelmed by how much information,
misinformation, and disinformation has been put out to the
public over the last year on healthcare. I would hope we do not
do the same thing on financial reform, regulatory reform, or
housing and GSE reform. Let us try to hold to the real facts,
and the facts are the Administration has not been in office 18
months, do we agree with that?
Mr. Bachus. I would say maybe 15 months, I just say that is
long enough to ask questions--
Mr. Kanjorski. Mr. Secretary, there are a few things that
disturb me. We have, of course, a bifurcation of legislative
responsibility, and we have some very important pending
legislation that has been passed by this committee and the
House of Representatives that seems to go to ``no-no'' land
when it gets over into the other side. Do you have any insight
as to what may happen on housing reform bills? I have several
of them that are pending there. Have you had some inside
information or intelligence as to what the Senate is going to
do on those pieces of legislation, or can we just assume they
are going to do nothing?
Secretary Donovan. I am sorry, Congressman, could you be
more specific about which pieces of legislation? Is this
financial regulatory reform or other housing bills?
Mr. Kanjorski. Well, as part of a regulatory reform we have
included in some of the housing reform legislation in the
House, and that is presently pending. However, the Senate bill
does not include that, so we can assume that they have
abandoned that reform in the regulatory reform bill. Then, we
have a freestanding bill with the same information of
appraisals, etc., and how we should handle that. Are you
getting any insight as to whether or not they are going to move
forward with that reform bill?
Secretary Donovan. What I can tell you is the entire
economic team has been working closely with the Senate
committee. Obviously, they have moved a bill at the committee
level and we continue to work with them. I can't give you any
insight into their legislative calendar in terms of bringing
those to an actual vote.
Mr. Kanjorski. Do you see a possibility that we can
actually strive to accomplish something here, as opposed to
just having political objectives over the next 7 to 8 months,
since we are in the silly season? Can we just anticipate that
nothing serious is really going to transpire and that is why
you are saying we have to wait until next year to get serious
reform in GSEs?
Secretary Donovan. What I believe--first of all, let me say
that serious reform is not only possible; it is absolutely
necessary. There is no question that we cannot allow the crisis
we witnessed to happen again. That is why the President has
been so focused on broader financial regulatory reform and it
is why we are absolutely committed to making sure we have a
housing finance system in the long run that creates the right
incentives and provides the right opportunities.
What I will also say is we are absolutely committed to
having a full and thorough examination of these issues, and
whatever the discussions may be in Congress about what could
move or couldn't move, we will be moving forward with a
thorough process which I discuss today to ensure that we think
through all of the potential implications as well as the
complexities of the transition from the system where we are
today to what it should look like going forward.
Mr. Kanjorski. Mr. Secretary, I am joined as a co-sponsor
on a piece of legislation involving covered bonds commonly used
in Europe but not in the Unites States. We are looking at the
best practices around the world in creating a situation for
liquidity and responsibility for mortgage market expansion in
the United States, and we have not even held hearings yet on
the covered bond bill that is pending here; the ranking member
sponsors that legislation, too. Therefore, I just want to make
the point that we certainly could not be adopting best
practices around the world if we had not had the chance to
consider that type of legislation; would you agree?
Secretary Donovan. Absolutely. I think it is an area that
is worth looking at, and in fact, we do have certain structures
in this country already that are similar to and function
similar to the kinds of structures that you are talking about.
I think the issue is really going to be thinking seriously
about whether a market of our scale and our sophistication can
adopt practices like that in a way that they would be equally
functional here. And I think there are some mechanical as well
as institutional issues about whether in fact those examples
are replicable or the right examples for here. And I look
forward to discussing that further with you.
Mr. Kanjorski. Thank you very much, Mr. Secretary. The
gentleman from California, Mr. Royce, is recognized for 5
minutes.
Mr. Royce. Thank you, Mr. Chairman. Secretary Donovan, in
your written testimony, you lay out the four priorities for the
Administration for a well-functioning mortgage market in the
future. You say a widely available mortgage credit, housing
affordability, consumer protection, and financial stability.
And I think in principle, these are worthy goals. In practice,
we found that these can be competing interests, right? So
looking back, would you agree that too much of an emphasis was
placed on housing affordability and too little of an emphasis
was placed on financial stability?
Secretary Donovan. I do not agree that an overemphasis on
housing affordability was the primary cause of the crisis that
we saw. I believe that the affordability goals lacked clarity
and that too often we mixed certain affordability goals without
either clarity or precision with broader mandates, and that for
affordability going forward we need to have a much clearer set
of objectives and mechanisms to achieve them; I think that is
laid out in the testimony.
However, I think if you look really at the facts of--for
example, take the affordability goals of the GSEs. Our recent
study which we presented to Congress on the causes of the
financial crisis looked in detail at the full range of loans
that were eligible for the GSE affordable goals; it discounted
all of the high costs or riskiest loans. So just within the
pool of good, low interest rate loans that would have qualified
for the affordable housing goals, the GSEs only purchased about
a third of those loans. And so what does that mean? That means
that they were not forced to go into risky lending to able to
achieve those goals.
Mr. Royce. Now, wait a minute. Let me stop you there,
because we had Secretary Geithner here last month, and he
described how the GSEs used those goals to justify their
purchases of subprime and Alt-A loans. He went over this, and
over the years, those total roughly one trillion dollars. Now,
many have attributed those loans to making up the bulk of the
losses of the GSEs. Numbers that I have seen show that it is
the vast majority of the losses.
So based on Secretary Geithner's testimony and based on
economists that have looked at this, they have come to a
different conclusion there and they see the trillion dollars in
meltdown that the GSEs were either holding in their portfolio
or had guaranteed as a real problem. And he made the
observation that the whole financial calamity started in this
housing sector and it started with the collapse of Fannie and
Freddie.
Secretary Donovan. There are two things I would say about
that. First of all, the large majority of the worst loans that
led to this crisis were PLS Private Label Security loans that
were not ultimately GSE loans. They did buy a portion of those
but I don't think--
Mr. Royce. Let me ask you this, because I have looked at
that--Countrywide.
Secretary Donovan. If I could just--I don't think it is
right to say that the GSEs led into this crisis, there were
plenty of other--
Mr. Royce. Let me quote somebody from within Fannie who
said, ``We went out and we bought Countrywide, and the reason
we were doing it every quarter was to a send a signal to the
market that if the Government-Sponsored Enterprises were buying
this and putting it in their portfolio, and if it were half of
their portfolio--these subprime and Alt-A loans--half of $1.5
trillion, that was then a message to the rest of the market to
do the same.''
Getting back to my opening statement, my worry here is that
what wilted on the vine here was the market discipline. And one
of the ways that we ran off-market discipline and due diligence
was that we implied a government backing and that we knew what
we were doing in government when we put these goals out there
and we said, yes, these were safe purchases. The junk that was
Countrywide was held by Fannie and Freddie, and everybody else
then began buying it, that is the concern I have.
Secretary Donovan. And you and I agree Congressman, first
of all, that those--you call them junk loans--
Mr. Royce. Yes.
Secretary Donovan. And I can't disagree, were the primary
cause of the downfall of the GSEs; I agree. And Secretary
Geithner and I agree on this as well. They were an enormous
problem and it was when they began buying those loans that we
ended up heading down the path that we had. Where I am
disagreeing--and Secretary Geithner and I do not disagree about
this point--the primary cause of their buying those loans was
not--and I think if you look at the record, if you look at the
report we did to Congress--was not driven by the affordable
housing goals. They were chasing profits; they were allowed to
buy those loans--
Mr. Royce. Look, I carried the legislation to stop them
from doing--
The Chairman. The gentleman's time has expired. We are well
over, and have a Secretary here, so everybody wants to ask
questions. The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman. I would like to thank
the Secretary for being here. And I thank him also for being in
Charlotte in my congressional district during the break, and
for the very positive visit he had there.
Mr. Secretary, one of the things that you said in your
statement is that we have to do this GSE reform in a way that
doesn't have an adverse impact on affordable rental housing.
Can you give me a brief statement on the extent to which the
GSEs if any, were involved in rental housing finance as opposed
to homeownership finance?
Secretary Donovan. I would say really over the last decade
the GSEs have become an increasingly important presence in the
multi-family markets with the--as we saw in the single-family
market, during the recent, during the crisis that we have
experienced, their role growing significantly as has FHA to
ensure that mortgage capital remains available at a time when
the private market had withdrawn. And so, it is a very similar
kind of role that ensures that there is capital significantly
available.
In addition to that, the other very important role that
they had historically and that grew over the last decade was
providing equity for low income housing tax credits, and that
is something that has been really eliminated in terms of their
purchasing new tax credits since they went into
conservatorship, which has been a major challenge for the
rental housing finance market.
Mr. Watt. And going forward, would you think that
separating whatever the new model's responsibilities are for
homeownership should be separated in some way from rental?
Would that make our tasks simpler or would it complicate
matters, from your view?
Secretary Donovan. That is something in fact if you look at
the questions that we are examining that we released today,
that is one of the specific areas that we are very focused on,
is the segmentation of the market; and I see this at FHA as
well.
What I will tell you is that there are significant benefits
of having those two functions aligned, but I think it is an
important question of how much they need to be aligned and
which pieces of housing, rental housing finance and support,
mission support, should be brought together. So I can't give
you at this point a specific answer about whether we should
keep them together, but I will say that there are real benefits
to that. And I also think we need to look very carefully at the
question of the more deeply targeted affordability and where
real subsidies are needed, how we ensure that continues. And
that, I think is more likely something that remains a mission
of HUD at FHA rather than being mixed into the GSEs missions.
Mr. Watt. You mentioned that you will, when you put these
questions out to the public, put a timeline on it, and I--one
of the concerns that I do have and share with my Republican
colleagues is making sure that the Administration's timeline
for getting responses to this series of questions corresponds
with the timeline on which this committee and Congress is
moving. When do you anticipate the cutoff date for responding
for the public's response to the questions that you will be--
you and the Secretary of Treasury will be posing?
Secretary Donovan. As I said, we will be transmitting them
to the Federal Register. I expect that they will be published
next week, given the time that they work on. And we would--our
expectation is to set a 60-day timeline for responses on those
questions.
Mr. Watt. So you think it is realistic for this committee
and Congress to be thinking about this as a next-year project
to deal with the GSEs? Is the Administration going to have a
specific proposal by that time early next year, do you think?
Secretary Donovan. That is why we are setting up the forums
that we talked about, in addition to the public comment process
on the questions.
Mr. Watt. When will those be completed?
Secretary Donovan. Those will be happening through the
summer and the fall, so I would certainly expect that the
timeline you talked about to be able to have a legislative
proposal next year would be one that we could work towards.
Mr. Watt. My time has expired. I thank you, Mr. Chairman.
The Chairman. The gentleman from Texas, Mr. Hensarling.
Mr. Hensarling. Thank you Mr. Chairman, Mr. Secretary.
Forgive me, I had an appointment outside, so we may be
covering some old ground here, as I think I heard you say that
in your opinion, it was the profit seeking of Fannie and
Freddie that caused their demise as opposed to their affordable
housing goals. Did I understand that correctly?
Secretary Donovan. What I was saying is that if you look at
the facts about the broad pool of loans that qualified for the
GSE goals and the fact that the GSEs only bought about a third
of the save loans that would have qualified for GSE goals, I
think it is pretty clear that the goals didn't force the GSEs
to start buying the subprime and riskiest loans that ultimately
caused their demise. Based on our investigation of the causes
there had to be--
Mr. Hensarling. Then what did cause their demise?
Secretary Donovan. I believe--and this is what our report
showed--that the lack of strong controls on their reserve
requirements, their ability to purchase those loans, and put
them into their portfolio was--and chasing substantial profits,
as much of the rest of the market did at that point in these
subprime, highly risky loans was ultimately what lead to their
demise. That is why I think it is so clear that as we think
through this system, we have to be very, very careful about how
we construct this blend that existed or how we replace the
blend that existed of private entity with public mandate.
That--
Mr. Hensarling. Mr. Secretary, I think I agree with
something the chairman said earlier. I hope there is a
consensus that this neither private nor public model has
worked, that it has failed.
But if you say that to some extent it was profit seeking of
the GSEs, why is it that the Administration hasn't taken any
action to reduce the portfolio limits, which have traditionally
been the huge profit center of Fannie and Freddie? And as you
well know, in earlier legislation we increased the conforming
loan limits that has created, again, more revenue stream for
Fannie and Freddie and created more taxpayer--why has the
Administration not taken any initiatives in this regard?
Secretary Donovan. In fact the requirement was for FHFA to
reduce their portfolios, and we have--FHFA has begun reducing
those portfolios along the lines that were required by
Congress. So that is, in fact, happening. Those actions are
being taken by FHFA, and--I'm sorry, in terms of your second
question?
Mr. Hensarling. It was portfolio limits and conforming loan
limits.
Secretary Donovan. The conforming loan limits, just to be
clear--and we had this discussion before while you had stepped
out. I want to be clear that what is driving the losses at the
GSEs is the bad loans that were on the books, in the portfolio
at the time they were taken into conservatorship. Every
indication is--and obviously this depends on the strength of
the housing market going forward--that new loans that they are
taking onto the books, given the improved underwriting that
they have implemented, the higher fees, and a rage of other
steps, is that new loans are not the biggest risk to the
taxpayer.
What is the biggest risk, at this point, is if we were to
have a double dip in the market, the market were to go in the
wrong direction, that would have the effect of significantly
increasing losses to the taxpayer, and that is why we believe
it is so important that we take a measured, careful approach to
reform that would not cause the housing market to be sent into
a double dip.
Mr. Hensarling. I'm not sure how careful it is. Certainly,
the Administration is not rushing into this, I would say,
having spent lo these many months still monitoring the
situation.
I think you mentioned stability in the marketplace.
Frankly, what I see in the marketplace now is that if we want a
mortgage in America, there is a 90 percent chance I have to go
to the Federal Government. It is either controlled by the GSEs
or FHA. I see taxpayers are hemorrhaging at roughly $6 billion
a month. If that is stability, I think I might want to look at
something else. I would hope that this is not what the ultimate
Administration goal is, is to have 90 percent of the American
people have to go to their Federal Government to get a
mortgage.
Secretary Donovan. So, there are two things I would say.
First of all, again, we have to be very clear about loans that
are on the books versus new loans that are being made. If you
look at our expectations of FHA's new lending reflected in our
2011 budget, we expect to return more than $5 billion to the
taxpayer based on new loans that we make in 2011. So these are
good loans.
But more importantly, I think we have to look at the fact
that these loans that were made, if we do not stabilize this
market--we have had 8 months in a row of increasing or stable
house prices. We have had significant positive impacts on the
market. We cannot do something that would cause this market to
fall further. We are absolutely committed, and I couldn't agree
with you more, that our goal is to bring the market back, and
we have begun to do that by--
The Chairman. That is all your time.
Secretary Donovan. --the Fed and other steps. FHA is
raising its pricing--
The Chairman. The time has expired.
The gentleman from Indiana.
Mr. Carson. Thank you, Mr. Chairman, and Mr. Secretary.
First, Mr. Secretary, can you definitively say reform will
serve underserved populations and communities; and second, how
can housing and finance reform offer access to capital by as
wide a variety of institutions as possible, including small
business, community banks, and credit unions?
Secretary Donovan. To go back to the chairman's opening
statement, I think it is very important as we are engaging in
this process--and this has been a focus of ours--that we look
not just at the GSEs, but more broadly at the housing finance
system to look at the impacts that FHA can have, the Federal
Home Loan Banks, other institutions, but also CDFIs, other
institutions that can--so I think it is very important as we
engage on this that we do look at broad availability and access
to capital. I think that in part can be through the direction
we take with reform of the GSEs.
But I think equally and perhaps more importantly, the
creation of a strong consumer financial protection agency as a
part of financial regulatory reform to ensure that we are
offering safe products across the board, and that those are
widely available, is a critical part of ensuring that we do
that.
So I do think as we move forward--and this was emphasized
in my testimony today--that broad access to capital is
critical, as well as ensuring standardization in the market and
broad availability of entry into the market so that we get
small businesses and others being able to participate.
Absolutely important. But I don't think that we can put all the
weight of that on whatever the reform process for the GSEs
looks like. We have to look more broadly at the financial
regulatory system and efforts we make there in financial
regulatory reform.
Mr. Carson. Thank you, Mr. Secretary.
Mr. Chairman, I yield back my time.
The Chairman. The gentlewoman from Illinois.
Mrs. Biggert. Thank you, Mr. Chairman, and welcome,
Secretary Donovan.
Secretary Donovan. Thank you.
Mrs. Biggert. It seems to me that the GSEs have exposed the
fallacy of bifurcated mission or consumer protection regulation
from the safety and soundness oversight. When HUD oversaw
Fannie and Freddie's affordable housing mission, and OFHEO
served as its safety and soundness regulator, it seems the
result was a $127 billion and growing bill for the American
people.
Do you think that the--I'm worried that the Obama
Administration is poised to make the same mistake by creating a
consumer financial protection agency. Can you explain how the
financial institution supervision would be more effective when
one regulator has a focus on consumer protection and might
potentially conflict with the safety and soundness?
Secretary Donovan. I guess I would have to disagree. The
fact of the kinds of loans that were made that led into this
crisis--if we had had a stronger consumer protection focus
rather than within the mortgage space having seven different
regulatory agencies that had some piece of responsibilities for
consumer protection--a single agency focused on that task--that
would have made a real difference in terms of the lack of focus
on consumer protection and the types of loans that were being
made.
I think there is no question that we also need stronger
safety and soundness, that there was not adequate focus, but I
don't agree that it was--the fact that those two might have
been together interagency. I think it was the very disperse
nature and fragmented nature of that system that led to the
problem, and that is exactly what financial regulatory reform
is intended to resolve.
Mrs. Biggert. I guess there is the difference with
regulators and OFHEO, not that seven regulators that were
really involved with the GSEs. But let me just ask another
question, and that is we need transparency. And the public I
think really does deserve easy, accessible information about
the actions of the FHFA, which runs the GSEs, and they need
information about the actions of the Fed and the Treasury that
are supplying the funds. Would you support legislation to
increase the GSE transparency?
Secretary Donovan. I would--first of all, I think that
increasing transparency broadly is a very important goal that
we have, an objective. It is actually reflected in my written
testimony. I didn't talk about it in the oral testimony, but it
is absolutely a critical piece of what we need to achieve with
the new system. And one of the real problems that we had was
the pricing of guarantees and the transference of risk was not
transparent in the system. That included the GSEs, but more
broadly within the market.
And any direction we take with reform of the broader
housing finance system and the GSEs must achieve greater
transparency in terms of the way the guarantees are priced so
that--and the risks that are inherent are priced. So more
information, more transparent information, is absolutely a
central part of achieving that.
Mrs. Biggert. I would ask you to consider legislation that
I have introduced. It is H.R. 4581, and it is for the audit by
an inspector general and a report back to the Congress, and I
hope that you would take a look at that.
Secretary Donovan. I would be happy to take a look. Thank
you.
Mrs. Biggert. That would be helpful.
Then, we have on the losses issue in a letter, February
2nd, from FHFA Director DeMarco. He said that since the
establishment of the conservatorships, Fannie Mae has realized
losses of $111 billion and Freddie Mac $63 billion. Now they
have drawn down $127 billion. How much more should we expect
that the taxpayer is going to have to expend before there is
some decision? You have the--
The Chairman. The gentlewoman's time has expired. If you
want, we will give him about 30 seconds to answer--remember, if
you ask questions right at the time, we are not going to have
time for long answers. But Mr. Secretary, in about 30 seconds?
Secretary Donovan. Let me go back to something I said
earlier in the testimony. The reason--the primary thing driving
those losses is loans that were on the books at the time of
conservatorship, and anything we do going forward to further
strength and stabilize the market will lessen any losses that
taxpayers have.
And so it is critical that as we engage in this debate that
we continue to focus on the broad set of measures that we have
been focused on to stabilize this market with significant
results. The market is still quite fragile, and so we must
continue to focus on the immediate results of being able to
stabilize the market, to improve performance of those loans.
And what that means is going forward, moving quickly to
reform, whatever we do, that doesn't change the fact that these
loans were made, they are already on the books, and the losses
are coming from those. That is important.
The Chairman. Your time has expired.
The gentleman from Massachusetts.
Mr. Lynch. Thank you, Mr. Chairman, and thank you, Mr.
Secretary for your willingness to help this committee with its
work.
I want to take the opportunity to focus on question number
five that the Administration has put out here in its list of
questions to the public, how should the housing finance system
support sound market practices? The gentlelady from Illinois
just talked about transparency, and I agree wholeheartedly, and
I know in your remarks you have emphasized that as well.
But I want to point out a couple of gaps in that push for
transparency. The Administration has not addressed the problems
with the rating agencies, and I think they help greatly. They
are one of the factors here. They allowed triple A to be
stamped on some very questionable loans, and to have that
triple A stamp accepted by the markets as a credible mark, I
think, and so that continues to be unresolved.
And secondly, the existence of the over-the-counter
derivatives market and the continuance of a black box model.
Now the housing finance system, as you know, is greatly served
by the securitization process, and if we allow this black box
model to exist for over-the-counter derivatives, many of which
consist of asset-backed securities of these mortgages that we
are generating, and also CDOs that replicate the performance of
these blocks of mortgages.
How do those--the lack of rating agency reform and the
existence of a black box model in over-the-counter derivatives,
many of which are real estate related and housing related--how
does that help the system support sound financial practices in
the housing industry? I don't get that.
Secretary Donovan. I think you raise two excellent points,
and I would say just broadly that securitization can be an
effective tool for raising capital--
Mr. Lynch. Oh, I agree.
Secretary Donovan. --and introducing benefits broadly
across the market in terms of more affordable lending and more
affordable home mortgages for the American family. But without
the transparency we just talked about with Congresswoman
Biggert, as well as a focus on ensuring the rating agencies are
accurately reflecting risk in their ratings, as well as the
over-the-counter market, it is difficult to get an efficient
and effective securitization market.
Frankly, that is why, as you know, this committee has
worked hard to get to an effective set of reforms as part of
broader financial regulatory reform there. So I think it
emphasizes, again, why broader financial regulatory reform is
critical, broadly for the economy, but also for the housing
market as well.
Mr. Lynch. I just agree with you on that last point. The
opaque and complex nature of the derivatives market, especially
in this OTC market going forward, allows--it actually enhances
mispricing of risk, and that was the root of our initial
problem, and I just think we are making that same mistake again
in this. But I thank you for your testimony. I yield back.
The Chairman. The gentleman from Delaware.
Mr. Castle. Thank you, Mr. Chairman.
Mr. Secretary, just to follow up on the questions that were
asked by the gentleman from North Carolina, Mr. Watt, on the
timeline. And I don't know if this is a comment or a question,
but I'm concerned about that. I worry when questions are put
out and you wait for the public to respond and that kind of
thing from a time point of view, but I think it is well and
good, and I think the questions are fine and we should do that.
But we asked the same questions of Secretary Geithner, and it
is uncertain to me what exactly the final timeline is. I heard
your comments that probably by the time this is all done, next
year for legislation or something of that nature.
My question is, is the Administration working on something
now? It is fine to get all these comments, etc., but this has
been going on for about a year-and-a-half, and you have been
around dealing with it for over a year now. And I am concerned
that we need to have some sort of final answers by the people
who are going to be in charge who know a lot about this, and I
consider you do. And I hope that is being worked on, even at
the same time that we are waiting for answers to questions,
etc.
Secretary Donovan. Absolutely, and I didn't talk about it
in my oral statement today, but in my written testimony, we
have laid out a series of four key goals for the housing
finance system, nine different objectives that we think are
important to achieve.
And we have obviously begun a process of putting a lot of
thought and effort. These are not simple questions,
particularly as we think is right and the chairman laid out at
the beginning of the hearing, that you have to do this in the
context of FHA, the Federal Home Loan Banks, and other pieces
of the mortgage finance system, because what you do with the
GSEs affects and is affected by what is available in other
parts of the market.
So we have embarked on that. We will continue to do that in
a thorough way, and I look forward to a thorough dialogue of it
with you and the committee going forward.
Mr. Castle. My next point is discussions you have in your
written statement and your oral statements--I think you have
said here today--but the whole business of democratization of
credit and housing affordability. We are all for being able to
put people in houses if they can pay for those houses or
whatever, but obviously those issues were a major factor in
some of the loans that were being made, the no doc loans, etc.,
in some of the problems that exist today.
I would hope that we are going to impose strong
requirements, though, with respect to credit and the issuance
of mortgages, not only with the GSEs but with the companies
that originally issue mortgages to make sure we are preventing
this problem as far as the future is concerned. Will that be a
part of the consideration of what will come forward?
Secretary Donovan. Absolutely, and I want to--just to give
you an example of that, we have, within FHA, begun a process,
we have implemented a number of reforms raising standards,
particularly for the highest-risk borrowers and a range of
other steps. It has to be. It is one of the central issues that
led us into the problem that we are in, and I do think that we
have, as I said in my testimony, too often emphasized
homeownership at the detriment of rental housing as an option.
But let me just say one thing. I think too often we
confuse, in the discussions about this, the idea that somehow
low- to moderate-income people can't be homeowners, and in
fact, if the home is affordable to them, if they get a decent
mortgage at the right cost, they can very effectively become
homeowners and it is still and will remain one of the primary
wealth building vehicles in this country. So access to
homeownership done right is important across the economic
spectrum.
And I know this from my own experience in New York where I
was housing commissioner. We had created about 17,000 units of
homeownership with about 5 foreclosures. The reason for that?
Because we ensured that families could afford the home, we
ensured they didn't get piggyback or exotic mortgages, there
was counseling that made sure they were prepared for
homeownership. If it is done right, a broad spectrum of the
economic groups in this country can be homeowners, but we have
to ensure, as you said rightly, that it is done the right way
with the right standards.
Mr. Castle. You probably won't have time to answer this
question fully, but I'm concerned about rental housing. And I
think about apartment housing when I say that--and some of the
problems they are having. I have met with Delawareans, and they
are becoming increasingly concerned with vacancies, etc. Are
you hearing more and more about that?
Secretary Donovan. It is not--
The Chairman. A very quick answer, please.
Secretary Donovan. Yes. There is no question in the multi-
family markets, but more broadly in the commercial markets,
that there is still significant distress out there, and FHA as
well as the GSEs--it doesn't get focused on as much. I tried to
do it in my testimony. That is a significant part of the
liquidity that is being provided into the market today on
multi-family to ensure that there is reasonable priced credit
available.
The Chairman. The gentleman from North Carolina.
Mr. Miller of North Carolina. Thank you, Mr. Chairman. My
recollection from March of 2004 when Mr. Watt and I introduced
legislation to regulate, restrict subprime lending to require
that anyone--any lender make sure the borrower had the ability
to repay the loan--my recollection is that was a lonely
position, that not many people were supporting it. But I'm
struck by how many members now remember that they were right
there with me all along.
My questions, though, are about securitization that follows
up largely on Mr. Lynch's questions. One of the reasons the
rating agencies ratings meant so much was there was essentially
no other information available to investors for securitized
debt, in contrast to the kinds of disclosures or procedures
required for issuing stock, which requires standardized
disclosures, waiting periods so investors could do their own
due diligence.
Typically, an investor would get a call saying, we are
going to market in 3 hours with a collateralized debt, an
asset-backed debt security. It has a triple A rating. Are you
in? Investors are not real happy about the idea of going back
to that, and the securitization market has pretty much
collapsed.
We have spent a lot of time in this committee trying to
figure out how to revive lending by regional and community
banks, but that was 20 percent of bank lending, and bank
lending was 20 percent of lending. The securitization market
which has largely gone away--I think the first residential
mortgage backed securities issue is probably going to come out
in the next month or two, and no one quite knows how it is
going to do.
Why should there not be disclosures and procedures that
allow investors to do their own due diligence that is
comparable to what the SEC requires and the securities laws
require with respect to stock issue?
Secretary Donovan. First of all, let me just say I'm not an
expert on the SEC disclosures and I don't want to get into too
much detail on that. I think it is important to have those
discussions with those within the Administration who are most
focused on it.
Mr. Miller of North Carolina. But the--
Secretary Donovan. But I will say there is no question that
transparency, disclosure, more information has to be a central
part of getting to a more efficient and effective market.
Information about the performance, there is no question, will
be critical to a better functioning housing finance system.
The other thing I would say, though, is ensuring--and this
is a key part that you are looking at in the reg reform bill--
looking at what kind of risk retention is required is also a
piece of this as well. It is information, but it is also
effectively ensuring that those originating loans' brokers,
originators, others--we ensure their interests are aligned with
us as the public and the taxpayer to make sure that they have
the right interests at heart as they are originating them as
well. So I think information is a piece of it in disclosure,
but also aligning incentives properly when you have
securitization as the primary vehicle.
And in fact next week we expect--I think it is Redwood--to
do the first securitization. We have seen the first one in the
commercial mortgage backed securities side. So we are hopeful
with our efforts to try to bring the private market back. We
had this discussion earlier. We are absolutely committed to do
that, and we do see early signs that is beginning to happen.
Mr. Miller of North Carolina. And have you heard the same
objections I have heard from investors that they need to be
able to do due diligence and not just rely on rating agencies
and something has to change? They are not going to invest in
asset-backed securities that were issued the way the ones were
that caused this problem.
Secretary Donovan. I have heard similar concerns.
Mr. Miller of North Carolina. Okay. I yield back.
The Chairman. If the gentleman would yield to me--
Mr. Miller of North Carolina. I yield to the chairman.
The Chairman. --because the SEC has proposed some rules
that should pick up where we started in our bill and that is
relevant to what my colleague from Massachusetts said. I think
one of the best things we did in our bill was to repeal these
requirements that people rely on the rating agencies, because
the best we can do is to tell people, don't get this false
sense of security, and we did it where it was statutory.
The SEC has proposed two things. First of all, a risk
retention and securitization, and secondly--in the mortgage
area--and secondly, no requirement of a rating so that they
have to do some of their own and I intend to express our
support for that.
So those are two areas where we have in fact moved in this
same direction, mainly--and this was bipartisan. The gentleman
from New Jersey and I felt very strongly that there was this
false sense of security people got from ratings, and they won't
be able to get that anymore. It used to be required, and it
won't be.
The gentleman from Texas, Mr. Marchant.
Mr. Marchant. Thank you, Mr. Chairman.
Mr. Secretary, I would like to talk briefly about the
failure of the private mortgage insurance industry and how it
affected the GSEs. Do you have an opinion on that, and has
there been any study as to what the financial impact on the
losses to the GSEs--
Secretary Donovan. FHFA has done extensive research in
looking at the issue, not just of the losses that have
resulted, but I think in some ways equally or more importantly,
looking forward, the strength of the mortgage insurance
companies that exist and still hold a portion of the risk on
existing GSE obligations. So it is an important issue, not just
historically, but going forward in terms of the risks to the
GSEs, and ultimately to the taxpayers. So it is something that
I think FHFA could provide significant detail on.
What I would say is, it is important, as we talk broadly
about reestablishing the private market, which we are very much
focused on, and the Fed steps, Treasury steps, our own steps
have helped to begin to encourage, we are beginning to see the
private mortgage insurers begin to step back into the market so
that FHA can begin to step back in the GSEs.
And I think the bill we have before this committee to
reform FHA and our insurance premiums is a very important step,
and I want to thank you and the committee for working very
effectively with us on that. If we can move quickly, I think,
and get our pricing structures right, it is one of the most
important things we can do to encourage the private market to
return.
Mr. Marchant. Has the issue of the 85/15 and the 80/15
loans that were being made primarily to get around the private
mortgage insurance industry so that many of the loans made by
Fannie Mae and Freddie Mac were actually zero down loans--
because in fact if closing, they were obtaining a 15 or 20
percent second lien to put the first lien down, primarily to
cut out the private mortgage insurance premium, and I guess to
qualify them. Has that practice stopped?
Secretary Donovan. Their underwriting has changed
substantially on those issues, so yes, that practice has
stopped. And I would say more broadly, we have been very
focused at FHA on similar concerns about past products, as you
know, seller-funded downpayments and other issues. We recently
increased our downpayment requirements for the riskiest
borrowers. So in a range of ways, we are ensuring that those
kinds of practices don't recur.
Mr. Marchant. I missed the hearing yesterday afternoon, but
watched it last night on C-SPAN concerning the companies that
are currently holding these same second liens and have the
first liens. Do we have a handle on how many of the delinquent
borrowers out there who are facing foreclosure are trying to
participate in these other programs, where in fact the servicer
has the first lien and the second lien, and that second lien is
not anything more than just the downpayment?
Secretary Donovan. We have a lot of detail on this and
would be happy to follow up with you and your office with more
specifics. But what I can say generally is for borrowers at
risk--if you look, for example, at broadly borrowers who are
deeply underwater, say more than 120 percent LTV--about half of
those borrowers have second liens and that as you go to more
and more risky deeper and deeper underwater, the share of the
underwater debt that is made up by second liens increases. So
the second liens are a significant part of the problem for
those borrowers, and it makes up a large share, about 50
percent, of troubled borrowers.
Mr. Marchant. Thank you.
The Chairman. Let me go to the gentleman from Colorado,
then the gentleman from Texas.
Mr. Perlmutter. Thank you, Mr. Chairman. It is good to have
you here, Mr. Secretary.
Secretary Donovan. It is good to see you again.
Mr. Perlmutter. Just a couple of questions, I was visited
by the mortgage bankers this morning--they are on the Hill--and
they raised a couple of points. Let's see how you react to
them.
One is FHA, which has gone from 3 percent of the market to
30 percent or--everybody is getting an FHA mortgage. They were
complaining that the computer systems or the technology there
is antiquated and it really is having trouble keeping up. And I
think within your budget there has been a request to update the
system. Can you tell us what is happening or whether you all
are looking at that?
Secretary Donovan. Thanks to Congress, we, in our 2010
budget, got significantly increased resources to invest in
improved technology, and we are in the process of implementing
that. I would be happy to provide you a more detailed update.
One of the things I would mention on that is we are
investing heavily generally in systems, but particularly in
fraud detection and risk evaluation systems as well. We have
taken 6 times more enforcement actions in the past year than
HUD took in the 10 prior years combined.
Mr. Perlmutter. Okay, good.
Secretary Donovan. And ensuring that we are making good
loans and that we are not allowing lenders that shouldn't be
making FHA loans to make FHA loans. We have an $80 million
procurement that is under way now on a broad range of fraud and
risk systems. So that is one particular example of what we are
doing.
Mr. Perlmutter. Second question, second point. When I think
the chairman carried a bill a year or two ago on Fannie Mae,
Freddie Mac kind of restructuring, we were talking about skin
in the game and the 5 percent retention. We did get some
resistance from the mortgage bankers, the independent guys who
are really more or less agents, and then they sell the loan
into the secondary market somehow or to Fannie Mae/Freddie Mac.
And I think at least in one of the bills was a carve-out for
vanilla products such as a Fannie Mae, Freddie Mac, FHA-
approved loan document, a HUD form.
When we started into the bigger bank bill where we were
dealing with the consumer financial products agency, there was
initially a section on vanilla products which I think
ultimately--either we passed it out of the House or it got
changed. Do you--what is the Department's position on, in
effect, carving out from the risk retention component a 5
percent skin in the game thing if it is a vanilla--
The Chairman. Would the gentleman yield briefly please?
Mr. Perlmutter. Yes sir.
The Chairman. Because what we have is that we--the
Administration had asked for an ability to require certain
projects. That is where the vanilla came in. We threw that out
so there was no--
Mr. Perlmutter. Right so--
The Chairman. What we have is in our securitization
requirement, the expectation is 5 percent, but the appropriate
regulator for each entity can go up to 10 or down to zero based
on this. And while we didn't write it in specifically, the
assumption was that a fixed-rate 30-year mortgage with a
significant downpayment would probably be rated a zero. So that
is what is in the bill.
Secretary Donovan. And what I would say, I think it is a
very important point broadly, and I think a piece of this is
direct risk retention, but there are other elements that I
think are important to look at as well that can align
incentives at the broker level, at all different levels in the
chain.
So given the discussions that are going on, I think it is
very important that we continue with the Administration more
broadly. We have had significant conversations internally that
we continue to discuss this and find ways to ensure that we are
aligning those incentives at every step, not just on the--not
just a loan with a risk retention requirement.
Mr. Perlmutter. Thank you. I yield back.
The Chairman. The gentleman from Illinois.
Mr. Manzullo. Thank you, Mr. Chairman, and Mr. Secretary,
thank you for coming here this morning.
I have a couple of questions, but let me start with this.
Every time we open up the paper, there is yet another program
to help out people who are underwater on their home mortgages
or behind, etc., knowing full well the reason they are behind
is because we have lost so many jobs in this country. In many
cases you can take somebody's home mortgage and cut it in half,
and they still can't make the payments because the job isn't
there anymore.
But then I read of yet another new program--I think it
would be appropriate to call it that--that would somehow
``encourage'' private lenders to forgive a principal debt of
tens of billions of dollars worth of home mortgages as to which
the homeowners have negative equity. Are you familiar with that
program?
Secretary Donovan. Yes.
Mr. Manzullo. What is that?
Secretary Donovan. So what we have done with FHA is to
encourage, as you said, private lenders to cut principal--
Mr. Manzullo. They would eat it.
Secretary Donovan. Yes.
Mr. Manzullo. All right.
Secretary Donovan. And just to be clear, what we are
finding more and more--the GSEs are seeing this in their own
portfolios and as are other lenders--we are beginning--we are
seeing increasingly that lenders are cutting principal because
financially they will see improved performance in those loans
and improved recovery. So this is something that is happening
in the market broadly without any government incentives.
Mr. Manzullo. That was my issue. That is a voluntary
program?
Secretary Donovan. Yes.
Mr. Manzullo. So there is no official, for lack of a better
word, non-bankruptcy cramdown that is being given to the banks
to force them to do this. Would that be a correct statement?
Secretary Donovan. In the program we announced, it is not
a--it is a voluntary--
Mr. Manzullo. It is voluntary.
Secretary Donovan. That is correct, yes.
Mr. Manzullo. And the banks are not penalized for not
participating in this? Would that be also correct?
Secretary Donovan. In that--yes, in that specific program.
Mr. Manzullo. The reason I say that is that we have been
through these cycles before where property would sell for
$200,000, say, in 1987, new, drop in value 8 or 9 years later
to $160,000, $170,000, and then go up to half a million dollars
7 or 8 years later. We do have cycles in this country, do we
not, where people who put on--put down relatively modest
downpayments find themselves underwater from time to time.
Would that be a correct statement? Obviously, it is correct, or
I wouldn't have asked the question in the first place.
Secretary Donovan. I think it is hard to compare what we
have seen in this country, perhaps since the Great Depression,
to the cycle that we have been through. The extent of negative
equity--
Mr. Manzullo. And the length.
Secretary Donovan.--scale of it is unlike anything we have
seen since then, and what I would say is reducing negative
equity is an important piece of helping to get us--
Mr. Manzullo. If I could--
Secretary Donovan. And that banks do, I believe, need to
start doing more of that.
Mr. Manzullo. Mr. Secretary, the other issue is, as you
stated in your testimony, where GSEs were encouraged to buy
Alt-A and subprime private crap that had been generated for the
purpose of increasing affordable housing goals, and that it
says that underwriting standards were lessened in order to buy
these portfolios that really were not intended to sell to the
GSEs in the first place. This occurred, I think, between 2003
and 2005. It is about $190 billion worth.
And the issue there is--and I know you weren't there. It
was a different Administration. But it is a fact, is it not,
that even with that mandate or Executive Order or pressure--
call it what you want--is that GSEs still have the authority to
say even though these instruments were never intended to be
sold to us, that we could have imposed our underwriting
standards and made it stricter in not buying them?
Secretary Donovan. Just to be clear, there was a large pool
of safe loans--not Alt-A, not subprime--that would have met the
goals that the GSEs didn't buy. So I don't believe that the
goals forced them to buy the Alt-A or subprime. They did so for
other--our evidence shows they did so for other reasons, and
that is what led them down that path. The affordable housing
goals did not require them to buy Alt-A or subprime loans.
Mr. Manzullo. Thank you.
The Chairman. Let me just--to answer his question, there is
no program anywhere in the Federal Government that I am aware
of that compels any holder of paper to write down the
principal. None whatever.
The only thing we have done in that regard is we did pass,
I think virtually unanimously, tax legislation--not out of this
committee--that said that a homeowner who was a beneficiary of
such a write down would not owe taxes on that amount. So that
was an encouragement, maybe, but there was zero requirement
that anybody who holds this write down any part of either the
interest or the principal.
The gentleman from Texas.
Mr. Green. Thank you, Mr. Chairman, and thank you Mr.
Secretary for appearing.
A quick comment before I get to what was my initial agenda.
We find that businesses--they do have an opportunity to write
off losses by way of something called bankruptcy, and continue
to function, as permitted. The unfortunate circumstance for
most Americans who happen to be holders of primary homes is
that they don't have that as an option such that bankruptcy can
benefit them to the extent that they can maintain their
residences. If you have a secondary residence, a tertiary, or
quaternary, you can with those. Anything beyond your primary,
bankruptcy can benefit you.
But we don't have that for homeowners. Homeowners don't
have the benefit of bankruptcy to the extent that businesses
do. That is just a fact. They do not. And there are some who
make the argument that it would be beneficial for homeowners to
have the same opportunity that businesses have to reorganize
and stay in business, and homeowners can do that to a limited
extent with debts other than the primary home, the primary
mortgage. And that was just a comment so that I could at least
say to the people who are viewing this that there are other
means by which we can achieve a goal of dealing with this
negative equity that are not in place simply because the laws
don't permit homeowners, people who have their primary
residence, to go into bankruptcy court and save their primary
residence.
And there is more that can be said on this, but let's go
back to the Great Depression, because it was during the Great
Depression that we--I think is a good point of departure for us
in this brief dialogue that you and I will have. We didn't have
30-year fixed-rate mortgages. We had 3- to 5-year mortgages.
People would refinance and refinance again.
And it is the evolution through the years that got us into
Fannie and Freddie such that we have 67 percent of Americans
who own their own homes, and over 70 percent of these, of
course, have mortgages, so when you say mortgages, they are
buying. They are in a position to own at some point.
And while Fannie and Freddie are not perfect, and while
they have not served us as well as I would like for them to
serve us, I don't think that we can overlook the fact that a
good many Americans who have homes now, who are legitimate,
hard-working people who have 30-year mortgages or some longer
period than 5 years--they have these because of the evolution
that took place with Fannie and Freddie. And just as we have
friends and I have friends who would favor keeping credit
default swaps and who would favor some sort of negative
amortization in products, they don't want to end all of the
things that created the circumstance, they want to make them
work better.
I think that there has to be a way for us to deal with this
and not just obliterate Fannie and Freddie and do nothing, and
that is my concern. The option that some seem to put forth is
that of doing nothing more than ending Fannie and Freddie. A
bad idea becomes a really bad idea when you try to implement
it, and it is unfortunate that we have to have the good sense
not to let that happen. We have to have the good sense not to
let this bad idea become an actual facility to the extent that
it exists.
What do I mean? If we literally allowed for the departure
of Fannie and Freddie--just overnight, let's just get rid of
it--what a thing--this bad idea would become a really bad idea
when the experiences that we would have to encounter would
manifest themselves.
So tell me, if you would, if we eliminated Fannie and
Freddie right now, what would be some of the effects of doing
so?
Secretary Donovan. I think that the risks to the housing
market and the economy more broadly would be substantial, and
if you look at the jumbo market, other forms of lending, you
look at the enormous gap in interest rates and availability of
credit in those other markets, there is no question that
whatever mistakes Fannie Mae and Freddie Mac made, which were
substantial, that currently they are playing a very important
role in stabilizing our housing market and the economy more
broadly.
So we do need to reform them, there is no question, and we
have embarked on that process, but we have to do so in a
responsible, measured way so that we don't end up doing more
damage to the housing market, and in fact damaging the taxpayer
through increased losses at Fannie Mae and Freddie Mac.
Mr. Green. Thank you, I yield back.
The Chairman. The gentleman from Florida, Mr. Grayson.
Mr. Grayson. Thank you, Mr. Chairman. It is nice to see
you, Mr. Secretary.
What percentage of mortgages in the United States are
underwater? In other words, how many households owe more than
they own, where the balance of their mortgage is more than the
value of their property?
Secretary Donovan. There are varying estimates that are in
the range of 15 percent to as high as 25 percent. About a third
of all underwater mortgages, the estimate is, are close enough
to being above water that with a few years of modestly
increasing house prices, they should be back above water, but
there are about \2/3\ of those who are severely underwater,
typically beyond 115 or 120 percent LTV.
Mr. Grayson. Do you happen to know what the percentage is
in Florida and other hard-hit places, like Nevada?
Secretary Donovan. They range as high as above 50 percent
in the hardest-hit places.
Mr. Grayson. For people in those circumstances,
particularly the ones who have dramatically more debt than the
property is worth, and in many places where there are a lot of
empty houses--in Orlando, for instance, 10 percent of all the
houses are now unoccupied. In situations like that, do you
think that people should continue to pay their mortgages or
should they just move across the street and start over again?
Secretary Donovan. I believe that we have a system that
depends on consumers paying their mortgages, and I would not,
here or elsewhere, recommend to people that they not pay their
mortgages.
What I would say is--and this is why we announced changes
and new initiatives just a couple of weeks ago--I do believe,
the Administration believes, that negative equity is a
significant problem in our market. Given the fact that we are
seeing increasing write downs by lenders in their own
portfolios, taking negative equity, I believe that it is
increasingly clear to lenders that writing down negative equity
in specific cases actually benefits lenders--homeowners as well
as the lenders themselves, because they are not going to
recover on those, and loans will perform better.
And that is why we announced a series of initiatives that
try to accelerate what we are seeing as a trend already, and to
get rid of some of the misalignments. There are accounting
treatments in a range of ways that currently I think we have
financial institutions that are reflecting the value of second
liens or other loans at unrealistic levels that will not be
recoverable in a foreclosure or in other actions. So we are
beginning to see some movement on that, and we are trying to
accelerate it with the efforts we have under way.
Mr. Grayson. We live in a market economy where we expect
businesses to maximize profits and minimize losses. Why would
we expect anything different from consumers, and in particular,
homeowners? Why would we expect them to keep paying on a
mortgage where the mortgage value is far more than the value of
the property that underlies the mortgage?
Secretary Donovan. I think--and this is one of the reasons
I work in housing--a home is much more than an investment, and
they are--those are complex decisions that involve negative
impacts to families themselves in terms of their credit,
displacement of families and children. There is a whole--it is
a very complex set of decisions that a family makes when they
buy a home or when they decide to give up a home. So I don't
think it is as simple as saying that this is a purely rational
economic decision that is only based on investment rather than
the other values of a home.
Mr. Grayson. My own impression--and you can correct me if
I'm wrong--is that for at least 90 percent of the people in
that particular circumstance where they owe more than they own,
there is no policy of the Federal Government at this point that
has, in any way, ameliorated their problems. Is that a fair
statement?
Secretary Donovan. I don't think that is a fair statement,
actually. First of all, a significant number of those
homeowners, if they remain and pay about a third, based on our
estimates, will be above water within a few years.
Second, we have taken a series of steps with the
announcements, changes to our modification program that
prioritized principal reduction, the FHA refinancing effort
that we talked about earlier, those are all efforts to try to
attack the problem of negative equity, recognizing that we
cannot nor should we put the burden of writing down that
negative equity on the taxpayer. We would be talking about
hundreds of billions of dollars, and those losses must remain
and should remain the responsibility of the private lenders who
made those loans to absorb the bulk of the losses.
Mr. Grayson. My time is up.
The Chairman. Your time has expired.
Mr. Grayson. Thank you.
The Chairman. The gentlewoman from California.
Ms. Waters. Thank you very much. Thank you, Mr. Secretary,
for being here today.
I know this hearing is focused on housing finance. I want
to talk a little bit about CDBG and section 108. In some ways,
it is connected to housing finance because CDBG funds can be
used to help fund housing and section 108 is more on the
economic development side, but it is used to support maybe
Choice Communities. I know that is an initiative that you have
put a lot of time in on.
I have been concerned about CDBG for quite some time. I
know that you have some ideas about some reform in CDBG. And I
and some other members of this committee are concerned about
the various ways that CDBG funds are used in cities that do not
inure to the benefit oftentimes of those who we intend to
benefit of it.
Many of us believe that CDBG funds are used almost like
campaign funds out of the back pockets of local elected
officials who find ways to get the money to those groups and
organizations that basically are their supporters rather than
plans that actually deal with providing a combination of
housing opportunities and/or support opportunities for
families, etc., etc. And of course CDBG has been revamped, cut
back in ways that I don't think really accomplishes economic
development.
And I also understand from my staff that you are
envisioning some kind of fee for use of section 108 funds. So
could you relate to both CDBG and section 108 a bit around
those concerns?
Secretary Donovan. Just to start with the section 108
program, it has been an effective program, it has expanded, the
use of it has expanded significantly, and as I think you have
seen us do in a range of different areas in FHA and elsewhere,
the proposal was to, now that we have a real history with 108,
to be able to understand the true costs of the guarantees and
to begin to set a pricing for that to reflect the actual
performance of the loans so that the program effectively pays
for itself rather than requiring appropriations. So that is
what we had proposed for 108. And given the strong performance
of it, it is a pretty modest fee.
On CDBG, more broadly what I would say is that it has been
critical for us to improve oversight of the program. I don't
think the kinds of things you have talked about are widespread
in the program. However, where we have seen examples that CDBG
funds have not been used appropriately, we have stepped up the
actions that we are taking. We would be happy to give you more
details on that. But I think CDBG is an important resource in
many communities and we believe, particularly given the
economic crisis that we have seen, that having a tool that can
attack economic development and create jobs is important, but I
would be happy to talk to you about further improvements that
you think are necessary.
Ms. Waters. Okay, my time basically is up, so I will be
happy to talk with you further about both of those programs.
The Chairman. Thank you for your testimony, and we will now
call the next panel.
Secretary Donovan. Thank you.
Ms. Waters. [presiding] Thank you very much. I would like
to call up our second panel: Mr. Anthony T. Reed, executive
vice president, Capital Markets, SunTrust Mortgage,
Incorporated, on behalf of the Financial Services Roundtable;
Ms. Sheila Crowley, president and chief executive efficer,
National Low Income Housing Coalition; Mr. Alex J. Pollock,
resident fellow, American Enterprise Institute; Mr. Jack E.
Hopkins, president and chief executive officer, CorTrust Bank,
NA, on behalf of the Independent Community Bankers of America;
Mr. Thomas Gleason, executive director, MassHousing; Mr.
Anthony M. Randazzo, director of economic research, Reason
Foundation; and Mr. Rick Judson, third vice chairman, National
Association of Home Builders.
Okay. We will start with Mr. Reed.
STATEMENT OF ANTHONY T. REED, EXECUTIVE VICE PRESIDENT, CAPITAL
MARKETS, SUNTRUST MORTGAGE, INCORPORATED, ON BEHALF OF THE
FINANCIAL SERVICES ROUNDTABLE
Mr. Reed. Thank you. Madam Chairwoman and members of the
committee, my name is Anthony T. Reed. I am the executive vice
president for capital markets with SunTrust Mortgage. I am
appearing today on behalf of the Housing Policy Council of The
Financial Services Roundtable.
Thank you for the opportunity to testify on the future of
the housing finance system. Today, I would like to focus my
remarks on reforming the secondary mortgage market for
conventional mortgage loans. The secondary mortgage market is
an essential feature of our system of housing finance. It has
produced a steady supply of mortgage finance for home buyers.
The secondary mortgage market has permitted the development of
products with unique benefits to U.S. borrowers, such as the
30-year fixed-rate mortgage.
For many years, and even throughout the financial crisis,
the GSEs facilitated this market efficiently and effectively.
Yet, the crisis has revealed several fundamental flaws.
Correcting these flaws presents Congress with an opportunity to
make significant improvements in the operation of the secondary
market that will benefit homeowners in the economy.
Reform should be based upon the following three principles.
First, reform should continue to ensure a steady flow of
reasonably priced housing finance for borrowers and should not
disrupt the economic recovery. Second, reform should minimize
risk to taxpayers. Third, reform should include some flow of
funding to affordable housing.
The housing policy council proposes to achieve these goals
in the following ways. First, creation of federally chartered
but privately owned mortgage securities insurance companies or
MSICs to perform the credit enhancement function currently
performed by the GSEs; second, a strong Federal regulator;
third, the establishment of a single MBS issuance facility to
create and administer mortgage-backed securities guaranteed by
the MSICs; fourth, in exchange for their Federal charter, MSICs
would be required to contribute a stream of revenue to State
and local housing finance agencies to support competitively-
evaluated affordable housing programs.
Finally, the recent financial crisis has demonstrated that
the Federal Government is fully capable of performing the
liquidity function in times of market stress. Therefore, any
successors to the GSEs should not be required or permitted to
maintain large portfolios. MSICs would not be backed by the
Federal Government. And I would like to repeat not be backed by
the Federal Government. However, the Federal Government should
provide an explicit backup guarantee on MBS still insured by
the MSICs.
To be clear, this catastrophic guarantee would not apply to
the MSICs themselves. It would only apply to the MBS that they
guarantee. This exquisite guarantee for MBS is needed to give a
broad range of MBS investors confidence in these securities and
to help ensure consistent and reasonably priced mortgage
finance to borrowers.
The government's guarantee should cover interest and
principal payments on MBS only after all private capital
backing and MBS is exhausted. And MSIC would pay a fee to the
government for the government guarantee, and the fees paid by
all MSICs would be placed in reserve that would provide an
additional buffer between private capital and the Federal
guarantee. In total, the layers of private capital standing
before the government's guarantee would be downpayments made by
homebuyers, private mortgage insurance, shareholders equity in
the MSICs, and the reserve fund.
Moreover, this explicit guarantee is intended to be budget
neutral. MSICs should be required to transfer a percentage of
revenue to affordable housing programs, much like the Federal
Home Loan Banks do today. The current numerical housing goal
should be ended. The funds for affordable housing could be
contributed under a competitive grant program similar to the
FHLB program, or it could be transferred to HUD for subsequent
distribution to State and local housing finance agencies.
We also called for the creation of a single MBS issuance
facility to perform the securitization function. This issuance
facility would support the creation of a single MBS. Today,
there are some differences between the MBS marketed by the two
GSEs, which can from time to time impair market liquidity. All
MSICs should be required to adhere to a standard form of MBS
that has the same terms and conditions in order to promote
investor understanding of the MBS. This would help ensure
homebuyers consistent access to reasonably priced home finance.
Thank you for the opportunity to testify on the future of
mortgage finance. I would be happy to answer any questions you
might have.
[The prepared statement of Mr. Reed can be found on page
114 of the appendix.]
Ms. Waters. Thank you very much.
Ms. Sheila Crowley?
STATEMENT OF SHEILA CROWLEY, PRESIDENT, NATIONAL LOW INCOME
HOUSING COALITION
Ms. Crowley. Good morning, Ms. Waters, Mr. Hensarling and
other members of the committee.
I am Sheila Crowley, president of the National Low Income
Housing Coalition. The Coalition is dedicated solely to
achieving socially just public policy that assures people with
the lowest incomes in the United States have affordable and
decent homes; thus, we are interested in the topic of today's
hearing, because the housing finance system in the United
States has failed miserably in assuring enough housing for all
Americans and any reform that Congress undertakes must address
this serious shortcoming.
In the United States today, there are 9.2 million extremely
low-income renter households, and only 6.1 million rental homes
available that they can afford--71 percent of extremely low-
income renter households pay more than half of their income for
their housing. That's an unacceptable situation. In the wake of
the foreclosure crisis, some will assert that we have an excess
supply of housing; and, while that may be the case for high-
cost housing, the supply of low-cost rental housing continues
to dwindle. Moreover, rents continue to rise.
The Coalition's annual study of housing costs called, ``Out
Of Reach'' will show that the 2010 national housing wage, that
is, the hourly wage that a full-time worker must earn in order
to afford a two-bedroom rental home is $18.44 an hour. That is
up from $17.84 an hour in 2009. A stable home is the platform
for success and all other spheres of individual and family
life, and all the other interventions we devise to help low-
income people improve their social and economic well-being. Or,
if not, if we do not first make sure they have safety in
affordable homes, given this understanding of the housing
crisis today, we offer several principles to guide reform of
the housing finance system in the United States.
One, Federal subsidies to the housing sector should be
directed to meeting the needs of those with the most serious
housing problems first. In Fiscal Year 2009, the Federal
Government spent $300 billion to support housing--80 percent of
that subsidized homeownership, primarily with tax deductions,
and the remaining 20 percent supported rental housing primarily
through the HUD budget.
A truer picture of the Federal commitment to housing would
also count the nearly $2 trillion in support for mortgage
credit and other insurance through FHA, Ginnie Mae, the VA,
Rural Housing Services, the Flood Insurance Program, Fannie,
Freddie and the Federal Home Loan Banks. Despite this
considerable Federal involvement in the housing sector, we have
a persistent structural deficit of housing that the lowest-
income people can afford. Clearly, subsidies are not being
directed to where they are needed and where they could do the
most good.
Second, all segments of the housing finance sector have a
duty to contribute to solving the most serious housing
problems. Some would argue that the conflicting goals of
maximizing profits and serving a public purpose contributed to
the downfall of Fannie and Freddie. We would argue that
housing, like healthcare, is so essential to human well-being
that any profit-seeking enterprise must be grounded by social
responsibility that is assured by government regulation. In
1992, Congress directed Fannie and Freddie to take a more
active role in ensuring the availability of affordable housing
by establishing affordable housing goals.
In July 2008, Congress added a further affordable housing
obligation in the form of contributions to the National Housing
Trust Fund, which was designed specifically to address the
shortage of rental housing. Whatever form Fannie and Freddie or
their successors take in the future the obligation to
contribute to the National Housing Trust Fund must be renewed
and expanded. And, further, we think all federally regulated
financial institutions should be required to make similar
contributions.
Third, Federal policy should not favor one form of tenure
over another. Rather, Federal policy should incentivize balance
in the housing market and the full range of housing choices in
every community. Federal policy clearly favors homeownership of
rental housing as indicated by the skewed nature of Federal
housing subsidies. A more balanced Federal housing policy would
make sure that rental housing enjoys the same advantages as
homeownership in lending and in the tax code.
Assuring that all members of a given community have homes
they can afford in the neighborhood of their choosing will also
require strict enforcement of fair housing laws and the full
implementation of the duty to affirmatively further fair
housing is a condition of receiving direct and indirect Federal
subsidies. I will close with three specific suggestions for
dedicating funding sources for the National Housing Trust Fund
that will help us take the trust fund to the scale that we
recommend: at least $15 billion a year for 10 years.
These are things Congress could do right away. First, the
Federal Government provides private financial institutions with
low-cost funds through a variety of sources--a 5 percent basis
point annual fee on outstanding low-cost funding balances could
raise several billion dollars a year for the trust fund;
second, Congress should levy a fee on the securitization of
mortgages by any capital markets participant; and third,
homeowners can gain a tax deduction for capital gains on the
sale of their homes, a surcharge on the percentage of capital
gains that a seller realizes at the time of sale would generate
several billion dollars.
Thank you.
[The prepared statement of Ms. Crowley can be found on page
61 of the appendix.]
Ms. Waters. Thank you very much.
Mr. Pollock?
STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN
ENTERPRISE INSTITUTE
Mr. Pollock. Thank you, Madam Chairwoman, Congressman
Hensarling, and members of the committee.
I would like to propose for your consideration seven steps
toward sound mortgage finance in the future for the United
States. These are: to create a private secondary market for
prime conforming mortgage loans; to transition to a world of no
GSEs; to facilitate, but not require, risk retention by
mortgage originators; to develop countercyclical strategies;
should there be surviving GSEs, in spite of my previous
recommendation, to ensure that we do not use government insured
banks to promote the financing of the GSEs; to develop clear,
straightforward key information for borrowers; and to
reintroduce savings as an explicit goal of mortgage finance.
I'll expand briefly on three of these points. First, a
private, secondary market for prime mortgages of conforming
size should have been a natural market development. Why did it
never happen? It never happened because no private entity could
compete with the government granted advantages of the GSEs.
There could be no private prime conforming mortgage market
while the GSEs used their advantages, both to make private
competition impossible and to extract duopoly profits or
economic rents from the private parties. This element of the
old housing finance system should not survive.
Second, we should structure a transition to a world of no
GSEs. I would like to commend Congressman Hensarling's bill,
which he mentioned earlier, for suggesting how this might be
done and how an orderly transition might actually be put in
gear. Housing finance inflation was at the center of the
financial crisis, and the GSEs were at the center of housing
finance inflation. No mortgage system reform can be meaningful,
which fails to address Fannie Mae and Freddie Mac. Everyone now
agrees with this.
In my view, this is the core issue: you can be a private
company with market discipline, or you can be part of the
government with government discipline of which there are many
kinds, but you can't be both. Fannie and Freddie or parts of
Fannie and Freddie should become one or the other. This desired
transition is somewhat easier now, because Fannie and Freddie
are not now GSEs. They are government housing banks owned
almost entirely and controlled entirely by the government.
Therefore, in my opinion, it's quite clear that as
recommended by the Congressional Budget Office, they should be
on the Federal budget. They should not get off balance sheet
accounting treatment, which comes in for so much criticism in
other areas. In this context, I would also like to commend
Congressman Garrett's bill, H.R. 4653, the Accurate Accounting
of Fannie Mae and Freddie Mac Act.
Third, we should develop countercyclical loan to value
(LTV) requirements. Financial cycles, particularly in real
estate, are inevitable, but they could be moderated by
developing countercyclical elements of the mortgage system.
Bubbles involve an unstable positive feedback loop between
asset prices and credit availability. As asset prices inflate
higher and higher in a boom, the risk of loans appears to be
growing less when it's in fact greatly increasing.
As asset prices go further and further above their trend,
the risk of their fall and the risk of the loans is becoming
greater and greater. The logical and necessary thing to do is
reduce the amount being lent against the current market price
of the asset. But what generally happens, and always happens in
a bubble, is the exact opposite. With increasing optimism, LTVs
rise instead of being reduced. We need to create a mortgage
finance system in which LTVs fall and downpayments rise as
asset prices inflate. Then we would have countercyclical LTVs.
Congressman Foster, in a very interesting draft paper, has
proposed some straightforward mathematical ways that inflating
asset prices might define requirements for lower LTVs. It's
clear that something along these lines would be extremely
beneficial for our future mortgage system, and we ought to
figure out how to do it.
I would be happy to address any of the other proposals
discussed in my written testimony, and I thank you again for
the chance to share these views.
[The prepared statement of Mr. Pollock can be found on page
100 of the appendix.]
Ms. Waters. Thank you very much.
Mr. Hopkins?
STATEMENT OF JACK E. HOPKINS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CORTRUST BANK, N.A., ON BEHALF OF THE INDEPENDENT
COMMUNITY BANKERS OF AMERICA (ICBA)
Mr. Hopkins. Madam Chairwoman, members of the committee,
thank you for the opportunity to testify today on the future of
housing finance.
My name is Jack Hopkins, and I'm the president and CEO of
CorTrust Bank, a $600 million community bank located in Sioux
Falls, South Dakota. I am pleased to testify today on behalf of
ICBA and its 5,000 members nationwide. The housing GSEs are
very important to community banks. Fannie Mae and Freddie Mac
provide a reliable secondary market for residential mortgage
loans, and the Federal Home Loan Banks offer liquidity, asset
liability management, and long-term funding.
My bank uses all three extensively. We are a seller
servicer for both Fannie and Freddie, servicing more than 3,500
loans with a balance of more than $400 million, and we have
used the Federal Home Loan Bank advances to fund lending
activities with $34 million currently outstanding. Were it not
for these finance options, our customers would be at the mercy
of the big banks and brokers for mortgage services and we would
not be able to compete.
That's why fixing the housing finance system and getting it
right is so important to community banks. Our priority for this
committee, either as part of housing finance reform or
separately, must be correcting the injustice suffered by more
than a thousand community banks when Treasury allowed the value
of their GSE preferred shares to plummet when Fannie and
Freddie went into conservatorship. Community banks invested in
preferred shares with the encouragement of the regulators, only
to have the rug pulled out from under them.
Even former Treasury Secretary Paulson, under whose watch
this happened, called it an ambush. In my opinion this led
directly to the failure of a large number of ``too-small-to-
save'' banks by wiping out excess capital and making it almost
impossible to raise new capital. This was unconscionable.
Restoring the $15 billion to $20 billion in community banks'
capital value that vanished as a result of the Treasury actions
can foster $150 million to $250 million in new lending and help
in the economic recovery. And that is not an insignificant sum.
I would like to thank the members of this committee who
have spoken out in support of community banks on this subject.
There is a wide range of proposals being considered to restore
the housing GSEs and reform the housing finance system, and
some would function better for community banks than others.
We believe any discussion should begin with the
fundamentals and consider what the corporate ownership and
governance structures of the secondary markets should look
like, and whether the mission of the GSEs is still adequate or
needs to be changed. Resolving these issues is an important
part of the reform effort; ICBA is still in the process of
examining these issues and others. However, as the matters are
sorted out, ICBA has developed a set of core principles we feel
should guide the debate. These principles are spelled out in my
written testimony, and I will highlight a few of them here.
The secondary mortgage market must be impartial and provide
equitable access and pricing to all lenders regardless of size
or volume. The secondary market must have a limited mission
focused on supporting residential and multi-family housing in
all communities. The conflicting requirements of a public
mission with private ownership must be eliminated. The
accumulation of retained earnings must be an important
component of the secondary market structure to help attract
equity capital when needed. And there should be more than one
secondary market to foster competition and provide better
access for community banks.
The functions of Fannie Mae and Freddie Mac should not be
incorporated into the Federal Home Loan Bank System whose focus
must remain that of providing liquidity to their members. And
Congress must ensure that the secondary market continues to
have government ties. Whether the Fannie Mae and Freddie Mac
charters are retained or a new secondary market is created,
they must have some government tie to ensure continued, steady,
and favorable access to the capital markets.
Finally, I would like to address the importance of the
Federal Home Loan Bank System to community banks. Federal Home
Loan Banks have not been immune from the financial stress that
has affected the entire financial industry. Yet, throughout the
financial crisis, they continued to provide advances to their
members without disruption, while other segments of the capital
markets ceased to function. Congress must ensure that this
stable, reliable, and resilient source of funding, liquidity,
and other products continues and is not diverted to other
social goals.
For example, some are already coveting the Federal Home
Loan Bank's Refcorp payments when the system's Refcorp
obligations are satisfied. I understand how tempting this may
be, but the Federal Home Loan Banks and their members, and
consumers and businesses that they serve should not be
penalized because the Federal Home Loan Bank paid off their
debts early. These earnings should be kept in the system to
build retained earnings for the system's financial condition
and not be siphoned off for other programs.
Thank you for the opportunity to present these views on our
Nation's community banks.
[The prepared statement of Mr. Hopkins can be found on page
84 of the appendix.]
Ms. Waters. Thank you very much.
Mr. Gleason?
STATEMENT OF THOMAS GLEASON, EXECUTIVE DIRECTOR OF MASSHOUSING
Mr. Gleason. Madam Chairwoman and members of the committee,
thank you very much for this opportunity today.
My name is Tom Gleason. I'm the executive director of
MassHousing based in Boston, Massachusetts, and I'm testifying
today on behalf of the National Council of State Housing
Agencies, which represents this country's housing finance
agency system.
I want to thank Congress and the Administration for making
housing a recovery priority. You provided HFAs with Federal
recovery resources and did it in a way that allowed us to break
through the barriers in the financial market. As a result, we
are right now helping to fuel the country's economic recovery,
financing hundreds of thousands of affordable homes for
America's working people, and generating jobs and tax revenue.
Madam Chairwoman, I especially want to thank you and the
members of this committee led by Chairman Frank for your
efforts to keep tax credit resources flowing over these last
few years, providing additional bonding authority in supporting
the Administration's bond purchase initiative.
We appreciate your efforts to continue and expand several
of these initiatives. Today, NCSHA calls on Congress and the
Administration to require future GSEs to make a powerful
commitment to affordable housing. We also recommend that
Congress direct future GSEs to use the proven HFA delivery
system to fulfill this commitment. We believe that a strong
secondary market is an essential component of our housing
finance system that must be preserved and strengthened, but
Federal Government support of the secondary market is also
necessary to finance affordable and sustainable homes and to
reach underserved people. These public purpose obligations
should be mandated and enforceable under Federal law and
regulation, and not simply be aspirational goals.
Some would argue that GSEs should not make affordable
housing investments, because that is what caused Fannie Mae's
and Freddie Mac's financial demise. We strongly disagree.
Buying affordable loans did not get the GSEs into financial
trouble. Buying bad loans did. Unfortunately, Fannie Mae and
Freddie Mac both made investments in subprime and non-
traditional mortgages that contributed significantly to their
financial woes. But this shouldn't negate the sound, affordable
housing investments that they made in housing finance agencies.
These investments have performed exceedingly well.
Further, while it's also true that the Federal Home Loan
Bank System is experiencing its own financial distress, bank
partnerships with FHAs have not contributed to it. In fact,
recognizing the strength of HFA lending, Fannie Mae has entered
into several exclusive arrangements with us, offering preferred
mortgage pricing in terms. Fannie and Freddie have also
purchased HFA mortgages based on their high quality, and
several member banks of the Federal Home Loan Bank System have
extended HFA's liquidity based on the strength of our
portfolio.
HFAs have proven over many decades that affordable housing
financing done right is not just good lending but good
business. We do it the old fashioned way: flexible but prudent
underwriting; fully documented and verified loans; extensive
homebuyer counseling; and a commitment not just to put a family
in their home, but to keep them there. I would like to give you
one specific example from Massachusetts, if I may.
My agency's loan portfolio has a delinquency rate right now
of 5.4 percent, compared to a 9.7 percent delinquency rate for
the conventional market in Massachusetts. That's a 44 percent
lower delinquency rate in our portfolio. Because of our proven
track record, NCSHA urges you to turn again to the time-tested
and consistently high-performing FHA delivery system to help
future GSEs achieve their affordable housing mandates.
We urge you to direct the GSEs to prioritize their
relationships with HFAs in designing their programs and rely on
us to carry them out. These public purpose mandates for GSEs
will require them to integrate a dedication to affordable
housing throughout their business culture and not simply treat
it as an niche business. Capitalizing the housing trust fund
from GSEs is essential, however, it should not be used as a way
to allow them to buy their way out of fulfilling their public
purpose mandates.
Future GSEs should make low-cost capital available to
support a broad range of housing finance for both homeownership
and rental housing. The GSEs should have broad authority within
prudent standards of safety and soundness to be innovative.
They should be able to respond quickly and nimbly to changing
market conditions and to take measured risks.
Finally, NCSHA recommends that HFAs play a key role in GSE
governance and have a seat at the regulatory table. This will
ensure that GSEs meet their affordable housing mandates by
informing those efforts and evaluating their success.
I thank you for this opportunity to testify, and I ask that
my full statement be included in the record. I would be happy
to answer any questions that you have.
[The prepared statement of Mr. Gleason can be found on page
80 of the appendix.]
The Chairman. Without objection, any information that any
of the witnesses want to provide will be made a part of the
record.
Mr. Randazzo?
STATEMENT OF ANTHONY RANDAZZO, DIRECTOR OF ECONOMIC RESEARCH,
REASON FOUNDATION
Mr. Randazzo. Chairman Frank, Congressman Hensarling, and
distinguished members of the committee, thank you for the
invitation to testify today.
My name is Anthony Randazzo, and I am director of economic
research at Reason Foundation, a nonprofit think tank that
advances the ways free market can be leveraged to improve the
quality of life for all Americans. There are two overarching
problems plaguing the housing industry today: uncertainty about
the future; and crippling price distortions that threaten to
prevent sustainable housing recovery.
Housing finance reform must be focused on addressing these
two issues. GSE reform is urgently needed and a plan should be
put into motion this year instead of waiting until 2011 or
beyond. As I discussed further in my written testimony, there
is a growing shadow inventory of homes, houses for which
foreclosure has only been temporarily delayed, rather than
prevented, and this is creating an excess of supply.
If current Federal housing policies and programs remain in
place, and the Federal reform process is dragged out, that
supply is only going to expand in the coming months, indicating
prices are artificially inflated and the market is distorted.
The current policy of the Treasury Department, as Secretary
Geithner has testified before this committee, is to wait until
housing markets are more stable before reforming the GSEs.
However, any such stable housing recovery will be artificial
and susceptible to sudden declines, either from another bubble
bursting, or from the emergence of a large supply of homes out
of the shadow inventory hitting the market.
Fannie and Freddie's support of the housing market, backed
by low interest rates from implicit government guarantee led to
rapidly increased home sales in the last decade, which
contributed to the spike in housing values from 2002 to 2006.
Those perpetuate and pretend prices turned out to be
unsustainable, since they were distorted by boom and bust
government policies. As such, fixing the GSE problem is
necessary before a real sustainable recovery can actually take
hold.
Fannie and Freddie cannot immediately be eliminated,
because virtually the entire mortgage market is dependent on
them as a wastebasket for toxic mortgage debt, and this stems
from the Treasury Department's bailout of the GSEs, propping
them up as the main source of liquidity in the mortgage market
today. But a strategy for dissolving them over the next few
years can and should be created now.
My written testimony offers some suggestions on how they
could be wound down in a prudent way without shocking the
market, and allows the government to continue its affordable
housing mission to the Federal Housing Administration. Some
specific principles for reform: First, Congress should focus on
encouraging and fostering a sustainable recovery not bailing
out homeowners in the near term. Waiting to reform the GSEs
would perpetuate the boom and bust cycle and risk the creation
of yet another housing bubble that will eventually collapse.
Furthermore, waiting perpetuates the uncertainty in the
financial markets that is largely frozen capital. Keeping
lenders in perpetual limbo on what the future market for
housing finance will look like and waiting increases risk to
taxpayers. The longer the GSEs are allowed to operate in their
current role as political rather than business entities, the
greater the potential for financial losses will be for
taxpayers.
Second, Congress should support a framework for mortgage
financing that does not distort prices. In order for the
mortgage and housing markets to be stable for lenders to act
more responsibly, perverse incentives must be removed from the
system. Only when price distortions are removed and assets are
more realistically and competently valued will private capital
return to the market allowing the GSEs to wind down prudently.
Third, there should be an effective framework for the
private sector to step into the current role that the GSEs play
in the market. It is important to note that Congress cannot
engineer the exact means for how the private sector will
innovate and engage the mortgage and secondary mortgage
markets. Congress should simply design rules to encourage
private capital as the main source of mortgage financing, avoid
market distorting policies, ensure transparency, and keep
taxpayers from shouldering risk.
In conclusion, the housing market must be permitted to find
its natural bottom, because that is the only real way to begin
to fix it after years of distortion. While the housing market
is weak is precisely the time to act in reforming the GSEs and
promote innovation. GSE reform is not an ace of spades to trump
all housing woes. Principal reform will mean short-term paying
as negative equity and foreclosures get worse.
But, in the long term, homeowners and businesses will
benefit from a soundly valued market and access to growing
private capital. Meanwhile, taxpayers will be spared the
inappropriate risks and crippling debt being taken on by the
government. The result would be a stable foundation for growth
that puts America on a path to a sustainable housing market.
Again, thank you for the opportunity to testify. I look
forward to answering any questions you may have.
[The prepared statement of Mr. Randazzo can be found on
page 105 of the appendix.]
STATEMENT OF RICK JUDSON, THIRD VICE PRESIDENT, NATIONAL
ASSOCIATION OF HOME BUILDERS (NAHB)
Mr. Judson. The housing GSE system functioned well for
decades, but the past few years have seen unprecedented
turmoil, to say the least.
While we are here today to discuss the future of the
housing finance system, one thing is clear. The status quo
cannot be maintained. NAHB has had a strong and long-standing
interest in the maintenance of an efficient secondary mortgage
market system, and the role of the GSEs.
NAHB believes that it is crucial for the Federal Government
to continue to provide some type of backstop for the housing
finance system. Such conditions are underscored by the current
state of the system, where Fannie Mae, Freddie Mac, and the
Federal Home Loan Banks and the Federal Housing Administration
and Ginnie Mae are the only conduits for residential mortgage
credit.
NAHB believes a Federal backstop must be a permanent
fixture, in order to ensure consistent supply of mortgage
liquidity, as well as allow rapid and effective responses to
market dislocations and crises.
With regards to the future of Fannie Mae and Freddie Mac,
however, NAHB recommends major, major changes, in terms of
structure and operations. NAHB recommends creating private
companies called ``conforming mortgage conduits,'' or CMCs,
which would be chartered to purchase conforming conventional
mortgages that are originated by approved mortgage institutions
such as banks, savings and loan associations, mortgage banking
companies, and credit unions. These CMCs would issue securities
backed by those mortgages, which would carry a Federal
Government guarantee of the timely payment of principal and
interest for the securities and their investors.
CMCs would guarantee the timely payment of the mortgages
that are pooled in the government-guaranteed securities.
However, CMCs and the mortgages themselves backing these
securities would not have implicit or explicit support from the
Federal Government. CMCs would be required to be well-
capitalized, and to maintain reserves at levels appropriate for
the risk exposure.
The CMCs would also pay fees in exchange for their
securities receiving the Federal guarantee. Those fees would
capitalize an insurance fund similar to what is maintained by
the FDIC currently, which, along with the CMC reserves and
private mortgage insurance coverage, would cover loss exposure
on the mortgages and the CMC securities.
The Federal Government, therefore, would only be called
upon to support conforming, conventional mortgage markets under
catastrophic situations when the capital and the insurance of
the securities insured and the resources of the CMC mortgage
insurance companies' fund have been depleted.
NAHB believes that the mortgages eligible for inclusion in
these securities and in an explicit Federal guarantee would be
tested and well-understood features in the well-known risk
characteristics, including fixed-rate mortgages, standard
adjustable rate mortgages, and selected multi-family mortgages.
Such standards could be set by Congress.
As this committee moves forward framing a new secondary
market structure, NAHB urges careful consideration of the
short-term and the unintended consequences that could occur
during the transition to a new housing finance system. Any
changes should be undertaken with extreme care, and with
sufficient time to ensure that U.S. home buyers and renters are
not placed in harm's way, and that the--efficiently and
effectively, as the old system is being abandoned, a new system
can be put in place.
Thank you for the opportunity to speak to you.
[The prepared statement of Mr. Judson can be found on page
92 of the appendix.]
The Chairman. Thank you. Again, as I said, I believe there
is a consensus that we need to replace the current system. The
question is whether that's all we need to do. There are some
who say that's just--let me start with Mr. Reed.
Would it be sufficient, in your judgement, to pass
legislation phasing out Fannie Mae and Freddie Mac, and take no
other legislative steps?
Mr. Reed. Thank you for the question, Mr. Chairman. I think
that would not be sufficient. I think certainly something has
to be done with the existing assets. An equitable and fair
solution has to be arrived at for the existing assets.
The Chairman. Well, you talk, though, in your testimony
about some other entities that you thought should be--let me--
Mr. Reed. Yes, sir. That was--that would be the second
point I would like to make, which is in our proposal there--we
do call for the establishment of a single utility that would be
responsible for the physical creation of the MBS, the
transformation--
The Chairman. Well, that's my question. Should we legislate
them so that they take effect simultaneously?
Mr. Reed. I would, yes. I think--to your point, I think one
could start to build out the infrastructure that we are
describing while the current GSEs are in process.
The Chairman. Yes. I am concerned that if we them, and
don't put that in place, then I don't know quite how we would
carry out some of what they need.
Mr. Judson, let me ask you a similar question. Would it be
sufficient simply to phase out the GSEs and then take no
further legislative steps?
Mr. Judson. A transition to the new entity, whether that be
a utility-type company or the conforming mortgage conduit that
I referenced, whatever that transition would be, it does need
to be a transition. And a dismantling of the GSEs would be
appropriate, because they are not working under the current
condition.
The Chairman. I understand. And, as I said, I think the
dismantling of the GSEs is not in question, and we have to deal
with the assets. But we're talking about some functions that
are not performed there, whether or not you can simply put them
out of business and not have this new utility. And that, when
people ask about the delay, the issue is to make sure we get
that right. That's what we're looking for, is some kind of
input on that. So, I appreciate what you said.
Let me ask Mr. Gleason. What do you think? Can we just move
to that, or would it be sufficient simply to phase them out as
they--and you're speaking for the Council of State Housing
Authorities, correct, not just Massachusetts?
Mr. Gleason. Yes, Mr. Chairman, that's right. To your
question, I don't think it would be appropriate to phase out
the GSEs and not put anything simultaneously in their place. We
clearly need a functioning secondary mortgage market. I don't
think there is any doubt about that.
I think dismantling Fannie and Freddie without putting an
alternative mechanism in place would not be the way to go.
The Chairman. Let me ask again from the supply side. Mr.
Hopkins?
Mr. Hopkins. My concern would be that if we didn't have a
functioning secondary market, it would--without competition
from the community banks, that the cost to the homeowners would
go up. There would be no price competition. We help with the
price competition, so there needs to be a functioning secondary
market.
The Chairman. I appreciate that, and I think while,
obviously, the private sector we hope to increase and encourage
that, my own view is that simply abolishing Fannie Mae and
Freddie Mac, which is going to happen, without making sure that
we have taken steps to facilitate, if necessary, the creation
and set the rules of the private secondary market, it would be
a mistake.
Let me ask Mr. Randazzo. You talked about the further
problems for the taxpayers if we don't immediately abolish
them. The Secretary testified that the ongoing activities are
not causing a loss, that the losses result from the kind of
sunken cost. Did you disagree with his analysis on that?
Mr. Randazzo. No, I think that's correct. I think that the
future further tax losses will come from the fact that building
a recovery on the way that the current policies and--the
current way that we're funding mortgages today is going to
create another bubble.
The Chairman. I appreciate--
Mr. Randazzo. Eventually that bubble is going to pop, and--
The Chairman. And that's a valid argument. But it's not
that the activities of Fannie Mae and Freddie Mac, in and of
themselves, are causing tax losses.
Mr. Randazzo. The activities of Fannie Mae and Freddie Mac,
in what they are issuing right now into the--or not issuing.
The mortgages that they are purchasing right now in their
current portfolio, those have the potential, as the Secretary
actually testified this morning, to actually have losses in the
future. Those are the tax losses.
The Chairman. Yes, everything has the potential. But the
ongoing activities are not now causing losses.
Mr. Randazzo. No, the ongoing activities--or the existence
of Fannie Mae and Freddie Mac right now, the--what they had
before, those are losses that are leaking into the system.
The Chairman. Right. And so no matter how quickly we
abolish--
Mr. Randazzo. There will be losses, no matter how fast--
The Chairman. Those don't diminish because of that.
Mr. Randazzo. Absolutely.
The Chairman. Thank you. Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman. Earlier, I think
many of you were here for Secretary Donovan's testimony, where
he opined that the affordable housing goals of the GSEs played
no role in their demise.
I note that in 1992, Congress required the GSEs to purchase
CRA loans as part of its affordable housing mandate. In 1995,
HUD authorized Fannie and Freddie to purchase subprime
securities, including loans made to low-income borrowers. In
1996, HUD required that 42 percent of Fannie/Freddie mortgage
financing go to borrowers with income levels below the median,
later increased to 56 percent by 2008. In 2004, Fannie and
Freddie purchased $175 billion in subprime mortgage securities,
which accounted for almost half of the market that year. And
the record goes on.
Mr. Pollock, do you believe that the affordable housing
goals of the GSEs played any role in their demise?
Mr. Pollock. Yes.
Mr. Hensarling. Well, I could not ask for a more clear
answer there.
Let me ask another question. I have had a number of
witnesses say that apparently we need government guarantees. We
need some kind of GSE structure, and I didn't hear anybody talk
about this in their testimony.
But it appears to me, as I look at the mortgage market
prior to the meltdown, we had a fairly competitive mortgage
market in the jumbo market. We had a fairly competitive market
in subprime.
I look internationally, and I see countries like Denmark,
who has--their housing prices have declined, similar to ours,
but there has been no surge in delinquencies or foreclosures.
They use a covered bond market. And, to the best of my
knowledge, there are no government guarantees in that
particular system. I see Canada has no housing GSEs. Their
homeownership rate, I believe, exceeds our own. In Canada,
loans are full recourse to the mortgage borrower.
So, I just question, when I look at our own historic
experience, when I look at international examples, I am having
a hard time believing that somehow you must have a government-
sponsored enterprise, and the taxpayer hemorrhage that goes
along with that, to have a functioning secondary mortgage
market, much less high rates of homeownership.
So, if there is somebody who studied these examples and
wants to push back, or--Mr. Pollock, yes, I will let you
comment again.
Mr. Pollock. I don't want to push back, but I have studied
these examples with some care, Congressman. What you say about
Denmark is true. That's an exceptionally interesting housing
finance system.
I gave a presentation in Denmark a few years ago about the
American system of GSEs. When I was done, the CEO of one of the
main Danish mortgage banks which issues their covered bonds
said to me, ``Everybody always says about us in Denmark that we
are the Socialists and America is free enterprise.'' He said,
``I see that when it comes to housing finance, it's the
opposite.''
Mr. Hensarling. I appreciate that observation. I have also
seen--I don't have it at my fingertips, but I believe there is
a study by the Federal Reserve showing that the GSE benefit to
the home purchaser was ultimately something like eight basis
points, which means that, ultimately, maybe a purchaser was
able to purchase at 4.92 percent, instead of 5 percent.
But on the flip side, when you pay your mortgage, you are
also paying the principal, which means that if you artificially
increase demand, you might drive up the cost on the principal
side, and ultimately you're no better off, because what you
gain, which, arguably, is very little on the interest side, you
lose on the principal side. And now, as I said in my opening
statement, there are at least 127 billion reasons that the
taxpayers would not like to see the GSEs maintained,
particularly with anything remotely resembling a Federal
backstop.
Again, I ask, what is the necessity and what is the
benefit, when we are a nation that is already on the road to
bankruptcy, and Fannie and Freddie will obviously prove to be
the mother of all bailouts?
Mr. Reed, I would be happy to let you comment.
Mr. Reed. Thank you, Congressman. To be clear, our proposal
does not call for a continuation of the GSEs in the current
form. What we advocate is that the guarantee, if there is one,
be placed on the MBS, not on the corporate entities themselves,
which I think is an important distinction between the ``GSE
model''--
Mr. Hensarling. And who is guaranteeing the MBS?
Mr. Reed. The MSICs. Actually, there would be several
layers of capital. First, the home buyer's equity mortgage
insurance, the equity in the MSICs, and then a reserve fund
that we propose be in between them, as well.
But to your point, it's an important question. Why have any
government guarantee at all? And I think it is an important
question. I think everyone would agree that--has agreed on the
importance of the secondary market, as a means of financing the
housing market that we have here in the United States. And I
think--I have seen studies as well that have pointed to the
past decade and said there has really been very little benefit.
The Chairman. Finish up.
Mr. Reed. But I think that might miss the point, which is
over the past decade perhaps investors--and lenders, and
everyone in the process--were not evaluating the risks
appropriately.
So, if you go back and you just use the past decade, and
you say--and I agree with you, if you look at the spread
between AAA, non-agency securities, and MBS securities, there
has been a fairly--range. But the point of the policy, and the
point of why Fannie Mae and Freddie Mac were created in the
first place, was to ensure consistent access to reasonably-
priced finance. And what you will see is that spread between
AAA, non-agencies, and MBS could range somewhere--it has been
as low as, say, 20 basis points. It has been as high as 200
basis points. And, in fact, the non-agency market has ceased to
exist.
So, if the policy objective is to ensure consistent and
reasonably-priced homeownership, then we would advocate the
most efficient way to do that is to put private capital in the
first loss, and a government guarantee on the MBS, only in the
event of catastrophe.
The Chairman. Thank you, Mr. Reed. The gentlewoman from
California.
Ms. Waters. Thank you very much. Let me thank our panelists
for being here today.
It is no secret that I was and I am a supporter of GSEs. I
did not support and do not support the move to risky mortgages
that our GSEs ended up involving themselves in. I think that
the mission of the GSEs is a credible mission.
But the fact of the matter is, as I understand it, our GSEs
started to compete with our private mortgage companies like the
one that was--Countrywide, Mr. Mozilo, and they were putting a
lot of risky products out on the market. They were--actually,
Mr. Mozilo was the poster child for the ARMs and the other
risky mortgages that were put out there. And it caused Fannie
Mae--even though I don't support the fact that they tried to
compete with them for it.
So, here you have a mortgage company like Countrywide and
others which, instead of giving people prime loans who were
deserving of prime loans, were giving them subprime loans and
all of the exotic products that you could think of.
So, you had a private market, you had people eligible for
prime loans. They were not getting them. They were thrown into
subprime. GSEs started to compete to get that business, and of
course that has created all of that debt, and I think the
downfall of the GSEs.
How do you propose to have a private, totally private
secondary market that could operate in the way Countrywide was
operating and take care of our needs with low- and moderate-
income would-be home buyers? Mr. Pollock?
Mr. Pollock. Thank you, Congresswoman. I think the case is
that with a private secondary market, Countrywide would not
have been able to operate in the way that it did operate.
Countrywide and Fannie Mae, for a long time, had a symbiotic,
mutually supporting and mutually dependant relationship.
There are secondary markets in debt securities of all
kinds--in corporate bonds, in municipal bonds, in charge card
loans--which are pure, private secondary markets in debt. And
that's what we should have for prime conforming loans. And I
think that market would work quite well.
For loans which are non-market loans, that other part of
the GSEs, that, if we wanted to have the government do it,
should be honestly made into a government function, like the
FHA is.
Ms. Waters. So, I guess what I just heard was that the
private market should be able to take care of all of the prime
loans, the secondary prime loans, without any problem. Is that
what I heard?
Mr. Pollock. Congresswoman, it's never the case in human
affairs--and certainly not in financial affairs--that we
operate without any problem. We always have problems. And
finance has its own problems. But it is my view that if the
GSEs were not there to dominate the market, and extract
monopoly rents from it, that a private market in prime
conforming loans would operate quite successfully.
Ms. Waters. And so, your preference is to transition to no
GSEs, period. Is that right?
Mr. Pollock. That is correct.
Ms. Waters. Thank you very much. I yield back.
The Chairman. The gentleman from New Jersey.
Mr. Lance. Thank you, Mr. Chairman. Good afternoon to you
all.
If we move to a private secondary market, as I favor--and,
Mr. Pollock, you indicate that, as I understand it, you favor
that as well. How about you, Mr. Randazzo, could you explain
your position regarding that?
Mr. Randazzo. I think it's important to understand that a
private secondary market is going to look very different than
what we have right now.
Mr. Lance. Yes.
Mr. Randazzo. And it's impossible for this committee, for
Congress, to engineer exactly what that's going to be. So
it's--for us to sit here and explain exactly what it's going to
look like to the detail would be impossible, and would be
unwise.
What is important to understand is that without the GSEs
there, there will be less distortions in the market, and there
will be wider room for private capital to step into place,
whether that's through the use of covered bonds, restarting
securitization, or something that we don't even know or have
heard of.
Mr. Lance. And I presume it would be your position that the
sooner the GSEs are wound down, the sooner the private market
can be involved in this.
Mr. Randazzo. Absolutely. As I put forward in my written
testimony, the longer, actually, that we have the GSEs around,
the harder it's going to be to let the private sector into the
market.
Mr. Lance. Regarding the question Congressman Hensarling
asked Mr. Pollock based upon the testimony of the Secretary
earlier today, is it your position that the GSEs were involved
to some extent in the financial situation that affected this
country?
Mr. Randazzo. Absolutely. They were a driving force.
Mr. Lance. I believe they were certainly one of the driving
forces. There may have been--
Mr. Randazzo. Absolutely.
Mr. Lance. --others, but they were certainly one of them.
Is there anybody on the panel who disagrees with Mr.
Randazzo and Mr. Pollock, and agrees with the Secretary?
Ms. Crowley. Agrees with the Secretary, that the GSEs did
not cause the financial meltdown?
Mr. Lance. Yes.
Ms. Crowley. I would say that the supposition that the
requirement that the GSEs participate in the affordable housing
market is--and that was what led to the financial meltdown is
not accurate, nor any of the other requirements that the
financial institutions engage in meeting social obligations.
I think that Mr. Gleason said it best. It wasn't that they
did affordable loans, they bought bad loans, and that those
were loans that shouldn't have been purchased.
There is going to be a lot written about what it is that
caused the financial meltdown--
Mr. Lance. I know I wouldn't say the GSEs did it alone. I
don't want to be interpreted as meaning that they alone were
responsible. I think that's clearly inaccurate. I would say
they, with others, but certainly not alone.
Ms. Crowley. I would say that there is--we had a culture, a
message that was permeated throughout our country, that
homeownership was the preferred form of housing tenure.
Homeownership was idealized to the extent that if you weren't a
homeowner, there was something wrong with you, and rental
housing was demonized and had a very negative connotation.
And so, you couldn't turn on the TV without having somebody
tell you how to become a homeowner, which would make you a
better person, and how to do it cheaply, and how to get it--get
that money very fast. And so I think that message, along with
the availability of those kinds of very bad mortgages led us to
this situation. And I think we all bear responsibility for
that.
Mr. Lance. Thank you. My own view is that the culture in
this society is that we have far too much debt. The Federal
Government is certainly a prime culprit in that regard. And the
culture that somehow we can all get rich quick is something
that, obviously, I disagree fundamentally.
I hope that the new culture of this country will be much
more responsible, fiscally, across-the-board regarding various
entities, including the successors to GSEs, I hope in the
private market, and certainly, ultimately, getting our fiscal
house back in order here at the Federal level.
Thank you, Mr. Chairman. I yield back the balance of my
time.
The Chairman. The gentleman from North Carolina, Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. I want to direct my
questions to Mr. Judson and Mr. Pollock. Mr. Judson, I welcome
him, he is from my hometown, so I told him I was going to pick
on him a little bit.
The chart that you have on the back of your testimony deals
with--all the way on the last page of the testimony, there is a
chart that looks pretty complicated. But it seems to me to deal
only with conforming, conventional mortgages, nothing--so I
assume one part of your approach would be to deal only with
conforming, conventional mortgages in the Federal Government
context of any kind.
Mr. Judson. That is correct, Congressman. Whatever entity
is created to replace the GSEs, they would be conforming loans
only.
Mr. Watt. Okay. And so, if one would not qualify for a
conforming, conventional mortgage security, the government
might set up some external entity to help that person qualify,
possibly by providing downpayment assistance, or getting them
ready to go into a conventional mortgage loan. Is that correct?
Mr. Judson. That is absolutely correct. That would help
solve the problem that had occurred.
Mr. Watt. I took it to be. Now, Mr. Pollock, the approach
that you advocated for in your answer to Ms. Waters's testimony
would involve solely conventional loans also. Isn't that right?
Mr. Pollock. Congressman, what I was saying is for the
market of conforming, conventional prime loans, which is, by
far, the biggest part of the market--
Mr. Watt. And you think that can be done only in the
private sector, without any government involvement?
Mr. Pollock. That is correct, Congressman.
Mr. Watt. Now, would you need, under your theory, this
mortgage insurance fund? I gave you a copy of what Mr. Judson's
organization, the Home Builders, have proposed. Would you even
need the mortgage insurance fund part of that? Or what would
happen if somebody defaulted? That would be just the cost of
doing business for the lender, or would there be some mortgage
insurance fund that would take up that slack?
Mr. Pollock. Congressman, this diagram which we have here
is not too bad, in my view, as one possibility for how private
conforming loan financing might work. We wouldn't need the
Federal Government guarantee on there, in my opinion, since
government guarantees always call forth the leverage which
causes them to be needed.
Mr. Watt. So you would drop the government, Federal
Government, guarantee part of it?
Mr. Pollock. I would drop that Federal Government
guarantee. Whether or not you needed a fund would be a matter
of design of the system. You can certainly design private
systems that have back-up insurance funds. That is a--
Mr. Watt. But without the government guarantee, it might
increase the premium in the fund, I take it.
Mr. Pollock. It might.
Mr. Watt. Okay. Mr. Judson, how do you react to what Mr.
Pollock is saying? Do you need a Federal Government guarantee?
Mr. Judson. I think you do need a Federal Government
guarantee.
Mr. Watt. Why?
Mr. Judson. To provide some security to the investor. Now
this is for the mortgage securities. One of the problems has
been in the past--
Mr. Watt. But if this is a private market situation, why do
you need to provide that security? Why would the government be
involved in this, if we are providing our subsidies or input
from the borrower side, getting them ready for a conforming
market, giving them--providing them possibly downpayment
assistance so that they have an equity in whatever they are
investing in from the outset, why would you need a Federal
Government guarantee?
Mr. Judson. If these are non-conforming or non-qualifying
loans under normal conditions, whether--
Mr. Watt. No, these are conventional loans.
Mr. Judson. The--
Mr. Watt. You said--that was the first question I asked
you. This is a conventional market. That's the only way you get
us involved, right?
Mr. Judson. That is correct. And it's only at roughly an 80
percent level. There are three layers of insurance, we will
say, between you--between the Federal Government and that
investor.
Mr. Watt. Okay. I yield back. I will ask you questions back
in Charlotte.
Mr. Judson. Okay.
The Chairman. The gentleman from California.
Mr. Royce. Thank you, Mr. Chairman. Mr. Pollock, Mr.
Donovan and I were discussing earlier the issue of the
affordable housing policies implemented by the Federal
Government, and whether or not that contributed to the housing
boom and bust. What do you think on that issue?
Mr. Pollock. I think it did. I think housing booms are fed
by credit. The more credit you push at an asset, the higher the
price of that asset tends to be. As I said in my testimony,
Congressman, there tends to be, in a boom, let alone a bubble,
a positive disequilibrium feedback loop between those two
factors.
And, as Congressman Hensarling suggested a minute ago, one
of the problems when we try to make housing more affordable by
increasing credit is we tend to push up the price of the
housing. We need to consider both of those factors.
Mr. Royce. We are talking about the future of mortgage
financing. But it appears that we may not have learned these
lessons about the clear distortions in the market that can be
caused by intervention by the Federal Government. That's part
of the concern I have.
Getting every American into a home was the goal. The GSEs
were the primary vehicle for that. But unfortunately, today our
economy is dealing with the consequences of that misguided
decision, along with other misguided decisions which helped get
us into this predicament.
But, Mr. Pollock, why did a private secondary market for
prime mortgages never develop?
Mr. Pollock. Congressman, I think the answer to that is it
never developed because it was crowded out by the government-
advantaged market of Fannie Mae and Freddie Mac. No private
market could compete with the various and very large advantages
that the two GSEs had.
Mr. Royce. So, we ended up with a duopoly and a certain
amount of moral hazard that economists argue always comes when
a Government-Sponsored Enterprise is presumed to have the
government behind it.
Let me ask Mr. Randazzo a question. Many have noted that
the mortgage finance market has been unusually susceptible to
boom and bust cycles. And let me ask you, what do you believe
is the major contributor to this phenomenon?
Mr. Randazzo. In the most recent boom, I think, as Mr.
Pollock pointed out, credit drives a bubble, and we had both
the GSEs and various other policies of the Federal Government,
including the CRA, that fed into that--that helped feed credit
into that bubble.
And when you have a distortion of the amount of credit
that's available, you drive down mortgage prices. When you
drive down mortgage prices, it is easier for more people to get
mortgages. That drives up the prices of homes, in general, and
you create a boom.
Without the GSEs or any government price distorting aspect,
you are going to have less of a boom and bust cycle. If there
is any boom and bust cycle, it would be a minimum.
Mr. Royce. And so, what would be a couple of your
suggestions for ending the tendency towards these pronounced
boom and busts, anyway, that have plagued the market? Why don't
you give us some of your suggestions on that front?
Mr. Randazzo. Well, in terms of winding down the GSEs in--
over the next few years, I think that the first thing that you
need to do is to begin to lower the conforming loan standards
of the GSEs. This will begin to allow the private sector to
step into--step in behind that, as the conforming loan
standards drop, and there is more open space in the secondary
market.
And then you can begin to, over time--as the secondary
market is taken over by the private sector, you can, over time,
wind down the GSEs' portfolios and their MBS pools.
Mr. Royce. And do you think, also, the Federal Government
setting the interest rate at below inflation also--
Mr. Randazzo. Yes, and I think that's absolutely a critical
part. What this committee can do to encourage the Federal
Reserve to begin to increase interest rates is very important,
because as long as the interest rate is set at an artificially
low level, you will have a distorted supply of credit.
And, in particular, I think as long as the interest rate is
as low as it is, there is no incentive for the private sector
to be lending money in the mortgage markets, because they can
use other means to sort of ride out this unstable period of
uncertainty, without having to use mortgage--use profit from
mortgages to generate profit.
Mr. Royce. Thank you, Mr. Chairman.
The Chairman. The gentleman from Texas.
Mr. Green. Thank you, Mr. Chairman. And I want to thank the
Independent Community Bankers. Mr. Hopkins, you represent them.
I want to thank them for the role that they did not play in the
crisis.
I would like to drill down just a moment on this question
of how the GSEs played a role in the crisis, because the
products somehow are being equated to the institutions. It was
subprime loans wherein buyers were qualified for teaser rates,
but not qualified for adjusted rates that created a problem in
the subprime market.
Does everybody agree that was a problem, that buyers who
qualified for teaser rates did not qualify for adjusted rates,
and then these loans were passed on to someone or some other
entity, the originator of the loan passed on all of the
liability to some other entity, maybe GSE, but passed it on?
And so, it was the product that created a real problem, in
terms of the subprime market. And I would like to debate that,
but I don't have the time, Mr.--is it ``Randazzo?'' Am I
pronouncing your name--
Mr. Randazzo. ``Randazzo.''
Mr. Green. ``Randazzo,'' all right. I don't have the time
to debate that with you, but I would like to debate at some
point the question of the products versus the institutions,
because the products were all products that were--came into
being because of changes in the laws. The Alternative Mortgage
Transaction Act, 1982 I believe it was, changed that--made it
possible for us to have a lot of these exotics. So, it was
products.
But now, let's come to something that I did want to talk to
a couple of you about, and do want to talk about in the--I hate
to follow the same paradigm as Mr. Watt, but the truth is he
and I had the same thoughts, so I have to pursue it the same
way.
Mr. Reed--not you, Mr. Judson, but Mr. Reed now--on page
seven of your testimony, you indicate that the Federal
Government would not back the MSICs. But it would back the
secured transactions, the securities themselves. Is this
correct?
Mr. Reed. Yes, sir, that's correct.
Mr. Green. Okay. So now you have the government as a
backstop. Mr. Judson, you have the government as a backstop, as
well. And, Mr. Pollock, it's your opinion that is not a good
idea. Is this correct?
Mr. Pollock. That's correct, Congressman.
Mr. Green. And you would simply allow the market to
function without the benefit of a government backstop with any
sort of entity, whether you call it GSEs or you call it MSICs.
In your world, it's the same, eventually.
Mr. Pollock. For the prime conforming market, yes,
Congressman, that's right.
Mr. Green. Okay. Now, let's just see how many folks agree
with this. Because at some point--I don't mean to put you on
the spot, sir, but we need to get some sense of where we are
here.
If you are of the opinion that there should be no
government backstop at all, kindly extend a hand into the air,
so that--or let me just start. Mr. Reed, yes or no? No
government backstop at all?
Mr. Reed. No. No, sir. We believe there should be a
government backstop.
Mr. Green. Should be. Okay, Ms. Crowley?
Ms. Crowley. Yes, there should be a government--
Mr. Green. Should be. We know where you are, Mr. Pollock.
Mr. Hopkins?
Mr. Hopkins. Yes, there should be a government backstop.
Mr. Green. All right. Mr. Gleason?
Mr. Gleason. Should be.
Mr. Randazzo. There should not be.
Mr. Green. Should not be?
Mr. Judson. Yes.
Mr. Green. Yes.
Mr. Judson. Should.
Mr. Green. Okay. I--the public is always interested in
knowing the source of all of these things. Do you find that
most people, Mr. Reed, that you work with in the industry--in
the industry--are of the opinion that there should be some sort
of backstop?
Mr. Reed. Thank you, Congressman. The committee that I am
co-chairing represents about 18 of the top lenders in the
country, and mortgage insurance companies, and others involved
in the lending industry. And I think there is an almost
unanimous opinion that, again, if what we are trying to achieve
here is consistent access to reasonably-priced home finance,
that a government guarantee is--
Mr. Green. Mr. Hopkins, quickly. Are you with the bankers,
or do you find that most people in the industry, who have a
hands-on experience, what are their thoughts?
Mr. Hopkins. Well, I think they believe there should be
some sort of a government backstop on it. We are dealing with
Fannie Mae and Freddie Mac. We have done it for many, many
years. And we have very low foreclosures. On 3,000 loans last
year, we only had 4 foreclosures for Fannie Mae and Freddie
Mac. So it can be done right. You have to use appropriate
underwriting.
Mr. Green. Yes, sir?
Mr. Reed. Congressman, just to emphasize again, what we
advocate, again, is not a guarantee of the corporate entities
themselves. They should be allowed to fail.
Mr. Green. Yes.
Mr. Reed. They make bad decisions, they ought to be allowed
to fail. But we do advocate some mechanism to assure MBS
investors of what they are getting.
Mr. Green. Okay.
Mr. Reed. And--
Mr. Green. Thank you. I will have to yield back now. Thank
you very much.
The Chairman. The gentleman from Missouri.
Mr. Cleaver. Thank you, Mr. Chairman. Just two short
questions. Ms. Crowley, as I struggle with the whole issue with
the GSEs--and you have been around here a great deal--I am
wondering if perhaps one of the problems is the mission. The
two main missions would be to make a profit and to increase the
supply of affordable housing. Do you see those as conflicting?
Ms. Crowley. Well, I would say that certainly some people
see that as conflicting. Our view would be that when you are
dealing with a commodity that is so necessary as housing or
health care or other things that are basic human needs, that--
and you're relying on the private sector to do the majority of
the provision of that basic human need, and that there is a
profit to be made from that, that in fact there should be some
corollary social responsibility that goes along with that.
And it would be lovely if everybody who made a profit
understood they had a social responsibility, but that's not
always the case. And so, usually that has to be regulated by
the government in some way.
Mr. Cleaver. Thank you.
Ms. Crowley. Okay.
Mr. Cleaver. Mr. Randazzo, my last question. This is more
philosophical, but how difficult do you think it would be for
Congress to eliminate Medicare?
Mr. Randazzo. To eliminate Medicare?
Mr. Cleaver. Yes, sir.
Mr. Randazzo. I think it would be difficult, though
probably needed.
Mr. Cleaver. How difficult do you believe it would be to
eliminate the GSEs, or some kind of a backstop?
Mr. Randazzo. Difficult, but it would be easier.
Mr. Cleaver. Easier than Medicare?
Mr. Randazzo. Easier. I think it's absolutely doable, if--
with the principle that the mortgage market is going to change.
The secondary mortgage market would not look the same as it is
today, with the GSEs.
Mr. Cleaver. Yes. Of course, you could explain all the
things that would happen in Medicare, as well.
Mr. Randazzo. Sure. But the--
Mr. Cleaver. And--
Mr. Randazzo. The GSEs, it would be unpleasant in the short
term. It would benefit all homeowners and taxpayers in the long
term.
Mr. Cleaver. So we call a press conference and say,
``Everybody here is going to suffer for a while, but just
suffer in joy because it's going to change later?''
Mr. Randazzo. There are short-term pains that are going to
come with any significant change in government policy. And the
GSEs have been well-rooted into American society and--
Mr. Cleaver. Yes, that's the point--
Mr. Randazzo. --the market for a long time. But yes, there
will be some short-term pains as a process of phasing out the
GSEs, as we try to figure out how the private sector is going
to step in behind them.
Mr. Cleaver. All right, thank you. Thank you, Mr. Chairman.
The Chairman. If the gentleman would yield to me his
remaining time, I would just like to say that while the
gentleman from Missouri, for rhetorical purposes, talked about
eliminating Medicare, I want to reassure all my fellow Medicare
recipients, that is not something being currently
contemplated--heading off some phone calls before they come.
I thank the witnesses and the members. This has been
helpful in advancing this discussion. And the hearing is over.
[Whereupon, at 12:50 p.m., the hearing was adjourned.]
A P P E N D I X
April 14, 2010
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