[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                   THE FUTURE OF HOUSING FINANCE: THE 
                   ROLE OF PRIVATE MORTGAGE INSURANCE 

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,

                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 29, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-149

                               ----------
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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
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

               PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York           SCOTT GARRETT, New Jersey
BRAD SHERMAN, California             TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts    MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas                PETER T. KING, New York
CAROLYN McCARTHY, New York           FRANK D. LUCAS, Oklahoma
JOE BACA, California                 DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
BRAD MILLER, North Carolina          JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia                 SHELLEY MOORE CAPITO, West 
NYDIA M. VELAZQUEZ, New York             Virginia
CAROLYN B. MALONEY, New York         JEB HENSARLING, Texas
MELISSA L. BEAN, Illinois            ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin                J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire         JIM GERLACH, Pennsylvania
RON KLEIN, Florida                   JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana                RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California            KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi         BILL POSEY, Florida
CHARLES A. WILSON, Ohio              LYNN JENKINS, Kansas
BILL FOSTER, Illinois
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 29, 2010................................................     1
Appendix:
    July 29, 2010................................................    47

                               WITNESSES
                        Thursday, July 29, 2010

Goldberg, Deborah, Hurricane Relief Program Director, the 
  National Fair Housing Alliance.................................    16
Ratcliffe, Janneke, Associate Director, University of North 
  Carolina Center for Community Capital, and Senior Fellow, 
  Center for American Progress Action Fund.......................    11
Rodamaker, Marti Tomson, President, First Citizens National Bank, 
  Mason City, Iowa, on behalf of the Independent Community 
  Bankers of America (ICBA)......................................     9
Sanders, Anthony B., Distinguished Professor of Finance, George 
  Mason University, and Senior Scholar, The Mercatus Center......    13
Sinks, Patrick, President and Chief Operating Officer, Mortgage 
  Guaranty Insurance Corporation, on behalf of the Mortgage 
  Insurance Companies of America.................................     7
Taylor, John, President and Chief Executive Officer, the National 
  Community Reinvestment Coalition (NCRC)........................    14

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    48
    Goldberg, Deborah............................................    50
    Ratcliffe, Janneke...........................................    60
    Rodamaker, Marti Tomson......................................    68
    Sanders, Anthony B...........................................    81
    Sinks, Patrick...............................................    89
    Taylor, John.................................................   101


                   THE FUTURE OF HOUSING FINANCE: THE
                   ROLE OF PRIVATE MORTGAGE INSURANCE

                              ----------                              


                        Thursday, July 29, 2010

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2128, Rayburn House Office Building, Hon. Paul E. 
Kanjorski [chairman of the subcommittee] presiding.
    Members present: Representatives Kanjorski, Sherman, 
Hinojosa, McCarthy of New York, Baca, Miller of North Carolina, 
Scott, Perlmutter, Donnelly, Adler; Garrett, Manzullo, Biggert, 
Capito, Hensarling, Neugebauer, Posey, and Jenkins.
    Chairman Kanjorski. This hearing of the Subcommittee on 
Capital Markets, Insurance, and Government Sponsored 
Enterprises will come to order. Without objection, all members' 
opening statements will be made a part of the record.
    We meet today to continue our hearings about the future of 
housing finance. As we work to reform this complex system, we 
must learn more about private mortgage insurance and determine 
whether to make changes related to this product. We will 
therefore examine the structure, regulation, obligations, and 
performance of mortgage insurers.
    Since its creation more than a century ago, private 
mortgage insurance has, without question, allowed countless 
families to achieve the American dream of homeownership. It has 
also worked to safeguard taxpayers by providing a first layer 
of protection against foreclosure losses for lenders and for 
mortgages securitized by Fannie Mae and Freddie Mac.
    Over the years, the industry has had to respond to 
significant economic changes. During the Great Depression, 
inadequate capital reserves and an inordinate amount of 
mortgage defaults drove every mortgage insurer into bankruptcy. 
As a result, the private mortgage insurance industry 
disappeared for more than 2 decades.
    Many, including me, feared the recent collapse of the 
housing bubble could produce a similar result. For a while, the 
industry teetered on the brink of extinction. Some mortgage 
insurers also sought, but never received, direct TARP 
assistance.
    We had good reason to worry. Historically, about 4 percent 
of mortgages guaranteed by mortgage insurers go into default in 
an average year. During this crisis however, approximately one 
in three mortgages made in 2006 and 2007 and insured by 
mortgage insurers are expected to go into foreclosure over the 
life of the loan. As a result, some estimate the industry will 
lose between $35 billion and $50 billion when all is said and 
done.
    Nevertheless, it appears the industry will survive because 
of some economic luck, many regulatory waivers, and its 
distinctive capital structure. In particular, mortgage insurers 
maintain contingency reserves of 50 cents on every premium 
dollar earned for 10 years. Thus, they build up capital in good 
times in order to pay out claims in rocky financial periods.
    While these countercyclical reserves are unique to the 
mortgage insurance industry, they provide an important model 
for Congress to consider in reforming the structure of the 
housing finance system. If Fannie Mae and Freddie Mac had held 
similar reserves, both Enterprises may have weathered the 
recent financial hurricane much better.
    Still, the industry's performance has been far from perfect 
during this crisis. Some have questioned whether mortgage 
insurers held enough capital. Because they had to seek 
regulatory forbearance and curtail underwriting, this reduction 
in new business has probably slowed the recovery of our housing 
markets.
    Others have raised concerns about whether mortgage insurers 
have increased the government's cost related to the 
conservatorship of the Enterprises. Specifically, mortgage 
insurers only pay claims on foreclosed homes. They have no 
affirmative obligation to prevent foreclosures. As a result, 
Fannie Mae and Freddie Mac, rather than mortgage insurers, have 
often had to bear the financial losses related to loan 
modifications. Mortgage insurers exist to provide the first 
level of protection against losses and should not evade their 
responsibilities by contractual technicalities. We must review 
this arrangement.
    We also need to explore the present credit enhancement 
requirements under the charters of Fannie Mae and Freddie Mac. 
While the standard U.S. mortgage insurance policy indemnifies 
against losses created by a default in an amount equal to the 
first 20 to 30 percent of the lost loan principal, an 
Australian policy covers 100 percent of the home loan amount.
    Additionally, we should examine the consumer protection 
issues, the State regulation of the industry, and its indirect 
Federal regulation. The problems of Fannie Mae and Freddie Mac 
resulted, in part, from the competing mandates of two 
regulators. As we reform our housing finance system, we may 
therefore want to streamline the oversight of mortgage 
insurers.
    In sum, all options for reforming our housing finance 
system are on the table, including those related to private 
mortgage insurance. I anticipate a fruitful and productive 
discussion around these and other issues today.
    I now recognize the gentleman from New Jersey for 4 
minutes.
    Mr. Garrett. I thank the Chair and I thank the witnesses. 
And I thank the Chair for holding this important hearing on the 
PMI, or the private mortgage insurance industry. Now, 
unfortunately, because of the current Federal Government 
policies, their role right now is very limited, almost 
nonexistent.
    If I could direct your attention, following yesterday's 
chart, to the chart over here, this chart illustrates the 
percentage amount of new high loan to value, or LTV, loans that 
PMI writes and the percentage that the government backs. 
Currently, the Federal Government, as you see in the chart 
there, which you can say is the taxpayer, is underwriting 99 
percent of every high LTV mortgage through FHA and GSEs. And 
so, this level of taxpayer support for the mortgage market, you 
must admit, is completely unsustainable and also unwise.
    We constantly hear that the government has to play this 
large role because the private sector is unable or maybe 
unwilling to reenter the market and provide the needed capital. 
But if you look at the details, you will see that is false. 
Over the last 2 years, private mortgage insurance companies 
have raised roughly $7.5 billion in new capital that could 
support $260 billion in new high LTV loans. However, the 
current marketplace only allows the PMI industry to support 
between maybe $40 billion or $50 billion of such loans.
    So what are some of the specific factors preventing more 
private capital from returning to the mortgage market through 
the private insurance? First are the changes in the loan limits 
for FHA that were made during the financial crisis.
    So if I could now direct your attention to my second chart, 
you will see that, before the crisis, the GSE loan limits were 
$417,000 and the FHA loan limits varied from 48 percent to 87 
percent of the GSE limits based on the area median price. Now, 
after the changes, the FHA loan limits vary from 65 to 175 
percent of that $417,000 house price number. So most of the 
attention in the debate over loan limits centers on the top-
line limit in the high-cost areas, as you see on the chart 
there.
    Now, while that is important, it is not the only area where 
the private market is being basically squeezed out. And as you 
can see on the chart, down there at the bottom, the changes 
that were made essentially increase the loan limits for the FHA 
in the lower-cost areas, as well. What does this mean? This 
means that in areas where housing is less expensive, say in 
Nebraska, where the average median home price is $150,000, the 
FHA can insure loans up to $271,000. And that is almost 100 
percent more than the average price in that low-cost area.
    So you have to ask yourself, why should the taxpayer be 
insuring mortgages that are almost double the average median 
home price in those lower-cost areas? And this is after 
mortgage prices have, I would just note, declined by 30 percent 
over the last 3 years. This area is prime territory for PMI to 
become more active while we roll back the taxpayers' support 
and liability.
    Another way that the government is prohibiting the return 
of private capital to our mortgage market is a rule instituted 
by the Federal Housing Finance Agency, and that is the loan 
level price adjustment. You see, when these fees were 
implemented, it was a turbulent time in the economy when 
housing prices were declining, particularly in distressed 
areas. However, it is 2 years later now, and we are seeing some 
encouraging signs that house prices are stabilizing, in 
addition to the fact that loans are being originated today at 
full documentation, amortized, and being prudentially 
underwritten.
    What I have been told is that Fannie and Freddie are not 
reserving these fees, so they are not providing any additional 
stabilizing effect. And I think these fees need to be given 
more attention, and Congress should more closely examine how 
these fees are pushing more people to FHA loans and away from 
conventional mortgages.
    Finally, just 2 months ago, Treasury Secretary Geithner 
told Congress, ``The government's role in the housing finance 
system and level of direct involvement would change,'' and 
that, ``The Administration is committed to encouraging private 
capital to return to the housing market.'' However, as you can 
see from my first chart, if he and President Obama are serious 
about restoring the housing market and relieving the taxpayer 
of the risk--and that is a pretty big risk, all the blue area--
they must return to traditional and more responsible methods of 
financing.
    The current loan limits, coupled with new and arbitrary 
fees by the GSEs make it impossible for the private capital to 
compete in the market. And this is exactly the opposite of what 
we want. The government has created a perverse incentive to 
provide private capital from being used in this market and 
relieve some of the burdens.
    So, Mr. Chairman, if we don't make changes, the FHA and 
GSEs will continuing to service a radically disproportionate 
share of the market, and they will collapse under their own 
weight, and we will face another taxpayer bailout from the GSEs 
and FHA. We need to shift the burden of mortgage finance off 
the backs of the American taxpayer and back onto the private 
investor.
    With that, I thank you, Mr. Chairman.
    Chairman Kanjorski. The gentleman's time has expired.
    We now recognize the gentleman from California, Mr. 
Sherman, for 3 minutes.
    Mr. Sherman. Thank you, Mr. Chairman.
    First, I should congratulate the survivors. To think that 
you could be in the business of insuring real estate loans in 
America at this time and still be here shows, as I think the 
chairman pointed out, perhaps some luck, but it also shows that 
both the regulators of the industry and the participants in it 
were prepared for the thousand-year flood. Very few other 
entities in our country are prepared for the thousand-year 
flood or even the hundred-year flood.
    Right now, the taxpayers are involved in the real estate 
market to a greater degree than in the past. Taxpayers are, 
therefore, taking an extraordinary percentage of the risk. I 
look forward to returning to a more traditional level of 
taxpayer involvement.
    And while I don't think that we can return to 2007, in 
terms of who can get some sort of mortgage, we don't want to 
return to 1920 either. And so, as the taxpayers play less of a 
role in absorbing the risk, we don't want to say, as in some 
European countries, ``Wait till you have a 40 percent 
downpayment, and then you can buy a home.'' Therefore, there is 
a need for a robust private mortgage insurance industry.
    One way to make sure that it is robust is to turn to the 
financial regulatory reform bill, where we require that the 
securitizer retain, I believe it is 5 percent, of the risk in 
that pool, unless the pool consists of plain vanilla, safe, 
not-risky, not-possibly-risky mortgages.
    Regulations have to be written that define what is ``plain 
vanilla.'' I suggest that plain vanilla includes both American 
vanilla and French vanilla--that is to say, that it includes 
not only mortgages which by themselves meet the criteria, but 
mortgages that meet the criteria of low risk to the investors 
when one factors in the fact that private mortgage insurance 
applies to some or all of the loans in that pool.
    To do otherwise would be to ignore economic reality, but, 
worse than that, it would be to deny a route to homeownership 
that does not put the taxpayer at risk. And certainly, we want 
the lowest possible taxpayer risk with the best possible 
opportunities for people to acquire a home.
    I yield back.
    Chairman Kanjorski. The gentleman's time has expired.
    We will now hear from the gentlelady from West Virginia, 
Ms. Capito, for 2 minutes.
    Mrs. Capito. Thank you.
    I would like to thank Chairman Kanjorski and Ranking Member 
Garrett for holding this hearing today. I look forward to 
hearing from our witnesses on the current status of private 
mortgage insurance and how we can work together to get a more 
vibrant private mortgage market, or to restore one, in any 
event.
    As my colleagues know, over the last few years, the Federal 
Housing Administration has dominated the residential mortgage 
market, providing federally backed mortgage insurance to 
borrowers. While FHA does have a role to play in the market, I 
am very concerned--we have had hearings, and I have made 
numerous statements about my concern over this recent expansion 
in market share, especially when the FHA is struggling 
financially. In order to have a healthy residential mortgage 
market, we must reduce FHA's market share and restore the 
private market.
    Earlier this year, the House passed much-needed FHA reform 
legislation that I believe will make significant improvements 
to the FHA program. While more reform may be needed, the 
legislation that we authored will give the FHA the ability to 
charge higher premiums. And this is important not only for the 
health of the FHA capital reserve fund, but it could also have 
the effect of leveling the playing field between FHA and the 
private mortgage insurance industry.
    I also have concerns with sections of the recently adopted 
Dodd-Frank financial reform bill and the effect it will have on 
the return of the private mortgage market. Included in this 
large package is a section requiring risk retention for 
mortgages but an exemption from this requirement for FHA 
mortgages. I was able to insert an amendment that will study 
the effect of this dichotomy and what effect it would have on 
the private mortgage market. I look forward to seeing these 
results to see if there is an unfair advantage for FHA and to 
level that playing field.
    Again, thank you, Mr. Chairman, for the hearing, and I look 
forward to the witnesses' testimony.
    Chairman Kanjorski. I thank the gentlelady from West 
Virginia.
    And now, we will hear from the gentleman from Georgia for 2 
minutes, Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    It is difficult to deny that the American dream remains 
today to own a home. That is the American dream. However, once 
that goal is achieved, it has become increasingly harder for 
some Americans to hold on to their homes and avoid foreclosure. 
Indeed, right now, as we speak, the foreclosure pipeline is 
full and getting overflowing.
    More access to mortgages, and thus homeownership, often 
coming to fruition due to use of private mortgage insurance is, 
ideally, a positive aspect of the current system. However, with 
job instability and unemployment rates reaching over 10 percent 
in much of the country, many Americans are finding it difficult 
to hold on to their homes despite their initial success.
    And when a homebuyer has less than 20 percent as a 
downpayment for their home, they are required to purchase a PMI 
policy, private mortgage insurance. This permits an individual 
the ability to afford a home who otherwise could not purchase a 
home. However, the use of subprime mortgages and jumbo loans 
contains obvious risk, namely traditionally higher default 
rates. And about a third of the mortgages made in 2006-2007 and 
insured by PMI's providers are expected to go into foreclosure 
during the life of the loan.
    We need to ensure that risky mortgages that are unsafe to 
potential lenders are avoided. The American dream of owning a 
home is something that I hope most Americans will certainly 
someday see fulfilled, but without the excessive risk that come 
with the use of certain PMIs. I hope to learn more about what 
PMIs are doing to reduce mortgage defaults and to protect 
potential homeowners.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much.
    We will now hear from the gentleman from Texas, Mr. 
Hensarling, for 3 minutes.
    Mr. Hensarling. I thank you, Mr. Chairman.
    Private mortgage insurance is clearly a rarity in our 
mortgage market: a private-sector solution for a private-sector 
challenge that, number one, actually worked, seemingly free of 
Federal handouts, bailouts, and also an industry that survived 
this market turmoil in relatively good shape, and also--I don't 
know how--it managed to survive competition with the GSE 
oligopoly.
    It seems like ancient history now, but there was a time, 
very recently in America's history, where one could actually 
get a mortgage on a home without having to go through their 
Federal Government. But now we know that Fannie and Freddie, 
which were left untouched, if nothing else, affirmed in the 
recent Dodd-Frank financial regulatory bill, now control 
roughly three-quarters of the new loan originations. FHA, whose 
own capital reserve losses are currently 75 percent below its 
statutory minimum, has roughly 20 percent of the market. We 
don't need to have a Ph.D. in economics to know that this is 
neither healthy nor sustainable.
    Again, private mortgage insurance has been an exception to 
the rule. It has been a very valuable, consumer-friendly, 
private-capital-backed tool, sold in a competitive market, that 
allows Americans to buy a home, and keep a home, without 
exposing taxpayers to risk. And this is a market, I think, that 
we would want to see flourish.
    Again, it appears, relatively speaking, to have weathered 
the recent economic crisis well. And, as I said earlier, these 
companies did not succumb to the temptation to take TARP money, 
bailout money from the Federal Government. And, in fact, we see 
that this is an industry that is back to raising capital in the 
private market, showing again that private-sector competition 
can work if we allow it to work.
    But, clearly, the private mortgage insurance market faces 
challenges. They were articulated very well by our ranking 
member from New Jersey. And so I continue to lament and decry 
the fact that this committee has yet to take up any type of 
reform of Fannie and Freddie, notwithstanding the fact that we 
have $150 billion of taxpayer-spent money, trillions of dollars 
of exposure. They continued to flourish, and yet we need this 
market to flourish.
    There is an old saying, ``If it ain't broke, don't fix 
it.'' Please don't bail it out; just let freedom work and allow 
this market to flourish.
    I yield back.
    Chairman Kanjorski. Thank you very much.
    We will now go to our panel.
    Thank you very much for being present today. And, without 
objection, your written statements will be made a part of the 
record. You will each be recognized for a 5-minute summary of 
your testimony.
    Our first witness will be Mr. Patrick Sinks, president and 
chief operating officer of the Mortgage Guaranty Insurance 
Corporation, testifying on behalf of the Mortgage Insurance 
Companies of America.
    And I would like every panelist to respond to Mr. 
Hensarling's opening remarks. Is there no further need for a 
secondary market? Shall we just allow the existence of 
financing of mortgages to be made in the tradition prior to the 
1929 crash? If you could give that answer, it would be very 
helpful, because we are certainly thinking about that.
    So, Mr. Sinks, start off, if you will.
    And I would like to hear this panel say that the government 
should get out of supporting the secondary market and probably 
do away with any involvement in the mortgage market other than 
you folks doing it all in the private sector. That would be a 
welcome relief for me, because I anticipate it would probably 
save me the next 2 years of my life.

   STATEMENT OF PATRICK SINKS, PRESIDENT AND CHIEF OPERATING 
OFFICER, MORTGAGE GUARANTY INSURANCE CORPORATION, ON BEHALF OF 
          THE MORTGAGE INSURANCE COMPANIES OF AMERICA

    Mr. Sinks. Let me go with my prepared remarks, and I will 
get to answering your question.
    First, thank you, Mr. Chairman, and Ranking Member Garrett. 
I appreciate the opportunity to testify on behalf of the 
Mortgage Insurance Companies of America, the trade association 
representing the private mortgage insurance industry.
    Mortgage insurance enables borrowers to responsibly buy 
homes with less than a 20 percent downpayment. Many of these 
borrowers are first-time or lower-income homebuyers. Since 
1957, private mortgage insurance has helped 25 million families 
buy homes. Today, about 9 percent of all outstanding mortgages 
have private mortgage insurance.
    This afternoon, I would like to make four important points.
    First, mortgage insurance is essential to ensuring 
mortgages are both affordable and sustainable. These goals are 
not mutually exclusive, and such loans are vital to the housing 
recovery.
    Mortgage insurance is in the first-loss position on 
individual high-ratio loans, and, as a result, private-sector 
capital is at risk. If a borrower defaults and that default 
results in a claim, mortgage insurers will typically pay the 
investor 20 to 25 percent of the loan amount.
    Because we are in the first-loss position, mortgage 
insurers' incentives are aligned with both the borrowers and 
the investors. As a result, mortgage insurers work to ensure 
that the home is affordable both at the time of purchase and 
throughout the years of homeownership.
    My second point: The mortgage insurance regulatory model 
works. The mortgage insurance regulatory model has been in 
place for over 50 years. This model has enabled the industry to 
write both new business and meet its claim obligations through 
many different economic environments, including some severe 
housing downturns such as we are currently experiencing.
    The most important element of the model is that it requires 
capital to be maintained through one of three reserves, known 
as the contingency reserve. Private MIs are required to put 50 
percent of every premium dollar into a contingency reserve for 
10 years so adequate resources are there to pay claims. This, 
in effect, causes capital to be set aside during good times 
such that it is available in bad times. It serves to provide 
capital in a countercyclical manner.
    Since 2007, the private mortgage insurance industry has 
paid over $20 billion in claims. In fact, mortgage insurers 
have paid $14.5 billion in claims and receivables to the GSEs, 
which is equivalent to 10 percent of the amount taxpayers have 
paid to the GSEs to date.
    My third point: The private mortgage insurers are well-
capitalized and can help with the housing recovery. Not only 
does the MI industry have ample regulatory capital, but it has 
attracted capital, even during these difficult times. We have 
raised $7.4 billion in capital through new capital raises and 
asset sales, and a new entrant has raised a further $600 
million since the mortgage crisis began.
    In fact, based on industry estimates, the MI industry has 
sufficient capital to increase our total insurance exposure by 
$261 billion a year for the next 3 calendar years. If this 
additional volume would be realized, it would mean that 
approximately 1.3 million additional mortgages would be insured 
in each of those years. Many of these new, prudently 
underwritten insured mortgages would go to low- and moderate-
income and first-time homebuyers.
    My final point: Mortgage insurers are committed to helping 
borrowers stay in their homes. Because mortgage insurance 
companies have their own capital at risk in a first-loss 
position, we have very clear incentives to mitigate our losses 
by taking action to avoid foreclosures. We have a long history 
of working with servicers and community groups to help keep 
borrowers in their homes.
    Mortgage insurers have fully participated in the 
Administration's loss-mitigation programs and other programs. 
These combined efforts have resulted in over 374,000 completed 
workouts from 2008 through the first quarter of 2010 by the MI 
industry, covering $73.8 billion in mortgage loans.
    In summary, the private mortgage insurance model has worked 
over many years. We have capital sufficient to meet the needs 
of the market, and we plan to continue to play a crucial role 
in the future of housing finance.
    Thank you for this opportunity to testify, and I will be 
happen to answer any questions.
    [The prepared statement of Mr. Sinks can be found on page 
89 of the appendix.]
    Chairman Kanjorski. Thank you.
    We will now have our next witness, Ms. Marti Rodamaker, 
president of the First Citizens National Bank of Iowa, 
testifying on behalf of the Independent Community Bankers of 
America.
    Ms. Rodamaker?

STATEMENT OF MARTI TOMSON RODAMAKER, PRESIDENT, FIRST CITIZENS 
 NATIONAL BANK, MASON CITY, IOWA, ON BEHALF OF THE INDEPENDENT 
              COMMUNITY BANKERS OF AMERICA (ICBA)

    Ms. Rodamaker. Thank you very much, Chairman Kanjorski, 
Ranking Member Garrett, and members of the subcommittee.
    First Citizens National Bank in Mason City, Iowa, is a 
nationally chartered community bank with $925 million in 
assets. I am pleased to represent the community bankers and 
ICBA's nearly 5,000 members at this important hearing on ``The 
Future of Housing Finance: The Role of Private Mortgage 
Insurance.''
    Residential mortgage lending, supported by conservative 
underwriting, is a staple of community banking, and mortgage 
insurance is an indispensable risk-management tool. The MI 
business model has been tested by the housing crisis, with 
repercussions for all participants in the lending process. I 
expect that it will emerge from the crisis looking 
significantly different than it has in the past, as a result of 
business imperatives but also as a result of policy decisions 
made by Congress.
    Any reform of MI must be made in coordination with the 
reform of other elements of housing finance, notably the GSEs. 
ICBA hopes to participate in all aspects of housing finance 
reform. Our members and their customers have a great deal at 
stake in the outcome.
    MI is used by lenders to insure mortgages of greater than 
80 percent loan to value. It enables lenders to reach those 
borrowers who cannot make a 20 percent downpayment, which is a 
sizable portion of today's market. These borrowers include the 
younger, first-time homebuyers who have traditionally used MI, 
as well as current homeowners who don't have enough home equity 
to sell and make a 20 percent downpayment on their next home.
    Most Americans have also experienced a drain in their 
savings accounts, depleting yet another source of downpayments. 
MI will be used to serve a broader segment of homebuyers than 
ever before. Without MI, the housing recovery will take longer. 
With MI, the recovery can be managed prudently.
    From the lenders' perspective, perhaps the most significant 
function of MI is to allow for the sale of high loan-to-value 
loans to Fannie or Freddie, who require insurance for such 
loans. Fannie and Freddie provide secondary market access and 
critical funding to community bank mortgage lending. Lenders 
who hold high LTV loans in portfolio also require mortgage 
insurance because our regulators apply a higher capital charge 
to uninsured high LTV loans.
    In sum, the only practical means of making high loan-to-
value loans, whether they are sold or held in portfolio, is 
with the credit enhancement provided by MI. If prudently 
underwritten, high loan-to-value loans can't be made, the 
market will take longer to recover, consumer options will be 
more limited, and banks will have fewer lending opportunities.
    Unfortunately for all parties, the MI market was severely 
disrupted during the housing crisis, and the MI companies have 
tightened their underwriting requirements in response to the 
market conditions. As a consequence, MI underwriting has fallen 
out of lockstep with GSE underwriting.
    Before the crisis, approval by Fannie or Freddie implied 
approval by the insurer--a linkage that greatly facilitated the 
loan processing. The breakdown of this linkage has impeded the 
recovery. We need to achieve a new consensus in which lenders, 
mortgage insurers, and Fannie and Freddie are all using the 
same underwriting and appraisals standards. This new consensus 
may not be achievable until the housing market stabilizes.
    In addition to tightening the underwriting of new loans, 
the MI companies are also disputing some claims. Denied MI 
claims on defaulted loans sold to GSE have become increasingly 
common and generally result in a buy-back request from Fannie 
or Freddie to the original lender.
    While some of these claim denials are supportable, many are 
based on questionable challenges to the original underwriting 
or appraisal. As a banker, I understand the reality of higher 
defaults and losses during difficult economic times. It is part 
of the price of doing business. However, high levels of denied 
claims and GSE buy-back requests have put an additional strain 
on all market participants, including community banks.
    In closing, ICBA appreciates the opportunity to participate 
in this subcommittee's review of MI. The recent dislocation in 
the MI industry has only underscored the critical role that it 
plays in housing finance. Restoration of a strong and 
competitive MI industry will be a critical part of the housing 
recovery.
    We would be pleased to comment on any proposals to reform 
MI that emerge from this subcommittee, and we hope to have the 
opportunity to share our views on other aspects of housing 
finance reform, as well.
    Thank you.
    [The prepared statement of Ms. Rodamaker can be found on 
page 68 of the appendix.]
    Chairman Kanjorski. Thank you very much, Ms. Rodamaker.
    Next, we will hear from Ms. Janneke Ratcliffe, associate 
director of the University of North Carolina Center for 
Community Capital, and senior fellow at the Center for American 
Progress Action Fund.
    Ms. Ratcliffe?

STATEMENT OF JANNEKE RATCLIFFE, ASSOCIATE DIRECTOR, UNIVERSITY 
  OF NORTH CAROLINA CENTER FOR COMMUNITY CAPITAL, AND SENIOR 
        FELLOW, CENTER FOR AMERICAN PROGRESS ACTION FUND

    Ms. Ratcliffe. Good afternoon, Chairman Kanjorski, Ranking 
Member Garrett, and members of the subcommittee. I am Janneke 
Ratcliffe, associate director at the UNC Center for Community 
Capital and a senior research fellow at the Center for American 
Progress Action Fund. I am honored to have the opportunity to 
share my thoughts about the role of private mortgage insurance, 
an industry that plays a key part in facilitating 
homeownership.
    Indeed, a discussion on the role of private MI must begin 
by stressing the importance of giving families the opportunity 
to buy homes when they have not yet accumulated enough wealth 
to make a big downpayment, which is what private mortgage 
insurance exists to do.
    To put that in context, to make a 20 percent downpayment on 
the median home sold in the United States in 2009 required 
$34,000, which is more than the annual earnings of 35 percent 
of U.S. households. When done right, high loan-to-value 
mortgages are essential for the U.S. housing system to offer 
opportunities and a pathway to the middle class. And the best 
way to put this opportunity within reach for more first-time 
and minority and low-income households is to reduce the 
downpayment barrier.
    Many of us started up the homeownership ladder with a 
modest downpayment and a loan made possible because of some 
form of mortgage insurance, be it private or a Federal Housing 
Administration or Veterans Administration program. In an 
average year, in fact, between a quarter and a third of all the 
mortgages made are to families with less than 20 percent 
equity. And among these are the families who will later buy 
another house, perhaps yours or mine.
    We have ample evidence that the risks associated with high 
LTV lending can be managed. One example is the Community 
Advantage Program that has funded affordable mortgages to 
50,000 lower-income, low-downpayment borrowers nationwide. The 
results: Defaults are low, and the median borrower accumulated 
$20,000 in equity through the end of 2009.
    This is just one example of how high LTV lending makes 
sense for lenders and for households when done right, in this 
case through fixed-rate, 30-year amortizing mortgages 
underwritten for ability to repay.
    The private mortgage insurance industry provides on a 
larger scale another answer to the right way to support high 
loan-to-value lending. An industry built on insuring mortgages 
with low downpayments has weathered the mortgage crisis, paid 
substantial claims without Federal support, and even managed to 
attract new capital.
    Three principles contribute to this outcome. First, as we 
have heard, are the countercyclical reserving requirements 
imposed by State insurance regulators. These days, we hear a 
lot about regulatory failures, but here is one story of 
regulatory success. The system of State regulation, combined 
with Federal oversight, played a critical role in maintaining 
systemic stability, and its principal elements should be 
preserved.
    Second are the standards set by mortgage insurers 
themselves, because their interests are aligned with keeping 
the borrower in the home. From underwriting through foreclosure 
prevention, they live or die by whether they get this right.
    And a third virtue of the mortgage insurance industry lies 
in its role as a pooler of risk. Mortgage insurance companies 
smooth risk out more efficiently, across multiple lenders, 
across securities, regions, and by reserving across time 
periods. In this way, they bring efficiency and stability to 
the entire system.
    But mortgage insurance only covers a portion of the high 
loan-to-value loan market. During the bubble, less regulated 
alternatives became increasingly cheap relative to the 
institutional monoline sources, both primary mortgage insurance 
and FHA. Lack of consistent oversight enabled risk to be laid 
off where no or low capital requirements existed.
    At the time, this looked like innovation, but in hindsight 
it was recklessness. The lesson learned is that an effective 
mortgage finance system must consider total system capital at 
risk on each loan, inhibit capital arbitrage, and prevent a 
race to the bottom.
    Justifiably, private mortgage insurance has special 
consideration in the GSE charter and is a qualified residential 
mortgage factor to offset risk-retention requirements. But this 
implies that this industry will play a critical role in 
determining who gets access to homeownership. This is no small 
concern because today, barriers are actually growing, 
particularly for those households and communities hit by the 
full cycle: first, by lack of access to capital; then, by 
subprime lending; then, by foreclosures; and now, by income 
losses and tight credit. Rebuilding will require the 
affirmative involvement of all market participants.
    Going forward, PMI insurance should have an important role 
in the market, but let me suggest three provisos. First, 
policymakers should maintain a level regulatory playing field, 
one that considers long-term, systemwide risk-taking capacity. 
Second, mortgage insurers must be held accountable to public 
policy goals of enabling access to safe mortgage products under 
affordable and transparent terms that do not unfairly handicap 
some market segments. Finally, recognizing that some markets 
may still go underserved, it is important to ensure alternative 
channels exist for innovation and expanding constructive credit 
to those markets.
    Thank you for the opportunity to testify, and I look 
forward to your questions.
    [The prepared statement of Ms. Ratcliffe can be found on 
page 60 of the appendix.]
    Chairman Kanjorski. Thank you, Ms. Ratcliffe.
    Next, we will hear from Mr. Anthony B. Sanders, 
distinguished professor of finance at George Mason University, 
and senior scholar at The Mercatus Center at George Mason 
University.
    Mr. Sanders?

  STATEMENT OF ANTHONY B. SANDERS, DISTINGUISHED PROFESSOR OF 
   FINANCE, GEORGE MASON UNIVERSITY, AND SENIOR SCHOLAR, THE 
                        MERCATUS CENTER

    Mr. Sanders. Mr. Chairman and distinguished members of the 
subcommittee, my name is Anthony B. Sanders, and I am a 
distinguished professor of finance at George Mason University 
and a senior scholar at The Mercatus Center. It is an honor to 
testify before you today.
    The Federal Government purchases or insures over 90 percent 
of the residential mortgages originated in the United States. 
The proliferation of government programs for homeownership 
purchase and insurance of low-downpayment loans by the GSEs and 
tax incentives for homeownership were largely responsible for 
the housing bubble that occurred in the 2001 to 2006 period.
    The problem is that public policy and risk management are 
intertwined, resulting in bubbles and devastating bursts. And 
the most vulnerable households are the ones who are most often 
hurt. The affordable housing crisis cycle must be broken.
    Even though trillions of dollars were pumped into the 
housing market during the last decade, homeownership rates rose 
from 67.8 percent in 2001, peaked at 69 percent in 2004, and 
declined down to 67.4 percent in 2009, less than where they 
started in 2001. The United States has comparable homeownership 
rates to other G-7 countries, even though they do not have 
entities like Fannie Mae and Freddie Mac.
    Given that there is a reasonable housing alternative in the 
form of renting, rather than owning, it is time to rethink the 
crisis cycle. We can break the cycle by getting private 
mortgage insurance and banks back in the game and downsize the 
government involvement in the housing finance area.
    The problem is that the Federal Government offers explicit 
guarantees on residential mortgages, which makes it difficult 
for the private sector to compete. This crowding-out phenomenon 
is exacerbated by the raising of the loan limits after the 
stimulus for the three GSEs to $729,750 in certain areas, which 
has effectively crowded out the private insurance market.
    My recommendations are as follows:
    Fannie Mae, Freddie Mac, and the FHA must downsize their 
market shares to open up the market for the private sector 
again. This can be done in the short run by curtailing the 
government purchase and insurance of low-downpayment mortgages 
and a lowering of loan limits to pre-stimulus levels at first 
and then a gradual phaseout of government insurance.
    Second, alternatives to Fannie Mae and Freddie Mac, such as 
covered bonds and improvement to private-label securitization, 
must be implemented.
    In order for capital to return to the market, it is 
necessary to restore confidence. The newly created Bureau of 
Consumer Financial Protection is generating significant 
uncertainty in the minds of investors as to how this agency 
will function. Congress should pass clear guidelines and 
provide assurances that limit the reach of this new agency.
    Fourth, the long-run structure of Fannie Mae and Freddie 
Mac must be resolved as soon as possible. However, true changes 
are not possible if the Administration and Congress insist that 
there must be an explicit guarantee. I do not see any way that 
the explosive combination of public policy and prudent risk 
management can work together. It failed in the housing bubble 
and crash, and nothing has been done to prevent this from 
occurring over and over again.
    Thank you for the opportunity to share my thoughts with 
you.
    [The prepared statement of Dr. Sanders can be found on page 
81 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Sanders.
    We will now hear from our next witness, Mr. John Taylor, 
president and chief executive officer of the National Community 
Reinvestment Coalition.
    Mr. Taylor?

    STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, THE NATIONAL COMMUNITY REINVESTMENT COALITION (NCRC)

    Mr. Taylor. Thank you, Chairman Kanjorski, Ranking Member 
Garrett, and other distinguished members of this subcommittee.
    And congratulations to those members of this subcommittee 
who voted for and passed the Dodd-Frank regulatory reform bill. 
I think that effort was owed to the American public and bodes 
well for consumers across the land.
    Private mortgage insurance also serves a vital part of 
America's system of mortgage finance by protecting lenders from 
losses associated with mortgage defaults. Done responsibly, 
private mortgage insurance can help those working their way up 
the economic ladder to achieve the American dream of 
homeownership. Coupled with the Community Reinvestment Act, 
private mortgage insurance can help underserved people, 
including minorities, to gain access to safe, sound, and 
sustainable mortgages.
    Today, the business of mortgage finance has become the 
business of the Federal Government. Without FHA, VA, Fannie 
Mae, and Freddie Mac, most mortgage lending in America today 
would not occur. NCRC is very concerned that the Federal 
Government is increasingly positioning itself as the sole 
gatekeeper to homeownership and mortgage lending in America. 
And much of this is done with the requirement of a government 
guarantee.
    It is imperative that we increase the role of the free 
market in producing and securitizing mortgages. The private 
mortgage insurance companies assist in this goal while 
remaining unsubsidized, without TARP funds--not that they 
didn't apply--and without government guarantees.
    The capitalization and reserve requirements placed on 
private mortgage insurance companies by the government is a 
perfect example of how government regulation, coupled with 
free-market enterprise, can result in healthy and profitable 
business. In spite of our great recession and the collapse of 
the mortgage banking sector in America, all the private 
mortgage insurance companies remain standing, indeed have even 
expanded their ranks.
    Having said all this, there are some improvements that I 
hope this subcommittee and the Congress might consider making 
to this industry.
    First, regulation of the private mortgage insurance 
industry occurs on a State level. We believe the industry and 
consumers would be better served by having Federal standards 
regulating this industry. Consumers, in particular, would 
benefit from having these new standards under the purview of 
the new Bureau of Consumer Financial Protection.
    Second, data currently available on the performance of the 
private mortgage insurance companies is limited and raises more 
questions than it answers. The FFIEC prepares disclosure, 
aggregate, and national aggregate data reports on the private 
mortgage insurance activity. To their credit, the private 
mortgage insurance companies voluntarily provide data on the 
disposition of applications for mortgage insurance using some 
categories of information used on the HMDA, the Home Mortgage 
Disclosure Act.
    In preparation for this hearing, NCRC analyzed the 
voluntarily provided data. There is enough evidence of 
disparity in the mortgage insurance access between Whites, 
Blacks, and Hispanics to suggest that Congress should enhance 
the data collection and increase the transparency on the 
performance of this industry.
    This data collection should be mandatory and include data 
on cost of premiums and amount of losses incurred by the 
various private mortgage insurance companies. Such additional 
information will assist us all in determining whether the 
denial disparities are based on sound business practices or 
have some basis in discriminatory practices. This will ensure 
fairness in that industry.
    NCRC would recommend that the Bureau of Consumer Financial 
Protection make recommendations on reasonable pricing standards 
that the private mortgage insurance company industry can employ 
to ensure that premiums are not keeping working-class, 
responsible borrowers out of the homeownership market.
    Further, we should explore the possibility of the lender 
sharing in the cost of the private mortgage insurance, since 
the benefit of insurance really directly accrues to the lender.
    Next, when a homeowner has reached the 20 percent equity 
threshold of ownership in their home, there should be a 
seamless and automatic allowance for borrowers to withdraw from 
the mortgage insurance product that is no longer necessary for 
these borrowers. Currently, some lenders do a better job than 
others at alerting consumers about their having reached that 20 
percent threshold.
    Finally, the appraisal methods, including automated 
valuation models, used by many private mortgage insurance 
companies ought to be scrutinized. We should learn once and for 
all from the injury done to our system of mortgage finance by 
shoddy, quick, and inaccurate appraisals.
    In conclusion, private mortgage insurance is vitally 
important to our national system of mortgage finance and can 
help refuel our economy by expanding opportunities for safe and 
sound mortgage lending to those who do not have the ability to 
make a 20 percent downpayment.
    Let me close by saying, to answer your question, Mr. 
Chairman, I do believe we need a federally sponsored 
securitization sector. And I think that what is prohibiting, 
really, the private sector from being successful today, more 
than anything, more than anything we will talk about today, is 
the fact that people no longer trust foreign governments, 
companies' pension funds. They don't trust America now to come 
and invest in here. We have to change that.
    And I think the law you just passed, more transparency, 
more accountability, sends a very strong message to the world 
that it is safe to come back and reinvest in America. Because 
the banks and everybody else do not have the money unless we 
have investors.
    So hopefully, we are beginning to turn the corner and say 
to the world, our economy is stable, we are bottoming out on 
housing prices and housing values, and there is more 
accountability, it is safe to come back to America and reinvest 
in America's economy. And I think that is going to help to, as 
much as anything, boost the private sector in being able to 
provide mortgages and to have the mortgage insurance companies 
support that.
    [The prepared statement of Mr. Taylor can be found on page 
101 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Taylor.
    Our last witness will be Ms. Deborah Goldberg, hurricane 
relief program director of the National Fair Housing Alliance.
    Ms. Goldberg?

    STATEMENT OF DEBORAH GOLDBERG, HURRICANE RELIEF PROGRAM 
          DIRECTOR, THE NATIONAL FAIR HOUSING ALLIANCE

    Ms. Goldberg. Thank you, Mr. Chairman.
    Chairman Kanjorski, Ranking Member Garrett, and members of 
the subcommittee, I want to thank you for the opportunity to 
testify here today on behalf of the National Fair Housing 
Alliance.
    In the face of our current foreclosure crisis, some say 
that we put too much emphasis on homeownership. We at NFHA take 
a different view. We continue to believe that homeownership, 
done right, can be a viable path to building wealth and 
economic security. It is one of our most promising tools for 
eliminating the enormous racial and ethnic wealth disparities 
in our country.
    But we need to understand how to make homeownership both 
achievable and sustainable, and also understand clearly the 
forces that have worked to undermine sustainability in recent 
years. Only then can we avoid repeating our past mistakes.
    In this context, we believe that private mortgage insurance 
has a very important role to play in expanding access to 
homeownership for those with limited wealth, particularly 
people of color. The requirement for a 20 percent downpayment 
on a mortgage is a big barrier for many people who could 
otherwise be very successful homeowners. Private mortgage 
insurance makes it possible for families with limited wealth to 
put less money down and still get a mortgage. This benefits the 
homeowner, the lender, the investor, and, of course, the 
private mortgage insurance company.
    You asked whether additional consumer protections are 
needed with respect to the private mortgage insurance industry. 
And one concern for us is the fact that PMI is sold directly to 
the lender and not to the borrower. This means that borrowers 
can't comparison-shop for the best deal. It also gives insurers 
an incentive to make the product as profitable as possible for 
their customers, the lenders, rather than as cost-effective as 
possible for borrowers.
    A situation like this calls out for greater transparency 
and oversight than we have now in the private mortgage 
insurance market. In other markets, this kind of situation has 
opened the door to adverse practices and discriminatory 
treatment. And we urge the subcommittee to make sure that is 
not happening in this market.
    Another issue of great concern to us, from both a fair-
housing and a broader consumer perspective, is the use of 
credit scores for underwriting and pricing private mortgage 
insurance. We have long had concerns about the impact of 
credit-scoring models on people of color, who have lacked 
access to the kind of mainstream financial services that help 
boost scores.
    Recently, we have seen credit scores drop even when 
consumers continue to make all of their payments on time, as 
lenders lower credit limits in order to minimize their risk 
exposure. And research suggests that certain loan features--
research that one of my co-panelists has done--certain loan 
features, such as prepayment penalties and adjustable interest 
rates, along with loan distribution channels, are more 
important in explaining loan performance than are borrower 
characteristics.
    But credit-scoring models do not make this distinction 
between risky borrowers and risky products. This places 
borrowers of color, whose communities have been targeted for 
risky products, at a tremendous disadvantage.
    We urge the subcommittee to look at this question in more 
detail. It has profound implications for the future, not just 
for access to PMI, but also for many other aspects of people's 
lives.
    The Federal Government has a unique relationship to the PMI 
industry, having done quite a bit to create a market for this 
product. One example that has been cited by several of my co-
panelists is the charter requirement that prohibits the GSEs 
from purchasing loans with LTVs above 80 percent unless those 
loans carry a credit enhancement.
    The recently enacted Dodd-Frank Wall Street reform bill 
also creates a carveout for private mortgage insurance. As a 
result, it is our view that the Federal Government has both an 
opportunity and an obligation to make sure that the industry 
operates in a manner that is fair and nondiscriminatory.
    In particular, Congress, the public, and ultimately the 
industry, as well, would all benefit from having access to more 
detailed information about how private mortgage insurers 
operate. This includes information about underwriting standards 
and also where, to whom, and at what price mortgage insurance 
is being offered.
    It could also include information about the impact of 
mortgage insurance on loss-mitigation outcomes for borrowers 
facing foreclosure. This is a question the subcommittee raised, 
but there is no publicly available information on which to base 
an answer.
    Better data on a range of issues related to private 
mortgage insurance and its impact on the housing finance system 
would put us all in a better position to have an informed 
debate about what the system of the future should look like. 
You can make such data available, and we urge you to consider 
doing so.
    Thank you for the opportunity to testify here today. I look 
forward to your questions.
    [The prepared statement of Ms. Goldberg can be found on 
page 50 of the appendix.]
    Chairman Kanjorski. Thank you very much, Ms. Goldberg.
    I guess I am the first one on the firing pad today, so let 
me go back and just see if I can pick up.
    Could everybody on the panel, just have a show of hands, 
who would support a secondary market?
    Okay.
    Oh, a slow ``yes.''
    Mr. Sanders. Clarification.
    Chairman Kanjorski. I think the impression that I received, 
at least, from the opening statement of Mr. Hensarling, was 
that we ought to really do away with the secondary market and 
government involvement therein. And I think there is a large 
portion of the American population who are taking that sort of 
tea-party effect--I am sorry, I didn't want to suggest that 
comes from a particular element--but that they follow that 
thought process.
    And on the other end--
    Mr. Garrett. Constitutionalist? Is that the word you are 
looking for?
    Chairman Kanjorski. Constitutionalist? I did not see that 
in the Constitution, but you may be right.
    This morning, I had the pleasure of sitting in on a 
briefing from Dr. Shiller and Dr. Zandi, which went over and 
explained the real estate market for the last 40, 50, 60 years, 
or perhaps 100 years, which was quite revealing and 
interesting, insofar as the bubble that occurred in 2006 to 
about 2009 was extraordinary and a one-time deal in the last 
100 years. Other than that, real estate was in a relatively 
staid and standard position without great fluctuation.
    And, quite frankly, neither one of them attributed any 
particular action to that, other than the changing from risk 
investment in the stock market in equities to risk investment 
in the real estate market, for one reason or another. And they 
looked at it as the bubble in the early 1990's and late 1990's 
and then moving into real estate in the 2004 or 2005 period.
    That all being said, everybody is trying to do a postmortem 
here and find a guilty party. I thought we had one, but that 
slow motion of the hand said we did not.
    In reality, I think we all have to accept the fact that the 
real estate market is a fundamental part of the American 
economy. If the real estate market doesn't stabilize and then 
improve, we do not have a great deal of hope for stabilization 
of unemployment and for a good recovery to the middle-class 
economy that we were blessed with for almost 20 years.
    Would the panel agree? And if you disagree, speak up as to 
what your disagreement is.
    Nobody heard my question, so they don't know whether they 
want to commit.
    Does George Mason want to speak to that?
    Mr. Sanders. Oh, the guy from George Mason, yes. Thank you.
    I agree, the real estate market is a fundamental part of 
the U.S. economy. I disagree with Mr. Shiller and Mr. Zandi. 
Again, if you look clearly at the evidence, when we pumped 
trillions of dollars into the housing market over the 2000's 
and we, at the same time, lowered downpayment requirements, 
rates fell, etc., you were going to get a housing bubble, 
period.
    And I don't understand why I haven't talked with Mr. 
Shiller before about this, and--
    Chairman Kanjorski. If I may interrupt you for a second, 
though, not too far from where you are sitting, if you moved 
over to Ms. Ratcliffe's position, about 5 years ago Alan 
Greenspan testified before our full committee, and he was 
sitting right in her seat. And he said he was not worried at 
all about a real estate bubble; it just was not going to occur, 
did not occur, and it was nothing for us or anyone else in the 
country to worry about.
    That was in 2005. Precipitous, because at that precise 
moment very strange things were beginning to happen in the real 
estate market, and all of us were a little worried. But, not 
having the expertise of Dr. Greenspan, we relied on him for his 
expert opinion.
    Subsequent to that, he has apologized for having been dead-
wrong on the issue. And I think that shows a big man and a good 
man, but, nevertheless, he was wrong.
    You do not feel that he was wrong? Or do you feel it does 
not matter? I am not sure I get the--
    Mr. Sanders. Oh, do I think Alan Greenspan was wrong? Two 
reasons: one, he confessed he was wrong; and two, when all of 
us looked at the housing prices going up like this, and 
simultaneously Freddie and Fannie's retained portfolio is going 
up about the same speed, we all knew that something has to 
give.
    Why Mr. Greenspan didn't choose to recognize that is--who 
knows? Maybe he thought it was a new plateau. But I can 
guarantee you other people at the time were scared about what 
was going on in the market.
    Chairman Kanjorski. Yes, sir?
    Mr. Taylor. Chairman Greenspan was the ultimate 
libertarian. And perhaps he was locked into that ideology as a 
way of not being able to respond to what was going on.
    The real estate market is absolutely an important part of 
our economy, but we need a system of checks and balances. And 
if we learn nothing else from this hearing today, it is the 
system of checks and balances over the mortgage insurance 
industry that required capitalization of 25 to one. Fifty cents 
of every premium dollar that came in was put into a reserve so 
that they could survive.
    Mr. Hensarling said earlier--I am sorry he is not here; I 
wanted to get to agree with most of what he said, and that is a 
rare occurrence for me--that it appears the MIs somehow 
weathered the storm. It wasn't ``somehow.'' It was because we 
had regulation that required them to be adequately capitalized.
    Had we done that with the rest of the industry, and if 
there was enough oversight of the rest of the industry, we 
could have avoided a lot of the problems and still had a 
healthy real estate practice.
    Chairman Kanjorski. So I am supposed to conclude that 
regulation may sometimes be a good thing?
    Mr. Taylor. Yes.
    Chairman Kanjorski. In this era, I do not often hear that.
    Ms. Ratcliffe, you were shaking your head. Do you agree 
with that position?
    Ms. Ratcliffe. I entirely agree. There are a couple of 
dimensions that are worth exploring. One is the issue of 
regulatory capital requirements being inconsistent across the 
industry that led lending to occur in places there were no 
capital or very cheap capital requirements that led to much of 
the bubble.
    One of the great ironies, I think, given the discussion we 
are having today, is the issue of AIG who, in their credit 
default swap business helped inflate the bubble and needed 
substantial billions of dollars of government support. They are 
the parent company of a mortgage insurance company who followed 
these capitalization rules when they took credit risk on 
mortgages. Right there within one company, you see this example 
of capital arbitrage that we need to make adjustments for in 
this. Thinking about the secondary market reform, we have to 
think beyond whatever quasi-government agency you have to the 
rest of the playing field.
    Chairman Kanjorski. Should there be a bar to the nexus of 
those two companies in the same structure?
    Ms. Ratcliffe. I'm sorry?
    Chairman Kanjorski. Should there be a bar to having a nexus 
or relations between those companies existing in the same 
structure?
    Ms. Ratcliffe. Again, I think if we set common capital 
requirements, that wouldn't necessarily be necessary.
    Mr. Sinks. If I may take a shot at that, not speaking on 
behalf of AIG, but speaking on behalf of the mortgage insurance 
companies, I would submit there is a bar.
    The mortgage insurance companies are controlled by the 
State insurance departments, and they have the ability to 
control what goes in and out of that company. So despite the 
fact it was part of the very broad AIG organization, I would 
submit, again in a general sense, that capital was, in fact, 
walled off and the policyholders were protected.
    Chairman Kanjorski. Very good. I now recognize the 
gentleman from New Jersey, since I have also taken additional 
time.
    Mr. Garrett. Thank you, Mr. Chairman.
    Let me start, a quick show of hands, how many think anyone 
who wants to get a loan, a home loan, should have to, in one 
way or other, go through the Federal Government, rely upon the 
Federal Government?
    Okay.
    And how many think that the Federal Government should 
essentially be backstopping or underwriting where we are, 
around 99 percent of loans, high LTV loans or otherwise?
    Good. So somewhere in between then. All right.
    On your point, Mr. Taylor, that Mr. Greenspan is the 
ultimate libertarian; I don't know. A lot of people now in 
retrospect say his monetary policy was one of the reasons that 
brought us to that bubble that Mr. Sanders was speaking to 
before. And I think most libertarians would say that the 
central bank should not be playing that role. But you can 
debate that.
    Professor Sanders, you saw that chart, that is the chart. 
The blue is showing where 99 percent of the high LTVs are being 
underwritten by you and I, and everybody else in the room, the 
American taxpayer. Is that where we want to be? Are you 
concerned about this?
    Mr. Sanders. The answer is it is not where we want to be, 
and we should be extremely concerned about this. Again, the 
same thing I said before, if Genworth or MGIC or one of the 
other private mortgage insurance companies want to go out and 
underwrite a 3 percent down mortgage, and they are going to do 
it and suffer the consequences of their folly if it fails, so 
be it.
    Again, as I said, Fannie, Freddie, and the FHA have this 
combustible joint process where they are doing public policy 
and risk management. And guess which one wins out, so we end up 
with a market capture of 99 percent.
    In addition, although you didn't bring it up, if we take a 
look at the percentage, 99 percent and over LTV occurring now, 
you have all of the GSEs, doing about 40 percent of their 
business, is low LTV lending.
    Once again, I sympathize with all of the people who say 
that they would like to see homeowners get that. You just have 
to understand, that is bubble creating. That creates another 
one of these incredible wave-type effects, and it is not good 
for the stability of the economy.
    Mr. Garrett. Mr. Taylor, you talked about the adverse 
market fees?
    Mr. Taylor. Am I going to get to respond this time?
    Mr. Garrett. Yes. You discussed the adverse market fees 
that the GSEs are charging. Can you elaborate on the fees and 
what that all means?
    Mr. Taylor. Yes. They have defined that they get to charge 
25 basis points in addition to what they define as adverse 
markets anywhere in the country. We are actually quite 
concerned about that.
    Mr. Garrett. Why?
    Mr. Taylor. Because we think it is unfair. The notion that 
because somebody lives in a declining market, that somehow they 
have to pay a premium seems fairly anti-American to me. You 
ought to be able to judge the person on their capability, their 
individual financial status, and their creditworthiness and so 
on, not by the neighborhood they necessarily live in. In fact, 
that is precisely why we created the Fair Housing Act and other 
laws to prohibit these kinds of discriminatory practices just 
based on geography.
    Mr. Garrett. What would the GSEs say if they were sitting 
next to you?
    Mr. Taylor. That they have an incredibly bad balance sheet, 
and they are doing everything they can to create strong, 
positive cash flow that will, when they separate out all of 
those bad assets, leave them standing.
    Mr. Garrett. Two points. Your one point you make is: Yes, 
that may be true, but they are making it on the backs of those 
people. That is your point.
    Mr. Taylor. I agree, yes. I agree with my point.
    Mr. Garrett. I just wanted to get that out.
    The second point here is, how are they using those fees?
    Mr. Taylor. I think they are using it to create 
profitability for the GSEs, and hopefully sustain themselves 
into the future. I'm not sure if that is getting at your point.
    Mr. Garrett. Yes. You can make the argument, hey, we have a 
bad balance sheet and we want to put this aside as reserves.
    Mr. Taylor. They are also concentrating on the safest and 
the easy to make--they have raised their credit scores in terms 
of who they are willing to make loans to. They are doing stuff 
that essentially is survival stuff for them.
    Mr. Garrett. Ms. Ratcliffe?
    Ms. Ratcliffe. I wanted to add that not only is it not fair 
to apply those kinds of pricing factors, but it is procyclical. 
That is exactly what we have been talking about. If you layer 
additional costs on in weaker times and take them out in good 
times, you end up exacerbating upsides and downsides.
    Mr. Garrett. I didn't think about that part of it. Thank 
you.
    Chairman Kanjorski. In fairness, before I recognize the 
next individual, the chart was beautiful, Mr. Garrett, except I 
do want to indicate it is misleading, because I think the chart 
showed 99 percent or 97 percent, but this morning, Inside 
Mortgage Finance released facts and information to indicate 
that it has fallen from 97 percent to 82 percent, and that was 
an extraordinary period of time that it went up to 97 percent. 
So I don't think we should allow the impression that it has 
been and continues to be at 97 percent.
    Mr. Garrett. These are LTV loans, high LTVs. I think they 
are still at 99 percent. Overall, it has come down, but not the 
high LTV.
    Chairman Kanjorski. We will check it out. Would it be 
surprising if they stay up and everything else goes down?
    Mr. Garrett. No. That is part of the consequence, and that 
is part of the concern.
    Chairman Kanjorski. We will check.
    Mr. Garrett. You put your chart over there. And we will 
have our chart here.
    Chairman Kanjorski. We will have the war of charts. With 
that, Mrs. Capito?
    Mrs. Capito. Thank you, Mr. Chairman.
    Mr. Sanders, in my opening statement, I mentioned concerns 
I have. I am the ranking member on the Housing Subcommittee, 
and we worked on the FHA reform bill, and have been trying to 
work on, with the Administration's help, the FHA capital 
reserve fund. As you know, FHA has played a much, much larger 
role in mortgage insurance than probably historically. I don't 
know that, but I assume it is close to that. Have you looked at 
the announced changes on the premium changes and do you think 
this will have any effect on FHA market share and open up some 
of the private markets? Do you have an opinion on that?
    Mr. Sanders. First of all, I also want to point out, not to 
pick on Mr. Taylor, but when he mentioned Fannie and Freddie 
have horrible balance sheets, we should ask ourselves: And how 
did they end up with horrible balance sheets?
    What is happening right now is, true, Freddie and Fannie 
have increased their standards for purchasing loans. However, 
the FHA has jumped in and filled the void so the whole point 
is, we still have tons of these low-downpayment loans being 
made. It just shifted. The FHA is now growing faster than 
Fannie and Freddie.
    But having said that, I think that the proposed legislation 
on the FHA is a very good thing. I think the fee schedules make 
a lot of sense. I think even the FHA would agree that they 
would like to actually have higher downpayment standards. 
Absolutely. They have some data. They can see how this can 
happen again.
    Mrs. Capito. They did raise some of their downpayment 
requirements for those with FICO scores of 570 or 580.
    Mr. Sinks. 580.
    Mrs. Capito. They raised them up to 10 percent. So I think 
that is a recognition by the FHA. In your opinion, that may not 
be enough.
    Mr. Sanders. Baby steps. The direction is great. I love to 
see it. However, once again, I keep trying to make this clear, 
the more we rely on low-downpayment loans, while it is very 
satisfying for many households, and I appreciate it, the slow 
rental market, it is inflationary in housing prices.
    And again, and I want to make this point, I appreciate what 
the FHA and Fannie and Freddie have done. On the other hand, if 
you are sitting out in Las Vegas, California, Florida, etc., 
you have a 3 percent down loan, which you were encouraged to 
do, housing prices fall 20 percent, how did we help out 
homeowners by encouraging them to take out a low-downpayment 
mortgage? These households are devastated.
    Again, we have to rethink shoving everyone into low 
downpayment. To say that the housing market is now stable and 
will never go up again, like Mark Zandi says, I think that is 
ridiculous. We have set the table. Warning, we have set the 
table for another lurch and crash. I don't want to see that 
again, and I don't think anyone in here really wants to see 
that either. But I think the FHA is a good step forward.
    Mr. Sinks. If I may, first of all, the housing prices have 
dropped significantly in the markets that Mr. Sanders alluded 
to. And there is a sense, and Mr. Zandi, for instance, will 
forecast the drop a little more. But our sense of it at the 
Mortgage Insurance Companies is that the worst is over in terms 
of the price drops. From peak to trough, the worst is over, we 
believe.
    The other thing is, I would not overemphasize the 
importance of downpayment. It is a criteria, and the example 
used is an important one. However, there are a number of 
factors that led to what happened.
    We talked about low interest rates and we talked about how 
easy it was to get a mortgage. But also things like instrument 
types, subprime mortgages, reduced doc loans, things of that 
nature. It was much more than downpayment.
    High-ratio lending can be done properly. It doesn't 
necessarily equate into high risk. What you have to be careful 
of is layering risk, where you only have 3 percent down, you 
have 580 FICO score and a BPI of 45 percent, when you layer all 
of those things in, that is when you walk into a problem. So 
downpayment is an important criteria, but we would submit it is 
not the only criteria.
    Mrs. Capito. Excellent point. Thank you.
    Ms. Goldberg. If I may add a comment to that, one of the 
other things we saw in the dramatic increase in the subprime 
lending and other kinds of exotic lending was a misalignment of 
interest between the borrower and the folks on the other side 
of the table, where people on the other side of the table were 
getting paid tremendous amounts to put folks in loans that were 
not sustainable, that had these many layers of risk that 
several of us have talked about. So it is not like it happened 
organically. There were profit motives and strong market forces 
driving people into those loans when they were not really in 
their own best interest.
    Mrs. Capito. Thank you. I would add this to that, coming 
from a State like West Virginia which has some of the highest 
homeownership in the Nation and some of the lowest foreclosure 
rates, we don't have the bubble of the real estate. We have 
responsible borrowers who, when they sit down to pay their 
bills, they pay their mortgage. That is the first check that 
they write. And so, there is an element of personal 
responsibility here that sometimes I think, not to say this is 
the only thing, and certainly there are people out there taking 
advantage of other people, absolutely. But the borrower has to 
take responsibility here.
    Part of my frustration has been in some of the foreclosure 
modifications when we were doing the trial modifications, there 
was such pressure to get people into trial modifications, they 
weren't even taking documentation on those. That just 
exacerbates the problem.
    We all want to keep everybody in a home, but at the same 
time, we can't keep repeating the same mistakes that have led 
folks to be thrown out of their homes and have led to this 
crisis. I just wanted to make that point. But I appreciate your 
remarks.
    Mr. Taylor. Mr. Chairman, if I may comment, I do think 
personal responsibility is important, and I think everybody 
needs to understand that and needs to live by that.
    But I think when you see almost 10 million Americans in a 
situation where they are facing foreclosure, it is not like the 
American public overnight became personally irresponsible about 
purchasing things and going into homeownership. What really 
changed is not the desire for homeownership or the individual 
personal responsibility of taxpayers or voters, what really 
changed is the malfeasance of the industry willing to make 
loans that they didn't care what happened to them because all 
they cared about was the fee.
    There wasn't the regulatory apparatus that ensured 
integrity and ethics in the industry. That and the 
piggybacking, as I think Mr. Sinks said, it is the layering of 
all of these different things on these loans--interest rates, 
options, payments, changing exploding loans, no documentation, 
all of these things that they were actually willing to make 
loans to people they knew didn't have an ability to pay. That 
is what changed. The industry before that was pretty good at 
making loans to people who could afford to pay them back. It 
wasn't that all of a sudden, the American public became 
irresponsible. That is my perspective.
    Chairman Kanjorski. Thank you, Mrs. Capito.
    We will now hear from the gentlelady from New York, Mrs. 
Maloney.
    Mrs. Maloney. Thank you, Mr. Chairman. Following up on the 
gentleman who just spoke, that what was happening was that no 
responsibility was in the process, but just fee-generated 
activity, could you elaborate? So it was more or less like a 
casino, and could you elaborate more? And are the safeguards 
put in the bill adequate with the 5 percent securitization and 
skin in the game and bringing everyone under regulation, does 
that, in effect, end these types of abuses, in your opinion?
    Mr. Taylor. I think the bill will go a long way towards 
addressing a lot of the abuses. I think what will be important 
is the real independence of the Bureau of Consumer Financial 
Protection and its oversight and ability to respond to things.
    Look, I think what we had was an industry gone wild on Wall 
Street that had so much money that was looking for a home. And 
America had a reputation, you buy these CDOs mortgage-backed 
securities, you could get good rates of return, and we had 
rating agencies that were willing to slap AAA ratings on 80 
percent of the high-cost loans. AAA rating on 80 percent of the 
high-cost loans. And you had appraisers--
    Mrs. Maloney. And these mortgage-backed securities had no 
insurance behind them, and did the public know that, that there 
was no--
    Mr. Taylor. The public, I remember sitting with some of the 
agencies before the crash and asking them, how could they be 
rating these things at triple A ratings, and sitting across the 
table, they would tell me, we are not really a due diligence 
agency.
    Mrs. Maloney. Then what were they?
    Mr. Taylor. I don't know. I think they were agents of the 
investment banks because that is who paid them. That is the 
fundamental problem. I know in the bill, you have language in 
there to recommend what to do with these agencies.
    But listen, it was top to bottom. It was appraisers. It was 
brokers. It was everybody getting fees, and nobody with the 
ability to step in and say, we can't have this kind of stuff 
because it is not sustainable, it is predatory, and it is going 
to cause problems for everybody, not only homeowners, but the 
investors. The investors, they are thinking they were buying 
American triple rated securities that are going to give them 
double digit, maybe high single digit rates of returns, safe as 
gold. That is what happened up and down the line.
    Hopefully, what you have in passing this financial reform, 
and God bless you for supporting it, is that you are putting 
sanity back into this industry, accountability, and you are 
protecting the American consumer in the process. And hopefully, 
we will get back to the business of banking in which they made 
loans to people who could actually afford to pay them back.
    Mrs. Maloney. Mr. Sanders, did you want to comment?
    Mr. Sanders. Thank you. Before we take the rating agency 
punching bag approach, I want to point out that a lot of 
investors bought many of these securities, and they didn't even 
take time to do due diligence and take a look because all of 
the loan files were available. They could have done their own 
modeling. I know this for a fact.
    Instead they just jumped in, said triple A rated, I will 
buy it, and then after they lost money, they said, ``Oh, my 
gosh, those damn rating agencies.''
    From the street, and I am sure if you had Mr. Zandi in here 
again, most people on the street know rating agencies--ratings 
don't mean much. They have a 6-month lag when things go back.
    I put the onus on the buyers. Buyer beware. Remember that 
one. I think a lot of times they substituted in a quick 
decision when they didn't do proper due diligence, and now they 
want their pound of flesh for doing it.
    Mr. Taylor. So, personal responsibility of investors.
    Mrs. Maloney. I began this morning at a meeting, a briefing 
that Chairman Frank had on housing, and he had several 
economists there. And Mr. Zandi, who was the economist for 
Senator McCain, testified that housing is roughly 25 percent of 
the economy. If we don't have a robust housing market, then we 
are not going to have a recovery and our recovery is still 
somewhat fragile. One thing that the private mortgage insurance 
does is help us finance housing and thereby help us dig our way 
out of this recession.
    Would anyone like to comment on the way that the private 
mortgage insurance business successfully raises millions of 
dollars for us to finance housing which under the new 
guidelines is following investment principles? Would anyone 
like to comment on that?
    Mr. Sinks. On behalf of MICA, I would say, first of all I 
think the attraction of capital to the industry that we have 
experienced in the last couple of years is a realization that 
prudent underwriting has returned. While we have the legacy of 
the older business and how that develops, first and foremost, 
prudent underwriting has returned. I think that goes a long way 
towards it.
    I also think that the industry has taken numerous steps. 
One of the key values that we bring, and perhaps lost sight of 
during a period of time but now bring again is a second set of 
eyes. We like to use the term ``friction.'' In other words, 
there is a second set of eyes looking at that loan, looking at 
that loan file to make sure that it meets the criteria and to 
make sure that the loan is proper and people can afford the 
loan, not only at the time they originate the mortgage or day 
one when they move in the house, but 3 or 4 or 5 years later 
they can stay in that home. So in many respects, it is back to 
basics. That is what it is.
    Mrs. Maloney. Back to basics. That is a good ending. My 
time has expired, but Mr. Taylor has a comment.
    Mr. Taylor. It is more than a second set of eyes. It is 
having skin in the game. The MIs know that if that mortgage 
goes bad, they lose. So they will make sure it is a good loan. 
That is critical because they have financial skin in the game.
    Mrs. Maloney. My time has expired. I thank the gentleman.
    Chairman Kanjorski. The gentleman from Texas, Mr. 
Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    I appreciate the rehashing. We have had a number of 
hearings where we rehashed what happened. I kind of am more 
interested in where we go from here because that is what is 
going to drive the economy, how to get these markets back 
functioning again and somehow divorce the taxpayers from having 
to subsidize and backstop these financial markets.
    Mr. Sinks, one of the things that people are kicking around 
is how we get the securitization market back operating again, 
and certainly the mortgage insurance industry plays an 
important part of that in the primary origination. One of the 
things that is being kicked around a little bit is instead of 
Fannie and Freddie basically securitizing and guaranteeing 
those portfolios, possibly there is room for private entities 
to do that.
    So instead of MI, you have SI, securitization insurance. Do 
you think that the industry would embrace a concept where there 
was another piece of business there where you would not only 
be, the private mortgage insurance on the underlying mortgages, 
but also on the securitization piece?
    Mr. Sinks. We would embrace it obviously if done correctly. 
In fact, we have in the past. We did insure private label 
securities over many, many years. I think the challenge and our 
position on it is, and we used to ask ourselves this at MGIC, 
many years in the boom time, is Wall Street patient capital? 
And they have proven that very well, they are not patient 
capital, for a variety of reasons.
    So to answer your question directly: Would we entertain it? 
Yes. However, we do believe the government needs to play a role 
because that ensures liquidity. And as long as there is 
liquidity in the market, again with proper oversight, with 
transparency, and the proper regulators, we are better and more 
in line with kind of a combination of private partner. And by 
that, I mean two different securitizers, not the Fannie Mae 
ownership.
    Mr. Neugebauer. People talk about how we need the 
government for liquidity. To me, liquidity is saying, if you 
need me to loan you some money against your securities for a 
period of time, I will do that. That provides liquidity.
    But then there is another piece of that. Some people say, 
we need the Federal Government to step in and take some of the 
risk with us. Certainly, I don't embrace that concept.
    We had a private securitized market before the crisis. We 
need to figure out a way to restore it. As Professor Sanders 
said, we need the industry to be willing to take risks, do 
their due diligence and make sure that understand what they are 
buying. But we also need to make sure that we don't take away 
the tools for some of those entities that are willing to make a 
market for those securities, to protect some of that risk. And 
that comes with hedging and derivatives.
    When we talk about liquidity, are we talking about for the 
Federal Government to take some of the credit risk when you say 
that?
    Mr. Sinks. We are talking in particular about liquidity to 
be able to move money in the secondary market, the capital 
markets. It is not so much taking credit risk. I think that is 
the role the private mortgage insurance companies can play. As 
I reported earlier, we have great capacity to be able to do it. 
That doesn't mean that the new entity, the new GSE wouldn't be 
exposed. It would depend on the layer of private mortgage 
insurance coverage you have.
    So on our terms, it would be more along the lines of the 
ability to transfer capital from those originating loans to 
this entity or into the secondary market and free up capital to 
make more loans.
    Mr. Neugebauer. Ms. Rodamaker?
    Ms. Rodamaker. From a community bank's perspective, I would 
wholeheartedly agree with that. As we originate loans, we need 
an avenue to sell those into the secondary market to free up 
capital to originate more real estate mortgages.
    We sell about 60 percent of our mortgages that we originate 
in our communities. We retain 100 percent of the servicing. We 
still manage those accounts and those customers, but we have to 
have a vehicle to get that sold and generate the liquidity.
    It does help us manage our interest rate risk because we 
sell our long-term fixed-rate mortgages. However, we utilize 
the same underwriting as if we were holding those loans in 
portfolio, and assume that credit risk even though we have sold 
it to Freddie Mac. I think that is true of most community 
banks. We are not looking to sell a credit risk; we are looking 
to generate liquidity.
    Mr. Neugebauer. I think that is important. I think everyone 
agrees that we need to get the secondary market back 
functioning again. Otherwise, we won't have much of a housing 
market if we don't have housing credit. And it will be 
difficult for us to address the Freddie and Fannie issue if we 
don't have an alternative because it has been pointed out that 
they are the only game in town right now, on top of FHA.
    I want to encourage the panel, as we begin to address 
Fannie and Freddie, we have to also I think simultaneously be 
addressing how we get the private securitization market back, 
started again, because otherwise we will be creating a very 
difficult situation to bring up any kind of a housing recovery, 
and really I think a long-term economic recovery for our 
country. I encourage, if you have some ideas, we will be 
listening.
    I yield back.
    Chairman Kanjorski. Thank you. The gentlelady from New 
York, Mrs. McCarthy.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman. I 
apologize that I had to leave. I had constituents coming in 
that I had to see.
    I am hoping that the question I want to ask hasn't already 
been asked. Mr. Taylor, when I read your testimony, you 
indicated that the mortgage insurance can play a crucial role 
to help troubled homeowners. Can you further explain the 
proposed partnership of the industry with the Administration 
and explain how further we can work along towards economic 
recovery? If you have answered that, I have another question.
    Mr. Taylor. I have, unfortunately, had to be fairly 
consistently critical of the lack of success of the 
Administration's HAMP program, considering that 390,000 people 
got permanent modifications out of the 4 million goal that they 
set for themselves, from over 16 months of running the program. 
So, it has been difficult that I have had to take that 
position.
    I have tried to look for creative things that can be done. 
I think one of them is the role that mortgage insurance 
companies could play because what is coming now, as of October 
1st, is the principal reduction, the call for principal 
reduction by the lenders on these mortgages to see whether that 
can save enough borrowers from going into foreclosure. And 
perhaps the role that the mortgage insurance companies could 
play is to offer mortgage insurance for those borrowers who are 
under 20 percent of value, loan to value, and perhaps encourage 
some of those lenders to be dropping the interest, and if 
necessary, principal, to reach a point where they are 
comfortable there will be mortgage insurance in play so if this 
redefaults, which is a concern for a lot of lenders, if there 
is a redefault, that there is somebody who can cover some of 
those defaults.
    I think the mortgage insurance companies, it is new. It is 
novel. I think the mortgage insurance companies, I urge them to 
work with the Administration and work with the lenders to see 
whether they can play a role in helping me make HAMP more 
effective.
    The final thing I will say on that is unless and until 
there is a mandatory requirement for lenders to participate in 
the HAMP program, as long as it is voluntary, we are going to 
see the poor numbers that we are seeing in that program.
    Ms. Goldberg. If I may just add one comment to that, 
because I think the mortgage insurance industry really deserves 
credit for stepping forward early on in this HAMP process, to 
recognize the fact that mortgage insurance exists on the loans, 
could be effectively the thumb on the scale, tipping the 
balance in the equation about what is going to be the best 
return for the investor towards going to foreclosure because 
that is when the claim, the mortgage insurance claim, is 
traditionally paid.
    I have been in a number of meetings with people from the 
industry and people from the government where they said this is 
a potential problem. We need to make sure that it doesn't 
happen. I think they have been trying very hard to work with 
servicers and to work with Treasury to prevent that from 
tipping the balance unfairly because it is not in their 
interest; it is not in the borrower's interest, and it is 
certainly not in the community's interest to have the fact that 
there is a mortgage insurance policy on a loan, make it go to 
foreclosure, when it could otherwise have been saved. Maybe Mr. 
Sinks can speak to this.
    It is my understanding that they have been trying to work 
with servicers to do some kind of preclaim advance or a partial 
payment that would tip the balance toward loan modifications. 
It is very hard to know how that is working or how widespread 
the take-up from the servicing industry has been on that 
possibility.
    Mrs. McCarthy of New York. We had a briefing this morning 
by Moody's, and they brought up the same exact points that you 
are bringing up. So the criticism has been out there. Mark 
Zandi gave us a great briefing. If something is not working, 
then obviously we have to try to fix it.
    Mr. Sinks, do you have anything to add to that?
    Mr. Sinks. I would add, we have done a great deal, the 
mortgage insurance companies, in working with servicers, and in 
certain cases, working directly with borrowers, to try to keep 
people in their homes. As we reported earlier, our interests 
are very much aligned with the servicer and the borrower, so it 
is important that we do that. The programs have evolved over 
the last couple of years. I think they got off to a relatively 
slow start, but we are now seeing more and more programs where 
the consumer's monthly payment is being reduced and that makes 
a big difference in keeping them in their home. So we are 
actively engaged there. I think there are 16 different programs 
we are involved with.
    In addition to that, I know many of the MI companies that 
actually place people on site at the servicers such that those 
loans that contain mortgage insurance are getting the attention 
that they deserve, and we can work them as quickly as we 
possibly can.
    Mrs. McCarthy of New York. One of the things--I am sorry, 
my time is up.
    Chairman Kanjorski. I recognize the gentlelady from 
Illinois, Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman, and thank you for 
having this hearing.
    Mr. Sinks, in your testimony, you say that PMI has saved 
taxpayers billions of dollars. Do you think that we should 
require PMI on all loans in excess of 70 percent loan to value?
    Mr. Sinks. I wouldn't lock in necessarily on loan to value; 
but I would tell you that we are prepared to go as deep as 
necessary and as is prudent, as long as we can protect the 
policyholders in our capital support. We certainly would 
entertain that idea.
    Mrs. Biggert. Some people say FHA's market share has 
increased because the private mortgage insurers have pulled 
back. Do you agree with that? Is this a reason for FHA's 
increased market share?
    Mr. Sinks. I think there are a variety of reasons for the 
increase in market share. I think as the crisis developed in 
2007 and 2008, we adjusted, ``we'' being the private mortgage 
insurance companies, adjusted our underwriting criteria to 
reflect the market conditions at that point in time. Since 
then, as the market has started to recover a little bit, we 
have adjusted those accordingly. So our underwriting guidelines 
have adjusted as markets have changed.
    But the other key reason why the FHA is getting the market 
share they are, first and foremost, they generally have pricing 
lower than we do. They have proposed, and I think it has been 
approved in the House, that their pricing will increase, and 
hopefully later this year that will happen. That will make the 
private mortgage insurance companies much more competitive.
    In addition, and it was alluded to earlier by members of 
the panel, Fannie Mae and Freddie Mac have added adverse market 
fees. They have loan level price adjustments to try to rebuild 
their capital base that has made the conventional market less 
competitive. So if a borrower looks at a monthly payment 
between the FHA and the private execution, more often than not, 
they are going to do FHA. It is just simply the borrower 
picking the best execution for them.
    Mrs. Biggert. Thank you.
    Ms. Ratcliffe, in the aftermath of the financial crisis, 
the government seems to have taken a dominant role in the 
single family mortgage market. The Federal Reserve has invested 
$125 million in mortgage-backed securities, Treasury has 
injected $145 billion to Fannie and Freddie, and now the FHA 
insures more than 20 percent of all new mortgages. In your 
opinion, is it appropriate that the government commit such 
extensive resources to support the housing market?
    Ms. Ratcliffe. Is it appropriate to what they have done, 
obviously it seems like in the heat of the moment, and the 
crisis, certain steps had to be taken. Whether every single 
investment and dollar put up, I think if I could turn your 
question a little more to the future and answer a question that 
has sort of been in the air here all day, whether going forward 
there should be some place for government in the secondary 
market.
    Mrs. Biggert. I guess I would ask then, is that investment 
sustainable over the long term?
    Ms. Ratcliffe. The current level seems inappropriate and 
unsustainable over the long term.
    Mrs. Biggert. What strategies would you suggest then for 
the private sector's role in the mortgage market?
    Ms. Ratcliffe. The private sector ought to play as big a 
role as it can while the mortgage industry can function to meet 
the public policy goal. To some extent, that may require some 
form of government support to build investor confidence and 
create constant liquidity and ensure access to standardized 
mortgage products, particularly the fixed-rate, long-term 
amortizing mortgage that is the staple of the U.S. market.
    But to the extent that the private sector, and mortgage 
insurance is a perfect example of that, the first loss position 
is on the private sector. They have skin in the game. They set 
the standards and they know the customers and the borrowers and 
the mortgage lenders. So the government role should be 
minimized. What we have proposed are things like private 
mortgage insurance, much more capital in front of whatever 
would replace the GSEs, and something like an FDIC fund before 
you even would touch a catastrophic government wrap.
    Mrs. Biggert. Mr. Sinks, to go back and maybe play on that, 
can you elaborate for us, you said, I think, that the mortgage 
insurance industry is very well regulated by the State 
insurance regulators. Are you concerned that there might be 
inefficiencies and burdens of having to deal with the different 
regulations and requirements among the States? Or do you still 
think this is the best way to go?
    Mr. Sinks. We still believe in the State regulatory model. 
It has worked successfully, as we have said. It has worked in 
good times and bad times. There are mortgage insurance 
companies over time, going back to the 1980's, for instance, 
that are no longer in the business because of regular steps, 
and addressed the situation. It is kind of a sense that the 
model works very well, and we don't need to fix it. If it is 
not broke, don't fix it.
    Mrs. Biggert. Thank you. I yield back.
    Chairman Kanjorski. Thank you very much, Mrs. Biggert.
    We have now run out of our first round of questions. I am 
sure members would have additional questions if we allow it.
    So, without objection, I am going to start a second round. 
We have this bright, anxious, participating panel here, so why 
not tap them.
    My first question would be, looking to the future, how many 
of you would recommend getting the government totally out of 
the secondary market and out of the real estate market?
    Okay, George Mason has one vote, and five to the contrary.
    Let us start with you, Mr. Sanders. Why are you so 
convinced that it is not advantageous for the entire American 
economy to keep the real estate market relatively flat and not 
highly cyclical that would cause this great fluctuation? Or do 
you see that there would not be fluctuation, because if you do 
an analysis from the late 1920's until 2004, 2005, the real 
estate market has been a tremendously flat, stable market, and 
it only bloated with the bubble right at the end. What are we 
to think if we go to a total private market again, why should 
we not be returning to the days prior to 1929 when it was a 
very, very fluctuating market?
    Mr. Sanders. Mr. Kanjorski, I have seen that same study by 
Bob Schiller. What is misleading about that is that is a 
national portfolio of housing. There have been regional bubbles 
in housing markets all throughout time: Boston; Houston; and 
Denver. That was the source of my quote in the New York Times 
where I said don't put lower-income households in low-
downpayment mortgages. You are going to hurt them because 
housing markets, by definition, can be bubblish.
    Now, having said that, I would disagree with what Mr. 
Taylor said. He said, Wall Street gone wild. I would say, 
government gone wild. We went through a period where government 
pushed housing over the cliff. And what did we get? We got a 
bubble; we got a burst; and we have a lot of heartache and 
pain. It almost crashed the banking industry and the private 
mortgage insurance companies ratings are not as high as they 
used to be. That is the downside of it.
    Having said that, can't we at least begin to withdraw the 
government support and go back and let the private mortgage 
insurance companies or the banks take risks they think are 
reasonable?
    Chairman Kanjorski. I do not have any question with that. 
Certainly we have to change the formula, perhaps how much 
government involvement there is. But to listen to the purists' 
argument, it is quite disturbing to me because you are 
willingly putting at risk, it seems to me, the entire economy 
of the United States since housing represents 25 percent of the 
economy. If we stay in the state we are in right now, there is 
literally little or no hope for recovery. That is a heck of a 
price to test against an economic theory, free market concept. 
I am glad you are able to make that price and argument, but 
would you want us to tie all of the support funds that the 
Federal Government supplies to your university based on that so 
if you are wrong, your university gets wiped out?
    Mr. Sanders. Absolutely, for the following reason: We are 
the only country that has Freddie Mac, Fannie Mae, and this 
extensive subsidization of the housing market. We got there 
because of that. You are right, if we suddenly removed it, it 
would be like a drug addict coming off of a heroin shot. We 
would probably have a terrible time afterwards. We need sort of 
a methadone period, where we withdraw it over time, say 3 to 5 
years. But eventually, we have to let a target, let the private 
sector make bets and pay the price if they are wrong.
    Chairman Kanjorski. And I can understand that argument, but 
how do you justify what happened when securitization by Fannie 
and Freddie really substantially lessened in 2006, 2007, and 
2008, and the private market of Wall Street took over, and the 
descriptions Mr. Taylor made of these people being on all one 
side of the transaction, getting their commissions and profit, 
that occurred when Wall Street was doing the securitizations, 
not when the government-sponsored agencies were doing it.
    Mr. Sanders. Again, I have seen that argument made before. 
Just using my hands because I don't have graphs, the housing 
bubble did this; at this point, Freddie and Fannie pulled out 
of the market and let the private sector come in. That is icing 
on the cake. This market was bubbled and was overheated before 
the private sector stepped in with the securitization, the 
private label market you are talking about.
    Mr. Taylor. That is not true.
    Mr. Sanders. Yes, it is.
    Mr. Taylor. Three years ago, FHA only had 3 percent market 
share.
    Mr. Sanders. We are talking Fannie and Freddie.
    Mr. Taylor. Let's talk Fannie and Freddie. Mr. Chairman, 
Fannie and Freddie in 2001 had $2.7 trillion worth of market 
share of these mortgages. By 2003, they lost a trillion dollars 
worth of market share to this so-called free market, it was 
free to abuse and do whatever they wanted, a trillion dollars 
of market share, that is when Freddie and Fannie got into this 
both feet, arms, legs, the whole body. That is when they really 
followed the market into this subprime abyss. But even then 
they had limits, and they wouldn't take no-documentation loans 
and they wouldn't do certain things that the market was still 
doing and willing to do. So let's be clear. We were led down 
this abyss, all of us, by a market gone wild.
    It wasn't low-income people. You look at the people who are 
in foreclosures, it is not just low-income people. It is all 
sorts of income levels. They keep blaming low-income people. I 
don't know what is going on with George Mason. It is simply not 
what has happened in America to this housing bubble. It wasn't 
created by low-income people. In fact, low-income people 
originations amounted to less than 10 percent of all the 
mortgages that were done in this malfeasant lending period. It 
had very little to do with lending to low-income people.
    Mr. Sinks. I would agree with what Mr. Taylor said here.
    When Wall Street came in and it created or extended the 
``exotic products'' and Fannie and Freddie started to lose 
share, that is when they reacted. That goes to the private-
public ownership of Fannie and Freddie, which is a different 
topic. But they were responding, trying to play to their 
shareholders, and they grew their share; and, therefore, 
accepted riskier loans dramatically.
    The flip side of that, and it goes back to something I 
spoke earlier about, is Wall Street patient capital, the answer 
is flat out no because they have a profit motive. As Mr. 
Garrett pointed out earlier with his charts, they disappeared 
and now the government has 99 percent of it, or 83 percent, 
whatever the right number is. So the pendulum swung completely 
the other way. And to your point, Mr. Chairman, as much as we 
want to see the FHA and the GSEs back off a little bit, we 
wouldn't have a housing market today if they weren't there 
because the private capital market sure isn't stepping in.
    Ms. Goldberg. Mr. Chairman, in addition, it is important to 
stop blaming the low-downpayment loan made to low- and 
moderate-income people because I think there is a lot of 
evidence that those loans done properly actually perform quite 
well, and are very stable over time, at least when the economy 
is not going whacko, because unemployment now is obviously 
driving foreclosures at a level that it hasn't before.
    I think it is important to be clear about what are the 
kinds of loans that have caused this crisis, and what are the 
kinds of loans that haven't, and not just say every loan with a 
low downpayment is a bad loan that is destined to go back.
    One other piece related to that, one of the critical roles 
for the Federal Government and its involvement in the secondary 
market and direction of the primary market is to make sure that 
lending is done fairly so people, not just low- and moderate-
income people, people of color, families with kids, women, 
people with disabilities, that they have access to mortgage 
credit in a fair and equitable manner, and in a safe and sound 
basis, which if we go a little ways back in history, we know is 
not the case with a market left to its own devices. So in terms 
of that kind of equity, and how we make sure people are treated 
fairly and have fair access, the government has a really 
critical role to play as well.
    Chairman Kanjorski. I really need an explanation for the 
record and that is why I have encouraged you all to go back to 
what caused this thing. I am firmly convinced that we need to 
find some way of defining some of the important causes we agree 
upon. Apparently, here on this panel, we have five witnesses 
who would agree this is not all of the government's fault, and 
one witness who says the solution to this would be going back 
totally to a free market system. Now this panel and the 
Congress has to write new rules and regulations and decisions 
need to be made as to whether we have a secondary market. And 
if so, who is responsible to encourage it, what kind of 
subsidization should be made for housing, if any, and should we 
get involved at all? It seems to me we cannot get back to that 
unless we get more uniform agreement as to what some of the 
basic causes for the crash were. And then leading off that, 
what are some of the solutions or cures we can put in place to 
prevent some of these things.
    One question, because we just recently passed the 
Regulatory Reform Act, do you think we have totally failed in 
doing the right thing there and we should have done nothing?
    Mr. Sanders. The Regulatory Reform Act?
    Chairman Kanjorski. The Dodd-Frank bill.
    Mr. Sanders. It is all about systemic risk, etc. We don't 
know what is going to be in the new agency that has been formed 
up that is going to moderate the markets. And it didn't mention 
Fannie and Freddie. Congressman Frank says we are going to do 
this. I say to my friend, Mr. Taylor, and I gave this 
presentation in front of Mr. Frank, I said we have pumped $8 
trillion in money, guarantees and loans into this mortgage 
market prior to the private sector getting involved. That is 
bubblish. By the way, I am not saying that the private sector 
didn't make some mistakes. Absolutely, there were. But what I 
am saying is, without the public sector's prodding into housing 
so heavily, we may not have seen that. Would the market have 
responded that way had they thought there wasn't this huge 
demand for it? Because remember, I took it out of my testimony 
for Mr. Taylor. I wish I had put it in. Take a look at the 
housing prices in cities. In some major cities, housing prices 
quadrupled during this bubble period. How do we get affordable 
housing people into those? There is only one way to do it, 3 
percent down. And again, I understand that. But that is 
bubblish.
    Chairman Kanjorski. But we were all worried about the 
tulips.
    Mr. Sanders. You are absolutely right. The private sector 
screwed up.
    Chairman Kanjorski. I would like to go on, but I have to 
let Mr. Garrett have some of the time.
    Mr. Garrett?
    Mr. Garrett. So the last exchange was I guess interesting 
and telling that here we are, ending in July, and we still 
don't know what was the underlying cause, at least have a 
consensus on what was the underlying cause of the economic 
morass we were just in. Why that is curious and maybe a little 
ironic is several weeks ago, we just passed a 2,300 page bill 
fixing the problem. When we were in this room and I was sitting 
over there and it was the first day of the first joint 
conference committee, House and Senate conference committee, 
and we were ready to start voting on the bill and I asked, may 
I have a show of hands of anyone in the room who actually has 
read all 2,300 pages. No one raised their hand on the 
committee. So what you had was no one actually having read the 
bill. And as we have seen in this last few minute dialogue, we 
still don't have a consensus as to what was the cause of it. We 
have a commission that is out there that is going to be coming 
up with their interpretation, after exhaustive studies and 
talking to experts like you and others to tell us what the 
cause was. That, I understand, is not going to get back to us 
until some time at the end of the year. But here we are already 
implementing a bill, 2,300 pages, and to what end. A couple of 
you already made the comment that what we need is certainty, 
and we need to get capital back into the marketplace.
    In the last week or so, it was reported in the Wall Street 
Journal that Ford was trying to get more capital into the 
system. And how did that work for them, as Dr. Phil would say. 
Not too well. It wasn't because of anything that Ford did, it 
wasn't because of anything that the private markets did, it was 
all because of this ill-conceived, not thought out what the 
ramifications of the bill is, and those are not my words, I am 
sort of paraphrasing Senator Dodd when he said we have see how 
this bill passes before we see how it all plays out.
    We saw how it played out with Ford. Thank goodness Mary 
Shapiro was able to come back and fix that situation in a band-
aid sort of approach for 6 months. Think about how much 
uncertainty there is there. Think of with the SEC, we don't 
even know how many regulations that they have to promulgate. I 
know someone is saying it is 95 regulations, somebody else says 
it is 102 regulations at the SEC. We don't know how many 
regulations they have to promulgate. How can anyone say we have 
just brought certainty to the marketplace?
    We have brought uncertainty into the marketplace, and that 
is just going to be a detriment for a time to come for your 
industries and the rest.
    I think what all of us want, whether it is the free markets 
or otherwise, is proper allocation of capital. That is the best 
way for any economy to perform, is if you have the proper 
allocation of capital. You have had a misallocation when the 
government encourages to go in one way when it shouldn't. I 
will concede with Mr. Taylor and others that there were 
mistakes made all of the way around, private sector, public 
sector, individuals, investors, and the like. But you have to, 
I think, agree that a lot of this was prompted by government 
activity.
    I think Ms. Goldberg was saying it is not the low-income 
loans and what-have-you, and I think some of the documentation 
sort of points that out. But you have to see what the 
government did on this to encourage the high income. Remember 
what the Federal Reserve up in Boston said several years ago 
just prior to the collapse, they published a report that says, 
what, that when you do the underwriting, you no longer have to 
look at traditional valuations, you no longer have to look at 
income sources, you can consider welfare payments as a proper 
source of income in the consideration of developing risk 
assessment and the like.
    They were talking about low-income loans in the urban 
areas, but what happened right after that or some time after 
that, they said if you don't have to look at those for low-
income loans, okay, because there are no longer the traditional 
values that banks used to use, you would probably say should we 
be looking at welfare payments as a proper source of income for 
a bank loan, you would say probably not. But the Federal 
Reserve of Boston was saying it was okay to consider it. So if 
it is okay for the Federal Reserve of Boston to do it on that 
loan, then you had Bear Stearns and others come out on the 
private sector saying, hey, we must be able to do it on the 
middle income and the upper income levels as well. And that 
then skewed the marketplaces.
    Ms. Goldberg, you talked a little bit about the downpayment 
aspects and what-have-you. Is the percentage of downpayment an 
appropriate indicator of risk?
    Ms. Goldberg. Sir, if I can take a second and speak to your 
previous point briefly, one thing on welfare payments, it is 
often true that people who get welfare don't have the income to 
support a mortgage, but it is a steady stream of income. And I 
am not familiar with the Federal Reserve of Boston's paper on 
this topic, but I suspect that is what they were getting at. I 
don't think you would find community advocates suggesting that 
should be the only underwriting criteria. I think we all want 
to see that loans are underwritten, looking at the borrower's 
ability to repay the loan. So it is not just are you getting 
welfare as a criterion for deciding whether you are eligible or 
should be eligible for a loan or not. There are a lot of 
factors that go into it.
    Several panelists have spoken, what we saw in the 
unregulated part of the private market was risk layering with 
lots of different loan features that together contributed to 
tremendous risk, loans that were not sustainable, and were not 
underwritten to the borrower's ability to repay.
    Having said that, I forgot what your question was.
    Mr. Garrett. Is downpayment an appropriate indicator of 
risk? Although now, you say that welfare payments may be 
appropriate.
    Ms. Goldberg. I will say that I don't believe my 
organization has a position on the level of downpayment that 
ought to be required. But I think we would say that we think it 
is a good idea for people to have a downpayment and to have, as 
a borrower, some skin in the game. However, just like with 
high-income people and lower-income people, that should not be 
the only factor that is evaluated in deciding whether someone 
is a good credit risk, and whether the loan product that is 
being offered to them is the appropriate product for them.
    Mr. Garrett. Do you have an answer?
    Ms. Rodamaker. When we talk about the downpayment, that is 
absolutely one aspect that we use of underwriting. We have gone 
through and we study every loss, every foreclosure, everything 
that happens in our mortgage market. The most common cause of 
foreclosure in our market is divorce, and you can't use that in 
underwriting.
    Mr. Garrett. This is not the committee that deals with 
that.
    Ms. Rodamaker. Right. When a couple comes in and applies 
for a mortgage, they are happy. When they start making 
payments, maybe that is when they become unhappy.
    Chairman Kanjorski. So all we have to do is outlaw divorce. 
That is the solution.
    Mr. Garrett. Just a technical question, Mr. Sinks.
    When the person comes in and makes their application to the 
bank, to your colleague to your left, you are doing all of your 
underwriting and then paperwork, if she is hooked up with one 
of your clients and they are doing that, what percentage of the 
cases that she will be sending, applications that will be 
coming in for PMI, are accepted on average and what percentage 
are not? Or is it accepted all of the time with just a higher 
premium?
    Mr. Sinks. I will speak on behalf of MGIC because I don't 
know the industry statistics, but historically, we would have 
rejected the application probably 2 or 3 percent of the time. 
In this environment, because we are so cautious, that number is 
closer to 25 percent.
    Mr. Garrett. But normally it is 2 or 3 percent?
    Mr. Sinks. Yes. As you came through the 1990's and 2000 
decade, it would be 2 to 3 percent. As the market changed, and 
we had to adjust our underwriting guidelines accordingly, it is 
probably in the neighborhood of 25 percent. The primary reason 
for that is because of concerns over valuations. It is not the 
credit score. You can verify income and things like that. It is 
really about the value of the property; is that appraisal good. 
And in certain markets, in Iowa, it is just fine. But in other 
markets, we still have concerns about those. I would expect 
that over a period of time to revert to the mean.
    Mr. Garrett. I will close, I know a couple of you made the 
comment as for the need of additional information and 
uniformity in regulation, and your suggestion was along the 
line with what the GSE has done in the past. Rest assured, the 
Frank-Dodd bill takes care of all that. We now have an Office 
of Financial Research that will get every single piece of 
information that anyone can possibly conceive of in that 
agency, and they will be a new systemic risk regulator all unto 
themselves.
    So every bit of information that you have ever been looking 
for, and any information as far as uniformity will come from 
them and the CFPA, because ultimately, there is no limitation 
on their power of information and there is no limitation as far 
as their power for setting some of the standards you need and 
inasmuch as these are consumer financial products, we have just 
created everything you need in this bill. So I will close where 
I began. We don't understand what caused the problem, but we 
have solved it.
    Chairman Kanjorski. I guess that office will be able to 
tell us just who is going to get divorced.
    The gentlelady from New York, Mrs. McCarthy.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman, for 
having a second round. I wish we always had more time to have 
an open debate. I always feel bad for the witnesses--5 minutes. 
You travel from all over, and you get 5 minutes. It is not 
enough for some of us. We would like to go back and forth with 
questions.
    Again, I am going to go basically back to the Moody's 
report that we got this morning. We might not have solved all 
of the problems, but going back when we started doing the 
financial reform, the goal was certainly not to put anybody out 
of business, but obviously there had to be some rules and 
regulations. I always said if I could legislate morality, we 
wouldn't be dealing with a lot of the things that we are doing, 
mainly because so many of these corporations knew what they 
were doing. They had been warned by their inner controls, and 
they ignored it because the money was so good coming in. Having 
said that, I have absolutely no qualms that what we did was the 
right thing. Is it perfect, there is no such thing as a perfect 
bill coming out of Congress. I don't care if you are Republican 
or Democrat, it just doesn't happen. That means we do 
corrections as we go along. This committee spent a year-and-a-
half going section by section by section, and working hard 
trying to get it right. I am not going to speak about the 
Senate. I didn't agree with a lot of things that the Senate 
did. With that being said, I certainly think that we have put 
Wall Street and some of the financial industry on notice. We 
are going to be watching you.
    For anyone who was planning on retiring, or those of us who 
actually grew up with parents who came from the Depression and 
saved so that I would be ready for my retirement, to see that 
wiped out when I did nothing wrong, and millions of other 
people in the same boat; and yes, the homeowners. And I agree, 
going back in 2002, 2003, 2004, this subcommittee, with a 
Republican chairman, saw that the subprime and the unlicensed 
mortgage brokers, what they were doing in this country was 
wrong. We had a good bipartisan bill that I believe could have 
possibly prevented a lot of things that happened in the housing 
market. And it came out of this committee with a good vote. It 
was never allowed on the Floor.
    Everybody wants to blame this side of the aisle, believe 
me, we tried and a number of Republicans tried back then. With 
that being said, and we solved those problems with unlicensed 
subprime mortgage brokers going from State to State, they are 
not going to be able to do that any more. And I think that is a 
good thing.
    With that being said, and again, I also know we are going 
to have hearings in September on Freddie and Fannie, basically 
going a little deeper on exactly what went wrong, and we have a 
lot of information on that already. But I want to go back to 
why this hearing is being held. Again, I apologize if it was 
talked about during the 20 minutes I was gone. If any of you 
have any ideas about the regulatory or legislation changes that 
must occur for the private mortgage insurance market to be able 
to play a larger role in the repair of our housing market, 
because again that is what we are going to be dealing with, I 
would certainly take your comments.
    Mr. Sinks. I will give the first shot. To make us more 
competitive and bring more private capital or more private 
exposure, and kind of bring that chart that Mr. Garrett had 
back into balance, the first thing we need to do is get the FHA 
prices back in line and commensurate with the risk that they 
are taking on. They are underpriced from where the private 
industry is right now. They have new pricing proposed. We know 
that we expect it to happen. That will clearly expand the pie, 
if you will, for the private mortgage insurance sector.
    In addition to that, they are planning on loan dollar 
limits that are a little higher than they should be, we 
believe. Those dollar limits need to be adjusted. And finally, 
as I alluded to earlier, the conventional market which is 
Freddie and Fannie, they have a series of fees on their loans 
as they attempt to rebuild their capital base that make the 
private execution versus an FHA execution less competitive. 
What it comes down to is when you add in the FHA having lower 
prices, and the fees that the GSEs have on the conventional 
side, when the consumer gets a piece of paper in front of them 
that says which is the lowest mortgage payment every month, it 
is, far and away, the FHA these days.
    The private mortgage insurance industry, as we alluded to 
earlier, has been able to raise billions of dollars worth of 
capital, and we have the capacity to do it. We are ready, 
willing, and able as an entire industry. And each company is 
ready, willing, and able. We just can't compete in the market 
with that kind of pricing, and we can't control that pricing. 
So that would be the primary influence on what we need.
    Mrs. McCarthy of New York. Just to follow through, and I 
don't remember who mentioned it when I was listening to the 
testimony, the appraisals, the appraisals of homes going back a 
number of years ago. I used to have the real estate people 
coming in and saying, what is going on here? I had a woman who 
basically came in, she was buying a home that she certainly 
couldn't afford and the house was appraised much, much higher 
than what it was ever worth. And there was no money down. One 
of the new exotic pieces to get people to buy homes. She 
herself backed out. She wouldn't be part of it because she 
thought it was fraudulent. How do we get the appraisals to be 
honest? You bring three appraisals in, and I saw that with my 
son and daughter-in-law. One was the top end, which nobody in 
the neighborhood had; their house was not any better, if 
anything, it wasn't updated as some of the other houses. And 
then a really, really low price. I know everybody goes high, 
low, and then in the middle. But how do you know you are 
getting a good appraisal because, you are the insurance, do you 
use different appraisers?
    Mr. Sinks. Yes, we do. We have an approved list of 
appraisers. This is an issue that has been around certainly 
since the private mortgage insurance industry has been around. 
As I said earlier, you can verify income, verify FICOs, but 
that appraisal is the great unknown. It plays havoc when the 
market is rising. When you see California double in value over 
a period of time, or it can have an impact when values are 
dropping. When you look at Detroit and you see values dropping 
and someone is trying to buy a home, and what is that house 
really worth?
    I think what needs to be done is, most importantly, it 
needs to be done locally. You need to have trust in people who 
are in those local markets and truly understand it. In addition 
to that, you have to have some other checks and balances, 
whether it is automatic valuation models and things like that 
might not be the exact answer, but it gives you a 
reasonableness check on what that appraised value should be.
    Mr. Taylor. First and foremost, in FIRREA you mandated 
there be independence between appraisers and financial 
institutions, and that never happened. Countrywide had their 
own appraisal shop. Citi, a number of these financial 
institutions owned the appraisal units. Yes, the guy who ran 
the mortgage department didn't oversee the appraisers, but they 
worked for the same company. There has to be independence in 
those businesses, so there is an arm's length transaction.
    Furthermore, there has to be the independence so you can 
make an appraisal and the lender simply doesn't turn around and 
never do business with you again. There has to be a process 
that allows for fairness, mediation, and oversight that 
protects the appraisers from giving honest appraisals.
    Finally, it has to be in person. These automatic valuations 
have proven not to be very effective. Yes, they work some of 
the time, but they don't work a lot of the time. We used to 
have people come into the house, look at what was going on in 
that house, not just sit in front of a computer and theorize 
what the value might be.
    One of the biggest overlooked groups in this crisis, this 
foreclosure crisis, was the appraisal industry. And a lot of 
the ones who tried to stand up and be independent, they are 
gone because businesses, banks, stopped doing business with 
them until they got appraisers who did what they said. You 
absolutely must fix this. I think in the financial reform bill, 
there is language that allows oversight for this to happen, and 
it is critical going forward that we really address this 
problem.
    Ms. Goldberg. If I can add one note to that, I completely 
agree about the need for additional oversight. I want to 
caution you that while I also agree appraisals in many cases 
helped to fuel the rise of housing prices in a way that didn't 
make sense, and bore no relationship to reality, appraisals can 
also work on the opposite end, to harm neighborhoods where 
property values are undervalued, underpriced.
    One of the footnotes in my testimony, I give some of the 
history of the appraisal industry predating FHA and applying to 
FHA where appraisers were actually trained that you could judge 
the value of the neighborhood based on who lived there. And 
there was a listing of different racial and ethnic groups 
according to whether they helped inflate property values or 
sustain property valuation, or whether they diminished property 
values. While those standards have been dropped from the 
industry, the effect of that really institutionalized kind of 
racial approach to valuing property. It is not really erased 
from the industry, and we need to make sure that kind of 
discrimination is not happening in appraisals, as well as the 
artificial inflating of the property values at the other end of 
the scale.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman. I thank 
all of you for coming in and enlightening us.
    Chairman Kanjorski. Now the gentleman from Illinois, Mr. 
Manzullo.
    Mr. Manzullo. Thank you. Can anybody on the panel advise me 
if private mortgage insurance had anything to do with the 
collapse of the real estate market?
    Mr. Sinks. The literal collapse of the market?
    Mr. Manzullo. Yes. Did you do anything wrong in your 
industry, Mr. Sinks?
    Mr. Sinks. Sure, we did. I think we are one participant 
amongst many. We were talking earlier about perhaps we haven't 
figured out exactly what went wrong. I think fundamentally, 
what went wrong was that basic principles of risk management 
were done away with. There was no fear in the market. People 
had different motivations, whether it be the government wanting 
to house all of America, whether it wanted to be Wall Street to 
make a buck as quick as they possibly could. I think everybody 
who was in that food chain from borrower to servicer, and 
investor at the end, played some role.
    Mr. Manzullo. The big problem is that the Fed has always 
had the authority to do two things: number one, govern 
instruments; and number two, determine the underwriting 
standards. At least as to those banks that the Fed covered. It 
wasn't until October of last year that the Fed came out with a 
written rule that said, voila, you had to have written proof of 
your earnings. Whenever MI was purchased, if this is within the 
purview of your knowledge, Mr. Sinks, how far did MI go? Did 
you actually look at closing statements? Or you just got an 
order to provide insurance based upon salary and the value of 
the property?
    Mr. Sinks. We did look at the documents. We do underwrite 
the file and provide the second set of eyes. What happened, I 
think in a sense was that as the market expanded, as Freddie 
and Fannie took on a greater role, they expanded the 
underwriting criteria under which they would buy loans. The old 
idea of 38 percent--
    Mr. Manzullo. Did that influence your issuance of mortgage 
insurance?
    Mr. Sinks. Yes, it did. The reason it did was because 
competitively, and we touched on it earlier, what happened was 
there was an expectation within the lending community, which is 
our customer base, that if Freddie and Fannie had underwriting 
guidelines, and I am going to use an example of 45 percent debt 
to income ratio, then private mortgage insurance, you need to 
play in that game. For us to remain competitive in that 
environment and be able to participate in the market, we 
stretched our underwriting guidelines. We reviewed the file, 
but we allowed the guidelines to expand due to competitive 
pressures.
    Mr. Manzullo. Let me go to a second area. On the 
appraisers, we have heard horror stories from many lenders back 
home. I remember reading in the Post some time ago where an 
appraiser from Richmond came to appraise a townhouse, or a 
stand-alone house in Alexandria, Virginia. And we are getting 
people from Chicago who are driving to Rockford, Illinois, 80 
miles to the west, who know absolutely nothing, nothing, I 
mean, nothing about Rockford, that are giving appraisals. And 
the Realtors are scratching their heads and saying: Where did 
these guys come from? They came from Chicago.
    The home valuation code of conduct, we had the hearings on 
that. I looked at that. I have been through probably a thousand 
real estate closings myself as a private attorney. In fact, I 
started practicing before RESPA, and we actually had more 
honest closings before RESPA. There are eight people at HUD 
working day and night on trying to revise RESPA at any given 
time.
    Now you have a situation where you have an out-of-town 
appraiser come in, and he doesn't know the fact that there are 
rumors that the highway may be expanded in front of the house, 
or he reads the newspaper and hears about the city council 
which may exercise powers of condemnation and taking a parcel 
of property, he knows nothing at all about the locality, and 
yet he is presumed to be dishonest simply because he is local. 
That is going to really hurt the real estate recovery as far as 
I am concerned. John, you are nodding your head. It may be the 
first thing you and I agree with in a long time. Do you agree 
with that?
    Mr. Taylor. The second thing, actually. The lack of 
government oversight in the Fed to put out rules that 
prohibited these practices.
    Mr. Manzullo. There you are, John.
    Mr. Taylor. Yes, I totally agree. It is all about local and 
having that person who really knows the property, and it is all 
about that person having the independence from not being overly 
influenced by the broker or the lender.
    You do that, build that, which is what you supposedly built 
with FIRREA when you created this separation, and we will clean 
up this mess with the appraisers, notwithstanding Debbie's 
comments about making sure that it is not done in a 
discriminatory fashion.
    Mr. Manzullo. The mess is done now. The Realtor goes out 
there. It is not hard nowadays to get comparables. When I 
started practicing law, no one had heard about the Internet. 
You had to research it the old-fashioned way at the courthouse. 
And that was always interesting because in Illinois, we had the 
green sheets. The green sheets would tell you which portion of 
that real estate was actually attributed to personal property.
    Mr. Chairman, I wanted to bring that up because I just 
don't think when the GSEs and FHA adopted the HBCCs by reasons 
of Attorney General Cuomo somehow forcing them to do that, that 
is going to help in the real estate recovery; do you agree with 
that, John?
    Mr. Taylor. I don't know about Attorney General Cuomo being 
the one who forced them into that position, but I agree that we 
need local. These appraisal management companies I think are 
not a good model to get accurate appraisals. We need inside; 
somebody needs to go into the house, and somebody needs to know 
the neighborhood and know what is going on. I think that will 
get us back to sane, accurate valuations.
    Mr. Manzullo. Do the rest of you agree with Mr. Taylor's 
statement?
    Good. On that note, I will end.
    Chairman Kanjorski. Thank you.
    If I may comment, the regulatory reform bill contained 
about 200 to 300 pages of revolutionary ideas about appraisals 
and how we handle them. And the bill did not take 18 months; it 
took 6 or 7 years of bringing that about.
    I think we are going to go on for another hour-and-a-half. 
No, Mr. Garrett has reined me in. I got carried away. A lot of 
times when we get down to a few members, we get extended 
questioning periods. I appreciate the response and the back-
and-forth nature of the panel. I was hoping we could get 
everybody to join hands and say we agree on everything, but we 
probably have failed. We will try that next time, or we will 
come down hard on the universities again.
    Mr. Sanders. If I may make one closing remark on my behalf, 
Mr. Garrett asked the question, and I wanted to provide some 
clarity on it. At one point, believe it or not, I was an 
advocate for Fannie, Freddie, and the FHA. Unfortunately, 
something happened at the beginning of the last decade. Freddie 
and Fannie were the gold standard for underwriting, 20 percent 
down, we don't need private mortgage insurance for 20 percent 
down. Everybody believed Freddie and Fannie was right on 
target. FHA was small.
    A question for you: What happened? Why did Freddie and 
Fannie balloon in size and why did the FHA balloon in size? I 
think if you are trying to look at a source of what happened in 
the housing market, why not look at that?
    Chairman Kanjorski. I don't blame the Bush Administration 
for selling real estate at any price.
    I think Mrs. McCarthy put her hands on it. We can sit here 
forever and blame one political party or another political 
party, or one Congress or another Congress, or one President or 
another President. The reality is, I would hope we can get to a 
common understanding of what happened because until you 
identify a problem, it is hard to come up with a solution, and 
we really do have on both sides of the aisle a gross 
disagreement on what really fundamentally caused this problem.
    I am hoping when the Commission gets done, we will come 
closer together on that issue. Regardless of what happened and 
what did cause it, it is not going to cure a thing. The future 
is going to cure something, and I think we should take on the 
rewriting of what happens to lessen the opportunity. We will 
never stop risk and we will never stop ridiculousness in a free 
market society, and we should not, but we can do things to 
improve it.
    The one impression that I may have left that I want to 
remove, I think the mortgage insurance market has played a very 
good role in real estate in the United States. But we have to 
recognize that for 2 decades after the Great Depression, it 
disappeared. And sometimes market situations will not cause it 
to come about and come back when there is such a tremendous 
disruption.
    I really do believe Fannie and Freddie fulfilled a great 
function in our society in the period from the war on until we 
lost control of them for one reason or another and they went 
overboard. But they are manmade institutions and therefore 
correctable and lend themselves to solutions or something 
similar to an enforced solution.
    I think what is important, if we can bring the temperature 
down and get serious, and I am inviting my friends on the right 
side to join us in that, and I don't mean right side, it is on 
my right. What disturbs me the most, and I will shut up after 
that, is that we have been through a real trauma in the country 
and the average family has been through a real trauma, and at 
this point, there is a lot of fear in those families and they 
are looking for more level heads to prevail. Sometimes we in 
the Congress do not provide the right image for that level 
head. I am hoping now we can get down to being levelheaded. If 
we can, we can solve this problem. I think we are on our way to 
the solution to the problem. I am absolutely convinced of that. 
The faster it happens, the better off we are.
    I agree with Mr. Zandi. And the fact he work for Moody's 
and was a Republican and supported Mr. McCain for President, 
that may be good. Because he did that, he probably should be 
more reliable to my friends on the other side. Notice I didn't 
say ``right.'' He basically said we are not going to really 
resolve this problem on real estate until we resolve the 
unemployment problem.
    Conversely, the real estate problem is going to stabilize 
the whole economy for a pretty good picture into the future. I 
tend to agree with that. So I say regardless of what side of 
the aisle we are on, let's get on with the work.
    Let me say, thank you all very much. I was a little 
annoying and snippy to all of you. I didn't intend to do that, 
to be that way. I was trying to extract out of you some good 
comments, and we certainly got some. Mr. Sanders, you and I 
sparred very well. I appreciate that, with a good sport.
    Mr. Sanders. Mr. Kanjorski, after today's panel, I am 
changing my name to George Mason.
    Chairman Kanjorski. I had a much stronger comment than 
that, but I did not use it. Thank you all very much. We hope 
you still make your planes and trips back. You have done a 
great service. It is one of the elements that we are going to 
take up as we are going through the reformations of the GSEs 
and other problems of establishing a better focus for real 
estate in the country. Thank you very much.
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the record will remain open for 30 
days for members to submit written questions to today's 
participants and to place their responses in the record.
    Before we adjourn, the following will be made a part of the 
record: a letter from Essence Guaranty to Secretaries Geithner 
and Donovan regarding reform of the housing finance system. 
Without objection, it is so ordered.
    The panel is dismissed, and this hearing is adjourned.
    [Whereupon, at 4:35 p.m., the hearing was adjourned.]















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                             July 29, 2010

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