[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
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HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
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SEPTEMBER 29, 2010
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Printed for the use of the Committee on Financial Services
Serial No. 111-164
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62-689 WASHINGTON : 2010
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
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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