[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
GSE REFORM: IMMEDIATE STEPS TO PROTECT
TAXPAYERS AND END THE BAILOUT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
FEBRUARY 9, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-2
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64-551 WASHINGTON : 2011
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO R. CANSECO, Texas
STEVE STIVERS, Ohio
Larry C. Lavender, Chief of Staff
Subcommittee on Capital Markets and Government Sponsored Enterprises
SCOTT GARRETT, New Jersey, Chairman
DAVID SCHWEIKERT, Arizona, Vice MAXINE WATERS, California, Ranking
Chairman Member
PETER T. KING, New York GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois BRAD MILLER, North Carolina
JEB HENSARLING, Texas CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin
JOHN CAMPBELL, California ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan JOE DONNELLY, Indiana
KEVIN McCARTHY, California ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico JAMES A. HIMES, Connecticut
BILL POSEY, Florida GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK, AL GREEN, Texas
Pennsylvania KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
C O N T E N T S
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Page
Hearing held on:
February 9, 2011............................................. 1
Appendix:
February 9, 2011............................................. 55
WITNESSES
Wednesday, February 9, 2011
Calabria, Mark A., Director of Financial Regulation Studies, Cato
Institute...................................................... 13
Pollock, Alex J., Resident Fellow, American Enterprise Institute. 17
Randazzo, Anthony, Director of Economic Research, Reason
Foundation..................................................... 15
Wartell, Sarah Rosen, Executive Vice President, Center for
American Progress Action Fund.................................. 19
APPENDIX
Prepared statements:
Calabria, Mark A............................................. 56
Pollock, Alex J.............................................. 63
Randazzo, Anthony............................................ 70
Wartell, Sarah Rosen......................................... 86
Additional Material Submitted for the Record
Garrett, Hon. Scott:
Letter to Hon. Timothy Geithner, Secretary of the Treasury,
and Hon. Shaun Donovan, Secretary of HUD, from the American
Bankers Association (ABA), dated February 9, 2011.......... 105
Letter from the National Association of Federal Credit Unions
(NAFCU), dated February 8, 2011............................ 109
Written statement of the National Association of Realtors
(NAR)...................................................... 112
Written statement of the National Multi Housing Council
(NMHC) and the National Apartment Association (NAA)........ 117
Schweikert, Hon. David:
``Taking the Government Out of Housing Finance: Principles
for Reforming the Housing Finance Market,'' An American
Enterprise Institute Policy White Paper, by Peter J.
Wallison, Alex J. Pollock, and Edward J. Pinto, Preliminary
draft dated January 20, 2011............................... 122
GSE REFORM: IMMEDIATE STEPS TO
PROTECT TAXPAYERS AND
END THE BAILOUT
----------
Wednesday, February 9, 2011
U.S. House of Representatives,
Subcommittee on Capital Markets and
Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:12 p.m., in
room 2128, Rayburn House Office Building, Hon. Scott Garrett
[chairman of the subcommittee] presiding.
Members present: Representatives Garrett, Schweikert,
Royce, Lucas, Manzullo, Biggert, Hensarling, Neugebauer,
Campbell, Marchant, McCotter, Pearce, Posey, Fitzpatrick,
Hayworth, Hurt, Grimm, Stivers; Waters, Ackerman, Sherman,
Miller of North Carolina, Maloney, Moore, Perlmutter, Donnelly,
Carson, Himes, Peters, Green, and Ellison.
Ex officio present: Representative Frank.
Also present: Representatives Gary Miller of California and
Carney.
Chairman Garrett. Greetings. This hearing of the
Subcommittee on Capital Markets and Government Sponsored
Enterprises will now come to order.
And we have just conferred with the other side. Maxine is
on her way, but we thought that since we have the panel here,
and a number of esteemed Members from both sides of the aisle,
we would begin the proceedings. So we will begin, without
objection.
Also, without objection, all Members' opening statements
will be made a part of the record.
And so we begin with opening statements.
It was on September 7, 2008, that Fannie Mae and Freddie
Mac were put into conservatorship by the Federal Government.
Over $150 billion and 885 days later, the government-backed
mortgage twins remain in conservatorship. The Federal
Government now underwrites 95 percent of the housing market.
And still the American taxpayer continues to hemorrhage
billions of dollars every quarter to keep them afloat.
So I am pleased to hear that the Department of the Treasury
is getting closer with their much anticipated reform proposal,
which I understand can be out here now. If I had known that
simply scheduling a GSE reform hearing would facilitate such a
swift response, we would have held one even sooner.
While I know a lot of attention has been given to the
Treasury's proposal and what the future of U.S. housing finance
will look like, I believe that there are other areas of this
debate that we can focus on right now.
In particular, I believe the question we need to be asking
ourselves is this: What are the immediate steps that Congress
can take right now, this very instant, to protect taxpayers, to
end the bailout, to get private capital off the sidelines, and
to reduce the government exposures to the housing market? I
believe it is these four objectives that should be the driving
force behind our immediate reform efforts.
And so I look forward to discussing a number of reform
proposals in greater detail with our esteemed panel. As I can
see from their written testimony, there are many ways to
protect taxpayers and begin the end of the bailouts.
Now, I say that on one hand. It is also unfortunate that
some of my colleagues on the other side of the aisle have
resisted any attempts, at least in the last Congress, to
address the most expensive and explosive component of the
Federal Government's intervention during the financial crisis.
But I assure you, it will be a top priority of mine, as
chairman of this subcommittee.
The Federal Government's housing policy has been a
monumental disaster, and we must find new ways forward.
Secretary Geithner said just the other day that the new policy
should leave us with a system that will not be vulnerable to
the really tragic colossal failures of the past. I couldn't
agree with him more.
Even in The Washington Post, they are on board, too, with
wholesale changes to Fannie Mae and Freddie Mac. In an
editorial this Monday, the Post wrote, ``Homeownership does
help instill thrifty habits and solidify communities, but it
can be taken too far.'' They said the national homeownership
rate slipped back to 1998 levels, according to the Census
Bureau.
So, in terms of building a community, etc., it is as if the
last 13 years have never happened, except, of course, for the
catastrophic losses to the taxpayers and also to the home
buyers. They conclude by saying, ``It might be more accurate to
say that the Federal housing policy has helped to destroy
communities.''
It will be the goal of this subcommittee to ensure that we
put an end to this destructive and costly housing finance
policy and then replace it with a system, going forward, that
protects taxpayers and actually strengthens communities instead
of, as the Post says, destroying them.
I thank the witnesses for being here today, and I look
forward to their testimony.
And, with that, I recognize Mr. Miller.
Mr. Miller of North Carolina. I think Ms. Waters had
allocated 2 minutes to me. So I will now take 2 minutes.
Thank you, Mr. Chairman.
The wrong lesson to draw from the financial crisis is that
homeownership should not be a goal, a public policy goal. It
undoubtedly can be taken too far, but the financial crisis was
by no means caused by the goal of homeownership. Seventy
percent of the people who got subprime mortgages were not
getting those mortgages to buy a home. They already owned their
home, but they needed to borrow money.
More than half, well more than half--the Wall Street
Journal estimated 55 percent; other estimates have been much
higher than that--of the people who got subprime mortgages
qualified for prime mortgages. So it was not about making
mortgages available to people who would not have qualified in
ordinary circumstances. It was entirely about making as much
money as possible as quickly as possible without regard to the
consequences.
Fannie and Freddie were certainly guilty of that, to some
extent, but the private-label securitizers, their competitors,
were also guilty of that and probably even more guilty of that.
We do need to recreate, to reinvent our housing finance
system. But a principal goal should still be to make
homeownership available, on reasonable terms, for middle-class
families. We got away from that in the last decade. And as we
reinvent our housing finance system, that is what we need to
get back to.
I yield back my time.
Chairman Garrett. The gentleman yields back.
The gentleman from California, Mr. Royce, for 1 minute.
Mr. Royce. Thank you, Mr. Chairman.
It appears, after months of preparing, we finally got to
the point here where Treasury is set to release their proposal
for GSE reform. But I think, for us, the vexing part is,
instead of coming out with one definitive plan, they are going
to provide three options: no government role in the secondary
mortgage market will be their first option; government support
only sometimes looks like their second; and permanent
government support as their third.
Unfortunately, three options doesn't equal one plan. And I
think the time for debating the merits of options is long past.
Now is the time to act.
A permanent government guarantee will inevitably lead to
politicians and bureaucrats putting their proverbial thumb on
the scale. Human nature is not going to change here.
Politicians will insist that underwriting standards be relaxed,
guaranteeing fees being lowered, and downpayments being waived,
so just one more group can get into homes they otherwise could
not afford if you were depending on the market.
So this scenario has happened before, and it will happen
again. And when it does, we will again face a boom-bust cycle
in our financial markets, followed by a massive taxpayer
bailout.
I think we can do better. I think we should confront the
reality of not putting in place that type of permanent
government guarantee in the future.
I yield back.
Chairman Garrett. The gentleman yields back.
And before I yield the microphone to the gentlelady from
California, I am pleased to be joined by her today and pleased
to see her beside me as a ranking member, and I look forward to
working with her on so many very important issues, issues that
we worked on collaboratively in the past, in the area of
housing finance and the area of FHA reform. So, obviously,
there are commonalities in our interest in making sure that we
can get the economy back on track again. I look forward to your
comments, but also our collegiality moving forward, as well.
Ms. Waters. Thank you very much, Mr. Chairman--
Chairman Garrett. I yield you 4 minutes.
Ms. Waters. --first, for organizing this first hearing of
the Subcommittee on Capital Markets and Government Sponsored
Enterprises for the 112th Congress. I, too, look forward to
working with you. You are absolutely correct; we have worked
together on issues in the past, and I think we can do that for
the future.
Today's hearing is an opportunity to address one of the
most critical questions facing our economy: How do we continue
to move forward from the crisis and organize a secondary
mortgage market that ensures access to sustainable
homeownership at affordable rates for the American middle
class? And how do we do this while protecting all taxpayers?
For many years, we did a fairly good job of providing the
opportunity for homeownership to the average American who
worked hard and acted responsibly. But over the course of the
last decade, we saw the creation and evolution of toxic
financial products that pulled Americans further and further
away from the mortgages that we grew up with--30-year, fixed-
rate loans with sensible downpayments for homes we could
reasonably afford.
Now, what caused these products to develop was the subject
of many fights in this committee during the last Congress. I
continue to believe that an unregulated shadow banking system
created the crisis and that casino-style betting magnified and
lengthened it. Unfortunately, Fannie Mae and Freddie Mac,
hungry for profits and market share, hopped on the bandwagon,
albeit late. The result has been enormously consequential for
American taxpayers.
Our objective, moving forward, should not be to continue
arguing over the facts that led us to this point. I sincerely
want to begin the next phase, negotiating a plan for the
future.
I have not committed yet to any one proposal, and I am open
to any plan coming from any Member or group or institution that
can advance the following goals: Can the plan preserve the 30-
year, fixed-rate mortgage, whose availability I believe is
vital for American borrowers? Does the plan provide for
stability and liquidity, particularly in times of severe credit
constriction, as we experienced over the last few years? Are
there features in the plan that allow for access for all
qualified borrowers, as well as the small and community banks
that seek liquidity? Does the plan ensure that there is a
secondary market for multifamily loans and a market for
individuals who seek affordable rental housing? Is there
transparency for investors and regulators? Does the plan
protect taxpayers and ensure that a small number of
institutions don't again become ``too-big-to-fail?''
So these are the criteria by which I will evaluate
proposals, moving forward.
I understand that some details of the Administration's
options paper were released to reporters last night. I am
looking forward to reading the full report and studying the
options they propose. But what I am more interested in hearing
about are the principles the Administration thinks are
important for GSE reform, such as whether they think the
preservation of the 30-year, fixed-rate mortgage is essential.
While it is important that we get the technical details
right as we develop a new housing finance system, I think it is
more important that we make clear what values underpin our
vision for the future.
I look forward to working with the Administration and all
of my colleagues in Congress on developing a plan that best
meets the needs of all market participants. I believe that all
of us need to seriously consider every option on the table.
And, Mr. Chairman, I do thank you. And I yield back the
balance of my time.
Chairman Garrett. I thank the gentlelady.
And now, I yield 1 minute to the gentleman from Arizona.
Mr. Schweikert. Thank you, Mr. Chairman and fellow Members
and, obviously, our witnesses.
I know there is a certain frustration here because the
Administration had an obligation to provide us their proposal,
what was it, last week, and something for to us discuss and
build around, and here we are blind once again.
Having read much of the literature that is out there in
regards to Fannie and Freddie and some of the distortions they
may have created in the price of money and also the amount of
debt and nonperforming assets they are currently holding, Mr.
Chairman, witnesses, I desperately hope, as you testify, you
give us some sense of how bad it is out there and how much we
have in nonperforming assets that have to be unwound if we are
ever going to see a recovery in our housing market.
Thank you, Mr. Chairman.
Chairman Garrett. And the gentleman yields back.
I yield now to the gentleman from Connecticut, Mr. Himes.
Mr. Himes. Thank you, Mr. Chairman. I join in welcoming our
witnesses today.
I am grateful for the opportunity to finally begin
examining reasonably and seriously the future role of the GSEs
in our housing market. This has been the subject of much
demagoguery for a long time. And while there is no question
that the GSEs meaningfully contributed to our financial crisis
through irresponsibility and the way they went in the years
beginning in the 1990s, there are some things that we can't
ignore.
First, they operated for decades safely and soundly and
helped to really bulwark and assist the creation of an American
middle class. Secondly, a 30-year, fixed-rate mortgage may not
exist without them, or if it did exist, it could perhaps be
priced out of the range of American middle-class families. And
third, multifamily lending, which is so important to smart
growth and creating vibrant cities, might be severely damaged
were Fannie and Freddie to not exist in any form at all.
These are tough issues involving political decisions, and I
hope that the panel today will address them and give us some
guidance on how we can best secure our public policy goals
without taking on the risks that were incurred in the 1990s.
Thank you, Mr. Chairman. I yield back.
Chairman Garrett. And I thank the gentleman.
The gentlelady from Illinois, Ms. Biggert, please, for 1
minute,
Mrs. Biggert. Thank you, Mr. Chairman.
Fannie Mae and Freddie Mac have received the largest
taxpayer-backed bailout to date, over $150 billion. They are
responsible for over $5.4 trillion in outstanding mortgage
applications and were at the root of the greatest financial
crisis since the Great Depression. And yet the Administration
has failed to meet its deadline to produce a required report on
reform. Moreover, GSE reform was intentionally omitted in the
Dodd-Frank Act.
Fortunately, this is a new Congress, and housing finance
reform is at the top of our agenda. Certainly, we must take
care not to disrupt an already-fragile market. However, it is
time to move toward a market with less reliance on government
guarantees and more private-sector participation.
I thank Chairman Garrett for convening today's hearing, and
next week, the Subcommittee on Insurance and Housing will hold
a hearing to examine government barriers to the housing market
recovery.
The bottom line is that never again should taxpayers be on
the hook for risky housing finance policies. I look forward to
working with my colleagues to examine the future of housing
finance.
I yield back.
Chairman Garrett. I thank the gentlelady for yielding back.
Two minutes to the gentleman from Texas, Mr. Green.
Mr. Green. Thank you, Mr. Chairman. And I thank the
witnesses, as well.
This is about homeownership, it is about the American
dream, but it is also about the economy. It is about what
happens once we start to build housing and we have buyers.
Because, once you lay that foundation, you know that at some
point you will sell carpet or you will sell a washer, a dryer.
This economy has been driven in great part due to the
success of our housing market. So, as we move forward, we want
to make sure that market is still in place such that we can
utilize it to again help us with our economic recovery.
I think that if we don't consider the impact on the
economy, we are making a mistake. So let's be sure that, as we
move forward, we don't develop unintended consequences
associated with our desire to make things right.
I thank you for the time, Mr. Chairman. And I yield back.
Chairman Garrett. And I thank you.
And the other gentleman from Texas, Mr. Hensarling, for 1
minute, please.
Mr. Hensarling. Thank you, Mr. Chairman.
We all know that the classic definition of ``insanity'' is
doing the same thing over and over and expecting a different
result. Those who want to foster a system of continuing
government guarantees in the secondary mortgage market
certainly bear the burden of persuasion that somehow we can
expect a different result--a different result than $150 billion
of taxpayer bailout money, $8 trillion of debt that ultimately
the taxpayer is responsible for. That is a strong burden of
persuasion.
For 2 years now, we have had the Administration, which has
discussed, studied, ruminated, cogitated, and done everything
but acted upon the GSEs. I hope that very soon, they will
release a plan.
But I think the real question is, how do we transition to a
competitive market without taxpayer guarantees and how soon can
we get there? It is time for us, at three trillion-plus
deficits in our Nation's history in a row, to end the taxpayer
bailouts.
I yield back.
Chairman Garrett. Mr. Frank?
Mr. Frank. Thank you, Mr. Chairman.
I have, actually, a question which will be addressed.
Chairman Garrett. For 2 minutes.
Mr. Frank. I have heard criticism of the Administration for
missing its deadline. And I must say, this is a newly
discovered attitude of deference towards the Obama
Administration on these matters. I had not previously thought
that the Majority was waiting around for the President to
suggest to them what to do. I had thought that, frankly, the
Majority knew what it wanted to do.
Last year, in July, in the conference, an amendment was
offered to the conference report that we were told, as I
recall, resolved this problem, got rid of them. And I didn't
think it was germane; we ruled it was not germane. But when the
election happened, I had assumed--in fact, I am surprised that
we are now having a hearing on what the Administration hasn't
done. I assumed this would be a hearing on the amendment Mr.
Hensarling offered last year.
It did seem to me that the Majority knew what it wanted to
do in July when it was in the Minority. And, apparently, there
was something about transitioning from the Minority to the
Majority that induces a kind of legislative amnesia.
People on the Majority side were very sure what we should
do. So I had expected to be coming to a hearing in which we
would be considering the amendment. There was a great deal of
unhappiness on the Minority side that we couldn't vote on the
amendment. The Majority is in charge of that, so I assumed we
would go forward. And, again, I had not expected them to wait
for the Administration.
So my question is, why are we not--and I know it has been
introduced as part of the RSC package, the amendment of the
gentleman of Texas. So can we anticipate a legislative hearing
on this and a markup of that legislation? And if not, what
impediment intervened? Why was this a very good idea in July
and not in February?
Chairman Garrett. Would the gentleman yield?
Mr. Frank. Yes.
Chairman Garrett. I appreciate that, and I appreciate the
gentleman's recollection of the history of what we had proposed
in the past. And I assume the gentleman also remembers, as
well, that we had also called on the Majority at that time to
do what we are doing right now, and that is to call in the
interested parties, call in the academics, call in the
stakeholders to elaborate, to elucidate, and to explain what
some of the ramifications of these proposals are.
That was never done. And now we have a whole slew of new
freshmen from--actually, we only have one freshmen new--
Mr. Frank. I take back my time to say, no, these aren't new
questions. There is nothing new here that wasn't known then. In
July, people said, ``Adopt this amendment. We know what to
do.'' And I am surprised that there was a certainty then and
such uncertainty now. There aren't any new questions about
this. At least, there aren't questions that weren't there
before.
So, again, I am struck by the contrast between the
certainty that was expressed when the Majority was the Minority
and the uncertainty that has overtaken them in the Majority.
And I yield back.
Chairman Garrett. And the gentleman yields back. I assume
the gentleman will be interested in the contrast as we go ahead
in the next 2 years, as well.
And, with that, I yield to the gentleman from Texas, Mr.
Neugebauer.
Mr. Neugebauer. Thank you, Mr. Chairman. And thank you for
holding this very important meeting. As has been said, we have
been waiting for 2 years for some action to happen on this
issue, and finally we are about to start down that road.
One of the things that concerns me is, while we are in this
very hearing today, Freddie and Fannie will take on additional
taxpayer liability. And so, the time to act is not later but is
now. We need to start to make sure that we are doing everything
we can and the conservator is doing everything they can to
minimize additional exposure while, at the same time, making
space for private securitization to begin to take place
immediately so that we can begin to reduce that exposure.
There are a lot of things that should be discussed today,
and I look forward to this important dialogue.
Chairman Garrett. And now for 2 minutes, the gentleman from
Minnesota, Mr. Ellison.
Mr. Ellison. Thank you, Mr. Chairman and also Ranking
Member Waters, for this important hearing. I am looking forward
to this dialogue, and I would like to express a few ideas as we
go forward.
First of all, I think it is important to learn the right
lessons from the recent housing market crisis. And these
lessons point to the private sector's role in creating private-
label mortgage-backed securities as we start this new Congress.
Let's not forget that the subprime mortgage securities were
created by Wall Street firms, not Fannie and Freddie.
Now, I am not advocating that Fannie and Freddie were
perfect actors during the housing bubble, but let's be clear;
Fannie and Freddie did not start this crisis, and Fannie and
Freddie's affordable housing mission did not cause the
collapse.
Let's also be clear that the Community Reinvestment Act did
not cause the housing collapse either.
Reforming mortgage finance systems is a big responsibility
because homeownership has sustained the middle class of this
country. Calls to eliminate all government involvement in the
secondary mortgage market are not responsible. We can't go back
to the pre-depression housing market when government played no
role in housing finance and homeownership was restricted to the
very wealthy.
As this subcommittee addresses the important work of GSE
reform, I also hope that equal attention is given to the
important role that Fannie and Freddie have played in the
affordable rental housing market.
So I look forward to the testimony of the witnesses here,
and I thank all of you.
I yield back.
Chairman Garrett. I thank the gentleman for yielding back.
And now the gentleman from Illinois, Mr. Manzullo, for 1
minute.
Mr. Manzullo. Thank you.
It is very simple. Whoever came up with the great idea to
allow people who couldn't make the first mortgage payment to
buy a house made the mistake. It took the Fed until, I believe,
October of last year to come up with a simple rule that said,
whenever you apply for a home mortgage, you must have written
proof of what your earnings are.
That is how we got in this mess. People bought homes,
couldn't make the first mortgage payment, everything got
behind, and derivatives were soured because of the underlying
securities on it.
So now, we need to find our way out of this mess. Fannie
Mae and Freddie Mac could have done it a long time ago. They
simply could have passed a rule that said, we will not accept
any loan unless there is written proof of what a person earns.
I look forward to hearing from the witnesses.
Chairman Garrett. The gentleman from New Mexico, Mr.
Pearce, for 1 minute.
Mr. Pearce. Thank you, Mr. Chairman.
I appreciate the opportunity to take a little closer look
at Fannie Mae and Freddie Mac. I hope that we are taking the
first step today towards significant reform of these failed
institutions.
We are titling the hearing, ``Immediate Steps to Protect
Taxpayers and End the Bailout.'' And it is time for someone to
speak up for the taxpayers, who have now dished out $150
billion to save these institutions which were declared ``too-
big-to-fail.'' It is reason enough to put the country on notice
that servicing foreign obligations over obligations to American
citizens will not be the norm any longer.
While the priority of this committee is to protect
taxpayers, the conservatorship that took over Fannie and
Freddie created several other victims whose investments and, in
some cases, financial health were destroyed by the manner in
which the mortgage giants were seized. Prior to the
conservatorship, about 1,000 community banks held an estimated
$15 billion to $25 billion in Fannie and Freddie preferred
stock. That stock was wiped out by the government when the GSEs
were taken over and placed in conservatorship.
Former Secretary of the Treasury Hank Paulson acknowledged
in his book on the crisis, ``On the Brink,'' that the action
constituted an ambush. More concerning, Secretary Paulson also
mentioned in his book that the decision to wipe out preferred
stockholders in this country was done in part to satisfy
America's debt obligations to the Chinese.
As we move forward with proposals to reform the GSEs, it is
time for Congress to do the right thing and prioritize the
Federal Government's obligations to the citizens in this
country.
I look forward to the panel. Thank you, Mr. Chairman.
Chairman Garrett. And I thank the gentleman.
The gentlelady from New York, Ms. Hayworth, for 1 minute.
Dr. Hayworth. Thank you, Mr. Chairman.
The figures we are dealing with are stunning because, to
date, the GSEs have consumed approximately $150 billion from
our taxpayers, and most experts believe these losses will be
much higher. The CBO says that if we do nothing to stem the
lawsuits, the taxpayers will end up paying nearly $400 billion
to bail out Fannie Mae and Freddie Mac.
And as we wait for the Administration to come up with a
plan to wind down the GSEs, and protect our taxpayers, we know
that it becomes ever more urgent. So I want to commend our
chairman for holding this hearing, and I look forward to
hearing what you have to say.
I can tell you that my constituents in the Hudson Valley of
New York have become convinced that the more government
intervenes, the less common sense prevails. So I submit that
the task before us is to return common sense, in the form of
free enterprise principles, to the mortgage and housing
marketplaces.
I yield back the remainder of my time.
Chairman Garrett. I thank the gentlelady.
The gentleman from Virginia, Mr. Hurt, please.
Mr. Hurt. Thank you, Mr. Chairman.
Mr. Chairman, thank you for holding this subcommittee
hearing on this important issue. With $150 billion in taxpayer
funds already spent propping up Fannie Mae and Freddie Mac, and
hundreds of billions more a possibility, it is clear that this
will be the most expensive Federal bailout in response to the
financial crisis.
As it has been said, we must end the limitless bailouts of
Fannie and Freddie and effectively reform them in order to
protect the American taxpayer and give true stability to the
marketplace.
The previous Congress failed to address GSE reform while
passing one of the most sweeping regulatory overhauls of the
financial services industry. Today's hearing makes it clear
that this committee and this new Congress are prepared to act.
I look forward to hearing from the witnesses, and I thank
them for their appearance.
Thank you, Mr. Chairman. I yield back my time.
Chairman Garrett. I thank the gentleman.
The gentleman from New York, Mr. Grimm, for 1 minute.
Mr. Grimm. Thank you, Chairman Garrett. Thank you for
calling this hearing.
And thank you to those testifying.
This is obviously one of the most important issues facing
this committee and our entire Nation. Ending the enormous and
ongoing taxpayer bailout of Fannie Mae and Freddie Mac is, in
my opinion, an absolute must.
And this conservatorship started in September 2008. These
two failed firms have cost the American people over $150
billion. And this sum is almost guaranteed to go higher in the
coming months and years. And, shockingly, the recently-passed
2,300-page Dodd-Frank financial reform bill did not address
these two firms, and they are continuing to hemorrhage money.
So, as we move forward on deciding what the future of
housing finance will look like in the United States, there are
certain points that we should keep in the forefront of our
discussion.
For many years, homeownership has been considered the
cornerstone of the American dream and has led Congress to
support homeownership through various initiatives. I know that
back in my district in Staten Island in Brooklyn, the ability
to own your own home is unbelievably important to my
constituents for them to build a strong financial foundation to
improve the lives of their families.
And with that being said, we must give serious
consideration as to how to continue to make homeownership
affordable to middle-class Americans while, at the same time,
ensuring that the American taxpayer is never again left to
shoulder a burden the size of Fannie Mae and Freddie Mac.
Thank you, Mr. Chairman, for holding this hearing.
I yield back the remainder of my time.
Chairman Garrett. I thank the gentleman.
The gentleman from Ohio, Mr. Stivers.
Mr. Stivers. Thank you, Mr. Chairman. I would like to thank
the chairman for calling this hearing today.
The gentleman from New Mexico focused his comments on the
American taxpayer, and I think that is appropriate because
these GSEs should be an issue for all American taxpayers across
the country. The gentlelady from New York mentioned that the
taxpayers are already on the hook for $150 billion and
counting.
So finding a solution where the American taxpayer is not
left holding the bag for these gigantic losses while, at the
same time, continuing to ensure that home loans are still
available and accessible is a priority for me. I hope we act
quickly and prudently as we propose and implement reforms.
I look forward to hearing the panel discuss ideas on the
way forward for GSE reform. I would like to thank the chairman,
and I yield back the balance of my time.
Ms. Waters. Mr. Chairman, I have an unanimous consent
request.
Chairman Garrett. What is your request?
Ms. Waters. I request that Mr. Carney be allowed to
participate, to sit in on the subcommittee hearing today.
Chairman Garrett. Without objection, it is so ordered.
Ms. Waters. Thank you.
Chairman Garrett. Mr. Miller from California?
Mr. Gary Miller of California. Thank you, Mr. Chairman.
Over 10 years ago, we tried to reform Freddie and Fannie.
We worked on it for years. We tried to put a strong regulator
in place. We tried to create strong underwriting standards.
And, as you know, it all got killed in the Senate.
I have read some of the testimony, and I agree we all need
to protect taxpayers, and a $150 billion loss is outrageous.
There is just no excuse for that. But 66.5 percent of the
families in this country own their homes, and many of those are
two-taxpayer homes also.
So we need to look and say, what do we have to do? And when
we look at the overall marketplace, I think we need to look at
the marketplace and say, what is wrong with the marketplace and
how do we reform everything?
If you look at the default rates on subprime loans, it is
38.7 percent--38.7 percent. The default rate on Fannie and
Freddie is 3.1 percent. If you look at the default rate on
subprimes, it is 26.5 percent. The all-loan seriously
delinquent rate is at 8 percent and Fannie Mae is at 4.2
percent. So are the default rates on Fannie and Freddie high at
3.1 and 4.2 percent? They are high, but they are better than
the private sector.
So how do we address that? And we need to get to the bottom
of it. We can't put taxpayers at risk. I am not arguing with
that. But what is wrong with the overall marketplace?
I know some data says we need to eliminate high-cost areas.
But they are the best-performing loans with Fannie and Freddie.
If there is data other than that, I would like to see it,
because I have just not seen that.
So I look forward to the testimony. And, Mr. Chairman, I
thank you for the time.
Chairman Garrett. And I thank the gentleman.
And, finally, Mr. Fitzpatrick from Pennsylvania for 1
minute.
Mr. Fitzpatrick. Thank you, Mr. Chairman.
I believe the government has a role to play in encouraging
homeownership, but this laudable goal has led to interference
in the market, and now the taxpayers are writing checks to the
tune of hundreds of billions of dollars.
I believe that the government has overstepped its bounds,
Mr. Chairman. The United States Government went from being a
facilitator to now backing over 90 percent of all the loans in
the United States. There is no question that Fannie Mae and
Freddie Mac must be weaned off the government in a responsible
way that protects our economy but gets the American taxpayer
out of the bailout business.
We can argue about how we got here, but the fact remains
that Fannie and Freddie are now bloated with bad loans and
toxic assets. And while too fast of a wind-down could damage
our housing economy, we cannot allow prudence to be the enemy
of progress. The system must be reformed, the system must be
stabilized, American families protected, and the government be
relegated back to its proper role.
The path forward will not be easy, but we were sent to
Congress to fix the system and to fight for the taxpayers. I
look forward to the testimony and the solutions.
And, Mr. Chairman, I yield back the balance of my time.
Chairman Garrett. I thank the gentleman.
And I thank all of the witnesses. As you heard, we are all
very much looking forward to your testimony.
And we do have a great panel of esteemed witnesses, so let
me just run through them. And then I will refer to each of you
for 5 minutes.
On our left, Mr. Mark Calabria, director, financial
regulation studies at the Cato Institute. Next to him, Anthony
Randazzo, director of economic research at the Reason
Foundation. Next, Alex Pollock, resident fellow of AEI,
American Enterprise Institute. Following, last but certainly
not least, Ms. Sarah Wartell, executive vice president of the
Center for American Progress.
I welcome you all here today for our very first hearing.
And I do, indeed, look forward to your testimony and your ideas
and your expertise to help us solve this problem.
Sir, 5 minutes.
STATEMENT OF MARK A. CALABRIA, DIRECTOR OF FINANCIAL REGULATION
STUDIES, CATO INSTITUTE
Mr. Calabria. Chairman Garrett, Ranking Member Waters, full
committee Ranking Member Frank, and distinguished members of
the subcommittee, I thank you for the invitation to be here at
today's hearing.
Given the central role of Fannie Mae and Freddie Mac in the
financial crisis, the need for reform is beyond dispute. While
I believe a major overhaul of our Federal mortgage policy
should happen sooner rather than later, reform should be done
in a deliberate and thoughtful matter. The need for deliberate
and thoughtful process, however, does not preclude the
necessity of taking immediate steps to protect the taxpayer.
The most immediate and important step that can be taken to
protect the taxpayer is to change the role of the Federal
Housing Finance Agency from that of conservator to receiver.
The Housing and Economic Recovery Act of 2008 establishes a
resolution or reorganization process for the GSEs.
It should be noted that there is little, if anything, that
a conservator can do that a receiver cannot. There is, however,
a considerable amount that a receiver can do which a
conservator cannot, the most important difference being that a
receiver can impose losses on creditors.
Some might object to receivership on the basis that it
would end the GSEs. Such a position would be mistaken. HERA
specifically prohibits the receiver from revoking, annulling,
or terminating the charters of an Enterprise. Quite simply, the
charters of Fannie Mae and Freddie Mac would remain in place
under receivership.
Another potential objection to receivership would be that
it forces a solution upon Congress before it has had sufficient
time to deliberate. Such an objection would also be false.
Again, under HERA, a limited-life regulated entity, essentially
a bridge bank for the GSEs, has an initial life of 2 years,
which can be extended by FHFA for 3 additional 1-year periods.
This would give Congress and the Administration 5 years to
arrive at a suitable solution to Fannie Mae and Freddie Mac.
Another important feature of receivership is that it would
help lessen the perception that certain entities, including our
largest banks, are ``too-big-to-fail.'' The Dodd-Frank Act
establishes a resolution process for both non-banks and bank
holding companies. This resolution process mirrors, in many
ways, the receivership provisions of HERA.
Market participants have questioned whether the resolution
powers of Dodd-Frank would ever be used to impose losses on
creditors. Quite simply, if we are unwilling to take Fannie Mae
into receivership, then most market participants will conclude
that we are also unwilling to take Citibank or Goldman into a
receivership. Moving Fannie and Freddie into receivership adds
credibility to the resolution process established in Dodd-
Frank.
In transitioning from a government-dominated to a market-
driven mortgage system, we face the choice of either a gradual
transition or a big bang. While I am comfortable with believing
that the remainder of the financial services industry could
assume the functions of Fannie and Freddie, I recognize this is
a Minority viewpoint. Practical concerns as to the state of the
housing market point toward a gradual transition. The question
is then, what form should this transition take?
One element of this transition should be a gradual step-
rise reduction in the maximum loan limits for the GSEs. I would
recommend an immediate reduction of the loan limit to $500,000,
followed by annual decreases of $50,000. Of course, the details
can differ.
The hallmark of a private corporation is that its owners
bear the benefits and costs of its activities. This situation
no longer holds for Fannie Mae and Freddie Mac. Any revenue
going forward will help reduce the size of the hole, while
expenses will dig it deeper.
Given that the taxpayer is now the residual claimant to
these entities, it should be clear that the employees of Fannie
Mae and Freddie Mac are working not on behalf of the
shareholders but on behalf of the taxpayers. Accordingly, they
should be paid like other government employees. I recommend
that all GSE employees be transitioned to the GS pay scale as
soon as possible. This should also include the executive
officers. Quite simply, if FHA can adequately manage its
mortgage risk by paying its employees on the GS scale, then I
see no reason that Fannie Mae and Freddie Mac cannot do the
same.
Credit losses suffered by Fannie Mae and Freddie Mac have,
in some instances, been caused by the violation of
representations and warranties by the originating lender. While
the GSEs have made some efforts to recover losses from the
originating lenders, there is simply not enough public
information to gauge the aggressiveness of these efforts.
Congress should examine in detail the agreements reached
between the GSEs and the banks in regard to loan repurchase and
recovery for losses, both on private-label securities and on
mortgages bought from these lenders by the GSEs.
I believe a GAO audit of these agreements, along with
detailed information by lenders, would help stem some of the
losses.
The TARP directed the President to submit a plan to
Congress for recoupment of any shortfalls experienced under the
TARP. Unfortunately, assistance to the GSEs lacked a similar
requirement. Now is the time to rectify that oversight.
Congress should establish a recoupment fee on all mortgages
purchased by Fannie Mae and Freddie Mac. Such a fee could be
used to directly reduce the deficit and structured to recoup as
much of the losses as possible. I believe a reasonable starting
point would be 1 percentage point per unpaid principal balance
of loans purchased.
It is important to note that the structural flaws in our
mortgage finance system were not limited to Fannie Mae and
Freddie Mac, but also included the treatment of GSE debt within
the bank capital standards. One of the rationales for the
rescue of Fannie Mae and Freddie Mac was the concern over the
impact their failure would have on the rest of the financial
system. I believe we need to change the bank capital standards
away from encouraging the holding of GSE securities over
mortgages. So I believe Congress should direct the regulators
to end this preferential treatment.
Lastly, the bulk of losses suffered by Fannie Mae and
Freddie Mac were the direct result of declines in credit
quality. In order to limit future losses, Fannie Mae and
Freddie Mac should be restricted to the quality of loans they
can purchase. Under current law, Fannie Mae and Freddie Mac
essentially set their own credit standards. Going forward, the
GSEs should be limited to purchasing only those mortgages that
meet the definition of a qualified residential mortgage as will
be determined by regulations promulgated under Dodd-Frank.
Each of these recommendations, as well as others, is
detailed in my written testimony. I again thank the committee
for holding this important hearing and look forward to your
questions.
[The prepared statement of Dr. Calabria can be found on
page 56 of the appendix.]
Chairman Garrett. I thank you for your testimony.
And, Mr. Randazzo, you are recognized for 5 minutes.
I should also add that, without objection, the written
testimony of all of the witnesses will be added to the record
as well.
STATEMENT OF ANTHONY RANDAZZO, DIRECTOR OF ECONOMIC RESEARCH,
REASON FOUNDATION
Mr. Randazzo. Thank you. Chairman Garrett, Ranking Member
Waters, and distinguished members of the subcommittee, thank
you for the opportunity to join you in discussing the important
matter of reforming the Nation's mortgage finance system.
My name is Anthony Randazzo, and I am director of economic
research at Reason Foundation.
It is important at the outset of this debate to frame the
issue properly. Mortgage finance policy and affordable housing
policy are two different things. Whether we should or how we
should subsidize low-income Americans' putting a roof over
their heads must not cloud the analysis and the debate about
the consequences of government policy distorting mortgage
prices for nearly the entire housing market.
That being said, now is the time for major reform of the
government's role in the mortgage finance market. Ideally, a
fully reformed system would have no explicit or implicit
government guarantee for mortgage finance. Such financial
support only subjects taxpayers to high risks and eventual
losses.
Ultimately, the goal of housing finance reform should be to
allow private investors to replace the government, i.e.,
taxpayers, as financers in the housing market while ensuring
that any subsidies remaining in the system are explicit,
direct, narrow, on-budget, and properly accounted for.
Now, realistically, a robust overhaul of the housing
finance sector will take time to accomplish. And in the near
term, there is still a need to protect taxpayers from
additional future losses while ending the ongoing bailout of
the GSEs. The government's role in housing must be reduced, and
private capital must be allowed to return.
The following are 10 ideas that will help achieve these
goals. And while they are focused on addressing short-term
needs, they can also be extended beyond the near term as the
basis for a robust overhaul.
One, lower all conforming loan limits for Fannie Mae and
Freddie Mac by 20 percent by the end of September 2011. A 20
percent reduction would still leave conforming loan limits
above national average and median housing prices. And this
would be a very modest reform to create room for private
lenders and investors to begin re-entering the mortgage market
as Congress debates how to reform the system as a whole.
Two, increasing downpayment requirements for mortgages
backed by government agencies to 20 percent over the next 3
years. This would decrease government, i.e., taxpayer, exposure
to risky mortgages and prevent the government from supporting
mortgages for those without the resources to become a homeowner
right now. Both those who want to prevent future bailouts and
those who are looking to protect consumers from loans that
would hurt them in the future should support this idea. And
Fannie and Freddie should also be prevented from buying or
guaranteeing any loan originated outside the yet-to-be-
established qualified residential mortgage guidelines.
Three, instruct FHFA to begin slowly increasing the
guarantee fee charged by Fannie Mae and Freddie Mac. Over time,
this would increase the cost of doing business with the GSEs
and create room for private capital to be more competitive with
government agencies. And, in the meantime, the GSEs would be
collecting more revenue to put back towards the cost of bailing
them out.
Four, end all affordable housing goals. Again, mortgage
finance policy should not be considered the same as affordable
housing policy. And as I outlined in my written testimony,
while I would argue that we should have no subsidies for
mortgages at all, it is possible that aid for low-income
families can be pursued in more effective ways than affordable
housing goals which distort the entire mortgage market.
Five, raise capital requirements for Fannie and Freddie.
Six, create a legal framework for covered bonds.
Seven, cap expansion of Fannie and Freddie's portfolios at
a certain date and have the Treasury Department buy the
combined portfolio to be run off over time. And having the GSE
portfolios run down on the government's balance sheet would
allow Treasury to take advantage of Uncle Sam's debt funding
advantage and save the taxpayers money.
Eight, p`ut the staffs of Fannie Mae and Freddie Mac on the
Federal pay scale.
Nine, require the Treasury Department to formally approve
new debt issuance by Fannie Mae and Freddie Mac. And this would
help protect taxpayers by providing more accountability and
transparency to the GSEs while their fate is being further
considered.
And, 10, wipe out the remaining stock of Fannie Mae and
Freddie Mac. And it is also critical that mortgage finance
reform be paralleled by FHA reform.
To close, these 10 ideas should not be considered an
adequate fix of Fannie Mae and Freddie Mac or as sufficient to
reform the housing market. They are merely a starting point, a
first step towards a robust overhaul, and should open the door
to further mortgage finance reform discussion.
Thank you for the opportunity to discuss this important
issue with you, and I look forward to answering any questions
you may have.
[The prepared statement of Mr. Randazzo can be found on
page 70 of the appendix.]
Chairman Garrett. I thank you for your testimony.
Mr. Pollock for 5 minutes. Thank you.
STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN
ENTERPRISE INSTITUTE
Mr. Pollock. Thank you, Mr. Chairman, Ranking Member
Waters, and members of the subcommittee.
In the same lead editorial cited by the chairman, The
Washington Post recently wrote about Fannie and Freddie,
``Advertised as a new way to stabilize the housing market, the
government-backed mortgage securitization ended up distorting
and destabilizing the market.'' The Washington Post is
absolutely right about this.
To avoid this distortion and destabilization, we should aim
in the long run for a housing finance sector in which you can
be either a private company or you can be a government agency,
but you can't be both. In other words, in the long run, there
should be no GSEs.
This is consistent with the GSE reform bill introduced by
Congressman Hensarling in the last Congress, and also with the
AEI White Paper recently published by Peter Wallison, Ed Pinto,
and me.
May I just remind us that the old GSE charters meant not
only that Fannie and Freddie had a taxpayer guarantee, but also
that they were granted many privileges and large economic
subsidies. They were highly politicized, exercised duopoly
market power, discriminated against small lenders, and
transferred a portion of their taxpayer subsidies without
appropriation to politically directed housing programs.
They were accurately described as ``masters of Beltway
capitalism.'' Fannie, in particular, was genuinely feared as a
hardball political operator. Fannie and Freddie had especially
low capital ratios because their real capital was known by the
bond market to be the credit card of the U.S. Treasury. We
certainly don't want those GSEs back.
My view is that, in the long run, Fannie and Freddie need
to be restructured into a private company, a government agency
and a liquidating trust, but this can't be done just yet. There
are, nonetheless, a number of focused, specific actions we
could take now consistent with our long-term aim. My written
testimony suggests a dozen of them, and I will touch on a
number of these briefly.
We should enable covered bonds as an alternate long-term
mortgage funding option. A lesson everybody has learned from
the bubble is the importance of whether mortgage lenders retain
``skin in the game'' for mortgage credit. With covered bonds,
the issuing bank has 100 percent skin in the game for their
credit responsibility, and this is a major advantage over the
GSE originate-and-sell model.
Granting perpetual charters to GSEs was a major historical
mistake. We should set a 5-year sunset on Fannie and Freddie's
charters, thus having them expire in 2016. Before then, we will
be ready for their long-term restructuring.
Congress should instruct the GSE regulator to set Fannie
and Freddie's capital requirements at no less than those
applied to national banks for the same assets and the same
risks.
We should mandate the runoff of the GSE's investment
portfolios, both loans and securities. As these assets run off,
GSE unsecured debt will be correspondingly reduced, as will the
complex derivatives activity and portfolios associated with
these assets.
As my colleagues on the panel have recommended, we should
set a regular, predictable reduction in GSE conforming loan
limits.
We should mandate clear Federal budget accounting for
Fannie and Freddie, as proposed in the Accurate Accounting of
Fannie Mae and Freddie Mac bill introduced in 2010.
We should eliminate all GSE affordable housing goals and
transfer such goals to HUD. Public subsidies for affordable
housing and non-market, higher-risk lending should be
explicitly governmental activities. So all affordable housing
goals, assets, and related funding should be ended for the GSEs
and, as appropriate, become the responsibility of the housing
finance operations of the Department of Housing and Urban
Development.
One of the big mistakes made by bank regulation was to
encourage the banking system to increase the systemic risk of
the GSEs. Congressman Pearce previously raised the issue of the
preferred stock of Fannie and Freddie held by banks. It is
essential for us to understand and to correct the risk
interaction between the GSEs and the banking system. This
interaction caused a hyper-leveraging of mortgage risk for the
financial system as a whole, as discussed in my written
testimony.
Something everyone agrees on is the need to provide clear,
simply stated, straightforward key information to prospective
mortgage borrowers. We should mandate that no loan can be
guaranteed by Fannie or Freddie which has not provided the
borrower with the appropriate one-page information form.
And, finally, an outrageous part of the GSE bailout was the
full protection, so far, at the expense of the taxpayers, of
the holders of Fannie and Freddie's subordinated debt. The
investors in this subordinated debt should be put on a path
toward market discipline.
In sum, Mr. Chairman, there is a lot we could do now to
move in the right direction. Thank you again for the
opportunity to share these views.
[The prepared statement of Mr. Pollock can be found on page
63 of the appendix.]
Chairman Garrett. Thank you.
And finally, Ms. Wartell for 5 minutes.
STATEMENT OF SARAH ROSEN WARTELL, EXECUTIVE VICE PRESIDENT,
CENTER FOR AMERICAN PROGRESS ACTION FUND
Ms. Wartell. Thank you very much, Mr. Chairman, and thank
you, Ranking Member Waters, and all of you, for the opportunity
to share my thoughts on reform of housing finance.
We all agree today that we find ourselves in an
unsustainable situation. Government now bears the credit risk
on the bulk of residential mortgage loans, and private capital
must be attracted back into the market to bear as much of the
load as possible in our housing finance system going forward.
That said, our housing policy should have other goals, as
well: decent and affordable housing rental options and
homeownership so that American families have appropriate
choices; access to homeownership for creditworthy borrowers who
are ready to sustain the responsibilities of a mortgage;
equitable and nondiscriminatory access to credit; the
opportunity to rebuild, based on sound and sustainable lending
principles, communities hard hit by the foreclosure crisis; and
a diverse system not dependent on a handful of large financial
institutions, but which includes local institutions that can
meet the needs of the communities they know best.
Those are all part of our goals. Thoughtful evolution, not
overnight revolution, is the best way to reform the housing
finance system, provide stability, and protect the taxpayers.
So let me touch on just three topics that I mention in my
written testimony.
First, there are important conditions that must be in place
if we are going to pull back government support from parts of
the housing market in an attempt to try to crowd in private
capital.
Investors won't return unless the rules of the game are
clear. And given the mess that the private-label securities
market made in the past, we shouldn't want them to. Most will
wait to see what regulators do in implementing the provisions
of the Dodd-Frank Act regarding mortgages. And those who would
delay these regulatory efforts undermine the certainty that
they claim private markets need for investment.
The return of private securitization also requires
restoring confidence in servicing. Investors, as well as
consumers, are deeply frustrated by the servicing standards of
the lenders. A new servicing standard process is just
beginning, and it should be a priority also for those who want
to see private at-risk capital return.
Withdrawing the GSEs from market segments before these
steps, such as through loan-limit increases, risks a shock to
the housing market already struggling from an inventory
overhang and weak employment. We must ensure the private market
is ready to pick up the slack or risk restarting the vicious
cycle of falling home values, a shrinking economy, which would
also leave taxpayer losses for its GSE obligations larger than
is required.
Second, I have concerns that accelerating the liquidation
of the GSE portfolio may be directly counter to the taxpayers'
interest. Asset sales can sometimes yield higher returns, but
it also can allow buyers to benefit from market recoveries,
rather than the taxpayer, who is currently backing the GSEs.
The sales should be dictated by maximizing expected recoveries
and not a mandated schedule of sales.
Finally, a few quick reactions to some of the more radical
privatization proposals that have been advanced about the end-
state. These would take us to unchartered territories--truly
unchartered--because, despite assertions to the contrary, no
developed country has a purely private housing finance market
without some government support in one form or the other.
Moody's Mark Zandi made this point in a paper that he released
this week, as well.
The oft-cited Canadian market has significant government
insurance and support. In any event that purely private
intermediaries were able to finance all of the U.S. mortgage
market debt, their obligations would surely be considered
systemically important, given the high degree of concentration
in U.S. mortgage activity in a few financial institutions.
So instead of a private system, we might create a new set
of implicit but unmonitored and unpriced government
guarantees--exactly the opposite of the solution that any of us
seek.
These problems would be exacerbated if we relied entirely
on the covered bond model. While a useful product as a
replacement for a mortgage finance system, covered bonds
encourage the dominance of a few institutions, which receive
the benefit of implicit government guarantees in Europe. I talk
a little bit more about this in my written statement.
While these privatization schemes are unlikely to protect
the taxpayers and avoid moral hazard, they would result in some
stark consequences for American households. The availability of
mortgage finance would be sharply reduced, and middle-income
households would be shut out of homeownership. To the extent
that mortgage finance remained available for working
households, it would be directed into loans of shorter
durations, higher costs, and very high downpayments. Products
that help families fix their housing costs over time like the
long-term, fixed-rate mortgage would not be available at prices
affordable to most families.
Lack of long-term private finance would reduce the
availability and raise the costs of rental housing, even as
constrained homeownership access would create greater demand
for rental units and upward pressure on rents.
Finally, fewer families would have access to the forced
savings that homeownership represents and the opportunity for
economic mobility that is the American dream. After the sorry
consequences of private-market innovation over the previous
decade, we should think carefully before going down that path
again, leaving American families who have already suffered the
worst economy in our lifetime to once again pay the price.
Thank you.
[The prepared statement of Ms. Wartell can be found on page
86 of the appendix.]
Chairman Garrett. Thank you.
This is very interesting, so I will begin with the
questioning for 5 minutes. Mr. Pollock, you use the expression
in your written testimony about double leveraging of the GSEs
by the banking system.
Could you give me just briefly, in about a minute or less,
a little more detail on this and discuss what steps? You sort
of touched on how we could curtail that double leveraging.
Mr. Pollock. Yes. Thank you, Mr. Chairman.
As I mentioned, the interaction between the way that
lending money and investing in the GSEs was encouraged by
regulation in the banking system and the GSEs themselves
resulted in double leverage or hyper-leverage. One example is
with preferred stock. A large amount of the capital of the GSEs
was in the form of preferred stock. Preferred stock could get
leveraged 60 to 1, 60 in debt to 1 in stock by the GSEs.
Among the biggest buyers of the preferred stock, and
encouraged by regulation, were commercial banks. And the banks
themselves owned that stock on a leveraged basis, or a margin
basis, with a risk-based capital requirement of only 20 percent
risk weighting, which is equivalent to 1.6 percent capital. In
other words, they owned the equity of the GSEs on a 98 percent
margined basis, like buying stock on 98 percent margin.
So if you combine the banking system with the GSEs and
think about that as a total system, there was virtually no real
equity. You had a leverage of 60 squared, or over 3,000 to 1.
That thinking about the interaction between the banks and the
GSEs is, I think, critical. I will just mention quickly, if I
may, that banks were also encouraged to hold GSE debt and
mortgage-backed securities without limit, so that you got over-
concentration in GSE risk by the banks.
Chairman Garrett. Thank you.
And Ms. Wartell, right now we are trying to take actions.
What can we do today? Looking at the GSEs today, they are in
conservatorship, lots of money going out the door. A couple of
things are going to be coming up. The FHFA is soon to announce
that executive compensation is going to be due with the
executives of Fannie and Freddie.
What is your position on exec compensation packages that we
have seen over there? Should the taxpayer basically be funding
these quite high compensation packages in your view?
Ms. Wartell. I think what is important for the GSEs is that
because they do represent a significant contingent liability,
potential liability for the taxpayers, it is very important
that they be able to continue to attract the talent to manage
their obligations. And I do in their current situation believe
that it is difficult for them--they are seeing a great deal of
runoff already of their senior leadership into private
institutions--and the ability to attract people, for example,
to manage servicing and retain assets. So I don't have a
position particularly on the current compensation packages. I
understand the difficulty that they present. I also think it is
really important that we don't let them lose talent to manage
and protect the taxpayers' ultimate outcomes.
Chairman Garrett. We have to be careful of that because
over at Ginnie Mae and FHA, they are having to deal with the
same problems over there, and they are not getting the same
compensation package. So we may be getting a call for giving
them bonuses if we are not willing do it here.
Let me just ask you one other question. With them in
conservatorship right now, is now a good time to address the
issue or have them issuing affordable housing goals? Do you
think that should be something they should be doing right now?
Ms. Wartell. I think what is important, and what we would
suggest for both the near term and the long term, is that the
secondary market serve what the primary market is doing.
Chairman Garrett. How much is the near term? Because I am
looking at what we could do for them.
Ms. Wartell. In the near term, the affordable housing
goals, as written in the statute that the conservator is now
still implementing, require the GSEs to lead the market. The
rulemaking by the Bush Administration that really forced them
to stretch out ahead of the market is where I think the goals
really got out of bounds. Requiring the secondary market to
continue to serve the primary market, the loans that lenders
are making, and not cherry-pick those loans so that we end up
with communities without access to capital, communities that
are effectively credit deserts, seems to me an important
ongoing obligation. We just don't want to make them stretch in
ways that have them make unsafe loans.
Chairman Garrett. Okay. And in my 30 seconds' time, because
someone is trying to keep the time here, Mr. Randazzo, Mr.
Calabria, you both discussed variations of how to treat their
outstanding debt.
Mr. Randazzo, could you expound on your idea to bring that
debt online with the Treasury and Treasury's balance sheet, and
the potential taxpayers' savings there? Have you had any
discussions, I should say, also with Treasury on this as well?
Mr. Randazzo. You are speaking specifically to how to bring
the debt of the GSEs in line?
Chairman Garrett. Right. And onto the Treasury's balance
sheet, and then the tax savings that results there--in 15
seconds.
Mr. Randazzo. Sure. In short, the GSEs, because they are
not technically government agencies right now, pay more to
issue debt than the Treasury Department does. By bringing those
portfolios onto the Treasury's debt, you would have roughly 25
basis points cheaper borrowing when you reissue short-term
debt. And given that over the next year, about 40 percent of
their debt is going to come up for renewal, that has potential
savings of anywhere between $4 billion and $12 billion for
taxpayers just by having those portfolios run off on the
Treasury's balance sheet as opposed to in a separate holding
company.
Chairman Garrett. My time has expired. Ms. Waters for 5
minutes.
Ms. Waters. Thank you very much. Let me direct my first
question to, I believe, Mr. Pollock, of American Enterprise
Institute. Could there be a 30-year fixed-rate mortgage product
available on the market for the median-income family without
any government involvement in the housing finance system? If
so, how many basis points more expensive would it be compared
to what borrowers pay now?
Mr. Pollock. Congresswoman, there could certainly be one
and would certainly be one. I guess it would be somewhat more
expensive. I doubt that it would be very much more expensive.
It is hard to say until we run the market experiment, of
course. But that it would be available, I think is beyond
doubt.
Ms. Waters. I would like to ask Ms. Wartell that same
question.
Ms. Wartell. I agree that it would probably be available.
But I disagree that it would be available at a rate that would
be competitive in the marketplace and that would be able to
attract middle-income families. I think the reality is with the
economic uncertainty people have, they are not going to pay one
dime more than they can for their housing costs. And the
reality is that we are adding economic volatility into the
system by moving people to adjustable rate mortgages, as we saw
during the crisis. And you are also I think putting limitations
on central bank regulators' capacity to manage interest rates
if we know that so many families' housing costs will vary up
and down with adjustable rate mortgages.
Ms. Waters. Mr. Calabria, what do you make of the fact that
William Gross, the co-founder and managing director of the
investment firm Pimco, has said his funds wouldn't buy pools of
private label mortgages unless homeowners made a downpayment of
at least 30 percent? I know that as an investor, he is not
exactly an impartial party. He has an interest in there being a
government guarantee. Do you think he is bluffing, or do you
think his statement is an accurate picture of what investment
firms would actually do?
Mr. Calabria. I think he is doing what they call on Wall
Street ``talking your book.'' As you mention, Pimco is a very
large holder of GSE securities. Were a government guarantee to
end, his book of business would take a very large loss. I can't
blame him for trying to protect that. I think his statement as
to the effect of 3 percentage points strikes me as absolutely
ridiculous. I think that is outside of the realm of reason.
We don't see that kind of difference between--I think a
more reasonable--I will be willing to guess, where Alex would
not, and put an estimate, which is, I think, if we were to move
our conforming mortgage market to resemble our jumbo mortgage
market, we would see interest rates increase somewhere on the
range of 30 to 40 basis points at most, which I will note is
not large enough to impact the homeownership rate. And while
that might make mortgages more affordable, I think a constant
theme that we need to keep in mind is that homeowners are also
taxpayers. So taking a dollar out of one pocket just to put 90
cents back in the other does not make someone better off, and
we need to look at the whole picture.
Ms. Waters. Thank you very much.
Mr. Randazzo, I don't know if your expertise extends to
servicing. But given all of the expertise we have had over the
past year or so in housing finance, can you explain why we are
seeing a breakdown in the mortgage servicing industry? Today,
the Veterans Affairs Committee is holding a hearing on improper
military foreclosures by JPMorgan Chase. Do we need national
standards for mortgage servicing? If so, what should be
included in these standards?
Mr. Randazzo. Thank you for the question. I will say my
expertise is not mainly focused in the servicing market. I
would say that there are a number of outside factors that have
impacted the way that banks have put together their own
specific servicing standards. Without the right incentives for
private companies to track their risk, things can get out of
whack. And I think that has happened with a lot of these
companies.
I don't know that national servicing standards are
necessarily needed. But as long as there are misaligned
incentives in the marketplace, it would be natural that that
would be the route to go. I would say that--
Ms. Waters. Ms. Wartell, on the same issue of servicers,
there is a big problem--robo signing, all of this we are coming
up with. What happened? Do we need national standards?
Ms. Wartell. I think we absolutely need it, not only
because consumers don't have the ability to be dealt with
fairly, but also because investors need to know how servicers
are going to act and whether they are going to have an
incentive to act in the investors' best interests in trying to
maximize returns in the mortgage. And they are, I think,
without that confidence today. There are multiple ways of
getting to an effective set of best practices that are applied
across the entire market, either voluntarily or through
legislation. But if we don't see it happen voluntarily, then it
needs to happen in another way.
Ms. Waters. Anyone else on servicing? Yes, Mr. Calabria?
Mr. Calabria. I will make a comment and show that there are
certainly some issues on which Sarah and I agree. And I think,
given that the taxpayer is on the hook for much of the
servicing industry, there certainly is a national interest. I
would say the place to start is certainly with Freddie and
Fannie's book. They have a large amount that they are
servicing. So there is definitely a Federal interest. There is
definitely a reason do this. The details will differ, but I do
think it is something worth looking at.
Ms. Waters. Thank you. I yield back.
Chairman Garrett. Thank you. The gentleman from New Mexico,
Mr. Pearce, for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
I think I would go to Mr. Randazzo first. When we consider
the preferred stocks that were basically allowed to not be
exercised, do you know what the process was in which these were
suspended? The banks were being encouraged to buy the stock;
isn't that correct? Do you know anything about that? Do you
know anything about the process?
Mr. Randazzo. In 2008, when the--
Mr. Pearce. Yes. In other words, prior to the government
taking conservatorship, banks were encouraged to buy these--if
it is not something you are familiar with, you can yield to Mr.
Pollock. I think he might have--
Mr. Randazzo. I think Mr. Pollock and Mr. Calabria could
speak more to this.
Mr. Pearce. Okay.
Mr. Pollock. Thanks, Congressman. I would be glad to
address that.
By the regulatory capital treatment, banks were certainly
given an incentive to own this equity on a highly leveraged
basis. And when the GSEs were put into conservatorship, the
dividends on the preferred stock were suspended. That strikes
me as an appropriate thing to do under the circumstances. But
the valuation then of the stocks, looking forward to how much
could be recovered ever, of course, was extremely low. And the
write-offs were very high. It troubled many banks and it put
several banks into failure.
The fault, as I see it, is the design of the system in the
beginning, which encouraged the banking system running on what
you might think of as double-dipping of the government
guarantee. That is to say, you took government-guaranteed
deposits and used them to leverage investments in equity of the
GSE. That, in my view, was a big mistake.
Mr. Pearce. The term ``preferred stock'' means basically
just that. Were there lower-level creditors who were given
their value while preferred stockholders lost theirs?
Mr. Pollock. No. There were common shareholders, of course.
There still are legally common shareholders who saw the price
of their stock go down more than 99 percent to pennies on a
share. Then you have the preferred. Above the preferred you
have the subordinated debt, which I mentioned in my testimony,
which has been protected. And that is something I believe we
need to fix going forward; that the subordinated debt holders
should share in the realization of the risks which they
knowingly undertook by buying subordinated debt.
Mr. Pearce. Ms. Wartell, you mentioned on page 17 that we
need to bring people and families and home back into the
conversation about housing finance reform. Would you kind of
elaborate on that? In other words, when I hear that--I am not
saying that everybody who took out a subprime mortgage knew
that they could never pay a payment on it and they were being
encouraged into it, but also they were willing participants. So
when I hear that, I kind of hear that we need some personal
accountability and responsibility.
Is that what you intended in your comment, or did you have
a different direction? I would like for you to expand on that
just a bit.
Ms. Wartell. Sure. That was not what I intended by my
comment, but I certainly agree with that.
Mr. Pearce. You would agree with it?
Ms. Wartell. I certainly agree that individuals who take
out loans should have the ability to repay them. And I think we
have a responsibility as individuals and as a society to ensure
that lenders are making loans available to people who have the
ability to repay them. Some of them were lured or tricked
through predatory practices into taking on obligations they
didn't have the capacity to pay, and others were simply part of
a crowd that--kind of a crazy frenzy.
But what I had in mind by my comment was that I think there
are serious economic consequences for American families if we
don't care about the stability of the housing market and the
role that the housing market plays in creating economic
opportunity and mobility for families.
Mr. Pearce. Okay. That is fair enough, as long as we take
both sides of the equation. I mean that seems reasonable
enough.
Mr. Calabria, you mentioned on page, I think it is 3, that
you do not think there is much--that we have experienced most
of the risk in the financial sector; that if we start bringing
accountability in the system, there is not much downside risk.
Am I reading that correctly?
Mr. Calabria. For starters, yes, I believe we are past the
point where you could say we are in a financial panic. And my
point about I think it is time to consider start imposing
losses on creditors. Now, the concern about, I think during the
crisis the Treasury had, was there would be a run in these
markets. And of course the bazooka that Secretary Paulson was
given to back up Freddie and Fannie was to calm those markets
and provide liquidity. We are past that point.
We are at a point where I think we can start thinking about
where should we allocate the losses. And in my opinion, they
should be allocated on creditors. I do believe that creditors
can bear those losses. As I indicated in my testimony, I think
creditors would get at least 94, 95 cents on the dollar, which
if the Chinese central bank is not happy with that, they can go
invest somewhere else in my opinion.
Mr. Pearce. So all the instruments of risk, the MBS, CDOs,
whatever you are talking about, you are saying that a large
percent now resides in the U.S. Government to where there is
not much left out there. We have bought most of the bad assets.
Is that right?
Mr. Calabria. There are still a number of bad assets. The
concern is really if you start with the observation that 80
percent of the funding for Freddie and Fannie comes from the
rest of the U.S. financial services system, so about a trillion
of that, a little more than a trillion, trillion and a half of
that is in the commercial banking system, so we do need to be
concerned that if you impose losses such as were imposed on the
preferred shares, what would happen to the banking system.
Now, the FDIC has looked at this. And the number of banks
that would actually fail is quite small. You have other things.
The money market mutual fund system holds about a trillion in
unsecured debt. We have to remember the priorities would be
preferred shareholders get hit, subordinated debt would
essentially get wiped out, and the unsecured debt would take a
significant haircut. The MBS would largely, in my opinion, be
whole. That would pose significant risk I think to the money
market mutual fund. You would see dozens probably break the
buck.
We still at post-crisis do not have a solution, in my
opinion, into the issue of money market mutual funds, even
post-reserves primary. So I think that issue needs to be
directly addressed, but I think we can allocate those losses.
Mr. Pearce. Thank you, Mr. Chairman.
Chairman Garrett. Thank you. The gentleman from
Massachusetts for 5 minutes.
Mr. Frank. Thank you, Mr. Chairman.
I would like to ask all the witnesses if they have views on
H.R. 4889. That is the comprehensive bill for phasing out and
reforming and then phasing out Fannie Mae and Freddie Mac. It
was introduced by the gentleman from Texas, Mr. Hensarling,
about a year ago. It has been offered on the Floor in the
committee. And again, I had assumed that from what I had heard
my Republican colleagues say, that they were ready to deal with
legislation. They had a fairly well-developed bill. It is been
reintroduced this year, I understand, as part of the Republican
Study Committee package.
So I am wondering, the Majority having invited these
witnesses, if they called your attention to H.R. 4889, to
establish a term certain for the conservatorships of Fannie Mae
and Freddie Mac, to provide conditions for continued operation
and the wind-down, etc.; do any of the witnesses have views on
this?
Mr. Calabria. I will preface by saying I haven't read the
bill, but I understand--
Mr. Frank. You haven't read it?
Mr. Calabria. I haven't read the bill.
Mr. Frank. Were you asked when the Majority invited you on
this topic? Did they call your attention to the bill?
Mr. Calabria. I was not asked.
Mr. Frank. Next. Did they ask you to read the bill and give
your opinions on it?
Mr. Randazzo. I have read the bill. And I read the bill
when it was introduced last year. I think that it is a good
basis for where we need to go in terms of comprehensive reform.
I think that it is going to be difficult to get that specific
piece of legislation passed through both Houses of Congress
immediately, and so this hearing does have some value.
Mr. Frank. Okay. But let me ask you--I appreciate your view
on the strategy. It sounds like you not only read the bill, but
might even have been involved in it. You say it would be
difficult. But do you think, would you urge us to pass this
bill right now? The Majority controls the House. So would you
urge that this 4889 be passed right now?
Mr. Randazzo. I would not urge that the bill as it is
currently written be passed.
Mr. Frank. Why not?
Mr. Randazzo. I think that there are certain things that
can be adjusted. I think that there needs to be a more
comprehensive approach. I think that--
Mr. Frank. Can you tell me specifically? You obviously are
familiar with this. Again, we were asked to pass it. If the
Majority had its way, it would have been part of the financial
reform law as is. But since they didn't have their way, we have
a chance.
What changes would you make in this bill? You say it is a
good general framework but not ready to be passed. What changes
would you recommend in it? Because I like to think in
legislative terms.
Mr. Randazzo. I think the biggest thing that can be added
to the bill, or can be an additional piece of legislation, is
reform for rules with FHA. If we were to lower conforming loan
limits by 20 percent over, say, 5 years--
Mr. Frank. I appreciate that. But that is the FHA. With
regard to Fannie and Freddie, do you think it is ready to be
passed now with regard to Fannie Mae and Freddie Mac?
Mr. Randazzo. I think that the principal underlying issue
of beginning a process of winding down Fannie Mae and Freddie
Mac through all of the different pieces that are in there
should be pursued.
Mr. Frank. Okay. But that is not what I asked you. I
appreciate that. Again, we were told, we were criticized for
not passing this into law. And I just wonder why, if that was
something that we should have done last year, the Majority
wouldn't do it now. So we can't vote on--we don't vote on
general principles here, we vote on legislation.
Would you recommend that with regard--you said separate
stuff on FHA. I understand that. I hope we will get to that. We
have some pending--in fact, Ms. Capito and Ms. Waters, they
came to some good agreements on FHA. I hope we will pass the
rest of that. So I agree with that.
But with regard to Fannie Mae and Freddie Mac, do you think
the bill as it now stands is ready to be passed? And if not,
what changes would you recommend?
Mr. Randazzo. Once again, I think that there are pieces and
minutia that maybe we don't want to spend 5 minutes to an hour
going through and nitpicking.
Mr. Frank. Be my guest. I have nothing else to do this
afternoon. There are no more votes. I appreciate your concern
for my time.
Mr. Randazzo. I was not a part of putting the bill
together, so that I have a particular way that I think would be
best to--
Mr. Frank. So you would not recommend that we pass this
bill, as is, with regard to Fannie and Freddie?
Mr. Randazzo. I would say not immediately. I think that
there are some things that can be changed. It is a good base.
Mr. Frank. Thank you. Mr. Pollock?
Mr. Pollock. Congressman, I did read the bill when it was
introduced. I supported it then. As I said in my testimony, all
of the points in my testimony are consistent with Congressman
Hensarling's bill. And when reintroduced, I will support it.
Mr. Frank. It has been reintroduced. Would you urge the
committee then to just have a markup and vote on it fairly
soon?
Mr. Pollock. I think that would be a good idea.
Mr. Frank. Okay. Thank you. Mr. Hensarling is back in
minority status on the panel of his invitees. It is one to two.
But one out of three I suppose ain't bad.
Let me just--one other thing to say, and I do appreciate
the point that was made about separating mortgages and
affordable housing. And in my case, in my view what we ought to
be doing is affordable rental housing primarily. The great
mistake, I have consistently felt, was pushing people into
homeownership when they weren't ready. So I appreciate that
separation. And I hope as we go forward, what I would hope
would be we would find a way to get a revenue stream for
affordable rental housing and separate that out from the
decisions made on mortgages.
So I appreciate that separation. Thank you, Mr. Chairman.
Chairman Garrett. And I appreciate those comments. Now for
the rest of the story, the gentleman from Texas.
Mr. Hensarling. Thank you, Mr. Chairman. And I certainly am
fascinated by the ranking member's fascination with my
particular bill. I would wonder where the fascination was when
he was committee chairman. He certainly had the ability to give
a vote on the bill. I think I heard the gentleman say the bill
has been reintroduced. As the author of the bill, I can say it
has not been reintroduced. As with many pieces of legislation,
it is being refined through the process. I do intend to
reintroduce the bill. It will be quite similar to the one that
was introduced in the last Congress. But at least, there will
be a bill.
I recall on September 29th, during a full committee
hearing, where the now-ranking member, then-chairman, told us
that he was disappointed that we were not dealing with, quote,
a piece of legislation, but there is no point in rushing that
pace. It is not going to be possible now, I know, until
November when we come back, because we lost 7 days. Apparently,
we are now in the process of losing 133 days. I don't think I
have seen the gentleman from Massachusetts introduce the bill
that was committed in September.
Mr. Frank. Would the gentleman yield?
Mr. Hensarling. I would yield to the gentleman from
Massachusetts.
Mr. Frank. The gentleman is not accurately representing me.
I was not for passing it. I agreed with that. The gentleman
said it needs to be refined. You know how important refinement
is to me. I wouldn't have wanted to pass something that was
unrefined.
Mr. Hensarling. Reclaiming my time for one point, did the
gentleman make a commitment that he was going to introduce
legislation in the last Congress or have I been given an
incorrect record?
Mr. Frank. I thank the gentleman for yielding.
Chairman Garrett. It is the gentleman from Texas's time.
Mr. Frank. I thank the gentleman. I would ask unanimous
consent that the gentleman have an additional minute since I
have taken his time, Mr. Chairman.
I would just say after the election, when control changed
hands, it didn't seem to me that there would be any chance of
getting that done in the lame duck session. So I just want to
say, no, I was not for passing this bill last year. I was being
criticized for not being for passing it last year. And I am
very sensitive, so I was just glad to have some support for my
position for last year from your witnesses from this year.
Mr. Hensarling. Reclaiming my time, I am not sure I heard
the answer on where the gentleman from Massachusetts' bill is.
Mr. Frank. Would the gentleman yield 30 seconds? The answer
is, I have not filed one because it is not my expectation that
the Majority would pay any attention to it. And if I wanted to
do academic exercises, I would go back to school.
Mr. Hensarling. Reclaiming my time, I appreciate that
sentiment. I would note again, the gentleman certainly had time
on his shift to introduce a bill before the House switched.
Let me take time now to speak to the members of the panel.
I think I heard Mr. Randazzo--maybe it was in your testimony, I
am not sure. Let me ask the question this way. Do any of you
believe, as we know what has happened to home price values, we
know about the cratering, you can look at the Case-Schiller
index, did Fannie and Freddie play a role in the housing
bubble, in the housing price inflation? Mr. Pollock, do you
agree with that?
Mr. Pollock. Without question, they played a significant
role in inflating housing prices, inflating the bubble, and
therefore in making the collapse worse.
Mr. Hensarling. Do others agree? Perhaps just a show of
hands. At least, I see two nodding heads with Mr. Calabria and
Mr. Randazzo. I don't know about Ms. Wartell.
Ms. Wartell. Only a very small and--
Mr. Hensarling. Okay. All the panelists agree that Fannie
and Freddie played some role in price inflation. So when I
write out my mortgage check each month, I have principal, I
have interest. In the studies that I have seen, the GSEs may
have helped on the interest side anywhere from 7 basis points
to 30 basis points. Now, granted, I think the 7 basis points is
a several-year-old study from the Federal Reserve. I have seen
a number of academic studies. I don't know, maybe the median is
15 basis points, 20, I don't know. So they helped me on the one
hand by, say, a median of 15 basis points; but on the other
hand, is my principal perhaps not higher because of the
artificial demand? Meaning at the end of the day, as a
consumer, was I really better off? Can we make the case? Can we
make the case that I was better off? We know the taxpayer
wasn't better off. So Mr. Calabria, do you have a comment?
Mr. Calabria. To start with, the outcome of any price is
clearly the interaction of supply and demand. And what you are
referring to are the demand factors. So my answer would be it
really depends on the housing market. I think in housing
markets with relatively tight supply, places like California,
you ended up running up the house price. The seller was better
off in those instances.
Mr. Hensarling. So the consumer, maybe he benefited, maybe
he didn't benefit. We know the taxpayer did not benefit. We
have heard some discussion of the fact, or some have made the
assertion that there would no longer be a 30-year fixed-rate
mortgage in America without Fannie and Freddie. Yet were there
not 30-year fixed-rate mortgages in subprime? Were there not
30-year fixed-rate mortgages in jumbo? You gentlemen and lady
have researched the market. Am I correct in that assertion?
Mr. Pollock. You are correct, there were 30-year, fixed-
rate mortgages without Fannie and Freddie in the parts of the
market where they don't exist.
Mr. Hensarling. So they have existed in America in parts of
the market where Fannie and Freddie didn't exist. Isn't it also
true, perhaps not common, but in OECD nations in Europe you can
also find 30-year fixed? At least I think in Sweden and
Denmark? I have tripped across a few other countries. Is it
also true you can find examples of 30-year fixed overseas?
Mr. Pollock. You certainly find it in Denmark.
Ms. Wartell. I think Denmark.
Mr. Hensarling. I see my time has expired. I thank the
chairman.
Chairman Garrett. I thank the gentleman from Texas. The
gentleman from California for 5 minutes.
Mr. Sherman. Just responding to the gentleman from Texas, I
think 3 to 30 basis points is absurd. The fact is that if you
try to get a loan today that barely qualifies, and then you
say, what is a loan going to cost that Fannie and Freddie won't
touch because it is a little over that amount, the difference
is hundreds of basis points, if it is available at all.
The fact is that we would see a collapse in home prices if
it wasn't for Fannie and Freddie. And that means a collapse of
our economy. We already had one mortgage/home value collapse of
our economy. I am not looking for a second. And to say that in
2012, non-GSE financing is going to be just as available as it
was in 2002 assumes that all the lenders have been asleep with
Rip Van Winkle over the last decade. The fact is almost nobody
is willing to lend money to middle-class home buyers except if
it qualifies for Fannie, Freddie, or FHA.
The banks are not lending now because the future of
mortgage financing is uncertain. Home buyers need a reliable
flow of mortgage financing. GSE reform is needed. But
eliminating all Federal involvement would harm this economic
recovery, put the housing market at risk, and put the economy
at risk.
Today, private capital is nonexistent outside the GSE
mortgage financing limits. And to assume that it will suddenly
become available if we eliminate the GSEs because everybody
will go back and do what they did in 2005 assumes a level of
amnesia among investors that I don't see.
What we don't need is a precipitous decline in housing
prices. That is how we got the first dip. That would give us a
second, or double-dip recession, if not a depression. And it is
particularly important in regions like mine, where middle-class
homes go for $600,000 to $800,000. Certainly, all the upper
middle-class homes do. And without GSE financing, you would see
not only a collapse of home values, but a collapse of the local
economy.
Ms. Wartell, under Dodd-Frank, when defining a qualified
residential mortgage which is exempt from the Act's risk
retention requirements, regulators must take into account
consideration, underwriting criteria that historically
indicates a lower profile of risk and default such as mortgage
insurance. To the extent that such insurance reduces the risk
of default, the data seems clear that loans with PMI have lower
default rates.
Do you agree that mortgages should not have to meet the
risk retention requirements in Dodd-Frank as long as they meet
other underwriting criteria and PMI is also part of the loan?
Ms. Wartell. Congressman, I want to be careful not to speak
to the precise regulatory question today. And if I could send
you written comments on this, because I don't have all the
details in front of me. But I would agree with your general
proposition that there are many ways to ensure that the
borrower has adequate equity to protect the investors. And PMI
is certainly one of the ways to do that.
Mr. Sherman. Okay. We have Bill Gross, the co-founder of
Pimco, saying that without a government guarantee, if he was
going to invest in mortgages, he would demand a 30 percent
downpayment. There are proposals to go for a 20 percent
downpayment. Wouldn't such a requirement push more business to
FHA, further constraining that agency's resources? And wouldn't
it have a dramatic impact on the ability of the average family
to buy a home in many regions of the country?
Ms. Wartell. Yes. I completely agree with you. And to your
FHA point, I think it is important to understand that in the
case of the GSEs when they were functioning, or some future
system, it is possible to put private capital at risk ahead of
the taxpayer. In FHA, we do not have that. So when you shift
market to FHA by imposing high downpayment requirements like
that, you actually are having the taxpayer stand at a much more
extensive risk position than they would otherwise.
Mr. Sherman. So it is worse for home buyers, worse for home
sellers, worse for communities, and worse for the taxpayer.
Ms. Wartell. And unnecessary for us to take risks that the
private sector could take on their own.
Mr. Sherman. I yield back.
Chairman Garrett. All right. Thank you. The gentleman from
California, Mr. Royce.
Mr. Royce. Thank you. I think one of the vexing things for
us is that the Federal Reserve has come to us in the past with
concerns about the model that we have set up, especially since
1992, the GSE Act that passed the Congress here. Under that
model, they were able to dive into the junk mortgage market,
and they purchased over $1 trillion worth. They wracked up
leverage of 100 to 1. Part of the concern here is that once you
establish a GSE, you have established a huge quasi-governmental
monopoly that comes in and lobbies the Members.
So the Fed came to us, they asked us to take some action in
the Congress. I offered an amendment, endorsed by the Fed, that
would authorize the regulator to rein in Fannie and Freddie on
these mortgage portfolios based on the systemic risk that they
posed. That was opposed by Fannie and Freddie, and of course it
was defeated, as was Jim Leach's amendment.
Jim Leach, the former chairman of this committee, offered
an amendment to strengthen the minimum capital requirements for
Fannie and Freddie. And Ron Paul offered an amendment to
eliminate the ability of Fannie and Freddie to borrow from the
Treasury. Any one of these the Fed recognized would have helped
the situation.
But once we create these entities, they come in, they lobby
against those kinds of reforms. And indeed, the only reform we
ever passed out of the House is one that was opposed by the
Treasury and the Fed. Why? Because it made the situation worse.
It tied the hands of the regulators even more.
So here is the problem. We now have the president of the
Richmond Federal Reserve--and Mr. Calabria, I will ask you
about this--he comes to us and he says, ``We should phase out
government guarantees for home mortgage debt.'' Clearly, he
doesn't mean tomorrow. He means phasing it out over a long
period of time in order to make sure that we bring private
capital back into the market. And he says otherwise, financial
stability will be elusive, and fiscal balance will be
threatened by repeated boom-bust cycles in housing.
I was going to ask you, do you think government guarantees
on mortgages exacerbate or mitigate the boom-bust cycle that we
have experienced in the market?
Mr. Calabria. I would 100 percent agree with the remarks of
President Lacker. I think that our current system of mortgage
finance is procyclical rather than countercyclical. And I think
the point that you make, and I say this from having spent 7
years working on staff in the other body, I think any system we
set up will erode over time. The reality is there will be
another housing boom at some point in the future. We will all
again think that housing is the best thing since sliced bread,
and we will want to get everybody in, and we will push
underwriting standards again down. It has happened time and
time again. So I would 100 percent agree with that.
While you could design a system today that, if it just
stayed that way, might reduce the risk, I have very little
confidence that it would stay that way over time.
Mr. Royce. Let me ask you another question. In your
testimony, you call for shifting the FHFA from conservator to
receiver for the GSEs. Right?
Mr. Calabria. Yes.
Mr. Royce. And I think among the points that you make, your
argument is that it could be an instrumental step in combating
the perception that other entities out there are ``too-big-to-
fail.'' I know some think we have solved the ``too-big-to-
fail'' problem with the legislation passed last year, but a lot
of economists think otherwise. And I would ask you to expand on
that point and maybe explain to us how that transition process
might occur, how you would envision us getting from point A to
point B.
Mr. Calabria. Sure. Let me start with a broader point about
``too-big-to-fail.'' We have to recall that essentially every
financial institution, whether it is Fannie Mae or Citibank, is
primarily funded with debt. Ninety percent-plus of their
funding is debt. And so it is all good and well to fire
management and wipe out shareholders, but you will not have
sufficient market discipline in that absence.
So to me, to end ``too-big-to-fail,'' again whether it is
Citi or whether it is Fannie, you have to set up a process
where creditors take haircuts. And I think because we have not
done that, and because in the last crisis under this
Administration and the last Administration, the proposal was
always to protect creditors, I think that has been a mistake.
While you can argue maybe in a panic, I think going forward
post-panic creditors need to take losses. And why? That is
because as companies begin to take risk, whether it is
incompetent management, whether it is a business strategy,
those who provide funding will raise the cost of that funding
and constrain them. I was always puzzled, working on GSE
issues, that the more debt Fannie and Freddie issued, the lower
their funding costs were. It is certainly contrary to--
Mr. Royce. The bigger the share of the market they would
take--
Mr. Calabria. Exactly.
Mr. Royce. And I would argue--during the conference, I
actually had an amendment to sort of guarantee a larger
haircut. That was defeated in the markup in the conference
committee. I think we need to revisit that issue on the ``too-
big-to-fail'' front.
Thank you, Mr. Chairman. I yield back.
Chairman Garrett. I thank the gentleman from California.
The gentleman from North Carolina, Mr. Miller, please, for 5
minutes.
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
There is no doubt that we would not have much of a mortgage
market now without Fannie and Freddie. They are buying, the
vast, vast majority, well more than 90 percent of mortgages.
Five years ago, they certainly were not in a duopoly position.
In fact, they were rapidly losing market share.
What the three of you seem to imply is that the reason
their market share is now so enormous is that they are crowding
out the private securitization market somehow. I have talked to
mortgage investors, and they don't say that at all. The pension
funds, the insurance companies that bought the private-label
mortgage-backed securities 5 years ago, say there is no way
they are going to buy that stuff again unless there is a
serious reform of the private securitization market. They are
not going to buy mortgages based on a AAA rating from a rating
agency. Unless there is the kind of disclosure that an investor
in a new stock issue gets, so they can actually do due
diligence themselves and figure out what they are buying, they
are not touching that stuff again.
Do any of you have any basis, any evidence for the idea
that the private-label securitization market is going to come
back without reforms if we simply hobble Freddie and Fannie,
limit what they can do, but don't reform the private-label
securitization market?
Mr. Calabria. If I could touch on this, and this might be
where I differ from some of my colleagues, while I would like
to see the private securitization market come back, I don't
think that should be the ultimate objective. The vast majority
of mortgage lending in this country can be funded by a
portfolio of various financial services institutions, whether
it is banks or insurance companies. And it is important to keep
in mind, as I mentioned earlier, 80 percent of the funding for
Freddie and Fannie--so when people ask me, if Freddie and
Fannie aren't going to fund it, who is? The parties that fund
Freddie and Fannie. If the banking system can hold a trillion
and a half in Freddie and Fannie securities, then the banking
system can certainly hold a trillion and a half in mortgages.
So it is just moving it around from different institutions.
Are there problems with those other institutions? Absolutely.
And we should address those problems. But I don't think our
objective should simply be let's bring back the private
securitization. I think it should be how do we set up a system
that has substantially more capital? And it is important to
remember the very existence of Freddie and Fannie is to a large
degree a capital arbitrage, it is a massive subsidy for
lenders.
Mr. Miller of North Carolina. My understanding is about
half of all lending 5 years ago was the securitization market.
And you are saying if we simply let that go away, it would be
replaced by portfolio mortgages.
Mr. Calabria. First, we need to remember that in 2005,
2006, 40 percent of private-label mortgage-backed securities
were bought by Freddie and Fannie. So if you add what they
bought, what they originated, they maintained a majority of the
market share, which was still very close to--they dominate what
they can do. And if you look at it today in terms of how much
the housing stock is next to the jumbo market, they dominate
what they can do.
Mr. Miller of North Carolina. That strikes me as a
remarkable leap of faith upon which the entire economy depends.
Mr. Calabria. I would be happy to sit down with you at any
time.
Mr. Miller of North Carolina. Ms. Wartell?
Ms. Wartell. I would agree with you. I think that the
capacity of our financial institutions, which right now with
the new capital standards are already severely
undercapitalized, to provide the kind of ongoing support for
the housing market in the near term is an enormous leap of
faith.
I would also note that the durations that those--the big
thing that the secondary market provided, by creating a market
that was liquid, was it allowed longer term obligations to be
made available into the capital markets. If you don't have that
mechanism, banks will not make long-term mortgages available,
and we will have driven the entire housing market to an
adjustable rate regime in which you will see people's economic
costs of living varying with interest rates. And that, in and
of itself, will limit the ability of central bankers to be able
to adjust interest rates as they need to for monetary policy
purposes.
Mr. Miller of North Carolina. Let me move on to another
topic. I am sorry. You certainly can supplement your answers.
You are more than welcome to do that.
I have raised many questions before about the conflicts of
interest of having the servicers be affiliated with the
securitizers. And I have talked to investors who say that the
barriers they now face in pursuing their legal claims against
the securitizers is like doing business in Russia and trying to
bring a lawsuit against an oligarch. And they will not play
unless that is reformed as well.
I have talked to the small banks and the credit unions, and
they say one of the reasons they did business with Freddie and
Fannie, and not Wall Street, is they knew that their mortgages
would end up being serviced by a big bank, and the big bank
would try to use that relationship to steal their customers.
When the servicers sat there a month or two ago, I asked
them why on Earth, what is the reason for having a servicer be
affiliated with a securitizer? And they said, ``cross-
marketing.'' Which seems to support the concerns about the
small banks. What possible reason should servicers--should they
not be separate entities not affiliated with a bank? Is there a
reason that has not occurred to me? Because I have been
thinking a lot about it and been drawing a blank.
Chairman Garrett. I think what we will on that is do just
what you said, to ask them to provide that answer in more
detail not only to Mr. Miller, but to all of us as well. It
would be interesting to see the answer to that.
With that, I yield to the gentleman from Texas.
Mr. Neugebauer. Thank you, Mr. Chairman. Again, thank you
for having this hearing. One of the things I think we need to
point out is that, prior to securitization, as Mr. Calabria
said, is there were people who bought mortgages that didn't go
through Freddie and Fannie. In fact, I originated and actually
was in the banking business for a while, and we sold those
loans to other financial institutions, the insurance companies.
But securitization does provide a certain amount of
liquidity opportunity for investors to hold those mortgages and
some other ability to manage interest rate risk. And so,
certainly, we don't want to do away with securitization.
Back to what I think Mr. Pollock has said and maybe Mr.
Randazzo has said and the other panelists, probably where the
big mistake is here is we have had the government setting the
risk premium. And the government doesn't have a very good
record on setting the risk premium. All you have to do is look
at our National Flood Insurance Program and realize we haven't
been charging the appropriate amount of money for the risk that
the government is taking.
And so there is really not much space for private market
right now because the risk premium is so low that getting these
loans sanitized by Freddie and Fannie makes more sense than
doing it outside.
So, isn't it a way to make some space for private
securitization or for private investment--I don't want to get--
is to lower these conforming loan limits and, at the same time,
increase the risk premium that Freddie and Fannie are charging
for buying those loans and securitizing them?
At some point in time, the private market is going to say,
I am not willing to give up 50, 75, 100 basis points, whatever
that is; I would rather have that yield than go through that.
If I knew that those loans were being underwritten in a fashion
that gave me some sense that these are good-quality residential
loans, good old underwritten residential loans is a good
investment.
Is there consensus that that has to be some of the initial
steps if you are going to bring the private market in, is you
have to take away the competitive advantage of Freddie and
Fannie?
Mr. Calabria?
Mr. Calabria. I would say, absolutely. And, as I mentioned
in my testimony, I do think you need to institute a fee to try
to recoup some of the money we have put in. Obviously, one
benefit of that is you recoup some taxpayer money. The other
benefit is you reduce the competitive advantage that Freddie
and Fannie have.
I would also emphasize--and I know Alex has made this
point--we really do need to change the incentives facing the
banking industry. If you hold a Fannie Mae security, it is only
a 20 percent risk rating, where if you are holding a whole
loan, it is 50 percent. So, to some extent, the existence of
Freddie and Fannie has reduced the capital behind mortgages by
about 60 percent of the system.
I don't think a public policy objective should be how do we
get less capital into the system behind mortgages. So making
that a little more equal and treating Freddie and Fannie
securities as if they were any other corporate securities, I
think, would shift the incentives of banks.
Mr. Neugebauer. Mr. Pollock?
Mr. Pollock. I think you make a very good point,
Congressman. We might ask, looking back historically, why did a
private securitization market for middle-class prime loans not
develop? It is a natural market. It doesn't need a government
guarantee. The reason it didn't was because nobody could
compete with subsidized providers, namely Fannie and Freddie,
who effectively enjoyed tens of billions of dollars of taxpayer
subsidy.
And so, one way I have thought about the question of how
could you make that move with guarantee fees is to consider
that Fannie and Freddie, historically, had much lower capital
than other people. Now they have no capital at all, literally
zero, counting the government's capital, and their own capital
is very negative.
So one might do a calculation and say, if Fannie and
Freddie had to have the same capital as everybody else for a
risk and they had to have a reasonable return on that capital,
what would their price have to be?
You remember, with the Federal Reserve some years ago, the
Congress put in what they called the ``private-sector
adjustment factor'' for the Fed (the Fed is kind of a GSE) in
order to take away the Fed's pricing advantage. You might think
about that same kind of calculation for Fannie and Freddie.
Mr. Neugebauer. Kind of risk-based pricing basically is
what you are saying?
Mr. Pollock. Yes.
Mr. Neugebauer. And I think I agree totally, is that
whatever we do over at Freddie and Fannie, we can't make FHA
the new subprime lender. And so we are going to have to go over
there and determine what the lending limits and the credit
underwriting standards are going to be over there, as well.
Otherwise, we just move that market.
Mr. Randazzo?
Mr. Randazzo. The one thing I would add to what my
colleagues have said is I think the approach that you
mentioned, with a few other steps, addresses the concerns on
the other side of the aisle that this is not jumping into
privatization. You are not ending Fannie Mae and Freddie Mac
tomorrow. You are incrementally dropping the conforming loan
levels, and you are raising your G fees to let private capital
begin to step in slowly over time.
It is not this leap of faith and just trusting that capital
is going to be there from the private sector. It is, we are
going to take these short-term steps, and, along the way, the
private sector can adjust, can look at the new rules of the
game, and we can begin to back the government out slowly.
Mr. Neugebauer. Thank you.
Thank you, Mr. Chairman.
Chairman Garrett. I thank you.
And now, my good friend from New York, Mrs. Maloney.
Mrs. Maloney. Thank you. And I yield 30 seconds to the
ranking member.
Mr. Frank. I thank the gentlewoman.
I want to make it very clear, I did not think that we were
ready to pass the bill last year, including the one, 4889, the
Republicans offered. I thought it needed more time. My
Republican colleagues said, ``No, it is taking too long to get
to it. We are ready. Here is the bill.''
I mentioned earlier that it had been introduced this year
and I was surprised that the witnesses weren't asked to talk
about it. The gentleman from Texas said it hadn't been
introduced, but I was not hallucinating. It was introduced. It
was introduced as part of a package, the Spending Reduction Act
of 2011, introduced by the prime sponsor, Mr. Jordan. The
chairman of the subcommittee was a cosponsor.
So 4889, the late, lamented 4899, which was so popular last
year but has withered on the vine of popularity, was, in fact,
introduced.
And I only stress that to say, yes, I did think it was more
complicated and needed more time. It was my Republican
colleagues who were very critical of that, said, ``No, let's
move now; we can't wait.'' And I am, therefore, surprised at
this change of heart and their lack of enthusiasm for the bill
they were ready to have enacted last year.
I thank the gentlewoman.
Chairman Garrett. Mrs. Maloney?
Mrs. Maloney. Reclaiming my time, we have been discussing
how to restructure, what to do in the future. But irrespective
of any future policy, how should we address the literally
trillions of dollars of existing debt from the GSEs that are in
the mortgage-backed securities and in corporate bonds that were
purchased with the expectation that there was an implicit
government guarantee?
Much of this debt is now in pension funds, it is in
401(k)s, it is in assets that benefit the overall American
public. And I have read in some press reports that many central
banks across the world are also holding large packages of these
mortgage-backed securities.
So my question, really, to Ms. Wartell and then to Mr.
Pollock and just down the line is, how do we address what is
there now? And are these bonds government-guaranteed, at this
point? It is always an implicit guarantee? Are they guaranteed
or not?
Many of my constituents are holding them in their 401(k)s,
and they are very anxious to find out what the future holds for
them.
Ms. Wartell?
Ms. Wartell. I understand that the Treasury Department has
been very careful not to say that they are a full-faith-and-
credit obligation of the United States Treasury. That said, I
believe it has been the policy of this Administration and the
former to treat them as if they were--that the outstanding
debt--many of us talk about that, in a system in the future
when we have a new design, most of us would agree that the debt
of any future institutions should not be guaranteed, that any
liquidity backstop ought to be on the MBS.
But for the outstanding obligations, much like our
discussion about the debt ceiling in this country, it seems to
us very important that we give investors here at home and
around the world confidence that the United States stands
behind those obligations.
Mrs. Maloney. Mr. Pollock?
Mr. Pollock. Congresswoman, the question you raised focuses
on an essential point. Bond salesmen all over the world, when
they sold Fannie and Freddie unsecured debt and Fannie and
Freddie mortgage-backed securities, said to the investors
something along these lines: ``You have nothing to worry about.
This is a government debt. But it has a higher yield, it has
more spread, as we say. But it is a government credit. Don't
worry.''
Legally, as a technicality, that wasn't true, but, in fact,
the bond salesmen were absolutely right. It always was really
guaranteed, and it is guaranteed. Many of us could agree in a
theoretical world it shouldn't be. But I think we are stuck
with that on the existing debt.
In my view, that existing debt should, on the restructuring
of Fannie and Freddie, go into a liquidating trust, in a very
similar way as to what was done with the privatization of
Sallie Mae, and that debt be honored by the U.S. Government as
it runs off.
Mrs. Maloney. Mr. Randazzo?
Mr. Randazzo. This is where I disagree with one of my
colleagues, is technically, legally, this debt was not
guaranteed by the U.S. Government. And just as there has been a
lot of discussion in this Chamber and previous Congresses about
the importance for institutions that take on too much risk to
be able to fail, I believe that investors should also be able
to fail.
They knew, or they should have known, that, by law, they
were not explicitly guaranteed by the U.S. Government. And we
should not extend this explicit guarantee to honor what was an
implicit guarantee. It would be bad for the taxpayers.
Mrs. Maloney. Mr. Calabria?
Mr. Calabria. I would also add, I think an important part
is, not only by statute--and this was not changed in HERA--that
not only is it not guaranteed, it is explicitly rejected. The
Federal law says, you will not be paid.
And so, any commitments that Treasury Secretaries, previous
or current, or that bond managers or that GSE CEOs made, they
had no authority to. And they were making those commitments in
contradiction of statute.
And so, to me, a very important principle we should always
carry with us is the rule of law. It is not what a Treasury
Secretary says; it is what the statute says that should be
important and that should govern here.
Mrs. Maloney. Thank you.
My time has expired.
Chairman Garrett. Thank you.
I yield now to the vice chair of the subcommittee, the
gentleman from Arizona.
Mr. Schweikert. Mr. Chairman, fellow Members, and
witnesses, first off, in my opening remarks, I hope I didn't
cause a little bit of fussing when I complained that the
Administration hadn't met its obligation. Being a freshman
Member, I have actually really, really been killing myself to
read everything I get my hands on, Mr. Chairman. And, with
that, I was trying to be fair-minded and read stuff that was
coming from all directions. And, apparently, I annoyed the
ranking member with my fairness.
Mr. Pollock, I absolutely love this. Having now read binder
after binder after binder, yours is one of the best white
papers I have read so far. But one of your premises in there is
that Fannie Mae and Freddie Mac distort the true price of risk.
Am I fair in that assumption or in that interpretation or of
what am I reading out of that?
Mr. Pollock. That is exactly right. It is what we say, and
I think it is quite indubitably the case.
Mr. Chairman, may I request that the white paper that the
Congressman refers to be entered in the record, if that is all
right?
Chairman Garrett. Does the vice chair wish to--
Mr. Schweikert. Mr. Chairman, I would actually be elated.
There are some terrific items in there.
Chairman Garrett. Without objection, it will be entered
into the record.
Mr. Pollock. Thank you.
So when you push credit at an asset, at a market, the
credit flow gets capitalized into the prices in that market.
And when you separate the risk of the providers of the funds by
telling them they are guaranteed by the government so they
don't suffer the results of their putting a large flow of money
into a real estate market and driving up the prices, I think
the only fair way to describe that is as a distortion of
prices. The result will always be unhappy.
Mr. Schweikert. Mr. Chairman, I know I have very limited
time, and I have a handful of questions, so can I bounce on to
the next one? This one is for all the witnesses.
In also reading your white paper, the belief that if we
were to move to a much more true either private market or some
sort of bifurcated, that we would also have to reach out and
touch FHA and Ginnie Mae and those, so we didn't create a push
from one side of the bubble to the other.
Mr. Chairman, witnesses, is there an agreement that if we
are going to approach a GSE government-insured market that we
have to do something holistic?
Mr. Pollock. I think we all agree on that.
Mr. Randazzo. I do.
Mr. Calabria. I agree, absolutely, with that. And I think
we should keep in mind that a lot of that already is happening.
FHA is about half of new homebuyers now. So it is already a
considerable push of risk on to FHA as it is. But we need to
avoid that further erosion of credit quality on FHA.
Mr. Randazzo. It would be very irresponsible to just look
at Fannie and Freddie and not address all the components that
impact housing in the United States.
Ms. Wartell. I would agree that we need to--one of the
reasons I would argue against a fully private market is
because, in fact, it will push and create enormous pressure for
us to keep FHA taking on risks that I think otherwise the
private sector could be bearing if the government were standing
behind with a limited liquidity backstop. So we are taking on
more risk than we need to.
Mr. Schweikert. Mr. Chairman, you actually hit an issue. I
am concerned that if we are going to do something, we need to
be looking at everything together.
Mr. Chairman, witnesses, do I have a prediction on the
total loss in Fannie and Freddie? When we look back a decade
from now, how much taxpayer money will have bled?
Mr. Pollock. It is very hard to know, even if you are
inside and poring over the numbers. But informed estimates
range from $180 billion to $300 billion or $400 billion. It is
highly uncertain, of course.
Ms. Wartell. I agree with that; like he said, it is highly
uncertain. But the one thing I would say is that our actions
now can very much affect the size of that obligation, both in
how quickly we liquidate their portfolios--if we sell at fire
sale prices, that actually potentially increases the amount of
the losses.
And, similarly, the GSEs have an obligation to repay the
taxpayers, in effect, in the form of these dividend payments.
And if we, sort of, withdraw them from the market too quickly,
their ability to continue to make those payments might be
mitigated.
Mr. Schweikert. Okay. Mr. Chairman--and it is, Ms. Wartell?
Ms. Wartell. Yes.
Mr. Schweikert. Forgive me. To that point, if I am holding
huge amounts of nonperforming paper and I am waiting for the
market to come up to sell it, don't I perpetuate a 5-year real
estate depression to last a decade? Because when do you hit
bottom? If prices move, and the expectation--and there is
always an expectation of this huge overhang. And, Mr. Chairman
and Ms. Wartell, maybe it is because I come from the Phoenix
area, where there are 50,000 foreclosures in process, and a
year ago, there were 50,000 foreclosures in process, and the
year before, 50,000, there is no change in expectation.
I almost wish we would take our lumps, process through
those. We may come down substantially more, but at least we
start to build a base back up.
Give me your comment.
Ms. Wartell. My comment is, I guess, the question of, who
gets the benefit of the upside and having taken the losses on
the taxpayers? If we sell them at fire sale prices, then
private investors will get the market when it comes up, and we
will end up having larger obligations. It seems to me that the
taxpayers ought to be able to make a sensible, staggered sale.
And the other thing I would say is, not all those assets
they hold are nonperforming. In fact, the majority of them are
performing assets.
Mr. Schweikert. Mr. Chairman, Ms. Wartell, I was only
speaking to the nonperforming portion of the portfolio. And
being at foreclosure central, I don't know how you get the
chicken and the egg. We are going to wait until it gets better
to sell, but it never gets better to sell because I always have
an anticipation of all these foreclosures that are in process
that never go to the actual sale.
Chairman Garrett. And, with that--
Mr. Schweikert. Sorry, Mr. Chairman. Does that mean I am
beyond my time?
Chairman Garrett. Just a smidge.
Mr. Schweikert. Thank you.
Chairman Garrett. And I thank the gentleman.
The gentleman from Colorado.
Mr. Perlmutter. Thank you, Mr. Chairman.
Mr. Pollock, you and I have had a chance to talk about this
subject on a couple of occasions. And so my first question to
you is, when was Fannie Mae created?
Mr. Pollock. Fannie Mae was created in 1938.
Mr. Perlmutter. Okay. When was Freddie Mac created?
Mr. Pollock. By the Emergency Housing Finance Act of 1970.
Mr. Perlmutter. Okay. And just so we understand that we are
all talking the same language, we are not talking about Federal
Home Loan Banks? Are any of you? When we talk GSEs, you are not
talking about the Federal Home Loan Banks, are you?
Are you, Mr. Pollock?
Mr. Pollock. Congressman, I understood the hearing to be
about Fannie Mae and Freddie Mac.
Mr. Perlmutter. Okay. But it also says ``GSEs,'' and the
Federal Home Loan Banks are GSEs, are they not?
Mr. Pollock. That is true, Congressman.
Mr. Perlmutter. Okay. What about--we are not talking Ginnie
Mae here?
Mr. Pollock. Ginnie Mae is not a GSE. It is a wholly owned
government corporation whose credit is the full faith and
credit of the United States.
Mr. Perlmutter. Okay. But your premise is that Fannie Mae
more or less has been treated as something that is backed by
the full faith and credit--rightly or wrongly, it has been
promoted as being backed by the full faith and credit of the
United States, right?
Mr. Pollock. That is correct. I don't think there is any
doubt that is the way the markets looked at them.
Mr. Perlmutter. Okay. So here is my question. Initially,
was Fannie Mae simply government owned and then it became
partially privatized?
Mr. Pollock. That is correct, Congressman. Fannie Mae
originally was a 100-percent government-owned corporation. It
was actually owned by the Reconstruction Finance Corporation
when it was first set up. It had an extremely limited function;
it was to buy FHA loans. That is all it was allowed to do for a
portfolio.
Mr. Perlmutter. Right.
Mr. Pollock. Probably the original sin was the 1968
restructuring, which most people think was done in order to get
Fannie Mae off the Federal budget because President Johnson was
running outsize deficits at that point and he wanted Fannie's
debt off the budget. That unleashed the much wider activity of
GSEs, and we are now living with the results.
Mr. Perlmutter. Okay. And so, I guess the thing that
concerns me is that from--and I am to not going to be their
defender, but I want to understand really what is going on
here. You all have given us several proposals. We can do an
FDIC kind of a proposal and have a guarantee fund if everything
fails. We can have a Ginnie Mae, Fannie Mae kind of proposal,
which is you just go out and buy these mortgages, and you
provide liquidity in that fashion. Or you can do nothing at
all. I think there are sort of three--there is a guarantee,
there is the buy, there is just let the market handle it.
Given the history, what I see--and, I have my apple, and I
have--it really was a crash of the housing market starting in
really, oh, the end of 2007, beginning of 2008. It is about as
big a picture of a crash as you could have.
Prior to that, was the full faith and credit of the country
being called upon in Fannie Mae or Freddie Mac? Had it ever
occurred before?
Mr. Pollock. Congressman, the answer to that is ``yes.'' In
fact, Fannie Mae was in serious trouble in the early 1980s,
1981-1982, just as the savings and loans of the day were. They
were losing tens of millions of dollars. But they were always
able to keep borrowing because their debt was viewed by the
market as government debt.
Mr. Gary Miller of California. Would the gentleman yield on
that question?
Mr. Pollock. Sure.
Mr. Gary Miller of California. The first time they lost
money was 1985.
Mr. Perlmutter. Okay. In 1985 though 1990, the model that
was used as a guarantee model, the Federal Savings and Loan
Insurance Corporation--which is one of the proposals here,
something like that--failed, and the government had to pick it
up through the RTC.
So, I harken back to Mr. Oxley and the effort of the
Republican Congress in 2005 to put some limits on Fannie Mae
and Freddie Mac. And, I have said to you his quote. He was
upset because the House passed it, and the Senate wouldn't. He
said, ``All the hand-wringing and bed-wetting is going on
without remembering how the House stepped up on this. What did
we get from the White House? We got a one-finger salute.''
Okay? The White House, under the Bush Administration,
opposed any limitations on Fannie Mae and Freddie Mac because
it is my opinion, whether it was because of the government-
backed guarantee being promoted or that real estate only goes
up in the United States, we were repatriating a lot of money
that had gone overseas.
And so, Mr. Calabria, or Doctor, you said that China was
one of the owners of this debt. So in a perfect world those
creditors should just get hammered. Why did Mr. Paulson not
want to take that step?
Mr. Calabria. I think, to some extent, Secretaries Paulson
and Geithner were both concerned about, if you impose haircuts
on foreign holdings of GSE debt, then there would be questions
about how that would bleed over to the response by Treasuries,
so that you might see an increase in Treasury costs.
Now, I don't think that was ever explicitly made, but that
is an important part of it. So I do think it is looked it as
the credibility of the American public.
Mr. Perlmutter. Thank you.
Chairman Garrett. I thank the gentleman.
I now turn to the gentleman from Virginia, Mr. Hurt, for 5
minutes.
Mr. Hurt. Thank you, Mr. Chairman.
This is for Mr. Pollock. I was wondering, going back to,
kind of, the history of Fannie Mae and Freddie Mac, if you look
back at the time that it was established and formed, how come,
since that time, we haven't seen a private market for these
mortgages develop over that time?
And it sounds like from the question that was just asked
that, from its founding in 1938 to 1968, that, really, it had a
very narrow mission. Why didn't the private sector step in
during that period? And how does that inform us as we go
forward?
Mr. Pollock. Congressman, that is a very good question. And
the answer is, of course, the private sector was acting in the
market all during that period.
If I could put in a historical footnote, as I think one of
the other Congressmen said, there always was a secondary
mortgage loan market. Going back to the 1920s, there was a
channel of mortgage bankers who placed loans with insurance
companies, for example. So that is a classic idea.
But as the GSEs developed in their post-1968 form, which
was really the invention of the GSE form, wherever they could
operate they dominated the market, because no one could compete
with their government advantages and subsidies.
So, as I said a little bit ago, the market where it would
be most likely to have a private securitization market in
addition to a private portfolio lending market didn't develop.
It didn't develop because it was dominated by the subsidies
given to Fannie and Freddie. Of course, the subsidies include
the government guarantee--real, though not formal.
Mr. Hurt. Thank you.
I yield back my time.
Chairman Garrett. Mr. Green?
Mr. Green. Thank you, Mr. Chairman.
Just as a follow-up to the questions that were asked about
the private loan market in the 1920s, is it true that market
had balloons? And is it true that market had interest-only
loans? Is it true that market was very much akin to what we
just went through, with what we are calling ``exotic products''
now?
Is that true, Ms. Wartell?
Ms. Wartell. Yes, Congressman, that is absolutely true.
Mr. Green. So you had a private loan market in the 1920s,
but did it make homes available? Let's not talk about
affordable, since that has become a negative term now. I marvel
at how ``affordable'' can be negative for middle-class people.
But did it make those homes available to middle-class
people? Were middle-class people able to buy homes and fulfill
the American dream to the extent that they were before the
bubble and before the crash?
Ms. Wartell. In that period, most people who were able to
buy homes had been able to accumulate very significant amounts
of savings, sometimes up to 50 percent. And so the availability
of homeownership was very limited compared to modern--
Mr. Green. Seems like somebody ought to say that, that we
had that problem--that it was a circumstance. Let's not call it
a problem, but it was a circumstance. And we have
metamorphosed. It is no longer a circumstance.
But let's move forward to something else. Ms. Wartell, you
indicated that all governments, I believe, have some kind of
government involvement in the loans. Is that correct?
Ms. Wartell. Either explicitly or implicitly. In many of
the European countries, which are often cited as a comparison,
there are a relatively small number of financial institutions
that serve those markets that benefit very significantly from
an implied ``too-big-to-fail.'' And, in fact, many of them have
been supported by their countries as they have gotten in
trouble.
Mr. Green. Let me intercede because I have limited time.
My assumption is that the three other persons at the
table--all of whom I have great respect for, by the way; I
appreciate your commentary--but that all of you are in favor of
no government involvement at all. Is that a fair statement, or
did I miss something?
Mr. Pollock. I will speak for myself, Congressman.
My long-term objective for American housing finance is a
market that is principally a private market. I estimate about
85 percent. And about 15 percent--
Mr. Green. Mr. Pollock, you know I love you. We have been
together before here. And, I have a deep, abiding affinity for
you.
But the three of you, in essence, would have no government
involvement.
Now, let me ask you, Mr. Pollock, do you speak for the
banks when you say this?
Mr. Pollock. No, sir. I speak only for myself.
Mr. Green. All right. Let's go to your next colleague.
Do you speak for the banks, sir?
Mr. Randazzo. No, I do not speak--
Mr. Green. Do you speak for the banks, sir?
Mr. Calabria. I only speak for myself.
Mr. Green. Okay. Is it not true that, generally speaking,
we consider what those in the industry have to say about this?
Does someone have some plethora of evidence, empirical
evidence, if you will, connoting that the banks entirely
support this type of circumstance that you have called to my
attention?
Mr. Calabria. I will react--
Mr. Green. Is it yes or no?
Mr. Calabria. It is no. I put--
Mr. Green. No. Okay, here is why I bring this up. We put a
lot of thought on this committee into what those who actually
have to do what we say will be done, what they think about it.
It seems to me that, given that you are talking about what
is revolutionary--and I think Ms. Wartell said that we should
be thoughtful and have a resolution, not an overnight
revolution.
Is that your phrase?
Ms. Wartell. Evolution, not revolution.
Mr. Green. Evolution, not revolution.
It seems to me that the banks ought to have some say in
this process, as well, since they had a pretty good say in all
of the other aspects of things and since they are going to do
the lending, they will do the lending.
How is it that we conclude that banks will do all of these
things that you say and not what they are saying they will do?
Because the bankers who talk to me, they tell me they would
like to see a Federal backstop. That is what the bankers
talking to me say. And if you tell me that you speak for them
and that is not what they are saying, I will put that into my
computer and let that be a part of my processing of this
intelligence.
One more thing before we go, and I have to do this. I
apologize to you. But you indicated that it would be bad for
taxpayers--I believe this was indicated by Mr. Randazzo--bad
for taxpayers, but you didn't say what it would be like for the
economy to allow the default.
``Bad for taxpayers.'' Taxpayers have to be a part of the
economy. What is it going to be like for the economy if we just
allow the collapse? What would it be like if we allow all of
this bad paper to just go under?
Ms. Wartell, would you respond, please?
And I thank you, Mr. Chairman. I know that will be my last
question.
Chairman Garrett. Was that Mr. Randazzo's question?
Mr. Green. No. It is to Ms. Wartell, please.
Chairman Garrett. Okay. If you will keep that to 10
seconds, because we are over time.
Ms. Wartell. Too rapid a withdrawal of support from the
housing market could cause us to take the fragile economic
growth we are currently seeing back in the wrong direction.
Chairman Garrett. And I thank you.
The gentleman from Ohio, Mr. Stivers, for 5 minutes.
Mr. Stivers. Thank you, Mr. Chairman.
I would like to thank the panelists for coming today.
The thing that I was struck by is that there does seem to
be some similarities, commonality, that all of you agree on at
least some of the steps that we might want to consider moving
forward, or at least there is a consensus among you. And I know
that there are clearly some differences.
My first question is for Ms. Wartell. You talked about a
yield spread analysis, and you used that to conclude that
investors in Europe view covered bonds as having essentially a
government guarantee. But I guess the part I am trying to
understand is that yield spread was actually smaller than the
yield spread between U.S. Treasuries and the Fannie and Freddie
debt, which does have a government guarantee.
Isn't it really a statement by those investors that they
are admitting that there is less risk in those covered bonds
because the banks that originated them have continued to have
skin in the game, and they believe when somebody who originates
a mortgage has skin in the game, they are not going to let
themselves lose money, versus the system we have, where you can
originate and sell off 100 percent? Isn't that another way to
look at the view?
And, obviously, there is no--it is all speculation, too,
because we are just looking at a yield analysis instead of
really interviewing investors who have invested in these.
Ms. Wartell. It is my--let's put aside the analysis of the
spreads, because I think obviously different people can
interpret it different ways. But I do think that it is safe to
say both, as you said, that there is particular collateral
behind the covered bonds, and the investors understand they
have that, and that they believe that those institutions in
most of those countries benefit from an implied government
guarantee
Mr. Stivers. Thank you. Do you think, Ms. Wartell, that the
retention of risk leads to less risky behavior by those
institutions that have skin in the game?
Ms. Wartell. I generally have supported that lending
institutions should retain risk, have skin in the game, in
their loans, as the Dodd-Frank legislation also would require.
Mr. Stivers. Sure. Thank you.
And the second question I have, also for Ms. Wartell, how
do you explain the 30-year, fixed-rate mortgage in Denmark if
you think that a covered bond won't lead to a fixed-rate
mortgage here in the United States?
Clearly, it seems that it is a market requirement that
consumers in Denmark, consumers in the United States, have
demanded those products, and, therefore, the market has
provided them.
Ms. Wartell. Actually, I think there are two different
arguments that I have made that are being conflated in this
case. Denmark has provided, through the covered bond mechanism,
long-term, fixed-rate mortgages.
My point is that I think that if you have a purely private
market, the appeal of covered bonds for most of our financial
institutions under the U.S. regulatory scheme is very
different. It won't likely be the primary mechanism of funding.
And I also think that here we will end up with short-term debt.
But it is not the covered bond that I argue won't produce
30-year, fixed-rate mortgages. It is the fact that if we have--
Mr. Stivers. The problem with the FDIC.
Ms. Wartell. If we don't have the backstop for the
investments.
Mr. Stivers. Okay. Thank you.
Could the other panelists comment on their thoughts,
quickly, on retention of risk and what that would mean for the
marketplace?
Mr. Pollock. Congressman, I have worked on introducing
credit risk retention into the mortgage markets for 15 years. I
think it is an extremely useful and important idea. It is one
of many ideas, but it is a very useful one.
I think the advantage of the covered bond, which you cite,
is that there is 100-percent credit risk ``skin in the game''
for the covered bond issuer. This is also extremely important
in understanding how these bonds work.
Mr. Randazzo. I would just echo the comments of my
colleague.
Mr. Stivers. Thank you.
Mr. Calabria. And I would say, I think retention of risk is
an important thing in the marketplace, but I also believe there
was considerable retention of risk prior to the crisis. In
fact, most of the 400-some subprime lenders that went out of
business were because they were forced to buy back the piece
that they had. So skin in the game is important, but it isn't a
cure-all.
Mr. Stivers. Sure.
Mr. Calabria. I would also argue that one of the things
that should be considered going forward, if we are going to
keep a Fannie and Freddie model, is to get them out of the
guarantee basis, where they simply sell off the MBS, they don't
guarantee the credit risk, because three-fourths of their
losses have come about because they retained that risk and the
investor did not take it.
So we have lots of retention of risk. It hasn't always
worked that well. Sometimes it has; sometimes it hasn't. But it
is not a cure-all.
Mr. Stivers. Thank you.
Now for the whole panel, just going across, the focus of a
lot of your testimony was on covered bonds. Are there
approaches somewhere between what we are doing today and
covered bonds? Are there other approaches that people are
talking about, reinsurance or any other approach outside of
just the two approaches that we have heard today?
And I know that we don't have much time, so--
Chairman Garrett. Ten seconds.
Mr. Calabria. I will say very quickly that I think that you
can have a large amount of money that is portfolio-based not in
a covered bond way, even though that is portfolio-based.
Mr. Pollock. My answer is yes.
Mr. Stivers. Thank you.
Thank you, Mr. Chairman.
Chairman Garrett. Thank you.
The gentlewoman from New York.
Dr. Hayworth. Thank you, Mr. Chairman. I will make this
brief.
I was thinking about the comments that Ms. Waters made
regarding the PIMCO chair reflecting his comments about how
increasing the downpayment on houses might be burdensome for
homebuyers. But isn't it true that it would also help to, if
you will, rationalize home prices? I would appreciate the
panel's assessment of that.
Mr. Calabria. Yes, it largely would. I do think that we
need to get back to a point where housing prices reflect
fundamentals rather than availability of credit driving prices,
necessarily. There should be credit there.
I do want to note, as well, there was an earlier discussion
about very large downpayments in the 1920s. And I will note
that the homeownership rate for working males aged 55 to 64 in
1920 was 66 percent. So in no way was the 1920's homeownership
limited only to the wealthy. That is false.
Mr. Pollock. Congresswoman, I would say I have spent a lot
of time around bond markets in my career. The head of PIMCO's
comments have been widely cited. I never take too seriously
what bond traders say.
When it comes to downpayments, there is no doubt--and this
is just an unquestionable regularity of housing finance--that
size of downpayments or, inversely, the extent of the loan-to-
value ratio, is one of the most reliable indicators of credit
performance, either good or bad.
Ms. Wartell. I think that it is true that downpayment is a
relevant factor, but I think we overemphasize it in the
conversation. In the late 1990s, there was a great deal of very
positive experimentation that was going on, demonstrating
positive ways to mitigate the risk of low-downpayment lending.
And all of those good practices were wiped out by the abusive
practices in the subprime market.
And there are enormous disparities of wealth in our
society, and communities with low homeownership rates have
other social costs. So if we go to a system where we mandate
very high downpayments, there will be consequences that I think
we will all be very sorry to see.
So we need to make sure that there are ways to mitigate
risk, but downpayment should not be our only measure.
Dr. Hayworth. Is it fair to ask, on a very fundamental
level, whether or not all that these GSEs have done and all
that the Federal intervention in the housing and mortgage
markets has done, is it fair to conclude that those most
vulnerable have actually benefited from these interventions?
Because, certainly, the state of our economy would suggest
otherwise.
Mr. Randazzo. I would say, in large part, no. And if you
just look at the waves of foreclosures that have basically been
besieging the United States over the past several years, any
gains that were established turned out to be faulty and have
been wiped away. And, in large part, there are a number of
individuals who seemingly thought that we were helping that are
now worse off than when we started.
Mr. Calabria. If I could make a comment, I have worked on
housing policy and mortgage finance policy for a very long
time. And one of the things that has constantly puzzled me is
that proposals that have the aim of running up housing prices
are presented as enhancing affordability. That kind of confuses
me. Usually, that is a transfer to the seller.
I look at it as, housing is a basic necessity of life.
Everybody needs shelter. And when housing becomes more
affordable--that is, when prices come down--I think that is a
great thing.
Now, currently, the impact of that certainly helps the
poor, hurts maybe the middle class and the rich, but that is a
policy outcome I can live with.
Ms. Wartell. I think it is important, as we look backwards,
though, not to conflate the role that the GSEs played in the
housing market with the consequence of the subprime crisis that
we had.
The reality is, if you look at the Financial Crisis Inquiry
Commission report and others, the preponderance of the evidence
here is that there was an intervening factor. There was this
unregulated market, the shadow banking that was accelerated
with the Wall Street inventions. The result of that was chasing
horrible loans. And it is those lending practices, and not the
lending practices of the GSEs. They reacted to those; they
joined in the party. They have cost a significant amount of
money to the taxpayers.
I have no book to protect their record. But I think we
should be very careful here not to conflate the role the GSEs
played in the housing market prior to the year 2000 with the
consequences of the subprime crisis.
Dr. Hayworth. May I have 30 more seconds, Mr. Chairman?
Chairman Garrett. No, I am sorry, no. Your time has
expired.
Dr. Hayworth. Thank you.
Chairman Garrett. Your colleague from New York is up next.
If he wants to yield you--
Mr. Grimm. I will yield my time.
Dr. Hayworth. Oh, thank you, Mr. Grimm.
I would simply submit to you that there were, as we all
know, dissenting opinions regarding that Financial Crisis
Inquiry Commission report. And the clear message that someone
like me would take from it is that it is, in fact, the implicit
Federal guarantee, indemnification of bad risk, that created
the impetus for all of these risky investments.
Thank you.
Mr. Grimm. On that note, I think, Mr. Pollock, if you would
like to comment on the last comments, please, I will give you a
minute to do so.
Mr. Pollock. Thank you very much, Congressman.
I want only to make two points. One, when it comes to
subprime mortgage-backed securities, of course Fannie Mae and
Freddie Mac were among the biggest buyers and the richest bids
for subprime securities.
But on a more general point, having to do with credit
policy and housing finance policy everywhere, the worst thing
you can do for somebody is to make them a loan they can't
afford.
Ms. Wartell. No disagreement.
Mr. Grimm. I think we are getting ready to wrap up, and I
will be very brief.
Overall, I think to bring this all together at where we are
at, the Federal debt stands at $14 trillion. GSE debt stands at
$8 trillion.
I will ask Mr. Pollock, what are the implications of this
unsustainable debt load, in a nutshell?
Mr. Pollock. Unsustainable debt can't be sustained, and it
has to be addressed and adjusted to. It usually involves
finding ways to reschedule, restructure, or inflate your way
out of it. We are faced with a really tough problem, as you
suggest, Congressman.
Mr. Grimm. My last question: Mr. Calabria, you have
proposed that Congress establish a recoupment fee on all
mortgages purchased by Fannie Mae and Freddie Mac to reduce the
deficit and to recoup as much of the losses as possible. Just
very briefly, how would that work?
Mr. Calabria. Essentially, it could be a fee that the GSEs
charge to any lender that sells them the mortgage, and then
that fee is recovered just like the way the guaranteed fee
structures work now. Essentially, you would layer it on top of
the guarantee fee that the GSEs already require from lenders,
and then you put it off to pay down the amount of money we put
in.
So I certainly would not suggest that we charge them any
more than we have already put in, but just as an attempt to
recoup what we have put in.
Mr. Grimm. Okay.
And, in closing, I would just like to say that we have
heard both sides and that, on one hand, we need the government
to make sure that we still have mortgages. And, without it,
there will be the collapse of our economy and the collapse of
home housing. My inclination innately is always that, where
there is a need, the market will fill that need and that this
country was founded on private-sector principles that have
really risen to the occasion time and time again.
And if the government were to, say, step aside and move out
of the way of our free market, it would thrive. And a lot of
the answers to this insurmountable debt is that free market,
the enterprise, the entrepreneurial spirit that has made us
great and will continue to make us the greatest nation in the
world.
And, with that, I yield back the rest of my time.
Chairman Garrett. The gentleman yields back, but the
gentlelady from New York could have 1 minute left of his time
to use for any other questions that she has.
Dr. Hayworth. Would the panel agree that, in fact--and I
thank you, Mr. Chairman. I am sorry.
Would the panel agree that the mobility issue created by
the challenges that mortgage holders face because of the bad
risks they undertook with Federal help, if you will, actually
affects our unemployment rate materially today?
Mr. Pollock. Many economists, Congresswoman, have pointed
out the labor mobility problem entailed by having houses that
are underwater on their mortgage.
There is something else we should point out. For all the
advantages of a 30-year, fixed-rate mortgage, there are also
disadvantages to it. For example, if you are underwater and you
have what is now a high-rate mortgage, you can't refinance it.
I call that the ``dark side of the 30-year, fixed-rate
mortgage,'' and we have to take that into account. It relates
to this mobility problem.
Mr. Calabria. Responding to the Congresswoman's question,
there are a number of empirical studies that have looked both
across countries and across States and have reached the
conclusion that the higher your homeownership rate, the higher
structural unemployment you have. And this is something that is
very well-founded, in peer-reviewed journals.
My back-of-the-envelope is that at least a percentage point
of the unemployment rate we are seeing today is due to the high
homeownership rate we had going into the crisis.
Chairman Garrett. Thank you. And the gentlelady yields
back.
The gentleman from California.
Mr. Gary Miller of California. Thank you, Mr. Chairman.
This has been a very interesting hearing. I have heard so
many different sides.
I heard one of my good friends from the other side of the
aisle say that the Bush Administration did not support
reforming GSEs. That is fallacious. I met with the President
many times on this issue. We probably sent the bill to the
Senate 3, 4, maybe 5 times. And there was a filibuster that
occurred, and it wasn't by the Republicans, that stopped the
bill from being heard. So that is the fact on there. I
corrected one thing on you earlier, but that was just wrong on
that.
And I am having trouble with a lot of facts out here. I am
not taking sides on the issue. No doubt we have serious,
serious problems. But I am hearing a lot of the debate that
doesn't make sense when it is applied to reality, in some way.
Mr. Calabria, you made a great statement on mortgage-backed
securities because the only mortgage-backed securities worth a
darn are GSEs out there. The alternative, when the market got
really good in 2004, 2005, and 2006 was the private sector.
Countrywide did come in and be major players in the
marketplace. Now, if we had defined predatory versus subprime,
they would have never been in the marketplace. But they played
a huge part in the marketplace, made a tremendous number of
loans to people who could never pay them back, sold them off to
the private sector. And the way those loans are bundled, they
can't be debundled.
Now, GSEs--I will say that if you buy a mortgage-backed
security from the GSEs, you will get what you are promised.
Because they bundle them in a way where a nonperforming loan is
removed and replaced with a loan that is performing. And many
of the loans that the GSEs are eating today is because they are
taking those loans out and replacing them.
The problem we have is--let's go back to 2008. When you
look at the total losses in the marketplace in 2008, the
lending sector lost about $2.7 trillion in losses. Now,
understanding at that point in time that Fannie and Freddie
represented 70 percent of the marketplace, or 31 million loans,
Fannie lost $117 billion, Freddie lost $67 billion--a lot of
money, but let's put it in perspective. They had 70 percent of
the marketplace. Out of $2.7 trillion lost, they lost less than
$200 billion of it. Unacceptable numbers, no argument.
There have been statements made that the problem is that we
made loans to people with low downpayments. But VA and FHA do
that today. Let's look at the reality. In my district alone, LA
County, VA and FHA loan defaults are 2.6 percent; Freddie and
Fannie are 3.9; the jumbos, 10.1. Obviously, VA and FHA are
doing very well making low-downpayment loans.
In Orange County, the FHA/VA default rate is 1.4 percent;
Freddie and Fannie, 2.1 percent; the jumbo private sector is
2.89 percent. San Bernardino County--a high default rate in San
Bernardino County overall. VA and FHA is 3.5 percent; Freddie
and Fannie, 7.8 percent; jumbo is 18.4 percent.
So if the logic is that a low downpayment means necessarily
a high default rate, the numbers don't verify that argument.
To make a loan to somebody that they cannot repay, it
doesn't matter what they put in, they are going to default. If
they can't make the payments and they put 20 percent down, they
are still going to lose the house. If they put zero down and
they can't make the payments, they are still going to lose the
house.
So if we would have taken at some point in time and said,
let's define predatory versus subprime--which I know I put in
at least five bills going to the Senate, and my good Democrat
friends filibustered it--a matter of record, not fallacious--we
would probably not have some of the problems we have today.
And if you look at the chart, a great example of that is
delinquencies today. Had we taken and fixed the problem in 2000
when we tried to fix predatory versus subprime, the subprime
ARMs had a default rate of about 5 percent. Now, you go from
2000, when we did not fix it, to 2008; they had a default rate
of 38.7 percent. Why? Because nobody bothered to define
predatory versus subprime.
The default rate also, if you look at the middle-range
market, an average in 2000 was about 2 percent. An average in
2009 was 8 percent. The default rate for Freddie and Fannie in
basically 2000 were nonexistent. They had no default rate. It
rose in 2009 on the Freddie side to 3.1 percent and the Fannie
side to 4.2 percent. It is too high. But the average market is
8 percent. Subprime is 26.5. The better subprime, the ARM
subprime, is 38.7.
So when you look at the numbers, you say, is there a
problem? A serious problem with the entire industry. I remember
when I was a young man in my 20s, if I went to borrow money
from a lender for a construction loan, if I didn't meet
conforming standards, they would not make me the construction
loan. Why? Because at the end of the day, there was probably
not going to be a lender to make them the loan to do the
takeout on the house I had just built.
So, Freddie and Fannie were basically created to provide
liquidity to the marketplace. Had Freddie and Fannie not been
there in 2007, you could not have given a house away, period.
Wall Street was shut down. Private sector was shut down. Wells
Fargo, Bank of America didn't know if they could survive the
next day.
So what did we do to the taxpayers in this country who own
a home? Sixty-five percent of the families own a home. Many of
those homes have double--I ran out of time, didn't I?
I hate this when I am preaching. I love to preach. I should
have been a preacher. If I was a Baptist, I would be a preacher
today, but I am not.
But, in closing--
Chairman Garrett. Was there a question in there?
Mr. Gary Miller of California. Yes, there was. I never got
to the question.
My question was, I heard a lot of great information today,
but I heard it from a lot of different perspectives. And when
you put it together in reality, you see there are some basic
problems that should have been corrected. Was low downpayment
the problem? According to FHA and VA, no. Were underwriting
standards a problem? Absolutely. And guidelines were a problem.
Predatory versus subprimes were a problem.
And, Mr. Chairman, I hope we have a lot of these because
there is so much we need to get on the table, because I know
you have a passion on this issue, and so do I and many other
Members. But we have to figure out what we are going to do to
fix the housing market in this country without destroying it.
And if Fannie and Freddie don't make sense, let's get rid of
them. If they can make sense with modifications, let's look at
that. But let's just don't make assumptions based on an entity
that has 70 percent of the marketplace and is performing better
than any lender sector out there today other than FHA and VA.
So when we move into getting an answer for this, let's move
with that understanding and move cautiously.
I yield back the balance of my time.
Chairman Garrett. I appreciate that.
Mr. Gary Miller of California. Thank you for your
generosity.
Chairman Garrett. And I will seek unanimous consent to
allow the witnesses, even though it is over time, just to give
a short--
Mr. Gary Miller of California. --answer to my question.
Chairman Garrett. Yes, answer his global, and then they
will be our last--
Mr. Calabria. There was an awful lot there, but let me
first react to--in 2007, Fannie and Freddie were actually
pulling back. And one of the reasons that Secretary Paulson
gave for taking the conservatorship was to get them to make
more lending. Now, the fact is today that the reason they are
making lending is because their losses and their debt are
essentially backed by the government. And I would put it this
way: You cover all my losses, guarantee all my debt, and I will
go out and buy a whole lot of mortgages, too. So we have to
remember what is the important part here that is keeping them
together.
I 100 percent agree that downpayment alone is certainly not
the determinative factor. I think FICO score is far more
predictive of default than downpayment. So, certainly, that
could be a tradeoff.
I do think we need to keep in mind the vintages of loans
that we are looking at. As you are very well aware, in about
2005--
Mr. Gary Miller of California. Can I ask one question?
Mr. Calabria. Sure.
Mr. Gary Miller of California. Yes, on Freddie and Fannie's
making loans today, but the underwriting standards are
tremendously different than they were 3 or 4 years ago.
Mr. Calabria. Yes.
Mr. Gary Miller of California. Especially in the high-cost
areas, they are very stringent.
Chairman Garrett. Yes. Let's let the panel complete,
because otherwise we will--
Mr. Calabria. So, but what I was going to say, in comparing
FHA to jumbo or any other part of the market, you do have to
look at vintages. As you are well aware, FHA's market share in
California in 2005 was about 2 or 3 percent. So there was very
little lending, where they have picked up since when the loan
limits were raised. So my point would be, you have to make sure
you are comparing 2005 to 2005 loans. And that is an important
part of it.
I do think you can offset the downpayment if you put other
factors in the require good credit quality.
Mr. Randazzo. I would be happy to submit comments in
writing.
Chairman Garrett. All right.
Mr. Pollock?
Mr. Pollock. Mr. Chairman, I look forward to the discussion
of this at another hearing, should you ever want to invite me
back.
Chairman Garrett. Oh, okay.
Ms. Wartell. Thank you very much, Mr. Chairman, for having
us.
Chairman Garrett. Thank you.
And I thank all the witnesses and the members here today.
I seek unanimous consent to enter into the record the
statements of the National Association of Realtors, the
American Bankers Association, the National Multi Housing
Council, and the National Association of Federal Credit Unions.
And, with that, the Chair also notes that some members may
have additional questions for this panel, which apparently they
do, which they may wish to submit in writing. Without
objection, the hearing record will remain open for 30 days for
members to submit questions to these witnesses and to place
their responses in the record.
This hearing is thereby adjourned.
[Whereupon, at 4:50 p.m., the hearing was adjourned.]
A P P E N D I X
February 9, 2011
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