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



 
                    THE FUTURE OF HOUSING FINANCE--A

                     REVIEW OF PROPOSALS TO ADDRESS

                    MARKET STRUCTURE AND TRANSITION

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                           SEPTEMBER 29, 2010

                               ----------                              

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-164





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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 29, 2010...........................................     1
Appendix:
    September 29, 2010...........................................    41

                               WITNESSES
                     Wednesday, September 29, 2010

Bentsen, Hon. Kenneth E., Jr., Executive Vice President, Public 
  Policy and Advocacy, Securities Industry and Financial Markets 
  Association (SIFMA)............................................    10
Bodaken, Michael, President, National Housing Trust..............    14
Deutsch, Tom, Executive Director, American Securitization Forum..    22
Farrell, Michael A.J., Chairman, CEO, and President, Annaly 
  Capital Management, Inc., on behalf of Annaly Capital 
  Management and the National Association of Real Estate 
  Investment Trusts' Mortgage REIT Council.......................    16
Heid, Michael J., Co-President, Wells Fargo Home Mortgage, and 
  Chairman, Housing Policy Council, the Financial Services 
  Roundtable.....................................................     8
Papagianis, Christopher, Managing Director & Policy Director, 
  Economics21....................................................    15
Pinto, Edward J., Real Estate Financial Services Consultant......    20
Swagel, Hon. Phillip L., McDonough School of Business, Georgetown 
  University.....................................................    12
Wachter, Hon. Susan M., Richard B. Worley Professor of Financial 
  Management, The Wharton School, University of Pennsylvania.....    18

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    42
    Moore, Hon. Gwen.............................................    43
    Bentsen, Hon. Kenneth E., Jr.................................    45
    Bodaken, Michael.............................................    74
    Deutsch, Tom.................................................    82
    Farrell, Michael A.J.........................................   108
    Heid, Michael J..............................................   125
    Papagianis, Christopher......................................   141
    Pinto, Edward J..............................................   153
    Swagel, Hon. Phillip L.......................................   163
    Wachter, Hon. Susan M........................................   170

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Written statement of Essent Guaranty, Inc....................   176
    Written statement of Ranieri Partners........................   183
    ``Subprime Lending and House Price Volatility'' by Andrey 
      Pavlov and Susan M. Wachter................................   185
    ``Explaining the Housing Bubble'' by Adam J. Levitin and 
      Susan M. Wachter...........................................   214
Bachus, Hon. Spencer:
    ``Government Housing Policies in the Lead-up to the Financial 
      Crisis: A Forensic Study'' by Edward J. Pinto..............   295


                    THE FUTURE OF HOUSING FINANCE--A

                     REVIEW OF PROPOSALS TO ADDRESS

                    MARKET STRUCTURE AND TRANSITION

                              ----------                              


                     Wednesday, September 29, 2010

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:01 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Watt, Sherman, Moore of Kansas, Baca, Miller of North Carolina, 
Scott, Green, Cleaver, Ellison, Foster, Carson, Speier; Bachus, 
Castle, Royce, Capito, Garrett, Neugebauer, Posey, Jenkins, 
Paulsen, and Lance.
    The Chairman. The hearing will come to order. I will begin 
with some explanation, where we're not going to be able to do 
some of the things we thought. When we scheduled this hearing 
in consultation, both sides, we had assumed that we would have 
7 days of legislating left after today.
    That is, the original schedule was that we would meet until 
the 7th or 8th of October. It now looks as if today will be the 
last day of this session, although there will be a reconvening 
in November. That probably depends on the negotiations with the 
Senate on the CR.
    Given that I had said that, I had hoped we would be 
actually dealing with a piece of legislation, but there's no 
point in rushing that pace. So we're 7 days shorter than we 
were. I do think it is important for there to be pieces of 
legislation embodying somewhat different views, although 
there's a common core of agreement in some areas. But that's 
not going to be possible, I note, until November, when we come 
back, because we lost the 7 days.
    I will also apologize to the witnesses, and I am very 
pleased that we have a very broad-ranging group. We will be 
voting a lot today, but we do have at least a couple of hours 
to get started, so we're going to get into it as quickly as we 
can. We have 20 minutes of opening statements, and then we will 
hear your statements.
    And, as I said, originally this was going to be a fairly 
calm day with 2 more days this week and 5 days next week. It is 
now the helter and skelter last day, and I apologize, but 
that's the best we can do. And with that, I will now begin, and 
I'm going to recognize the chairman of the Capital Markets 
Subcommittee, the gentleman from Pennsylvania, Mr. Kanjorski, 
for 3 minutes.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Chairman, at the most recent Capital Markets hearing on 
the future of our Nation's housing finance system, we explored 
taxpayer protection issues. We need to continue working to 
minimize the Treasury Department's purchases of more senior 
preferred stock at Fannie Mae and Freddie Mac, and the 
Administration must work to hold accountable those entities 
that contributed to or exacerbated the housing crisis.
    We must also focus more and more on what the new 
architecture for housing finance should look like and consider 
how we should transition to this new system. We must 
additionally work carefully to avoid repeating past mistakes 
and doing harm. Today's conversations will assist us in these 
important endeavors.
    Some of the pending reform proposals suggest completely 
privatizing the housing and finance market, while others 
suggest imposing some form of explicit government guarantee. 
Regardless of one's views, we can all agree that we must do 
something to change the status quo in reestablishing a healthy, 
stable housing finance system. We need a thoughtful and 
deliberative discussion about what we ought to do. We should 
also have some goals. We need to limit taxpayer costs and 
risks.
    We additionally need to ensure that the credit unions and 
community banks continue to have the ability to compete and 
offer affordable mortgages. We should further have sufficient 
players in the marketplace in order to protect against ``too-
big-to-fail'' scenarios.
    The Dodd-Frank Wall Street Reform and Consumer Protection 
Act has already helped to advance the debate on the future of 
housing finance by changing the rules for mortgage 
organizations, risk retention, appraisal practices, and credit 
ratings. With these process reforms in place, we have laid a 
strong foundation upon which to determine what to do with the 
institutions that securitize the mortgages of responsible, 
creditworthy, middle class American families.
    As we consider transition issues today, we also need to 
remember that Fannie Mae and Freddie Mac now help to support 
just over 70 percent of their mortgages. A prudent evolution to 
a new housing finance system was therefore aimed to proceed 
smoothly and avoid unnecessary market disruptions. Moreover, we 
cannot replace something with nothing, as several of my 
colleagues on the other side of the aisle have proposed.
    In studying transition issues, we should further look to 
past precedents, like Sallie Mae's graduation from government 
sponsorship more than a decade ago. We can use the lessons 
learned, both good and bad, from our work on Sallie Mae's 
privatization to help guide us as we take on the difficult task 
of reconstructing a new housing finance system. In sum, Mr. 
Chairman, I appreciate your efforts in convening this hearing 
and I look forward to discussing the proposals offered by our 
witnesses.
    The Chairman. The gentleman from Texas is recognized for 1 
minute.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    I appreciate the proposals that the witnesses have prepared 
for us today and I look forward to our discussion. The question 
of whether we can have a robust, private, mortgage-financed 
securitization without the Federal Government backing it, I 
think, is the real question that is before this group today.
    It's important that we have a very robust financing 
mechanism in place, but it's also important that we not have 
one that's depending on the American taxpayers to bail it out 
in case it fails. So I look at other ways we finance and other 
kinds of financing that are done, for example, automobile 
financing and others out there. And we don't put the taxpayers 
on the hook for that kind of financing.
    We had a mechanism in place where the taxpayers weren't on 
the hook, we thought, but in many cases that didn't work out. 
So as we move forward, I think it's important that we make sure 
that we have a system in place that works, the housing industry 
and the industries that the mortgage finance business helps 
finance to provide the capital for is very important to our 
country, very important to our economy.
    But it's also important that we not have one that's reliant 
on the taxpayers in an eventual bailout for that activity. With 
that, Mr. Chairman, I look forward to our discussion today.
    The Chairman. The gentleman from Kansas, the chairman of 
the Oversight Subcommittee, for 1\1/2\ minutes.
    Mr. Moore of Kansas. Thank you, Mr. Chairman.
    Just like most issues in Congress, reforming Fannie Mae and 
Freddie Mac should not be about Republicans and Democrats. It 
ought to be about doing the right thing for our constituents 
and our country. I am disappointed that our friends across the 
aisle forgot that when they controlled Congress for 12 years, 
and they did not enact meaningful reform with Fannie and 
Freddie.
    In 2008, the former chairman of this committee, Mike Oxley, 
said, ``We missed a golden opportunity that would have avoided 
a lot of problems we're facing now, if we hadn't had such a 
firm, ideological position at the White House and the Treasury 
and the Fed.'' Last year, I was disappointed to learn of large 
salaries for Fannie and Freddie executives. I wrote their CEOs 
about this last March, and after receiving an unsatisfactory 
response from FHFA, I joined Chairman Frank and others to vote 
for H.R. 1664 to stop those unfair pay practices at Fannie and 
Freddie.
    Protecting taxpayers should not be a partisan issue. So I 
was disappointed that some of our friends didn't join us to 
support that commonsense measure. I sincerely hope we can come 
together this time, Republicans and Democrats, to explore good 
policy options to deal with Fannie and Freddie, and create a 
stronger, safer, housing finance system next year.
    I yield back, Mr. Chairman. Thank you.
    The Chairman. The gentlewoman from West Virginia for 2 
minutes.
    Mrs. Capito. Thank you, Mr. Chairman.
    I would like to thank you for holding this hearing today, 
and it is my hope that we will move forward in this debate on 
the future of the GSEs, Fannie and Freddie. I was disappointed 
that the Dodd-Frank reform bill failed to address the reform of 
the GSEs. I think we have made that point pretty repeatedly in 
the conference, considering their large role in the financial 
downturn.
    As we hear the testimony from experts today on how best to 
restructure the housing finance system, we must consider 
solutions to this challenge in a way that does not further 
subject the American taxpayer to undue risk or cost. The 
previous business model of private gains and public losses was 
an injustice to the American taxpayers and allowed the GSEs to 
take on far too much risk, resulting in a government rescue at 
the taxpayer's expense.
    It is my hope that we could find a road back to private 
markets as quickly as possible where mortgages can be priced 
according to risk, and do away, once and for all, with the GSEs 
as they currently exist today. I look forward to hearing from 
our panel of experts on how we can wind down the GSEs in order 
to prevent the taxpayers from further losses and future 
bailouts, how we promote a healthy and sustainable private 
sector, mortgage finance system, and how we address the lax 
underwriting standards that helped cause the collapse of the 
housing market.
    Again, I thank you for the hearing and I yield back.
    The Chairman. The gentleman from North Carolina, Mr. 
Miller, for 3 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. This 
hearing is about the future of housing finance, which is an 
enormous issues facing all of us, but I suspect we will have 
another installment of the revisionist history of the financial 
crisis from the Republican Ministry of Information. They now 
remember that they warned us all along that subprime mortgage 
lending was the road to ruin. I was here.
    I know who said what, and when they said it. Republicans at 
the time celebrated subprime lending as the triumph of the 
innovation that comes from unfettered capitalism, and 
homeownership was becoming possible now for people who never 
would have had it under the stultifying rules of traditional 
mortgage lending. It was all outside of government regulation; 
and, in fact, government hardly even breathed on it.
    There were mortgage brokers who were almost entirely 
unregulated, who originated loans for mortgage lenders that 
were not depository institutions, were almost entirely outside 
of government regulations. It sold the mortgages to investment 
banks that were almost entirely outside of government 
regulation.
    They created securities that had none of the disclosure 
required for equity securities and risk assessment, and that 
were entirely outside of government regulation. Risk assessment 
was done by rating agencies that were almost entirely outside 
of government regulation. And this triumph of unfettered 
capitalism was causing us to have homeownership at the highest 
levels ever, and it was something that should be celebrated. 
And in fact, it showed the complete uselessness of government 
policy.
    The Cato Institute, one of the organs of the Republican 
Ministry of Information, published an article that said the 
Community Reinvestment Act, the CRA, should stand for the 
``Community Redundancy Act,'' because it had nothing to do with 
subprime lending. And there were criticisms from Republicans at 
Fannie and Freddie, but their criticisms were that they weren't 
doing nearly enough to make homeownership available, to make 
affordable homeownership available, that the private system 
that I just described was running rings around Fannie and 
Freddie.
    And that was their criticism of Fannie and Freddie, not 
that they were making loans or somehow making lenders make 
loans that made no sense, that could not be paid back. We do 
need to reinvent our housing finance system, but what we do not 
need to conclude from the last decade and all the mischief, all 
the foolishness of the last decade, is that homeownership for 
working and middle-class families should not be a goal. It is a 
wholesome goal.
    It is a good thing for working and middle-class families. 
It allows them to build worth. It makes neighborhoods more 
secure, more stable. That should not be the lesson we draw from 
the last decade.
    I yield back.
    The Chairman. The gentleman from New Jersey for 2 minutes.
    Mr. Garrett. I thank the chairman, the ranking member, and 
all the members of the panel.
    It has been over 2 years now since the collapse of the 
housing market and Fannie and Freddie were placed into 
conservatorship. Now it has been hundreds of billions of 
dollars later. This committee is finally becoming serious and 
starting to debate and consider new structure of our housing 
finance system.
    One thing I continue to hear from all the interested 
parties and everyone across the political spectrum was the 
desire to get more private capital back in the market. 
Fortunately, based on many of the actions I have seen so far, I 
think it's all a lot of lip service from some folks, because 
today, as part of the continuing resolution that we'll have, 
Congress is extending the higher loan limits on the GSEs and 
FHA for yet another year. To be able to afford a $729,000 house 
with its higher loan limits, a borrower must make roughly a 
quarter of a million dollars.
    These are the same people that our Administration says that 
a majority of Democrats say are rich and they want to raise 
taxes on, so I'm having a little bit of trouble understanding 
why you want to raise taxes on them and then we want the 
taxpayers then to turn around and help the so-called rich buy 
rich houses. Why don't we just not raise their taxes on them in 
the first place?
    One of the most fundamental questions we have to ask 
ourselves is how much government subsidy wound up in our 
housing market, especially if much of that subsidy doesn't go 
to the borrower in the form of lowered cost, and when much of 
that past subsidy in government policies led to the creation of 
the housing bubble and the collapse of the economy.
    Some are already attempting to score political points and 
say that without a U.S. Government subsidy or rep, borrowers 
won't be able to have attained a 30-year fixed-rate mortgage, 
but I'm skeptical of that too, and such statements, considering 
borrowers can get 30-year fixed-rate mortgages on jumbo loans, 
and they have been able to throughout the crisis. Also, 
numerous studies exist that indicate that the more the 
government subsidizes housing, the more unaffordable and 
expensive that housing becomes.
    Mr. Chairman, this debate we are finally having over this 
issue is truly, extremely important, and one that we really 
must get right. And so I do appreciate this whole list of 
witnesses for appearing today, and I look forward to each and 
every one of your testimony.
    The Chairman. To even out the time, the gentleman from 
California, Mr. Royce, for 2 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    The Federal Government spends roughly $300 billion on 
subsidizing homeownership every year here in the United States, 
and we are the only developed nation in the world that provides 
government-backed mortgage insurance, provides government-
backed mortgage insurance guarantees, and has Government-
Sponsored Enterprises.
    We have all three in this country, and this level of 
government involvement in the mortgage sector paired with the 
negative, real interest rates from the Fed between 2002 and 
2006 facilitated the housing bubble here in the United States. 
While we have not heard much from the Administration on the 
subject, I think they would be well-served to listen to some of 
the warnings issued by FHFA Director DeMarco on some of the 
proposals that have surfaced. And a week or so ago, Mr. DeMarco 
shared these thoughts with us.
    Replacing the GSE's implicit guarantee with an explicit 
one, he says, does not resolve the problems and inherent 
conflicts in the model. He said that it will produce its own 
problems, maybe make the situation worse. He says if the 
government continues to provide a guarantee for the vast 
majority of mortgages in this country, policymakers will yet 
again want to say as to the allocation and pricing of mortgage 
credit for particular groups in geographic areas, and that is 
problematic in terms of what this will lead to.
    The mortgage finance system of tomorrow should be based, 
the lion's share of it for the most part of it--on private 
capital, on private investment. And considering the current 
state of the economy and the mortgage market, I think it's 
understood that it will take time, quite some considerable 
time, to get to that point, but that should be our end goal, to 
try to evolve the market back into a position. This was not the 
first housing bubble to develop in our Nation's history, and if 
we repeat the mistakes of the past, it certainly won't be the 
last.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from North Carolina, Mr. Watt, 
for 2\1/2\ minutes.
    Mr. Watt. Thank you, Mr. Chairman and members.
    If you detect a little edge in the comments of 
Representative Miller and I, it's because we have been working 
on the problem of predatory lending since 2004 when we 
introduced our first bill. And there's a little uneasiness on 
our part when we hear stories about how we are somehow 
responsible for the meltdown in this industry.
    So I want to remind folks that the Republicans controlled 
the House, the Senate, and the White House from January 2001 to 
January 2007, during which time the subprime lending exploded 
and the housing bubble became fully inflated. And while we were 
introducing our anti-predatory lending bill in 2002, President 
George Bush announced a new initiative to create 5.5 million 
new homeowners by 2010, said that anybody who wants to own a 
home has a shot at doing so.
    We ought to break down these barriers to homeownership, and 
while we were fighting to stop predatory lending, he went on in 
2004 to continue efforts to increase the U.S. homeownership 
rate and FHA announced a new proposal all for subzero 
downpayment mortgages. And while we were still introducing our 
anti-predatory lending bill, some of the members of this 
committee, who now claim that we are responsible, didn't know 
anything about what was going on in the market.
    They were still saying it was the private market that 
should be controlling this and we ought to get out of the way. 
Our own colleague from Texas, Mr. Neugebauer, said we have a 
very efficient mortgage system today. It's the envy of the 
world. It has brought record homeownership. A lot of people 
have benefitted from our mortgage industry and the 
sophistication and creativity that has come from it.
    And Mr. Garrett said to build this anti-predatory lending 
bill that Mr. Miller and I were pushing, bill may well limit 
the products available to subprime borrowers, particularly 
minority borrowers and will deprive many of those consumers 
from owning or maintaining the home, as if he was--
    Mr. Garrett. Mr. Chairman, does the gentleman yield, since 
he mentioned my name?
    The Chairman. The gentleman's time has expired.
    Mr. Garrett. Unanimous consent for another 15 seconds or 20 
seconds, just to respond?
    The Chairman. Unanimous consent for 15 seconds, and will 
the gentleman from North Carolina yield to the gentleman from 
New Jersey?
    Mr. Watt. No. I won't yield, but I'll use the 15 seconds if 
he wants me to finish my sentence and tell him how it was him 
who--
    Mr. Garrett. No, I was just asking for your time.
    Mr. Watt. Okay.
    The Chairman. We have, I guess, unanimous consent. I 
apologize to you both and we'll continue this later.
    The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman. Mr. Chairman, members 
of the committee, as you all know, I offered a subprime bill in 
2005, which was the North Carolina bill with the New Jersey 
securitization. But I don't think it's very helpful to play the 
blame game, because the American people really don't care, at 
this point, whether it was Democrats or Republicans--what I 
would like to say is that all of us were guilty.
    The Administrations were guilty. The regulators were 
guilty. The Congress was guilty. I at least admit that and 
think we all ought to come to our senses and admit that and 
admit where the mistake was. And part of that mistake was that 
we tried to take economics and turn it into social policy, and 
we tried to promote affordable housing to the point where we 
required no downpayment.
    We had high loan-to-value mortgages and we gave loans to 
people with questionable credit. Any time you do that, you're 
going to have losses, whether you're the government or whether 
you're a private enterprises. But the point now, I think, has 
gotten down to whether we're going to continue to have a 
government role or whether we're going to go to, as Mr. Miller 
says, capitalism. I view capitalism a little more favorably 
than he does.
    I see our panel. We have eight panelists. Six of them want 
a government guarantee, and two of them don't. And I think that 
the thing we all ought to admit to ourselves is if you have a 
government guarantee, you may have the taxpayers liable. And 
there is a subsidy. There is a subsidy there, and whether it's 
worth it or not is what this Congress has to decide, whether 
we're going to obligate the taxpayers.
    Paul Volcker said, and I agree with him, and I saw Mr. 
Pinto--I stole this from your opening statement, but I think 
it's very appropriate. Some have argued that Federal 
intervention and guarantees are inevitable. I think most of my 
colleagues in the Majority have said that. Beware of such 
advice. The failures caused by past interventions are evidence 
that such interventions do not work.
    They will say, but this time will be different. It will not 
be. As he said, Chairman Volcker said, any explicit government 
guarantee of private mortgages will once again privatize 
profits and socialize the inevitable losses. So, let me 
conclude by saying this. I know the industry is here, and 
they're saying we need a government guaranty.
    Let me tell you this. If I were in the industry, I would be 
doing the same thing, because I would love to make loans. And 
if they fail, let the taxpayers pick up the loss. That's a 
pretty sweet deal, but Americans all throughout this country 
have started saying ``Don't obligate us.''
    The Chairman.Now, we will begin the testimony. Before that, 
I ask unanimous consent to insert into the record a statement 
from Louis Ranieri, Ranieri Partners, on his rent-to-own 
approach, and a statement from the vice chairman of Essent 
Guaranty, Adolfo Marzol. If there is no objection, they will be 
put into the record.
    As to the witnesses, we will listen to your oral testimony 
and anything you want to insert in the record in addition to 
that. Without objection, you have consented to it, so you won't 
have to ask for permission to do it. Just feel free to 
supplement your oral testimony with any documentation you would 
like, including further parts of the statement.
    And with that, I'm going to begin. I never know who decides 
this order. I'm just handing it by someone from on-high, and 
we'll begin with Michael Heid, who is the co-president of Wells 
Fargo Home Mortgage and chairman of the Housing Policy Council 
of the Financial Services Roundtable.

 STATEMENT OF MICHAEL J. HEID, CO-PRESIDENT, WELLS FARGO HOME 
MORTGAGE, AND CHAIRMAN, HOUSING POLICY COUNCIL OF THE FINANCIAL 
                      SERVICES ROUNDTABLE

    Mr. Heid. Chairman Frank, Ranking Member Bachus, and 
members of the committee, thank you for inviting me here today.
    I am Mike Heid, co-president of Wells Fargo Home Mortgage 
and the current chair of the Housing Policy Council of the 
Financial Services Roundtable. In considering housing finance 
reform, we need a solution that works for every part of the 
housing market, and that has the ability to attract the 
necessary capital to provide affordable mortgage financing.
    The Dodd-Frank Act already has laid much of the necessary 
groundwork for GSE reform by aligning the interests of 
consumers, lenders, and investors. It has set the stage for the 
maintenance of sound and prudent lending practices. If properly 
implemented with consistent regulation and consistent 
enforcement for all mortgage market participants, many of the 
underlying problems in the market itself will have been 
addressed.
    However, even with financial reform, history has shown that 
capital markets are inevitably subject to periodic shocks. It 
has also shown that a government guarantee carefully 
constructed and strictly limited is required to ensure a 
reliable and sustainable system of housing finance to help 
shield the broader economy from the effects of these temporary 
disruptions.
    One of the major challenges we face in GSE reform is how to 
deliver a guarantee in a way that maximizes the use of private 
capital, minimizes moral hazard, encourages competition and 
innovation, and ensures that no institution is ``too-big-to-
fail.'' The Housing Policy Council has suggested an approach 
that I believe will meet these basic objectives and capitalizes 
on the industry's existing infrastructure. It involves 
privately capitalized competing conduits, a Federal wrap 
guarantee on the mortgage-backed securities but not on the 
conduit's debt, an FDIC-like insurance fund, and the adoption 
of a common security.
    To be clear, we do not see this as a request for government 
subsidy. Rather, the conduits would pay a guarantee fee that 
would be properly priced to reflect the underlying risk to the 
Federal Government and protect taxpayers from potential loss. 
Unlike the old GSE model, the guarantee would not be used to 
subsidize the conduits or their shareholders.
    Some have proposed that the GSE's bureau placed with the 
government agency or merged with FHA and Ginnie Mae; however, 
even ignoring the resulting impact on the Federal budget, we 
believe that nationalization of the GSEs is not the solution. 
Others have called for the creation of a single utility or 
industry cooperative. While these proposals have some merit, we 
question whether either structure would produce the innovation 
required to support a variety of financing needs, including 
those of non-traditional borrowers or the cost-effectiveness 
required to provide financing to qualified borrowers at the 
lowest possible cost.
    A single utility or industry co-op also would inevitably 
produce an institution that is by its very design ``too-big-to-
fail.'' As a result, we have proposed creating a number of 
federally chartered, privately capitalized conduits that would 
compete with one another on a level playing field. To reduce 
barriers to entry, we also have called for the creation of a 
single, standardized form of security, similar in concept to 
Ginnie Mae, that would have a single, legal framework, uniform 
loan eligibility standards, and consistent Administration 
practices. This security would serve a number of important 
purposes.
    First, it will enable newly formed mortgage conduits to 
compete against the exiting GSEs. Without a single security, 
start-ups would find it difficult, if not impossible, to match 
the liquidity of the Fannie Mae and Freddie Mac MBS, and one 
would be left with an altered version of today's status quo.
    Second, a single security will reduce the moral hazard that 
would otherwise be associated with access to a government 
guarantee. Since the security would not be issued in the 
conduit's name, the conduit would be allowed to fail without 
jeopardizing the market value of the security, just as it is 
for Ginnie Mae issuers today.
    And, third, a single security will lead to a more efficient 
secondary mortgage market and will provide the broadest 
liquidity at the lowest possible cost for the American 
consumer.
    Finally, we recommend replacing the GSE's affordable 
housing goals with a fee on future MBS issuances. Research has 
shown these goals have been largely ineffective, and many 
believe they contributed to the GSE's eventual downfall. The 
revenue stream that would result from the fee, which could be 
administered by a housing trust fund or redirected to State and 
local housing agencies, would make a significant and lasting 
contribution to affordable housing.
    We believe this overall approach provides the cornerstone 
for meaningful reform. While some customization would likely be 
required, we believe these concepts could apply to both 
residential and multi-family housing. As such, the needs of 
homeowners and renters would be addressed, resulting in an 
approach that preserves what is good about our current system 
and fixes what is not.
    Thank you for the opportunity to share our views today. I 
look forward to the discussion that follows.
    [The prepared statement of Mr. Heid can be found on page 
125 of the appendix.]
    The Chairman. Thank you. And I note this is to some extent 
a former Member's day, since Mr. Heid was testifying on behalf 
of an organization whose executive is a former member of this 
committee from Texas. And now we have another Texas former 
member of the committee, Mr. Bentsen, and he and I were 
talking.
    I think had he made different career choices, he might have 
been sitting next to Mr. Watt. So Mr. Bentsen was a very valued 
member of the committee and we're glad to have him testify in 
his capacity as executive vice president for public policy and 
advocacy for SIFMA.

 STATEMENT OF THE HONORABLE KENNETH E. BENTSEN, JR., EXECUTIVE 
VICE PRESIDENT, PUBLIC POLICY AND ADVOCACY, SECURITIES INDUSTRY 
           AND FINANCIAL MARKETS ASSOCIATION (SIFMA)

    Mr. Bentsen. Thank you, Mr. Chairman, Ranking Member 
Bachus, and members of the committee.
    On reform of the housing finance system, and related 
provisions in the Dodd-Frank Act, in late 2009, SIFMA formed a 
GSE reform task force, comprised of members involved in all 
aspects of mortgage finance from originators to investors, and 
the market makers that create liquidity between them to develop 
views on what are the most critical aspects of GSE and housing 
finance reform.
    The Dodd-Frank Act contains a number of provisions that 
will impact the securitization process. The most commonly cited 
provision of the Dodd-Frank Act relates to the risk retention 
for asset-backed securities. Dodd-Frank appropriately calls for 
regulators to apply retention in a tailored manner with levels 
and forms of retention designed specifically for the distinct 
risk profiles of different asset classes.
    While the 5 percent threshold is established in law, it is 
important that regulators conduct meaningful econometric 
analysis of the appropriate level and form of retention 
required in a given situation. Furthermore, the Dodd-Frank Act 
creates a carve-out for certain types of low credit risk 
mortgages or qualified mortgages, which may be accepted from 
risk retention provisions due to the limited credit risk they 
are likely to present.
    Congress appropriately directed regulators to work jointly 
to implement the provisions of risk retention. This is to 
ensure that all securitizers, regardless of their corporate 
form or regulator, will face the same rules. SIFMA is 
concerned, however, that actions by regulators may 
inadvertently conflict with Congress' intent, and regulators 
should consider revisions to comport with the Act.
    For instance, the FDIC recently finalized rules regarding 
the securitization safe harbor, which include risk retention 
provisions that materially differ from those under Dodd-Frank. 
Other requirements in Dodd-Frank, including those related to 
credit rating agencies, also have the potential to impact the 
securitization market's ability to fund originations of 
consumer credit.
    With regard to GSEs, SIFMA believes there is no easy 
solution to the question of how to resolve the conservatorships 
of the GSEs and define the future infrastructure for mortgage 
finance in the United States. Policymakers faced with a series 
of difficult choices, each with its own costs and benefits, 
which will shape the future of housing finance and ultimately 
affect consumers in the general economy.
    Only Congress can define what the goals of national housing 
finance policy should be. Accordingly, policymakers need to 
determine what they want from the mortgage markets before they 
can address what to do with the GSEs or the broader 
infrastructure, mortgage finance.
    That said, SIFMA believes that without the benefit of some 
form of government support for the conventional mortgage 
market, mortgage credit would be less available, mortgage 
markets more volatile, and interest rates on loans higher, 
because fewer investors would be willing to absorb both the 
credit and interest rate risk. In short, investors would not 
support mortgage credit equivalent to the historic norms, thus 
affecting the supplied stability of such credit.
    The issues for policymakers to consider are how liquid 
secondary markets for loans and mortgage-backed securities 
should be about the products that would be offered to 
consumers, the capacity of lenders to extend credit, whether 
national lending markets could be sustained, or if regional 
pricing differentials would reappear, and ultimately the cost 
and affordability of credit to consumers.
    The GSEs for all their faults have conferred significant 
benefits on the U.S. mortgage markets. It is indisputable that 
these faults need to be rectified. One of the most important 
was fostering the development of a liquid forward market for 
mortgage-backed securities known as the To Be Announced market 
or TBA market, which allows lenders to hedge risk, attract 
private capital, and reduce the cost of mortgage lending.
    In this time of distress, the importance of the TBA market 
is heightened, and it is difficult to exaggerate the 
consequences from a loss of confidence and liquidity in this 
market. Our members believe that some form of explicit 
government guarantee on the conventional loan, mortgage-backed 
security market will be required to maintain the liquidity of 
the TBA market.
    The implicit guarantee of the GSE MBS historically reduce 
the issuance costs of these bonds, because it attracted a 
number of important class investors and provided for the 
development of a large, extremely liquid secondary market. 
SIFMA believes that in the future, these investors will not 
accept an implicit or non-guaranteed MBS product at levels 
sufficient to support historic norms.
    SIFMA believes portfolios will be required if for nothing 
else but to facilitate securitization and standard maintenance 
of securities issuance programs, such as providing a holding 
facility for loans that are repurchased from securitized pools. 
Further, GSE portfolios from multi-family mortgage-backed 
securities provide necessary liquidity for this important 
market.
    If portfolio activities were restricted to serving a 
limited role, they could be capped at levels significantly 
lower than their current size. The resolution of 
conservatorships of the current GSEs will clearly be a 
challenge. SIFMA believes that the government must clearly 
state intentions with respect to legacy GSE issues. Bifurcation 
of markets into pre- and post-reform markets should be avoided. 
The alternative, essentially abandoning an existing market, 
would have serious and long-term consequences for the global 
flow of capital in the United States.
    We appreciate the opportunity to testify and look forward 
to continuing to work with the committee on these important 
issues, and we would be pleased to answer any questions the 
committee members have.
    [The prepared statement of Mr. Bentsen can be found on page 
45 of the appendix.]
    The Chairman. Next, is Phillip Swagel from the McDonough 
School of Business at Georgetown.

STATEMENT OF THE HONORABLE PHILLIP L. SWAGEL, MCDONOUGH SCHOOL 
               OF BUSINESS, GEORGETOWN UNIVERSITY

    Mr. Swagel. Thank you, Chairman Frank, Ranking Member 
Bachus, and members of the committee. Thank you for the 
opportunity to testify today.
    I'm now a professor at Georgetown, but I was previously the 
Assistant Secretary for Economic Policy at the Treasury from 
December of 2006 to January 2009, so chief economist during the 
financial crisis.
    My testimony discusses a proposal for GSE reform I put 
forward with Donald Marron, Jr., and I will very briefly 
summarize this. I start from the observation that in the next 
financial crisis, whenever that occurs, the government will 
step in to ensure that mortgages are available. Market 
participants will expect a government backstop and act like it.
    I see this not as a problem that can be solved, but 
unfortunately as a fact of life. So, given that, it would be 
better to make the terms of the government support limited and 
transparent, but explicit and priced rather than implicit and 
free. So our proposal starts here. It centers on competition 
and this limited role for the government.
    The Federal Government would sell a secondary guarantee to 
firms that securitize mortgage-backed securities made up of 
high-quality conforming loans. Fannie and Freddie would be 
privatized and focus on securitization, but would compete with 
other private firms that are allowed to also securitize 
conforming loans. There would be no more GSE bailouts. There 
would be no retained portfolios, no bondholders requiring a 
bailout, and shareholders would be wiped out before the 
government pays anything.
    Allowing new firms to compete is crucial. The history of 
government insurance is that the premiums are inevitably 
underpriced, and this gives rise to a subsidy. So taxpayers 
will be subsidizing housing, and the question is, who gets the 
subsidy? Competition will drive the subsidy to families rather 
than having it accrue to shareholders and management as in the 
old GSE system.
    With competition, a GSE could fail without it being a 
catastrophic event. Our plan, described in detail in my written 
statement, maintains beneficial features of the current system, 
notably the TBA structure in securitization. This proposal, any 
proposal with a guarantee, puts a lot of stress on the 
definition of a conforming loan, since firms will naturally 
look to put their riskiest loans into government insurance.
    At least regulators will be aware of this and can shine a 
spotlight on conforming loans. Regulators must also ensure that 
firms purchasing this backstop guarantee maintain considerable 
private capital to take losses in front of taxpayers. Part of 
the insurance premiums collected by the government would 
support affordable housing activities, but the GSEs and other 
firms purchasing the government backstop should not have 
affordable housing goals that distort the market and are not 
effective ways to support the very important functions and 
purposes of affordable housing. These are activities that 
should be done by the government, and I start from the 
observation that Congress should vote on all uses of public 
resources.
    Part of the hard work in moving toward a new structure for 
housing reform will be to limit government involvement and to 
focus official support on American families most in need. I 
would say a place to start is to allow the conforming loan 
limit to return to a level that's consonant with support for 
American families most in need, rather than dissipating public 
resources and fostering continued reliance of the housing 
market on government assistance. GSE reform will require 
choices. It seems to me that the conforming loan limit is a 
good place to start.
    Chairman Frank and Ranking Member Bachus, thank you again 
for the opportunity to testify today. I will be pleased to 
answer any questions.
    [The prepared statement of Mr. Swagel can be found on page 
163 of the appendix.]
    The Chairman. The next witness is Michael Bodaken, who is 
the president of the National Housing Trust.

STATEMENT OF MICHAEL BODAKEN, PRESIDENT, NATIONAL HOUSING TRUST

    Mr. Bodaken. Thank you, Chairman Frank, Ranking Member 
Bachus, and members of the committee.
    I am Michael Bodaken. I am with the National Housing Trust 
and I am more or less the odd man out today. I am representing 
America's renters and their role in the housing finance system. 
Often in these discussions, we think about homeownership as the 
housing finance system, but one-third of us actually rent in 
this country, and the robust housing finance system must take 
into account both homeownership and rental housing. And I hope 
to demonstrate today the importance of the housing finance 
system for America's renters.
    According to the joint center at Harvard, 45 percent of 
America's renters now pay more than 50 percent of their income 
for housing, and any solution to the housing finance system 
must take these people into account. It's fair to say that 
renters constitute policemen, janitors, service workers, people 
on our economy, and we need to figure out a solution that 
embraces both homeownership and rental housing.
    There are three simple things that can be done for rental 
housing that should be part and parcel of your consideration. 
The first is a well-functioning, liquid, secondary mortgage 
market that will be able to function in times of crisis. While 
it's tempting to think about housing crises as affecting all 
housing, the fact of the matter is that the GSE's underwriting 
of rental housing performed remarkably well during the past 
crisis.
    If one compares the single family underwriting of the GSEs 
between 2006 and 2009, you'll see a rise in delinquencies from 
3 to 11.5 percent. During that same timeframe, the 
delinquencies in the family market of all the GSEs remained 
under 1 percent. It remains under 1 percent today.
    The second is a government-supported secondary market that 
will provide liquidity and countercyclicality in times of 
crisis. During the 2006 and 2009 timeframe, and especially in 
2008 and 2009, private lenders suffered significant losses in 
the multi-family mortgage market; not so with the GSEs. Again, 
taking a look at the mortgage lending and the GSEs in multi-
family housing alone, they occupied 84 percent of rental 
housing mortgages during that timeframe, effectively acting as 
liquidity, as countercyclicality during a time of crisis in our 
Nation's mortgage finance system.
    And, finally, a majority of these loans can and should be 
made to low-income households renting in the market. People 
think that the GSEs are only renting to people who are well 
off. The fact of the matter in the multi-family space, 62 
percent of the GSE's loans served households who are learning 
less than 80 percent of median income. I'll repeat that: 62 
percent over a 4-year timeframe were serving households earning 
less than 80 percent of median income. And so in the rental 
housing finance market--and this was profitable by the way--
this was not unprofitable. It was not a bailout.
    The bailout that was provided was not for the multi-family 
housing finance system. We need to find some way to make sure 
that they don't throw the baby out with the bathwater when 
considering how to deal with mortgage finance for rental 
housing.
    There is a consonant, something happening right now in the 
market with respect to HUD-financed housing, Section 8 
contracts--800,000 of those apartments will expire during the 
next 5 years, and in my prepared remarks I suggest a number of 
ways in which the GSEs or whatever is coming to the GSEs can 
help Congress deal with this oncoming expiration of very low-
income housing.
    Time doesn't allow me to provide all the recommendations, 
but suffice it to say that there is a way for you to solve both 
problems without putting the taxpayer at risk. Again, the 
taxpayer was not put at risk in the last crisis under rental 
housing. Fixing the existing housing finance system is a 
complicated endeavor, one that requires careful consideration 
of taxpayer loss and the importance of housing to our national 
economy.
    We know that the performance of the present GSEs in multi-
family housing was prudent. It was profitable, and it served 
households at less than 80 percent of median income. These 
Enterprises provided the essential countercyclicality for 
multi-family housing that was required during times of stress. 
These are a good basis upon which to build whatever we decide 
to do with the next generation of housing finance 
intermediaries.
    I'll be happy to answer questions at the conclusion of the 
panel. Thank you.
    [The prepared statement of Mr. Bodaken can be found on page 
74 of the appendix.]
    The Chairman. Now, Mr. Christopher Papagianis, who is the 
managing director of Economics 21.

STATEMENT OF CHRISTOPHER PAPAGIANIS, MANAGING DIRECTOR & POLICY 
                     DIRECTOR, ECONOMICS21

    Mr. Papagianis. Chairman Frank, Ranking Member Bachus, and 
members of the committee, thank you for the opportunity to 
testify.
    I am the managing director of the nonprofit think tank E21, 
economic policies for the 21st Century. Drawing on the 
expertise of practitioners and academics, our mission at 
Economics21 is to foster a spirited debate about the way 
forward on issues like housing finance.
    Over the past year, a consensus has emerged that the main 
goal in addressing housing finance reform is to promote the 
efficient allocation of credit to finance single-family and 
multi-family housing. Fundamental to this objective is the 
restructuring of our system, which includes not only resolving 
the GSE conservatorships, but also rationalizing all the other 
ways the government subsidizes housing.
    Until recently, the largest Federal subsidy for 
homeownership was through tax expenditures, in other words, by 
lowering a homeowner's tax liability. Over the next 5 years, 
tax expenditures are projected to reduce Federal revenues by 
roughly $1 trillion. One of the underappreciated consequences 
of all the recent actions to backstop housing is that the 
government now provides roughly the same amount of support for 
homeownership through spending programs.
    A bipartisan goal moving forward should be to ensure that 
the dozens of spending programs have discrete objectives and 
are clearly and accurately accounted for in the budget. Unlike 
fairly straightforward tax accounting, it is difficult to 
compare the cost effectiveness of spending programs, especially 
loan guarantees or contingent liabilities.
    Fannie and Freddie are unfortunate examples of this 
principle. CBO estimates that Fannie and Freddie cost taxpayers 
$291 billion last year, and will cost an additional $90 billion 
over the next 5 years. At the end of the day, the GSEs will 
likely be this crisis' most expensive bailouts, many times 
larger than AIG or Citi Group, or even the entire and much 
maligned TARP.
    As policymakers consider new alternatives, they must be 
careful to make clear the risks and costs of subsidizing 
housing investment. Government loan guarantees can appear to be 
low cost initially, since they pay out only if a borrower 
defaults in the future. But we have learned that such 
guarantees are contingent on an accurate assessment of all the 
various risks, and the guarantees can be extremely expensive if 
the original assessments are wrong, or if the defaults all 
happen to occur at the same time.
    It is also important for policymakers to recognize that 
bailouts in the housing sector are inevitable regardless of the 
system's structure if the key institutions involved do not set 
aside sufficient capital. By most accounts, we are still in the 
early innings of this reform debate, and I applaud this 
committee for investigating bold new plans.
    In my view, policymakers should pay particular attention to 
those that would more directly deliver subsidies to their 
targeted beneficiaries, individuals and families. In the end, 
the overarching goal should be to make taxpayers--and by that I 
mean current homeowners, prospective homeowners and renters 
too--better off through more efficient subsidy delivery and 
budgetary transparency.
    Thank you.
    [The prepared statement of Mr. Papagianis can be found on 
page 141 of the appendix.]
    The Chairman. The next witness is Mr. Michael Farrell, who 
is the chairman and chief executive officer and president of 
Annaly Capital Management. He is here on behalf of the National 
Association of Real Estate Investment Trusts.

     STATEMENT OF MICHAEL A.J. FARRELL, CHAIRMAN, CEO, AND 
PRESIDENT, ANNALY CAPITAL MANAGEMENT, INC., ON BEHALF OF ANNALY 
CAPITAL MANAGEMENT AND THE NATIONAL ASSOCIATION OF REAL ESTATE 
            INVESTMENT TRUSTS' MORTGAGE REIT COUNCIL

    Mr. Farrell. Chairman Frank, Ranking Member Bachus, and 
members of the committee, thank you for the opportunity to 
speak today on the future of housing finance, a subject that 
virtually affects every American and not just homeowners.
    My name is Mike Farrell, and I run Annaly Capital 
Management. Annaly is the largest listed residential mortgage 
REIT on the New York Stock Exchange with a capitalization of 
over $11 billion.
    Annaly, together with our subsidiaries and affiliates, owns 
or manages over $90 billion of primarily agency and private 
label mortgage-backed securities. Additionally, we are deeply 
involved in mortgage markets through our securitization 
structuring, financing, pricing and advisory activities.
    I am here today representing the secondary market investors 
who have historically provided the majority of the capital to 
the $11 trillion mortgage market, and my remarks are focused 
from that perspective.
    Debate over housing finance reform has largely been about 
the government's role in it, and rightly so, given that Fannie 
and Freddie's government-sponsored hybrid charter was 
ultimately disastrous for taxpayers.
    However, there are certain activities that these agencies 
performed that are important to the pricing and liquidity of 
the housing and mortgage market.
    The current housing financing system, certainly the one 
that prevailed until housing standards started to slip around 
2004, is the most efficient credit delivery system the world 
has ever seen.
    There are important elements of the existing system that 
are worth keeping. First, securitization, where fully 
documented borrowers with similar creditworthiness using 
similar mortgage products are pooled and receive the benefits 
of scale and pricing.
    Second, the government guarantee to make timely payments of 
interest and principal MBS that scales the process even further 
by making the securities more homogenous.
    Third, the TBA market, which is what Fannie, Freddie, and 
Ginnie facilitated. It is through the TBA market that most 
residential mortgages are pooled and sold and enables 
originators and investors to hedge themselves.
    I believe that the market will adapt to whatever changes 
occur in these new items in the housing finance system. 
However, the market will adapt to the new structure by re-
pricing it.
    If the new system has significantly different risks, 
uncertainty and friction than the housing finance system we 
have now, the consequences may be that our housing finance 
system is smaller with lower housing values and less 
flexibility and reduced mobility for borrowers.
    This can have an ongoing and broad consequence for economic 
growth.
    If mortgage rates and house prices were not an issue, the 
government would not have been involved in housing finance. 
These are important issues. Therefore, I believe the housing 
finance system that utilizes a government guarantee on well-
underwritten mortgage securities would maintain the significant 
size and liquidity of the market as well as continue to provide 
for relatively lower costs to the borrower.
    Going forward, however, the portfolio activities of Fannie 
and Freddie should be eliminated. The private market would 
expand its investment activity to fill this role, much like 
Annaly and its brethren and competitors do now.
    It is important for the committee to understand that the 
majority of agency MBS investors finance their positions using 
financing that is available and priced where it is because of 
the government guarantee on the assets.
    Fannie and Freddie financed their portfolio purchases 
through the capital provided by the debt markets. This is an 
essential component of housing finance.
    In any transition, Congress must consider the potential 
size of the market in the system to which we are transitioning 
because about $8 trillion of the $11 trillion in home mortgage 
debt is funded by investors in both agency and private label 
mortgage-backed securities. Of that $8 trillion, some 70 
percent is held by investors in rate sensitive agency mortgage-
backed securities with the balance in credit sensitive private 
label MBS.
    There is not enough capital in the universe of credit 
sensitive private label MBS investors to supplant the installed 
base of rates buyers, at least not at the current price.
    Without the support of mortgage values and home prices that 
are provided by the government guarantee, the funding goal of 
$8 trillion will get smaller only by shrinking the value of the 
housing collateral and the mortgages needed to finance them.
    At its essence, any transition to a new housing finance 
system has to factor in the speed at which these values will 
change.
    In conclusion, I believe that Fannie and Freddie should 
continue to operate in conservatorship with the goal of winding 
down their retained portfolio's over a set period of time and 
honoring the guarantees of the agencies.
    For simplicity sake and for the markets' certainty and 
simplicity, going forward, Congress should consider delivering 
explicit government guarantees on MBS in a manner similar to 
Ginnie Mae.
    This would enable it to continue to serve as the portal 
between the borrower and the secondary market through 
securitization and the TBA mechanism, but most importantly 
enforce underwriting standards for mortgages carrying the 
government guarantee.
    I thank you again for the opportunity to testify today, and 
I look forward to answering your questions.
    [The prepared statement of Mr. Farrell can be found on page 
108 of the appendix.]
    The Chairman. Next, is Susan Wachter, who is the Richard B. 
Worley Professor of Financial Management at The Wharton School, 
University of Pennsylvania.

STATEMENT OF THE HONORABLE SUSAN M. WACHTER, RICHARD B. WORLEY 
    PROFESSOR OF FINANCIAL MANAGEMENT, THE WHARTON SCHOOL, 
                   UNIVERSITY OF PENNSYLVANIA

    Ms. Wachter. Chairman Frank, Ranking Member Bachus, and 
members of the committee, thank you for the invitation to 
testify.
    The U.S. housing finance system suffers from market failure 
that requires reform. In research with colleagues, we show that 
the explosive growth of private label securitization in non-
standard mortgages was a market driven phenomenon.
    It was securitizers' appetite for private label mortgage-
backed securities that drove a race to the bottom in lending 
standards, risk creation, and competition for market share. 
This was the primary cause of the housing bubble.
    The proof is the declining spread of mortgage-backed 
securities over Treasuries in parallel with the rise in non-
standard mortgages and private label securitization, even as 
risk grew.
    If possible, I request that the papers referred to be 
entered into the record.
    The Chairman. We gave consent for that to be done.
    Ms. Wachter. Thank you. The Dodd-Frank Act attempts to 
remedy some of the problems caused by the former system of 
securitization. It requires a securitizer to retain at least 5 
percent of the default risk of the underlying assets, but it 
exempts qualified residential mortgages from this regulation.
    This is a potential loophole, but even mortgages that do 
not meet the standard put the system at risk. Five percent risk 
retention is not a panacea. Many of the most fragile banks 
retained far more than 5 percent of the default risk, but this 
did not stop them from leading the race towards the bottom.
    A sustainable solution will be to require the market to 
move to transparency and information standardization. These 
considerations are imperative to the transition from the 
current conservatorship of Fannie and Freddie to any new 
arrangement.
    For the time being, we must ensure that the GSEs remain in 
their conservatorship until the housing market stabilizes. They 
guarantee more than half of the mortgage market, $5 trillion, 
and they support almost all new transactions.
    Without conservatorship, housing prices would have fallen 
farther and faster and would be falling farther and faster now.
    However, reform of the GSEs is also imperative. It must go 
hand-in-hand with strict regulation of private label 
securitization.
    When the government designates qualified residential 
mortgages, investors will expect these products to be safe and 
will be less likely to investigate the risk profile.
    Securitization offers a benefit to securitizers. It 
increases liquidity and profitability of the underlying assets. 
Therefore, securitization should only be available to products 
whose risks can be analyzed. Securitization of non-standard 
mortgages and the opacity this creates increases systemic risk.
    The resulting risk is owned by the taxpayer and the 
taxpayer will bail out the system with foreclosures driving 
towards a recession or even depression.
    Regulators must adopt stricter standards about information 
that must accompany the issuance of private label mortgage-
backed securities.
    Without government support, the long-term fixed-rate 
mortgage would not be the dominant form of housing finance in 
the United States. As the experience of other countries 
confirms, we must not lose this centerpiece.
    One solution that has been suggested today is for the 
government to sell an insurance wrap to licensed mortgage 
insurers that guarantees the underlying mortgage for standard 
mortgage-backed securities with private capital in the first 
loss position.
    Another option is to group mortgage originators into 
cooperatives that purchase and securitize the mortgages of the 
respective members.
    In truth, however, both these options are open to crowding 
out by poorly underwritten and growing in risk private label 
security mortgages that spelled the GSEs' demise.
    If private label securitizers can be more profitable in the 
short run generating fees and generating seemingly more 
``affordable'' mortgages, then originators will flock to the 
private securitizers, leaving the government wrap or coop's in 
the dust and making them fail.
    These options have great promise but they all will require 
significant regulation of private activity to succeed.
    Thank you.
    [The prepared statement of Professor Wachter can be found 
on page 170 of the appendix.]
    The Chairman. Mr. Ed Pinto, a real estate financial 
services consultant is next.

 STATEMENT OF EDWARD J. PINTO, REAL ESTATE FINANCIAL SERVICES 
                           CONSULTANT

    Mr. Pinto. Thank you, Mr. Chairman, and Ranking Member 
Bachus. Thank you for the opportunity to testify today.
    My purpose in testifying is to provide both words of 
caution and advice. John Adams observed 240 years ago that 
facts are stubborn things, and whatever may be our wishes or 
inclinations or the dictates of passion, it cannot alter the 
state of facts and evidence.
    Here are the stubborn facts that should demonstrate the 
dangers posed by repeating past government housing policy 
mistakes.
    Numerous proposals have been put forth today and over the 
past year that call for ongoing government support of private 
mortgages. Most say it is inevitable.
    You have already heard about Paul Volcker's advice and Ed 
DeMarco's advice. The bottom line is a government guarantee 
always ends up with the privatization of profits and 
socialization of losses, period.
    If you go back to 1992 when this Congress passed the Safety 
and Soundness Act that regulated Fannie Mae and Freddie Mac, 
what was the avowed purpose? It was to reduce the risk of 
failure by the GSEs and protect the taxpayers from ever having 
to bail them out. This was just a mere 3 years after the bail 
out of the thrift crisis. That was the origin of the 1992 Act.
    I would ask that again you look at what past history has 
shown and where you are going today with these requests to 
provide an ongoing government guarantee that is now explicit.
    Secondly, a housing finance system designed around flexible 
and innovative underwriting standards in the pursuit of 
affordable housing goals presents a systemic risk to all 
homeowners and to our economy.
    Consider the advice of FDIC Chairman Sheila Bair. We must 
recognize that the financial crisis was triggered by a reckless 
departure from the tried and true commonsense underwriting 
practices, traditional mortgage lending that worked so well in 
the past, because lenders required sizable downpayments, solid 
borrower credit histories, proper income documentation, and 
sufficient income to make regular payments.
    We had such commonsense practices in the early 1990's. They 
were slowly destroyed as a result of the 1992 GSE Act along 
with other policy initiatives.
    Third, our housing policies have been deeply flawed. Again, 
Chairman Sheila Bair described it well. For 25 years, Federal 
policy has been primarily focused on promoting homeownership 
and promoting the availability of credit to home buyers.
    In Appendix A, I provide a list of 16 procyclical policies 
that created the long and unsustainable boom in house prices 
and housing finance. No other developed nations went to such 
policy excesses and none have experienced our default levels.
    I would add that we had no countercyclical policies in 
place during that time, not one.
    These policies boomeranged upon the very homeowners you 
were attempting to help.
    It is now clear that this interference has been both a 
failure and unnecessary.
    How to get our housing finance system off life support. 
First, have faith in the free market. Consider how the free 
market provides an abundance of other necessities of life, 
namely food and clothing, like shelter, you cannot live 
without.
    Second, one cannot justify a continuation of flawed 
policies of government interference just because rates may go 
up. Rates go up and down all the time. Over my career, mortgage 
rates have gone from 9 percent in 1974 to 18 percent in 1981 to 
4 percent today. This has had much less impact than the 
congressionally-mandated abandonment of underwriting standards 
that took place starting in 1992.
    Without the distortions created by government intervention, 
the market will price for credit risk, adequate downpayments, 
and capital requirements would assure sound underwriting, and 
bad business decisions would not be bailed out by the 
taxpayers.
    Other developed countries do this without such government 
guarantees.
    Any return to a privatized housing finance system must be 
based on the following principles: We must withdraw the 
government from having any role in the financing of prime 
mortgages and return to a system based on private capital.
    It is time to end the government's affordable housing 
mandates and to allow the private sector to return to 
commonsense underwriting standards. It is time to return to an 
emphasis on thrift, and it is time to return FHA to its former 
role of serving a low-income market in a responsible way.
    I have outlined in my written testimony some opportunities 
for the private sector to do this. I have also addressed how 
Fannie and Freddie could be wound down, and I have also 
addressed how FHA should be returned to its original goals of 
serving low-income homeowners, and that be their mission and 
make it transparent.
    With that, I thank you for the opportunity to testify.
    [The prepared statement of Mr. Pinto can be found on page 
153 of the appendix.]
    The Chairman. Finally, Mr. Tom Deutsch, executive director, 
American Securitization Forum.

    STATEMENT OF TOM DEUTSCH, EXECUTIVE DIRECTOR, AMERICAN 
                      SECURITIZATION FORUM

    Mr. Deutsch. Chairman Frank, Ranking Member Bachus, and 
distinguished members of the committee, my name is Tom Deutsch.
    As the executive director of the American Securitization 
Forum, I very much appreciate the opportunity to testify here 
on behalf of the 330 member institutions of the ASF who 
originate, structure, trade, and invest in a preponderance of 
mortgage-backed securities created in the United States, 
including those backed entirely by private capital, as well as 
those guaranteed by public entities such as Fannie Mae, Freddie 
Mac, and Ginnie Mae.
    Let me begin my remarks by stating what I believe to be a 
near unanimous or consensus position, that there is a very 
strong political and economic will in the United States today 
to decrease the overall level of Federal involvement in housing 
finance and have more private capital eventually replace many 
of the risks and rewards of that involvement.
    Given that 89 percent of mortgage loans made in America in 
the first half of 2010 were guaranteed by the GSEs and 
ultimately the U.S. taxpayer, there is not a shortage of 
opportunity to achieve this goal.
    There is one key area that I would like to emphasize in the 
debate regarding the transition and future architecture of the 
GSEs, and that is there should not be any underestimation of 
the critical importance of maintaining through any transition 
period the so-called To Be Announced or TBA market.
    Although not well understood outside the housing finance 
industry, the TBA market makes it possible for borrowers to 
have the peace of mind of locking in favorable mortgage rates 
and originators immediate and liquid sale into the capital 
markets.
    Ultimately, any new structure of the U.S. mortgage finance 
system must have a TBA style structure for plain vanilla 
conforming loans.
    Second, the role of any guarantee, if there is to be a 
guarantee, should be catastrophic or 100-year flood in nature 
that allows the maximum use of private capital to limit the 
government's potential liability, while in the interest of 
investor confidence, provide a critical risk backstop for 
unforeseeable macroeconomic risks.
    Reducing dependence on public guarantees for new mortgage 
origination necessarily implies that private capital investment 
in mortgage originations will have to be reinvigorated, 
although large and small bank portfolios have continued to help 
fund some level of mortgage origination outside the GSE 
business and in the credit crisis, that level has not been 
sufficient to meet overall consumer demand and reinvigorate the 
housing market.
    As regulatory capital levels will rise through various 
policy initiatives such as Basel III and FAS-166 and 167, the 
balance sheets of large banks and small banks will be further 
constrained over time from extending additional mortgage 
credit.
    Although key bipartisan legislative initiatives such as the 
legislation offered by Representatives Garrett and Kanjorski 
may help create additional funding sources from the secondary 
market for banks to fund additional mortgages, there will still 
be outer limits of bank risk and capital that severely 
constrain the availability of mortgage credit unless or until 
private capital begins flowing again through mortgage-backed 
securities.
    As debate moves forward on the elimination or 
transformation of the GSEs, I want to encourage a debate of 
equivalent strength on how to reinvigorate the private label 
RMBS market without overburdening that market with regulation 
or regulatory uncertainty.
    On Monday of this week, the FDIC unilaterally formalized 
broad revisions to the securitization safe harbor rules that 
would radically change the nature and structure of RMBS 
transactions, and most particularly how RMBS will be treated in 
the case of a bank issuer's insolvency.
    ASF investor members in particular are quite concerned that 
their confidence in bank-issued private mortgage transactions 
will be significantly reduced rather than enhanced by these new 
rules because the FDIC as of January 1, 2011, will now be able 
to disregard the ``true sale'' nature of the securitizations 
and repudiate the underlying contracts.
    This is in direct contrast to the previous FDIC safe 
harbor.
    The net effect of these new FDIC powers is to create a 
significant market risk for investors in private label 
securitizations, for 100-year-flood type events. This is in 
direct contrast to ASF's earlier recommendation and many other 
recommendations from this panel here today that investors need 
to be protected from the 100-year-flood event rather than be 
subjected to additional uncertainty in case of that event.
    Although the securitization market has been deeply engaged 
in its own reform efforts and in support of some of the 
appropriate legislative changes in the Dodd-Frank Act, now 
there are a myriad of proposed and enacted regulations that 
have created an extraordinary burden for the market to 
understand and comply with in a short period of time.
    While many of these proposed initiatives have merit in 
isolation, there does not seem to be a robust macro prudential 
oversight or rationalization for the potential cumulative 
consequences of these changes.
    As we reconcile each of these changes over time, we need to 
carefully consider how all these pieces moving simultaneously 
will ultimately impact the mortgage market.
    I thank you again for the opportunity to testify here and I 
am looking forward to any questions you may have.
    [The prepared statement of Mr. Deutsch can be found on page 
82 of the appendix.]
    The Chairman. Thank you. I appreciate the reference to the 
multi-family market, and that has been very important. I think 
sorting out multi-family and single family is an important 
piece of this.
    Let me go back to our first witness and others. One of the 
obvious things that is clearly acknowledged as a mistake was 
setting up what were in some ways private corporations, Fannie 
Mae and Freddie Mac, but infusing into their business decisions 
a social component, so that because of the goals, you could 
never be sure of what the basis was.
    The alternative is what I think Mr. Heid was talking about, 
and it is a model that the Federal Home Loan Bank followed 
since Henry Gonzalez put through the affordable housing 
program, in which the entities involved, the private entities, 
made business decisions based on profitability and a certain 
fixed percentage decided by public policy of the revenue 
generated from that, the profit, presumably, is dedicated to 
subsidizing housing, and in my view, they should be primarily 
rental housing, and we would hope to find entities, housing 
financing entities or others, who could be trusted with that.
    That is essentially the model you are talking about. Let me 
ask Mr. Bodaken. Would that solve the problem or respond to the 
needs you talked about?
    Mr. Bodaken. Yes. I think that it's important to note that, 
without subsidy whatsoever, the GSEs are able to serve low-
income households. When you get down to very low-income 
households, we have an intractable problem. Anything below 50 
percent of median income, as I mentioned, is a problem.
    Through either some kind of a millage, or some kind of a 
profitability standard, you are going to need to set aside some 
form of subsidy, whatever you call it, where the private market 
simply can't provide rental housing that is affordable to very 
low-income households.
    But the vast majority of the activities of the progenitors 
of whatever you're calling the GSEs can be limited to low-
income households without significant taxpayer subsidy. That's 
the proof in the pudding of comparing the multi-family versus 
the--
    The Chairman. But they're not going to be--if you're 
talking about something--I would be opposed to any mandate to 
them.
    Mr. Bodaken. Yes.
    The Chairman. They will be making a business decision, if 
they can make the money. But to the extent that we--and, for 
me, that is particularly relevant in the rental field.
    Mr. Bodaken. And, indeed, that has been the history. They 
were profitable--
    The Chairman. We are not going to talk about history. But 
the point I would make is this. When you are talking--
particularly, I think, when you start subsidizing 
homeownership, you're getting into trouble.
    Mr. Bodaken. Yes.
    The Chairman. People can't clearly afford it, then you are 
imposing on them an obligation, going forward, that was shaky 
from the beginning, which you don't have when you are talking 
about rental housing. And that's why I would feel strongly 
about it.
    Mr. Papagianis, there is just one thing I noticed in your 
piece--one of the things this committee had talked about and 
had passed some legislation on was covered bonds. You expressed 
some skepticism about the viability. Would you expand on that?
    Mr. Papagianis. First off, let me just say that I support 
covered bonds, and I think that the committee should consider 
setting in place, working with the FDIC and others, a legal 
structure--
    The Chairman. We have already done that.
    Mr. Papagianis. Okay.
    The Chairman. I was interested in your skepticism about 
their viability.
    Mr. Papagianis. But the viability issue is really in 
regards to the FHLBs, the Federal Home Loan Banks. The Federal 
Home Loan Banks borrow at sub-market rates. And the function of 
the FHLBs is very similar to what the covered bond market would 
actually do.
    And so, the question is, if you're a bank and you're 
looking for ``capital relief,'' in essence to free up capital 
to do more business, is it--are you going to get a better price 
through the Federal Home Loan Banks, or are you going to get a 
better price through covered bonds? And I--
    The Chairman. Even if we--even having moved to set it up, 
they may just be out--undersold by the Home Loan Banks.
    Mr. Papagianis. But again, the same concern with Fannie and 
Freddie exists, where they're able to borrow at sub-market 
rates, that obviously led to moral hazard. And I think that 
there is potential for moral hazard with the Federal Home Loan 
Banks.
    The Chairman. Thank you. That is--I just want to make one 
notation. I notice, actually the ranking member said it and 
somebody else--the ranking member said he was skeptical of this 
system whereby the government guarantees that loans will be 
paid off, and the private entity gets the benefit from making 
those loans which the government has guaranteed to be paid off. 
And I agree with that, and that's why I voted for the change in 
student loans.
    That model that we talk about, of one entity making the 
loans but the Federal Government guaranteeing they be paid off, 
I think was a good rationale for changing that, as well.
    The gentleman from Alabama.
    Mr. Bachus. I thank the chairman. And I think I have 
enjoyed all your testimony. I think it does move us forward. 
And Mr. Bodaken, I agree with much of what you said about the 
rental market, and I had noted some months ago with some 
amazement that there had not been losses there.
    We don't need to do anything to further sort of 
disadvantage people who choose to rent, particularly in that I 
think the worst victims are people who took out mortgages that 
they couldn't afford. Whether it was their own involvement--but 
obviously, the worst thing you can do to a family is to put 
them in a house they can't afford, because it's really a 
traumatic experience that they go through, both economically 
and, I think, emotionally. And one way to avoid that is 
renting.
    I noticed, Mr. Swagel and Mr. Farrell--or Professor 
Swagel--I would agree--I think I would agree on one thing. And 
I don't commit any of my colleagues, but if we're going to have 
a guarantee, it needs to be explicit. I think we all agree on 
that. This implicit guarantee is--you can't be half pregnant, 
you know. There either is a guarantee or there isn't. We didn't 
know for years. But if there is going to be a guarantee, it 
needs to be explicit.
    Now, Mr. Papagianis, you mentioned on budget. Now, if 
you're going to have an explicit guarantee--and I think one 
reason it was implicit is no one wanted to put it on budget. 
But do you put it on budget?
    And how do you calculate the tail risk--which it is, a tail 
risk. I think if there is a guarantee by--down the line, it is 
a tail risk. A tail risk, by definition, is something that you 
don't foresee. So how do you calculate that tail risk? And 
should it be on budget? I will just ask all of you. Any ideas 
there?
    Mr. Heid. The work we have done so far on this would say 
that there is a way to structure this in such a way that if the 
guarantee is paid for adequately, it can be held off balance 
sheet, not unlike some of the Ginnie Mae markets that exist 
today.
    Mr. Bachus. But off budget?
    Mr. Heid. Off budget. And then what we would suggest is, 
relative to any housing subsidies, make those on budget, very 
explicit, and make it a policy choice, in terms of whether or 
not to provide true subsidization of housing as its own 
separate and independent decision.
    Mr. Bachus. All right. Mr. Pinto?
    Mr. Pinto. I think, when you look at this tail risk 
question, we have an excellent example, and it's called the 
deposit insurance. And we have had failures there. We had a 
$150 billion failure in the late 1980's with the FISLC, and 
it's no more. Fortunately, I guess, at that time there was 
another agency called the FDIC that came in.
    When we had the problem this time, there wasn't any agency 
to take its place, so they had to come up with TARP. And TARP, 
effectively, bailed out the FDIC. And the FDIC, in the mid-
1990's, made their premium zero, effectively. They went to a 
fixed amount of a few thousand dollars, regardless of the size 
of the bank, because their losses were so low they just assumed 
there weren't going to be any.
    And these are the kinds of problems you get into when you 
start having the government take on these risks. You start 
doing things because it looks like everything is going great, 
and it is, in fact, the tail risk that you can't anticipate. 
And then it hits the taxpayers.
    Mr. Bachus. Sure, and I want to recognize Professor 
Wachter, or Dr. Wachter. But before I do, some other examples 
are the National Flood Insurance Program, where the government 
is required to statutorily have sound actuarial premiums. Of 
course, we now find out that they're $20 billion in debt, and 
taxpayers will probably have to make repayment.
    The Pension Benefit Guarantee Corporation, we now look at 
$168 billion worth of losses, even though it's ``self-
funding,'' which is the same recommendation here. The FHA 
mortgage insurance program, the FDIC-administered Deposit 
Insurance Fund, there are already people beginning to say 
taxpayers ultimately are going to have to pick up those losses 
if they continue.
    Professor Wachter?
    Ms. Wachter. Thank you, Congressman. You asked the 
absolutely key question, which is, how do you price this risk?
    It's one thing to price a risk with you can have 
idiosyncratic failures, so that if a system like the FDIC, when 
you have always some banks failing because of their individual 
practice. It is another thing to attempt to price systemic 
risk. And this is nearly impossible. As a finance theorist 
would tell you, this is nearly impossible.
    And, indeed, it doesn't matter whether the systemic risk is 
coming from the private sector or the public sector. The 
private sector generates systemic risk too. In other countries, 
such as the U.K., they stepped in to rescue a private sector 
failure, because the alternative would have been a depression. 
So we are faced with that. The answer has to be strict 
regulation and information that is real-time, so that the risk 
is monitored and tracked, and is not allowed to grow. That is 
not impossible.
    The Chairman. Thank you. The gentleman from Pennsylvania.
    Mr. Kanjorski. Thank you very much, Mr. Chairman. First of 
all, let me compliment the panel. Although you have different 
philosophical positions, I think you have really--in a broad 
sense, if we could only put you together in a room somewhere, I 
think we could come up with a consensus of what we should do, 
which could be helpful.
    But I hear in the two extremes one group of the panel 
favoring the private sector solution--particularly you, Mr. 
Pinto. And I am sympathetic to that, except what do you do 
about the fact that the real estate market represents 15 
percent of our economy, and it's in the tank?
    And if we take a radical position right now to cut it free 
from any government subsidy, and allow the marketplace to give 
the response, we probably will take a much longer period of 
time to get out of the recession, we run the risk of getting 
into a depression, and the price to be paid on all segments of 
the economy could be horrific. What's your response to that?
    Mr. Pinto. My response to that is what I have suggested, 
and what some others have suggested, is a very explicit wind-
down of Fannie and Freddie over time. Their portfolios can be 
sold off, or allowed to run off, which solves one of the big 
problems. The losses are the losses. They are already there.
    And secondly, by reducing their mortgage limits on a 
schedule or by a specific plan, sunsetting them so that the 
market knows they are going to be gone in 10 years and it's 
going to take an act of Congress to continue them, so that 
there is some feet to the fire, if you go through all of those 
things, you can wind--you can back out of this process.
    Mr. Kanjorski. I take it, then, that you do not agree with 
our friends on the other side of the aisle with the McCain 
amendment that was offered during conference on the regulatory 
reform bill to immediately close down Fannie and Freddie. That 
would not be a rationale decision, would it?
    Mr. Pinto. Closing down Fannie and Freddie, how that's 
done, I think we have to look at how quickly the private sector 
moves into the breach.
    The clear--I have to--I was very disappointed with Dodd-
Frank, in the fact that the definition of ``qualified 
residential mortgage'' did not provide for prudent underwriting 
standards, a minimum downpayment, and a credit history.
    Mr. Kanjorski. Will you--
    Mr. Pinto. The fact--if that message was given to the 
marketplace, and if the affordable housing was moved off the 
table, and the private sector was allowed to come back into the 
market, I think you would be amazed at how quickly it would 
happen.
    Mr. Kanjorski. You believe, then--I'm trying to get you to 
say yes or no, in terms of do you agree that we can close down 
Fannie and Freddie today by the action of the Congress, or do 
we have to take a longer view, attend to the portfolio that's 
out there, and come up with an actionable or replaceable 
alternative for the marketplace, considering the fact that 
we're dealing with 15 percent of the American economy?
    Mr. Pinto. My only concern about not doing it immediately--
and there is some appeal to that--is how to hold Congress' feet 
to the fire so they don't backtrack.
    Mr. Kanjorski. Okay, I--
    Mr. Pinto. That's my only concern. If we could come up with 
a way of making sure you couldn't backtrack, and they would 
actually go out of business, then I think we're fine. If you 
won't do that, then I think they have to be killed immediately.
    Mr. Kanjorski. Right. So you're saying a good, prudent 
decision would be not running ahead and closing down Fannie and 
Freddie immediately, because it could be injurious to the 
economy, as a whole. But you may concede to do that and go to 
pure market circumstances, because you don't trust--as the 
American people obviously have a low trust--of the Congress 
acting responsibly. Is that--
    Mr. Pinto. I think that's a fair statement.
    Mr. Kanjorski. Okay. And it is reflective. The fact that in 
2001 we changed the responsibility of balancing a budget by 
cutting taxes--I remember, what was the cry, ``It's your money, 
you're entitled to it?''
    It turned out it wasn't your money, it was the Chinese 
money, and the people who were willing to fund this terrible 
debt that has taken us from $5 trillion to $12 trillion, 
because we could not rely on honest, rational sense, reasonable 
sense by the Congress to apply what was good economics. They 
opted for--and probably will in the future opt for--political 
consideration over good economics. Is that correct?
    Mr. Pinto. I didn't follow the beginning part of that, it's 
a little out of my area. But all I know about the Chinese is 
nobody held a gun to our head to take the money. I look at what 
drove that--
    Mr. Kanjorski. We are doing that today, aren't we? Don't we 
have a cry in the Congress today about the tax cut, in terms of 
you should just give that tax cut, even though it cost $700 
billion more in debt?
    The Chairman. The gentleman's time has expired.
    Mr. Kanjorski. That's a rhetorical question.
    The Chairman. The gentleman from Delaware.
    Mr. Castle. Thank you, Mr. Chairman. Mr. Pinto, I am sort 
of interested in your testimony and where we might end up. 
Let's--if you could just extract this out, say, 10 years from 
now. And let's say that we had done something about Fannie Mae 
and Freddie Mac and whatever dissolution or whatever has to 
happen there. What is your plan, or what is your thinking about 
where we would be and what we would have then?
    And I ask that question because you have indicated a 
private secondary market or whatever. Or is a private secondary 
market even necessary? I think that question needs to be 
raised.
    And I'm just curious as to where you think this might be, 
if we were to actually go through a dissolution of Fannie Mae 
and Freddie Mac, and where would this country be, and where 
should we be?
    Mr. Pinto. That's a legitimate question. And my answer 
would be, first of all, we had a working, workable underwriting 
structure in place in 1990. I have documented this in a 
chronology that I have written, which shows that the LTVs, the 
credit, all of the things--FHA was really the high-risk part of 
the market.
    People forget that subprime market in 1990, if you had a 
FICO score--it would be the equivalent, they didn't have FICOs 
in use back then--below 620, you would need 25 percent down. I 
was listening to CNBC the other day, and they were lamenting 
the fact that today, somebody with below a 620 FICO with 15 to 
20 percent down couldn't get a loan. That's the way the market 
was when it was being operated by the private sector. There was 
this certain responsibility, in terms of downpayment. We need 
to go back to that commonsense underwriting, which we haven't 
had for a very long time.
    I have written publicly, or stated publicly, that it will 
probably take 10 to 15 years to get back to a system that is 
pretty well privatized and operating on a sound basis. I 
believe, because I believe in the free market, that the free 
market will come in and fill as the government recedes, will 
come in and backfill that with responsible lending, if they're 
not forced to meet artificial, affordable housing goals, and if 
they're allowed to offer a variety of instruments, including 
things like pre-payment penalties.
    I know people hate pre-payment penalties, but there is a 
marketplace for them because we can't have a system--if you 
start with, ``You have to have a 30-year mortgage and no pre-
payment penalty,'' yes, you probably need to have a government 
guarantee, and FHA insuring many, many of the loans. But if you 
start backing away from that, and looking at what other 
countries have done, and how they have some variety and things, 
you don't end up in that spot. And so, if you start with 
defining things a certain way, you're going to get a certain 
answer.
    So, again, I think we need to let the government back out 
of this in a reasonable, responsible way. But it has to be very 
deliberate, and it has to hold Congress' feet to the fire, so 
that they can't undo it.
    Mr. Castle. Is it your belief--I think you stated this, I'm 
not certain I followed this as carefully as I should--but that 
there would end up being a private secondary market when this 
is all said and done? Or would this--
    Mr. Pinto. There would be--as I indicated in my testimony, 
there would be portfolio lenders, there would be, potentially, 
covered bonds. There is a Danish system out there that could be 
emulated. There would be private mortgage-backed securities. 
All of those things could develop to take the place of Fannie 
and Freddie. And FHA would go back to its, roughly, original 
role.
    I would see private mortgage insurers--which are the only 
entities so far in this crisis that are actually raising 
capital, in terms of the mortgage space itself--I would see 
them participating, as they have in the past. And so those are 
the things that I would see.
    One of the problems I think you're facing is you have so 
nationalized this process--if you were running the food chain 
in this country, and you ran all the supermarkets, you would 
be--and they all looked like the post office, you would be 
hard-pressed to figure out how to bring Giant and Safeway into 
being. But the fact of the matter is, Giant and Safeway came 
about not because the government designed them; they came about 
because the private sector designed them. We need to let the 
private sector get back into this process, and fill the vacuum 
as the government recedes.
    Right now--and again, I think if you look at the private 
sector and the free market, they don't like to go up against a 
brick wall. And you have heard a lot of testimony here that 90-
plus percent of all the financing is guaranteed by the 
government. That's the equivalent of a brick wall for the 
private sector. They can't compete against that. If that wall 
starts receding, you will start seeing the private sector grow 
into it.
    The Chairman. The gentlewoman from California.
    Ms. Waters. Thank you very much. Mr. Bodaken, I have 
observed redlining when certain communities could not get a 
mortgage. And, literally, a line was draw around those 
communities.
    Mr. Bodaken. Yes.
    Ms. Waters. And I have observed what has happened in 
housing from that point in time to the subprime market and the 
securitization of these loans that were packaged by small banks 
and others. And I am trying to figure out, without government 
support--
    Mr. Bodaken. Right.
    Ms. Waters. --how can, say, a family of four--two adults, 
two children--earning about $45,000 a year, how would they be 
able to afford a home if, in fact, we remove government 
support?
    Perhaps there should be some changes in the way Fannie and 
Freddie works, or something else to take its place, but could 
you help me to understand what your thinking is about he we can 
preserve the opportunity for both rental housing and for 
residential family homes?
    Mr. Bodaken. Yes. Very briefly, I am not an expert in 
single-family housing finance. What I know about the crisis is 
that the single-family market was the one that really brought 
us to the precipice of, and the problems that we had to bail 
out both Fannie and Freddie.
    I think one thought about government support, either in 
rental housing or homeownership, is that it has to be carefully 
thought out, as the chairman mentioned, as to how it could be 
both profitable, and how--there are certain targeted 
populations where there needs to be explicit subsidies to make 
sure that people have shelter. The private market--no one on 
this panel would disagree--cannot effectively serve people who 
are in less than 30 percent or 40 percent of median income. 
It's just the statistics are undeniable.
    However, for 90 percent of the American public, the 
government-supported system in the rental housing market worked 
very well. It works very well for low-income households.
    Now, in Los Angeles, where you're from, low income might 
mean people earning up to $50,000 or $60,000, because of the 
high concentration of--the high cost of housing and high cost 
of living there. But it is difficult, I think, for us to deny 
that for people earning $45,000, a family of 4 in Los Angeles 
County, to get a home, a reasonably-priced home without some 
amount of subsidy, I don't see how that would be explicitly 
possible. Just going--
    Ms. Waters. Thank you very much. If I may, I want to go to 
Mr. Heid. You are representing the Mortgage Housing Policy 
Council. I think at one time, Wells Fargo and others in this 
council were a part of FM Watch, and you were concerned about 
Freddie and Fannie and the fact that they were expanding their 
role in the housing market.
    But it seems now that, in this proposal that you are 
bringing us, you are basically saying there has to be some kind 
of government guarantees. Is that right?
    Mr. Heid. Separate issues. In the old days, the--you're 
right, we were part of those organizations. But our primary 
focus there was making sure there was adequate oversight and 
adequate mission and adequate business model to move forward. 
What we have seen is that has not worked.
    What we are suggesting now is, going forward, the 
government guarantee is necessary, but for a reason we haven't 
really spent much time on yet today. You think about, 
especially, 10 years out. It is likely that worldwide capital 
markets will always be subject to shocks. We saw it a few 
months ago with Greece's debt crisis. We saw it years ago with 
the Russian debt crisis. In those situations, having an 
explicit government guarantee to ensure that there is adequate 
flows of funds all the time is very necessary.
    The Ginnie Mae market has moved forward unstopped. It's the 
primary homeowner purchasing--or people purchasing homes today, 
Ginnie Mae is the primary source of that funding. So we are 
seeing the need for the guarantee to move through those capital 
market shocks, often times having nothing to do with housing 
itself.
    Ms. Waters. What's the great difference between Fannie and 
Freddie and your MSICs?
    Mr. Heid. One big difference would be parts of the Fannie-
Freddie mission would no longer continue. For example, the 
explicit liquid support for the entire marketplace, and 
therefore, the need for significant amounts of debt would be 
discontinued, and the debt itself would not be guaranteed. Big 
difference between the confusion around implicit/explicit that 
existed in today's world.
    The other piece that would be very different is the size of 
the portfolios would be very different than it was in the old 
days.
    And then, a third big difference is the only way to move 
forward with any of these proposals is to ensure that you have 
a very tough regulator with adequate powers.
    The Chairman. Let me--we are going to be going to some 
votes in a little while, and I have consulted with the 
Minority. We are going to have a set of votes, only three. So I 
am going to ask the witnesses to stay, and Members can come 
back. We will then be debating for another hour and 20 minutes 
or so, and then have another set of votes which will include a 
recommittal motion, which takes longer.
    So, it's my sense that fairness would be we will ask you to 
stick with us through one set of votes, but not two. So we will 
go, we will get a couple more sets of questions in. We will 
come back and have another hour or so, and then that will be 
the end of it. And we appreciate your accommodating us on this 
day.
    And I want to echo what the gentleman from Pennsylvania 
said. I am enormously grateful to you, because every one of you 
got to the point. And if you haven't sat here year after year, 
you don't know what a rare pleasure it is to have people get to 
the point that you want to discuss. So, thank you.
    The gentleman from Texas.
    Mr. Neugebauer. Thank you, Mr. Chairman. I think one of the 
things that the chairman just said I think is appropriate, I 
think we have gotten to some of the main points about where we 
go from here. And I think several of the witnesses have pointed 
that out. And basically what we're talking about is, in this 
structure, what is the risk premium going to be, who is going 
to receive the risk premium, and who is going to take the risk. 
And there are a lot of different scenarios that have been put 
forth out there.
    I guess the question that I have is I go back to--and it 
kind of dates me a little bit--but in the late 1970's and early 
1980's, I was in the banking business for a while, and we were 
making mortgage loans. And we were originating those. We could 
sell them to Fannie Mae, but we could actually make more money 
selling those loans to savings and loans and banks and other 
entities.
    And we did that without--there was no Federal guarantee, no 
Federal backstop. We had PMI insurance on the loans over--and 
that market went and behaved fairly well, until we reached a 
point where the savings and loans got in trouble, and 
obviously, that source of financing went away.
    I think that one of the things that Mr. Pinto said, and I 
think I agree with, is we have so much government intervention 
into many of these financial markets--and particularly, I 
think, into the mortgage market--that it's really--there has 
been an artificial pricing of mortgages. And so that, then, 
begins to put some pressure, politically, on this body that, if 
we go down the road of trying to price a risk premium--if, in 
fact, the decision is made for the government to somehow have 
some intervention here--is who sets that risk premium?
    Mr. Heid, under your proposal then, who will set that 
premium for the government's role?
    Mr. Heid. The way we look at this is there are several 
pieces to it. Ultimately, there would have to be some 
organization designated to have the skill and have the ability 
to actually price that premium itself. That, by itself, is a 
very difficult thing to do. And for that reason, we wrapped 
around it a broader series of concepts.
    For example, start with the Dodd-Frank requirements. It has 
a different expectation on lenders today, a consistent 
regulatory and enforcement mechanism that didn't exist in the 
old days. That's a positive first step.
    If you then layer in a layer of private capital in front of 
the government--and you see that in the form of the downpayment 
the consumer makes, we see that in the form of a layer credit 
enhancement like--mortgage insurance is one example. We also 
see it as the equity in the conduits themselves that has to be 
exposed to fail. And then, finally, we see the guarantee fees 
paid into the government as another layer of protection.
    So, the way we're looking at the total package is pricing 
the premium on the guarantee is a difficult activity, and 
that's the reason you keep that as your last line of defense, 
and you put all of the steps in front of it, including private 
capital fully at risk, to make sure you're insulating the 
taxpayer in whichever way possible.
    Mr. Neugebauer. Yes, I just want to focus back to my 
question--and it was the last part of your series of proposals 
there, or layers--is who prices that premium to the government 
for the government's portion?
    Mr. Heid. The agency itself that is taking the risk would 
be having to have the skill to do that. Ginnie Mae today has a 
guarantee fee priced for different kinds of securities. There 
is a designated agency, and it's their obligation to get the 
skill, and be in a position where they can provide that--
calculations effectively.
    Mr. Neugebauer. But the Ginnie Mae concept is a little bit 
different, in that Ginnie Mae is basically guaranteeing 
mortgages that are backed by the Federal Government already. So 
I don't know if that's necessarily--pricing the risk on a 
mortgage that is guaranteed by the Federal Government and 
pricing one that's not is--the risk premium for that, 
hopefully, is different.
    Mr. Heid. Absolutely. I'm using it as a concept, not an 
absolute. You have--this is different. There is private capital 
in place to take that credit risk. The calculations, the 
skills, the thinking has to be different. But the concept, I 
think, is very similar, in terms of whoever the organization 
is--and probably the regulator--would be the one actually 
pricing that--
    Mr. Neugebauer. See, the problem I have with that is I 
don't have a lot of good vibrations on the history of the 
government being in the reinsurance business. I think Mr. 
Bachus mentioned the flood insurance.
    I am more interested in the market pricing that risk. And 
it's going to obviously increase the cost of mortgages for this 
country. And the reason I don't want the government setting 
that premium is once the government sets the premium, then that 
basically takes the market off the hook for the pricing of the 
risk and the availability.
    And what I am afraid of is my colleagues will get a little 
nervous, from a political process, and will want to keep that 
risk premium low, and which then distorts the market. And so in 
some way--and again, not necessarily discarding your program, 
but that is one of the things that I think we are going to have 
to--
    The Chairman. The gentleman's time has expired. The 
gentleman from California.
    Mr. Baca. Thank you very much, Mr. Chairman. As our country 
continues to recover from the collapse--and I state the 
collapse--of 2008, our housing market continues to struggle. It 
is clear at this point that the housing market will not lead us 
out of our economic woes. But our recovery will not be complete 
until it is stabilized and shows signs of progress.
    I appreciate the fact that we're looking at some form of 
solutions. But yet there are still a lot of problems that we 
have not even tackled with. And as we look at suggestions for 
now, Mr. Heid--and I would like to address this to you and 
Wells Fargo--how does your approach take into account the 
struggle that we are currently having with progress? It seems 
that it shouldn't take us moving forward until the current 
foreclosure crisis is fixed. And we have had a lot of problems.
    In my district, thousands of homeowners have had problems 
with HAMP. And the response I have gotten from the servicers 
of--homeowners often receive different answers. A lot of 
times--I don't know if you have outsourcing that is being done 
by those individuals who are doing a lot of the response back 
to them, because incomplete information, incomplete documents, 
they are going back and forth, yet the persons are still 
struggling in completing. And yet we are still trying to come 
up with additional ideas on how to handle the crisis, but yet 
Wells Fargo, in its process, have had a lot of problems in 
documentation, setting that information.
    How do we address that, those problems that are currently 
there, as we look at moving forward? And how should we reform 
Fannie Mae to take into account the problems that we're having 
with the service compliance with HAMP?
    Mr. Heid. I think there are a couple of ways to answer 
that. With HAMP itself, what's important to remember is that 
HAMP is just part of the solution. It's one program. It's the 
first program offered. In our case, it's about 12 percent of 
the loan modifications that are getting done. For the 88 
percent that are getting done outside of the program, it's 
because customers don't qualify for that program itself. So 
when you think about--
    Mr. Baca. But you're not responding back in time to the 
individuals who did qualify at one point or another. And, 
because of the delays and the lack of documentations, or the 
lack of explaining to the consumer about what they needed to 
have completed, those problems exist. Because I have thousands 
of cases in my district, and the problems that we have had with 
Wells Fargo.
    Mr. Heid. Yes, to that point, on where we have evolved, 
your criticism is very true, especially a year ago. Things have 
evolved tremendously. Where we now are, we have added close 
to--we have over 17,000 people working on this now.
    And what we have moved to just a few months ago is a one-
to-one service model, so that we have a designated individual 
on our side working with the customer from start to finish, so 
documents don't get lost, repetitive conversations don't need 
to occur. There is a level of accountability on our side in our 
position now that didn't exist a year back.
    Mr. Baca. That's why we need to continue to have--Mr. Pinto 
indicated that we should move towards a private sector. But 
accountability and oversight needs to be done. If we don't have 
the accountability from us, then how can then we deal with the 
problems of greed that we have had in the past?
    That's what led us to a lot of the problems that we had, 
because there wasn't the accountability, there wasn't the 
oversight. There was a lot of greed. And you needed government 
to intervene to make sure that the oversight was done.
    And this is a question to all. Given that the market, in a 
current state of depress, at which point should we begin to 
transition whatever form GS or the Fannie Mae/Freddie Mac will 
take in the future?
    It seems that with the unemployment at close to 10 percent 
and the housing market, we'll have a tough time recovering, 
regardless of the structure of Fannie Mae and Freddie Mac. What 
economic signs should we look for in order to erase or ensure 
that it is safe to move forward? And this is a question for all 
of you. Mr. Pinto?
    Mr. Pinto. I would like to make two observations. One is, 
at least in the 20 years I have been looking at this in terms 
of Fannie and Freddie, the excuse is it's never a good time to 
do it. It can be a boom time, it can be a bust time, it can be 
an in-between time, and it's never a good time.
    Secondly, when you're an alcoholic and you're hooked on 
leverage, which is what this market is hooked on, and what 
Congress has been pushing for decades, ever higher levels of 
leverage and lower downpayments, there is no time like now to 
stop taking that drink.
    And so, you have to send a signal to the market that you're 
serious about this. And, therefore, you have to stop keeping 
these mortgage limits that you keep rolling forward. You have 
to start backing away from this and sending a signal that you 
are going to allow the private sector to reassert itself in 
this market. And once you do that, I think you will be very 
pleasantly surprised by what happens.
    Now, I know you probably don't have confidence in that, but 
there is a very different view of how this happened than 
perhaps--I beg to differ with you as to the view of how this 
happened.
    Mr. Baca. Okay, thank you--
    The Chairman. The gentleman from California--
    Mr. Baca. Yes, Ken?
    The Chairman. We don't have time for a new question.
    Mr. Baca. He is still responding right now. Ken?
    The Chairman. Very quickly.
    Mr. Bentsen. Yes. All I would say is I don't know that 
there is a right time, from the terms of the economy, but I 
think what's important to the market--to investors, in 
particular--is that there is clarity, and you do this as a full 
package. And also, you don't ignore the transitional issues or 
the legacy issues in creating a new system. That will 
dramatically affect the markets going forward and the economy 
going forward.
    Mr. Baca. Okay, thank you.
    The Chairman. The gentleman from California, Mr. Royce, and 
then we're going to go to Mr. Miller, and then we're going to 
break for the vote.
    Mr. Royce. Yes. I will go to Mr. Pinto, as well, with a 
question. Because last week, as I mentioned in my opening 
statement, Mr. DeMarco, who is the GSE regulator, brought up a 
couple of points, and he said that the GSEs bought up junk 
mortgages to reach their affordable housing goals, that is what 
was driving that. And this was something that the former Fed 
Chairman Greenspan had said. He said that the GSEs did whatever 
was necessary to reach that goal that Congress had mandated on 
the GSEs.
    And then, even the current Treasury Secretary, when he was 
testifying, he said the affordable housing goals were used to 
justify the GSE's purchases of these subprime loans.
    So, I was going to ask you, because you worked at Fannie 
Mae--so being on the inside you have a real perception, in 
terms of what was going on--to what extent did these goals 
drive Fannie into the junk bond market, or in the junk market 
for mortgage-backed securities?
    Mr. Pinto. Yes. I left Fannie in 1989, before the goals 
were implemented under the 1992 Act.
    Mr. Royce. Yes.
    Mr. Pinto. I have researched exhaustively, and I have a 
paper, it's 181 pages, called ``A Forensic Study: Government 
Housing Policies and the Lead-Up to the Financial Crisis,'' and 
I have documented, step by step, what happened with Fannie and 
Freddie.
    What happened, starting right after the Congress passed 
this in 1992, starting in 1993, Fannie and Freddie--or Fannie, 
in particular--went into competition with FHA. And that was the 
goal of the 1992 Act, one of them, that private sector would go 
into competition and provide the same kind of loans that FHA 
was doing. Fannie did--started doing that in 1993. Fannie and 
Freddie offered a 97 percent loan for the first time in the 
history, starting in 1994, in direct response to the affordable 
housing goals.
    In 1996 they started buying subprime, private mortgage-
backed securities, to meet the goals. In the early part of late 
1990's, early 2000, they started buying alt-A loans, private 
mortgage-backed securities, to meet the affordable housing 
goals. In 2000 they offered a zero downpayment loan in direct 
response to a major increase in the goals that was announced in 
1999.
    They were--the way I describe it is it was like a team of 
mush dogs, and FHA was the lead dog. They were always out in 
front--and I have documented how they were out in front on all 
these issues--downpayment, FICO scores, etc.--they were always 
out in front. Fannie and Freddie were forced to follow. The 
private sector was forced to compete. And at the end of the 
day, the private sector came up with a way to compete in 2004.
    Mr. Royce. I understand that point. But let me ask you 
another point, because one of the executives at Fannie made 
this point to me. He said their desire was--at the GSEs, their 
desire was to send a signal to the market that these were, in 
fact, safe loans.
    So, on top of the moral hazard problem that we had with the 
perception that the government was behind the GSEs--and that 
time, they were securitizing most of these loans--you also had 
this understanding in the market that if the Government-
Sponsored Enterprises have looked at this and deemed that 
Countrywide is safe, or whatever, then we can follow that lead.
    And I was going to ask you if you agreed with this 
statement. I have actually had two executives who were at 
Fannie at the time share this with me. I was going to ask you 
for your viewpoint on that.
    Mr. Pinto. I do agree with that, and that was actually a 
policy at Fannie and Freddie to do that. And HUD actually, in 
2000, recognized it in their rulemaking, that Fannie and 
Freddie, once they pulled these loans in, these affordable 
housing loans in, would be calling them prime loans. And the 
market would have to try to figure out what they really were, 
if they could. There is an actual statement by FHA as to that 
effect.
    The other thing--I think it gets back to your initial 
question--Fannie and Freddie--and, again, I can speak more 
about Fannie--Fannie, right from the get-go--I have 
documentation from 1994 through the period that shows that they 
had to subsidize these loans because they had higher default 
rates than they expected, going back to 1994, 1995, and because 
of the initial risk that they were projecting before they 
actually had higher default rates. And this continued 
throughout this period.
    So, this argument that they were doing this to make money 
is just completely counterintuitive. They were losing money on 
these loans, or they were--
    Mr. Royce. And they were also nervous about the risk. Or at 
least--
    Mr. Pinto. They were very nervous about the risk.
    Mr. Royce. --the loan officers told me they were, because 
they would wait until the end of the quarter to make the 
purchase.
    The Chairman. Time has expired.
    Mr. Royce. Thank you, Mr. Chairman.
    The Chairman. The gentleman from North Carolina, Mr. 
Miller.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. Just 
like Mr. Bachus' insinuation earlier, I do support capitalism, 
but I don't think support for capitalism requires the idolatry 
of every predatory business practice. And I think the 
capitalist economy works better for almost everybody if there 
are sensible rules.
    Despite the obvious failures of our safety and soundness 
regulation in the last decade, we are much better off with 
safety and soundness regulation and deposit insurance than we 
would be with the banking system we had in the 1920's, which 
led to bank runs, bank failures, and contributed greatly to the 
Great Depression.
    I agree we need to bring back the private securitization 
market, and the continued lack of life in that market is an 
enormous burden on our economy, since it was half of lending 
not long ago. But I have talked to investors, private 
investors, who are enthusiastic participants in capitalism, but 
they say that they will not buy mortgage-backed securities 
again, based upon the lack of rules that existed before. Unless 
there are sensible rules, they are not going to buy mortgages.
    And they won't standardize disclosure. They want rules for 
mortgage-backed securities or any kind of debt-backed security 
that is similar to the rules for the issuing of stocks, that 
there be standardized disclosures, that there be cooling-off 
periods, waiting periods, that they be allowed to sample the 
pools, that they be able to do their own due diligence, their 
own risk assessment, and not rely upon a rating agency, AAA 
rating, based upon God only knows what.
    And unless there are--unless they can do their own due 
diligence, their own risk assessment, they are not coming back 
into the market. And they say the SEC rules help, but there is 
more to be done to bring back the securitization market and to 
make private investors feel confident that they know what 
they're buying.
    And they say that the sales side, the securitizers, 
continue to resist those changes and those standardized 
disclosures. Mr. Bentsen, do you support those kinds of 
standardized disclosures?
    Mr. Bentsen. Absolutely. I think that we all believe that 
there has to be a very strong regime for the issuance and sale 
of asset-backed securities, whether it's in the mortgage-backed 
security area, credit cards, or whatever. And, at the same 
time, it has to be a workable regime.
    I think you are absolutely correct, that investors will--as 
investors have always been able to do--to really do their own 
due diligence, and should be doing their own due diligence, in 
whatever investment product they are going to buy. But we agree 
there should be a very strong regime. It should be uniform.
    And again, that goes back to the comments that we made and 
our colleagues at the ASF made, with respect to concerns about 
regulators getting out in front of what you tried to do in 
Dodd-Frank, in coming up with the FDIC taking action. And, 
frankly, even with the SEC on reg AB, we believe they're going 
to have to go back, in the advent of Dodd-Frank, and rethink 
those rules, and make sure that they're uniform across markets.
    Mr. Miller of North Carolina. They don't agree that they 
could always do their due diligence. They say that they were 
pretty much captive to rating agencies' ratings of mortgage-
backed securities, which, as we all know, proved to be pretty 
nearly worthless.
    Mr. Deutsch, do you support standardized disclosures? Do 
you support cooling-off periods? Do you support allowing 
potential investors to look at individual mortgages, a sample 
of mortgages in a securitized pool before it's issued?
    Mr. Deutsch. Absolutely, to each one of those. In 2008, we 
developed and started a Project Restart, where we developed the 
loan level standardized disclosures over the course of the past 
2 years. But the SEC in their reg AB II proposals actually 
used, as the basic model, what the ASF had developed for loan-
level disclosure, which was a joint working group of investors 
and originators to develop over 150 fields of loan-level 
information.
    Mr. Miller of North Carolina. There appear to be some odd 
alignment of interest, if you have the usual kinds of ideas of 
what constitutes a conflict of interest. Why should a trustee 
or a servicer of a securitized pool be an affiliate of the 
securitizer? That seems an obvious conflict of interest. Mr. 
Bentsen?
    Mr. Bentsen. I think historically you had a broad array of 
servicers in the marketplace. I think, through this crisis that 
we have been through recently we have had consolidation that 
has occurred in the market. And that has raised a question of 
whether--and I know you have legislation that's looking at this 
issue--that has raised a question. I think it's a legitimate 
question to look at--
    The Chairman. All right, let me say this. We're going to--
things have gotten a little hairy over there, so would you--you 
or anyone else, it's a very important question, and we would 
ask you to respond in writing. And we will go to Mr. Posey, and 
then we're going to adjourn the hearing, because there is no--I 
don't know if we will ever get back. Mr. Posey?
    Mr. Posey. Thank you, Mr. Chairman. I don't have any 
questions. I wanted to echo your comments to the witnesses. 
It's nice to have somebody in here who can speak frankly and 
give us straight answers, and even know or have in their 
vocabulary the words ``yes'' and ``no.'' We do appreciate that.
    And, Mr. Heid, I wanted to comment. Wells Fargo has been 
having some mortgage seminars for homeowners who are having 
problems with their mortgage in central Florida, and I think 
that's an outstanding idea. I just wanted to pass my 
compliments on to you and your company. I wish more of them 
would do that.
    Thank you, Mr. Chairman. I yield back.
    The Chairman. I thank the gentleman. The hearing will be 
adjourned, because there is an extra adjournment vote. It would 
be unfair to people to keep them here. And we have had a very 
useful discussion.
    I would encourage every one of you--because sometimes we 
really do have hearings to get information, and this is one of 
them. I will tell you that a great number of members here know 
what we shouldn't do and continue to do. There is less 
certainty about what we should do. I would encourage all of 
you, please, if you have anything you want to supplement in 
writing, I guarantee you it won't be wasted effort. It will be 
looked at. And we will be back here after the election, talking 
about this. I thank you all very much.
    [Whereupon, at 11:57 a.m., the hearing was adjourned.]


                            A P P E N D I X



                           September 29, 2010


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