[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]




 
                     ARE THERE GOVERNMENT BARRIERS
                    TO THE HOUSING MARKET RECOVERY?

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                        INSURANCE, HOUSING, AND
                         COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 16, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 112-7



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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 ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio

                   Larry C. Lavender, Chief of Staff
     Subcommittee on Insurance, Housing, and Community Opportunity

                    JUDY BIGGERT, Illinois, Chairman

ROBERT HURT, Virginia, Vice          LUIS V. GUTIERREZ, Illinois, 
    Chairman                             Ranking Member
GARY G. MILLER, California           MAXINE WATERS, California
SHELLEY MOORE CAPITO, West Virginia  NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey            EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina   WM. LACY CLAY, Missouri
LYNN A. WESTMORELAND, Georgia        MELVIN L. WATT, North Carolina
SEAN P. DUFFY, Wisconsin             BRAD SHERMAN, California
ROBERT J. DOLD, Illinois             MICHAEL E. CAPUANO, Massachusetts
STEVE STIVERS, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 16, 2011............................................     1
Appendix:
    February 16, 2011............................................    47

                               WITNESSES
                      Wednesday, February 16, 2011

Caldwell, Phyllis, Chief, Homeownership Preservation Office, U.S. 
  Department of the Treasury.....................................    12
Farrell, Michael A.J., Chairman, CEO, and President, Annaly 
  Capital Management, Inc........................................    33
Gordon, Julia, Senior Policy Counsel, Center for Responsible 
  Lending........................................................    37
Holtz-Eakin, Douglas, President, American Action Forum, and 
  former Director of the Congressional Budget Office from 2003 to 
  2005...........................................................    32
Schwartz, Faith, Executive Director, HOPE NOW Alliance...........    35
Stevens, Hon. David H., Assistant Secretary for Housing/FHA 
  Commissioner, U.S. Department of Housing and Urban Development 
  (HUD)..........................................................     8
Tozer, Theodore ``Ted'', President, Government National Mortgage 
  Association (Ginnie Mae).......................................    10

                                APPENDIX

Prepared statements:
    Caldwell, Phyllis............................................    48
    Farrell, Michael A.J.........................................    56
    Gordon, Julia................................................    60
    Holtz-Eakin, Douglas.........................................    96
    Schwartz, Faith..............................................   101
    Stevens, Hon. David H........................................   122
    Tozer, Theodore ``Ted''......................................   133

              Additional Material Submitted for the Record

Westmoreland, Hon. Lynn A.:
    Written responses to questions submitted to Hon. David 
      Stevens....................................................   141


                     ARE THERE GOVERNMENT BARRIERS
                    TO THE HOUSING MARKET RECOVERY?

                              ----------                              


                      Wednesday, February 16, 2011

             U.S. House of Representatives,
                Subcommittee on Insurance, Housing,
                         and Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:50 p.m., in 
room 2128, Rayburn House Office Building, Hon. Judy Biggert 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Biggert, Hurt, Miller of 
California, Capito, Garrett, McHenry, Duffy, Dold, Stivers; 
Gutierrez, Clay, and Sherman.
    Also present: Representative Green.
    Chairwoman Biggert. Good afternoon. This hearing of the 
Subcommittee on Insurance, Housing, and Community Opportunity 
will come to order.
    We will begin with opening statements. I apologize for 
keeping all of you waiting. I really didn't think that we were 
going to have 18 votes, so it did take quite a bit of time. So 
I will start and recognize myself for 3 minutes.
    Good afternoon, and thank you for attending this hearing. 
It is the first hearing of the subcommittee.
    Today, we will hear testimony that explores how government 
barriers are driving private capital away from housing while 
impeding market recovery. We will also examine options for 
promoting long-term stability in housing and moving toward a 
housing market that is financed by the private sector.
    At no other time in our Nation's history has housing 
finance been so controlled and so dominated by the Federal 
Government. While private investors or borrowers benefit on the 
upside, taxpayers assume the risk and foot the bill for 
failure. It is a distorted equation: congressionally-created 
mortgage giants Fannie Mae and Freddie Mac received nearly $150 
billion in a taxpayer-backed bailout, and programs like the 
Federal Housing Administration, or FHA, compete with the 
private sector businesses. In fact, according to HUD's Web 
site, FHA is the largest insurer of mortgages in the world, 
insuring over 34 million properties and over 47,000 multifamily 
projects, and this is since the inception in 1934.
    Combined, Fannie, Freddie, and FHA have well over 90 
percent of the mortgage market. And in recent years, 
government-created and managed mortgage programs united with 
the private industry and investors. They loosened underwriting 
standards and offered borrowers risky but low-cost loans, and 
all with a government guarantee. The result has been that we 
have seen turmoil not unlike the Great Depression. The 
government's role in housing and finance is unsustainable.
    Thus, during today's hearing we will examine the future of 
housing finance: Where are we now, what government barriers are 
fostering uncertainty or preventing a housing market recovery? 
And finally, what mid- and long-term steps should the 
Administration and Congress take to enable the private sector 
to reenter the business of housing finance?
    Housing is one of the most important cornerstones of our 
economy and we must get it right. I look forward to working 
with my colleagues on reforms to facilitate the private sector 
and reentry, eliminate the taxpayers' risk, and generate a 
vibrant housing finance system that serves creditworthy 
Americans.
    So, I welcome today's witnesses and now call on the ranking 
member, Representative Gutierrez, for 4 minutes.
    Mr. Gutierrez. Thank you.
    Good afternoon. I want to thank our witnesses for being 
here today.
    Before we move on to discuss the role of government in 
housing and what kind of barriers may be hindering the housing 
market recovery, I believe we need to have an honest and open 
discussion about the harsh realities facing hundreds of 
thousands of hardworking families across our Nation who have 
lost or are at risk of losing their homes. People are still 
being displaced, neighborhoods continue to fall apart in some 
parts of our country, and communities are still suffering due 
to the foreclosure crisis and the devastating economic 
condition facing our Nation's housing system.
    Since we are all familiar with the current housing 
situation, I think we should use this platform as a venue to 
discuss ways to ameliorate the housing crisis and restore faith 
in America's housing system.
    I would like to be clear about something; contrary to what 
some of my colleagues may believe, I do not believe that the 
government is hampering the recovery by placing burdensome 
barriers and driving away private investment in the housing 
market. Let me join the voices of those wiser and more expert 
on this subject--and I mean the voices of the Financial Crisis 
Inquiry Commission. It stated: ``The government did not cause 
the collapse of the housing bubble.''
    Importantly, there is also consensus among the majority of 
the members of the Commission that Fannie Mae and Freddie Mac 
were not primary causes. And lastly, they concluded that the 
Community Reinvestment Act was not a significant factor.
    Today, our government is serving the housing market at a 
time when private capital is scarce. Since the Federal Housing 
Authority, FHA, was created in 1934 to serve the housing market 
in a time of financial crisis, it has worked hard to ensure 
that housing finance credit is available to the American 
worker. And I would like to thank them, as I was able to obtain 
my first home because of FHA.
    We are now, once again, in a time of financial crisis, and 
the FHA is doing what it was created to do: make housing credit 
available to help struggling homeowners avoid foreclosure. Our 
government needs to continue to play the crucial role of 
providing homeowners with the assistance they need during these 
tough economic times. At this moment, if the government were to 
leave the housing market, there is no assurance that private 
investment would take its formidable place to help families 
save their homes.
    So as we move forward and look at ways to bring back the 
housing market to recovery, we need to give thoughtful 
consideration to real solutions that will help protect 
hardworking families. We have seen the devastating effect of 
lack of credit. Ask business people. It is my belief the same 
would happen in terms of housing.
    I would like to just take a moment and introduce this 
draft. It is the summary of conclusions of the Financial Crisis 
Inquiry Commission. It has the majority report. I would just 
like to say importantly the majority, three out of the four 
dissenters, concluded that Fannie Mae and Freddie Mac were not 
primary causes, and they were Republicans. This was a 
bipartisan group of people, much wiser and much smarter than 
many others on the issues.
    And I would just like to read the second dissent--there was 
one person who did blame Fannie Mae and Freddie Mac, and that 
was Mr. Wallison. This dissident blamed the crisis on the 
government housing policy, a factor that all the other 
commissioners concluded was not a primary cause, and concluded 
that almost all of the causes on which the majority report and 
the first dissent agreed were not primary clauses.
    I would like to ask unanimous consent to introduce this. 
And thank you so much for calling this valuable hearing, Madam 
Chairwoman.
    Chairwoman Biggert. Without objection, it is so ordered.
    The gentlelady from West Virginia is recognized for 2 
minutes.
    Mrs. Capito. Thank you, Madam Chairwoman. And I would like 
to thank Chairwoman Biggert for holding today's hearing and to 
congratulate her on this being her first hearing as the 
chairman of the Insurance and Housing Subcommittee. I look 
forward to working with her and Ranking Member Gutierrez on the 
many challenges facing our Nation's housing market.
    Since the start of the housing collapse, the FHA and the 
Government-Sponsored Enterprises, Fannie and Freddie, have 
grown in market share to the size where they now collectively 
insure or guarantee more than 90 percent of all the mortgages 
in the United States. While the government has played an 
important role in enhancing the flow of credit to targeted 
sectors of the economy, excessive risk exposure coupled with 
lax underwriting standards--and we learned more about that this 
morning--resulted in a government rescue at the taxpayers' 
expense.
    I think we could all agree that the taxpayer should no 
longer be on the hook for losses, and that reforms to the 
housing finance are long overdue. In laying out a plan for 
housing recovery, I was happy to hear the Administration 
acknowledge the need to bring private sector capital back into 
the mortgage market while taking steps to minimize government 
support and housing finance.
    I think generally their report, I welcomed it and thought 
it was a very good step towards hopefully a bipartisan solution 
for this. It is important to keep in mind, however, that 
reforms to reduce the presence of Fannie and Freddie must 
coincide with FHA reforms to ensure that increased market 
opportunities flow to the private market and not into FHA. I 
hope that the efforts that were made last Congress to restore 
the capital reserves and to enhance financial stability to its 
deteriorating FHA will continue this Congress so that we may 
see FHA return to serve its intended role in the housing 
market.
    I believe the Commissioner shares some of those--maybe not 
entirely, but some of the thoughts there. And I would also like 
to thank him for all of the work that he did with me and our 
staff in crafting the FHA reform bill last year. I am sorry we 
didn't get it all the way through, but we are still here to 
fight another day.
    I look forward to hearing from our panel of experts on the 
challenges to housing recovery and the future role both the 
private sector and government support will play in housing 
finance.
    Thank you again to the chairwoman for holding this hearing, 
and thank you to our witnesses for their testimony.
    Chairwoman Biggert. The gentleman from California, Mr. 
Sherman, is recognized for 4 minutes.
    Mr. Sherman. The title of this hearing is, ``Are there 
Government Barriers to the Housing Recovery?'' I think the real 
title ought to be, ``Are there Government Barriers to the 
Housing Market Collapse?''
    Right now, there are too few buyers, the prices are lower 
than we saw just 2 years ago by a very significant percentage, 
and we are clinging to the leverage under which we fell just 2 
years ago. And now some want to push us off the ledge on the 
theory that free flight is more ideologically consistent.
    We are in a crisis here still, and I don't think we should 
be deciding what to do with housing finance based on 
ideological purity. If we were having a long-term hearing about 
what to do 4 or 5 years from now, I would say that then we 
would focus on how we want to build for the future. But right 
now, we are just a few headlines away from another housing 
collapse, another 10, 20, 30 percent, and with that would be a 
double-dip recession.
    And so it is fortunate that the Federal Government has 
stepped up to the plate; they should do so in the most 
responsible manner. And after I am no longer obsessed with 
dealing with the present crisis and that crisis has passed, I 
look forward to hearings of this subcommittee to look at a new 
structure.
    I want to thank our witnesses for playing an important role 
in preventing the collapse that would otherwise occur. I would 
point out that in the absence of Federal involvement, we might 
see this market dominated by two or three financial 
institutions, just as even under the current circumstance, 
Wells, Bank of America, and Chase originate well over half of 
the mortgages.
    But my greater concern is that--and I see this in my own 
area because just outside my area, I see houses selling for 
such a price that they are above the conforming loan limit, 
even the higher conforming loan limit. If the homes are out in 
Malibu, the person buying them is able to get financing from 
their bank, which they may own. But when the home used to be 
worth $3 million, is now $2 million, you can't get financing 
for it, and that home ends up dropping further. And I can't say 
what it would do to the economy of Los Angeles and so many 
other cities if middle-class neighborhoods were to face that 
kind of implosion. That is why we need to maintain the 
conforming loan limit at $729,000 to $750,000 for high-cost 
areas, and it is why we need to have Fannie and Freddie 
involved in every community for the next phase of our effort at 
economic recovery.
    This economic recovery hasn't hit Main Street. We are still 
in a crisis, and ideological purity should not be the enemy of 
fiscal sanity and economic stability.
    I yield back.
    Chairwoman Biggert. I thank the gentleman for yielding 
back.
    The gentleman from California, Mr. Miller, is recognized 
for 2 minutes.
    Mr. Miller of California. Thank you. Welcome, Commissioner 
Stevens. It is good to see you here.
    This is the most difficult housing market I have seen in 
the 40 years I have been involved in it. I have never seen 
anything like this occur. We have done what we could in the 
past; we have increased GSE and FHA participation in high-cost 
areas, and basically we moved into about 92 percent of the 
marketplace. That, I believe, staved off an incredible crash 
that could have occurred had we not done that.
    We have tried to encourage homeownership. We have tried to 
give tax credits for first-time homebuyers. We have done some 
things out there that I think are pretty good. And we are 
trying, at this point in time, to encourage more private market 
participation in the marketplace, but liquidity is a problem as 
we all see it.
    The Administration has proposed three options we have to 
look at, and they are on pages 21 through 29 of the written 
testimony, I believe. The first 20 pages talk about things that 
are really not in the three proposals, like guaranteeing low- 
and moderate-income housing, stability in the marketplace, 
being able to move into a marketplace in case it becomes 
illiquid, which one, two, and three do not do. But my concern 
is that while we are doing this, at the same time the 
Administration is proposing to increase guarantee fees, 
reducing larger loans in the high-cost areas, requiring larger 
downpayments--which I understand some of these--but at the same 
time, when a market is illiquid, before we have an opportunity 
to resolve the GSE issue, we are pulling FHA back out of the 
marketplace.
    I understand you are up to 30 percent and you would like to 
get back to 10, 15 percent where you should be, but these are 
major changes in the current market and they are going to have, 
I believe, a major effect and a negative impact on the market 
too. In this fragile marketplace, dangerous actions like this 
can take steps that I believe are negative, and I think they 
can have consequences that we don't want to see. These actions 
are being proposed in the short term before we ever decide what 
we are going to do in the long-term. That doesn't make sense to 
me. We need to have a long-term resolution in place before we 
start making short-term moves that have a dramatic impact 
immediately on the marketplace.
    I think we need to take a step back, look at how these 
proposals are already impacting a fragile marketplace, and what 
we need to do to guarantee financing availability in the 
future. I just think we are moving in the wrong direction.
    I yield back.
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from North Carolina, Mr. McHenry, is 
recognized for 2 minutes.
    Mr. McHenry. I thank the chairwoman. And congratulations on 
your first hearing as well.
    Obviously, the dual mandate of Fannie and Freddie 
supporting both government housing policy and chasing profits 
for shareholders ended with predictable catastrophic results, 
proving that the Federal Government isn't really well equipped 
to deal in competing in the marketplace, especially with an 
unfair advantage with reduced costs of lending for the Federal 
Government.
    Since Fannie and Freddie's failure and subsequent placement 
into conservatorship, the Federal Government's intrusion into 
the housing market has been the most expensive market 
intervention of the financial crisis. Surprising to most, but 
with taxpayers on the hook for close to $150 billion, it is a 
very real impact. It is time we end this disastrous bailout and 
let private capital get back into the marketplace. That is what 
we need to do in order to move forward.
    I am pleased the Obama Administration supports our call to 
wind down Fannie and Freddie and I look forward to hearing from 
our witnesses about how we move forward.
    Chairwoman Biggert. The gentleman from Virginia, our new 
vice chairman, is recognized for 1 minute.
    Mr. Hurt. Thank you, Madam Chairwoman, for the opportunity 
to serve in this capacity, and for holding the subcommittee's 
first hearing on the state of the housing finance market. I 
also want to thank the witnesses for being here.
    In response to the financial crisis, the role of government 
in the housing finance market has grown dramatically. This 
growth not only increases the risk of substantial financial 
burdens on the taxpayers in Virginia's Fifth District, my 
district, but also across the country. It also prevents the 
private sector from competing in the market.
    I am particularly concerned about the Administration's 
foreclosure and mitigation initiatives, which do not appear to 
be helping a sufficient number of distressed homeowners to 
justify the program's enormous cost. The Administration's ever-
shifting strategies and massive expenditures of taxpayer 
dollars may only be forestalling a necessary bottoming in house 
prices, thereby hindering a more sustainable recovery in 
housing and the broader economy.
    Again, I appreciate your being here, I look forward to your 
testimony, and I yield back my time.
    Chairwoman Biggert. The gentleman from Ohio, Mr. Stivers, 
is recognized for 1 minute.
    Mr. Stivers. Thank you, Madam Chairwoman. I want to thank 
the chairwoman for calling this hearing today. I think it is 
especially timely given last week's focus on GSE reform in the 
Capital Markets Subcommittee and the delayed release of the 
Administration's report to Congress last Friday, talking about 
the need to limit government's involvement in the housing 
industry.
    Due to the burst of the housing bubble and changes to FHA 
eligibility requirements, FHA's market share has increased in 
the recent past. For example, in my district in Columbus, Ohio, 
and central Ohio, in the 15th Congressional District of Ohio, 
FHA now makes up over half the loans in my district. 
Unfortunately, FHA, along with the rest of the market, has been 
facing higher mortgage defaults. So in reviewing reforms, we 
don't want to limit access to the American dream, but I think 
it is important for my constituents to understand what is going 
on here and to focus on what we can do to make sure that we 
avoid damage to the economy and make sure that we look out for 
the American dream.
    I look forward to learning more from the witnesses today on 
how we can ensure the stability of the mutual mortgage 
insurance industry without removing this important resource 
from homebuyers.
    Thank you. I yield back the balance of my time, Madam 
Chairwoman.
    Chairwoman Biggert. The gentleman from Illinois, Mr. Dold, 
is recognized for 2 minutes.
    Mr. Dold. Thank you, Madam Chairwoman.
    I certainly want to take this opportunity to thank the 
witnesses for their time, their effort, and their 
participation, and I look forward to hearing from each and 
every one of you.
    All too often, well-meaning government efforts go too far 
and end up having unintended consequences, which are usually 
very negative and which frequently create more and larger 
problems than those that they were ostensibly intended to 
solve. These government policies often distort resource 
allocations, disrupt market mechanisms, manufacture artificial 
investment risk profiles, and put taxpayers on the hook for 
huge amounts of money. And by doing so, they frequently drive 
the private sector out of the market to the detriment of our 
families, employees, businesses, and our overall economy.
    And then some say that the government must increase its 
role in the marketplace because it is the only marketplace 
participant, sometimes forgetting about why the government 
became and remains the only marketplace participant.
    We have seen these results in the housing market, which is 
one of our most heavily regulated economic activities.
    Right now, the Government-Sponsored Enterprises have more 
than 90 percent of the mortgage market, and it is not 
surprising that the private sector capital can't compete with 
this kind of political force that drives out private sector 
capital and misallocates resources, and that also puts 
taxpayers at potential risk for hundreds of billions of dollars 
and potential liabilities, all with, I would argue, little 
accountability.
    Fortunately, I think we have reached a consensus in this 
country that we must return to a more stable mortgage market 
with far less potential taxpayer exposure and with far greater 
private sector participation. I understand that the 
Administration and Members of Congress on both sides of the 
aisle agree that we must move quickly toward this important 
objective.
    We as Congress have some important questions to consider, 
including the two most fundamental questions: first, what are 
the existing government policies or regulations that are 
keeping private capital out of the mortgage market; and second, 
what existing government policies or regulations are extending 
or deepening these difficult housing market conditions? I agree 
with the Administration that the government must not be a 
barrier to the housing market recovery, and I look forward to 
hearing from each and every one of you.
    Madam Chairwoman, thank you for the time.
    Chairwoman Biggert. The gentleman's time has expired.
    Now, I would like to ask unanimous consent for a member of 
the Financial Services Committee as a whole, Mr. Green from 
Texas, to make an opening statement for 1 minute.
    Mr. Green. Thank you, Madam Chairwoman. I thank the 
witnesses for appearing today.
    I think that there are some things that we agree on. I 
think that we agree that the VA loans are not a real problem, 
and my hope is that we won't disrupt that agency and the way it 
benefits our veterans.
    Most people don't perceive FHA to be a significant problem, 
and my trust is that as we move forward, we will realize that 
there is a meaningful place for FHA. Those of us who do concur 
and agree that Fannie and Freddie are going to have to have 
some adjustments made--and we understand that we don't know 
exactly where we are going, but we don't want to go back to 
that era before Fannie and Freddie when you had to have a 
balloon payment every 5 to 10 years, when you had to have an 
enormous downpayment, when housing was for the few, not the 
many, in terms of ownership compared to the number of people in 
the United States of America. The American dream should not now 
be put out of reach because of the crisis.
    Thank you, Madam Chairwoman. I yield back.
    Chairwoman Biggert. The gentleman's time has expired.
    And now again, let me welcome the witnesses. Thank you for 
being here, and thank you for spending quite a bit of time 
before we even got back from voting.
    I would like to introduce the witnesses now from Panel I: 
David Stevens, the Assistant Secretary of Housing and the 
Commissioner of the Federal Housing Administration, U.S. 
Department of Housing and Urban Development, commonly known as 
HUD; Theodore ``Ted'' Tozer, President, Government National 
Mortgage Association, known as Ginnie Mae; and Phyllis 
Caldwell, Chief, Homeownership Preservation Office, U.S. 
Department of the Treasury.
    Without objection, your written statements will be made a 
part of the record. You each will be recognized for a 5-minute 
summary of your testimony.
    I will now recognize Commissioner Stevens of the FHA for 5 
minutes.

    STATEMENT OF THE HONORABLE DAVID H. STEVENS, ASSISTANT 
   SECRETARY OF HOUSING/FHA COMMISSIONER, U.S. DEPARTMENT OF 
              HOUSING AND URBAN DEVELOPMENT (HUD)

    Mr. Stevens. Thank you. Chairwoman Biggert, Ranking Member 
Gutierrez, and members of the subcommittee, thank you for the 
opportunity to testify here before you. It is particularly an 
honor for me to testify today because I have not yet had the 
privilege of appearing before you or many of the other new 
members of this committee.
    I am here today on behalf of HUD and the FHA regarding the 
Obama Administration's efforts to encourage the return of 
private capital to the housing market.
    It is important to understand the context of the crisis 
that led to government intervention in the first place. With 
home prices falling every month for 30 straight months, $6 
trillion lost in home equity that wiped out the wealth for many 
families, and the loss of 750,000 jobs a month for 22 straight 
months of job losses, this Administration faces an economic 
crisis second only to the Great Depression.
    With private capital in retreat, the Administration had no 
choice but to intervene. The Administration kept mortgage 
interest rates at record lows. We also provided critical 
support for Fannie and Freddie while FHA stepped in to enable a 
robust market to emerge. The FHA's loss mitigation policies, 
combined with the Administration's HAMP program, set the 
standard for mortgage modification that the private market has 
finally begun to meet.
    We stopped the slide in home prices. Since April 2009, 
nearly 13 million homeowners have been able to refinance their 
mortgages. Monthly foreclosures starts are down more than 
30,000 per month from the same period a year ago. And we have 
seen 13 straight months of private sector job growth. But the 
time has come for the next step as we begin to reduce the 
government's role and develop policies that will help bring 
back private capital.
    As you know, in the absence of private capital, FHA's role 
expanded significantly, from less than 4 percent of the market 
in 2006 to more than one-third of new home purchases today. FHA 
has helped over 2 million families buy a home since President 
Obama took office, 80 percent of whom were first-time home 
buyers.
    FHA's role in the multifamily market is equally striking. 
In 2008, we supported the development of about 49,000 rental 
homes. In 2010, however, it was 150,000 rental homes. But as 
proud as we are of the historic steps we were forced to take to 
support American families, we are very aware of the risks of 
this elevated role. FHA has already made important reforms to 
reduce our footprint and strengthen our reserves. With new 
authority granted by Congress, we have been able to raise our 
FHA mortgage insurance premiums, including the 25 basis points 
additional increase we announced this week.
    FHA has also implemented a two-step credit score policy for 
FHA purchase borrowers, requiring that borrowers with lower 
credit scores make significantly larger downpayments. But the 
result of these actions that we have already taken are clear as 
we reduce financial risk to taxpayers and lay the foundation of 
the return for private capital. The quality of loans made over 
the last 2 years is much improved. Fiscal year 2010 represents 
the highest quality book of business in FHA history.
    It is clear that FHA is in a stronger position today, but 
more needs to be done. That is why we delivered this report to 
Congress last week that provides a path towards a return of a 
responsible private mortgage market and suggests how FHA can 
help make that possible.
    First, returning FHA to its traditional role as a targeted 
lender of affordable mortgages by decreasing the maximum FHA 
loan size by allowing the present increase of those loan limits 
to expire as scheduled.
    Second, continue to reform and strengthen FHA itself. The 
Administration will make sure that creditworthy borrowers who 
have incomes up to the median level for their area have access 
to FHA mortgages, but we will not allow the FHA to expand 
during normal economic times to a share of the market that is 
unhealthy or unsustainable.
    Madam Chairwoman, I believe it is necessary for Congress to 
give FHA more flexibility to respond to market conditions and 
manage its risks more effectively.
    Third, through broader commitment to affordable rental 
housing. To be clear, the Administration is committed to 
providing families with rental housing choices and believes 
that affordable options for the millions of Americans who rent 
is essential to a more balanced, sustainable housing policy.
    Having spent all of my career in the private sector, I know 
that one of the barriers we face to reform isn't government, 
but rather a trust deficit that the housing finance industry 
faces in its relationship with everyday Americans who associate 
housing with exploding ARMs, predatory loans, and foreclosures. 
Reducing that trust deficit is one thing the government can't 
do alone. The Administration is not only committed to restoring 
a healthy balance in the housing market, it is committed to 
working with Congress to find the common ground we need to 
build a 21st Century system of housing finance rooted in a 
strong, healthy market for private capital that harnesses the 
vitality, innovation, and creativity that has been at the 
foundation of our system for centuries. FHA's role in restoring 
this balance will be critical. We look forward to working 
closely with Congress to ensure people have the tools they 
need. That is what all our efforts are about.
    Thank you for this opportunity to testify here today.
    [The prepared statement of Commissioner Stevens can be 
found on page 122 of the appendix.]
    Chairwoman Biggert. Thank you, Commissioner.
    And now, we have Mr. Tozer. You are recognized for 5 
minutes.

  STATEMENT OF THEODORE ``TED'' TOZER, PRESIDENT, GOVERNMENT 
           NATIONAL MORTGAGE ASSOCIATION (GINNIE MAE)

    Mr. Tozer. Thank you, Chairwoman Biggert, Ranking Member 
Gutierrez, and members of the subcommittee for inviting me 
today.
    To provide context for our discussion, I would like to 
describe Ginnie Mae's role in the U.S. housing finance market 
and efforts we have taken to reduce that role.
    Ginnie Mae serves as the financing arm for FHA and other 
government-insured or guaranteed mortgage products. We are a 
wholly-owned, self-financed government corporation.
    Since inception in 1968, our corporation created and issued 
the first mortgage-backed security in U.S. history. Since then, 
we have guaranteed $3.7 trillion in mortgage-backed securities 
and we have brought liquidity and stability to the market 
through all economic environments.
    The recent decline in housing clearly led to retreat of 
private label securities investors. As it has before, Ginnie 
Mae stepped in to ensure liquidity. That is our historic role--
to provide the counter-cyclical support in times of crisis.
    During this crisis, our market share rose from 4 percent to 
nearly 30 percent. In 2008, our total MBS outstanding stood at 
$577 billion, but in June of 2010, we crossed the $1 trillion 
mark. Currently, outstanding Ginnie Mae securities have 
financed the homes for 7.2 million homeowners and 1.1 million 
rental units.
    Additionally, our corporate performance has been strong. 
Last year, our net income was $541 million. We have earned this 
profit despite increasing our loss reserve to $1 billion, and 
we are well positioned to deal with future market volatility 
with $1 billion of the loss reserve, plus we have $14.6 billion 
in capital.
    This performance is largely due to our business model. Let 
me explain. We work with lenders to pull loans guaranteed or 
insured by FHA, VA, Rural Development, and PIH to issue Ginnie 
Mae MBSs, mortgage-backed securities. Although securities are 
commonly referred to as Ginnie Mae's, we are not the issuer. 
These lenders who service and manage the mortgage-backed 
securities are the issuers and they pay us a fee to guarantee 
their bonds through investors. Ginnie Mae's business model 
mitigates the taxpayers' risk associated with secondary market 
transactions.
    Before Ginnie Mae's guarantee is at risk, three levels of 
protection have to be exhausted: first, the homeowner's equity; 
second, the insurance provided by the government agency to back 
the loan; and third, the corporate resource of the entity that 
issued the mortgage-backed security. We are in the fourth and 
last position before a guarantee comes into place. In effect, 
our issuers must exhaust all their corporate resources before 
we step in. We are the only entity involved in the housing 
market today that has this model.
    Madam Chairwoman, our business model has positioned us well 
for this volatile economy, but issuers have issued Ginnie Mae's 
securities at levels during the past 2 years that cannot 
continue. We must revise the private label securities market.
    To help us in that direction, we have implemented policies 
that increase accountability among our issuer base. We have 
increased capital and established new liquidity requirements 
across all product lines. These requirements can be looked at 
as a different but very effective form of ``skin in the game.''
    We have expanded our loan data disclosures, announced 
changes to allow small lenders to more easily do business with 
us, and we have worked with the GSEs to implement standardized 
loan delivery requirements.
    For investors, uncertainty about the future of GSEs impact 
their decision-making. It is difficult to plan production when 
you are not clear which secondary market outlets will remain. 
The Administration's proposal to increase the GSE guarantee 
fees, increase capital, and wind down portfolios will help end 
uncertainty and create space for the private label securities 
investment.
    As the financing arm for the government-insured products 
such as FHA, the level of MBS for guarantee are directly 
related to the level of mortgages these agencies ensure. 
Commissioner Stevens outlined plans to reduce FHA's role in the 
market. Our mortgage-backed security bond will decrease 
respectively.
    In recent years, financial flaws occurred at almost every 
link in the mortgage process. We now are aware of the advantage 
and disadvantage of securitization. When securitization is 
managed appropriately, it is a very efficient conduit for 
capital. However, if insufficient attention is paid to the 
quality of the collateral, consequences can be disastrous.
    Many investors in the private label securities market 
believe that investing in today's market requires them to take 
excessive and unpredictable risk. Restoring their faith will 
require great transparency, standardization, and 
accountability.
    Addressing the GSEs alone will not give rise to a market 
that meets the needs of investors, nor will it guarantee that 
private markets can effectively play a more dominant role. We 
must work together to map our way forward by looking at some of 
the additional forms I have outlined.
    Thank you again very much for giving me this opportunity to 
testify, and I am happy to answer any questions you might have.
    [The prepared statement of Mr. Tozer can be found on page 
133 of the appendix.]
    Chairwoman Biggert. Thank you.
    Ms. Caldwell, you are recognized for 5 minutes.

      STATEMENT OF PHYLLIS CALDWELL, CHIEF, HOMEOWNERSHIP 
      PRESERVATION OFFICE, U.S. DEPARTMENT OF THE TREASURY

    Ms. Caldwell. Thank you.
    Chairwoman Biggert, Ranking Member Gutierrez, and members 
of the subcommittee, I appreciate the opportunity to testify 
today. I would like to share with you some of the lessons we 
have learned from responding to the most serious housing crisis 
since the Great Depression.
    To begin, I believe it is important to remember where the 
housing market stood just over 2 years ago. When the Obama 
Administration took office in January 2009, home prices had 
fallen for 30 straight months, home values had fallen by nearly 
one-third, Fannie Mae and Freddie Mac had been in 
conservatorship for over 4 months, and American families were 
struggling to buy and keep their homes.
    Treasury, in partnership with other Federal agencies, 
responded by taking a series of aggressive steps with a 
strategy focused on providing stability to housing markets and 
giving families who can afford to stay in their homes a chance 
to do so.
    In particular, under the Troubled Asset Relief Program, or 
TARP as it is better known, we launched the Making Home 
Affordable Programs to help responsible homeowners avoid 
foreclosure. Through one such program, the Home Affordable 
Modification Program, or HAMP, Treasury worked to leverage the 
private sector to bring homeowners and their mortgage servicers 
together to find reasonable alternatives to foreclosure. So 
far, HAMP has helped close to 600,000 struggling families stay 
in their homes, and the median monthly payment reduction in 
these modifications is $520 per month, or close to 40 percent. 
The programs only pay for successful modifications, and they 
pay over time as the loan remains current.
    In addition, HAMP has spurred the mortgage industry to 
adopt similar programs that have helped millions more at no 
cost to the taxpayer. Mortgage assistance provided to 
homeowners through HAMP, the Federal Housing Administration, 
and private sector participation in the HOPE NOW Alliance has 
outpaced foreclosure sales by more than two-to-one. At the same 
time, implementing this program has been challenging on many 
fronts. I would like to share a few lessons we have learned 
over the past 2 years.
    First, when HAMP was launched in early 2009, mortgage 
servicers were totally unequipped to deal with the crisis. 
Servicers were set up to collect payments on performing 
mortgages. They did not have the staff, the systems, or the 
procedures to help people avoid foreclosure. By participating 
in HAMP, servicers had to build a modification infrastructure. 
They had to comply with HAMP requirements on how to modify 
mortgages and how to deal with homeowners. This has changed the 
industry.
    Second, engaging homeowners is key. Families facing 
foreclosure are often overwhelmed by their situation and 
frustrated by poor communication from their servicer. As such, 
we launched a national public service advertising campaign and 
outreach efforts aimed at engaging homeowners. We have also 
established systems designed to address homeowners' questions 
and complaints and improve the service they receive from their 
mortgage provider.
    Third, homeowners need safeguards. Being evaluated for a 
modification at the same time one's house is being foreclosed 
upon can be frustrating and confusing. In response, Treasury 
required HAMP servicers to evaluate a homeowner for HAMP before 
initiating foreclosure.
    And fourth, affordability matters. Mortgage modifications 
work only if they are affordable. Because HAMP sets a clear 
affordability standard, median savings for borrowers is close 
to 40 percent from their mortgage payments, and because of 
these reductions HAMP modifications have lower redefault rates. 
Nearly 85 percent of homeowners remain in their permanent 
modifications.
    We have faced many challenges in developing and 
implementing our programs, and much work remains to ease the 
housing and foreclosure crisis, but that should not obscure the 
importance of what has been accomplished. Our housing programs 
have established key benchmarks and borrower protections that 
are now viewed as industry best practices. We will continue to 
reach out to as many eligible homeowners as possible through 
our program's expiration in 2012, while safeguarding taxpayer 
resources every step of the way.
    Thank you for the opportunity to testify, and I welcome 
your questions.
    [The prepared statement of Ms. Caldwell can be found on 
page 48 of the appendix.]
    Chairwoman Biggert. Thank you.
    We will now proceed to questions. Members will be 
recognized for 5 minutes each to ask questions. I will start 
and yield myself 5 minutes.
    Commissioner Stevens, the report that was issued to 
Congress on modernizing the housing finance stated the goal of 
reducing the market share of FHA from historic high levels to a 
more normal level in the future.
    However, at the same time, I have been hearing about 
discussions of the Qualified Residential Mortgage (QRM) among 
the regulators, involving creating a very narrow QRM, such as 
perhaps mandating a 20 percent downpayment requirement. 
Wouldn't a narrow QRM, coupled with winding down of Fannie Mae 
and Freddie Mac, exclude many qualified and worthy borrowers, 
but also drive them to FHA rather than into the private sector?
    Mr. Stevens. Yes. Thank you for that question, Madam 
Chairwoman.
    There are two components here. As it relates to QRM, we are 
one of the regulators that are involved in this rulemaking 
process, and so to some degree, I am a bit limited in what we 
can discuss related specifically to what may come out there. 
But I would say this: Experience that has proven itself over 
the decades in this housing system is that FHA traditionally 
has always played a much smaller role in the housing market, 
driven mostly by curtailments around loan limits as well as a 
robust competitive market that was functioning well. We don't 
have the robust competitive market functioning well, and we 
have loan limits that clearly cover a much larger section of 
the market than what FHA was ever intended to do.
    I remember buying my first home with an FHA mortgage and I 
paid a 3.8 percent mortgage insurance premium on my home--which 
is much higher than we charge today. The loan limits were far 
lower in terms of what we were able to qualify for. And FHA 
played a very important role in the housing market.
    So as we go forward, whatever the QRM--Qualified 
Residential Mortgage--guidelines are and as we work to try to 
find avenues for private capital to reengage, there are 
measures within the FHA that can control that volume in a 
responsible way and remain targeted towards the purpose it 
would serve. Loan limits are one; mortgage insurance premiums 
are clearly another; and product guidelines are a third. I 
think those are the three primary methods that would ultimately 
be used, again, over time as we carefully transition to a more 
normalized market where private capital is reengaging.
    Chairwoman Biggert. The White Paper also talks about 
phasing down Freddie and Fannie. And there is some angst about 
how could private investors be encouraged to increase 
investments in both the single-family and multifamily housing 
if there is no guarantee. What mortgage metrics could help 
investors gain confidence in investing in private mortgage-
backed securities that don't have a government guarantee? Is 
that possible?
    Mr. Stevens. That is really the crux of what the White 
Paper is meant to tease out from a debate standpoint. And that 
is why, when we presented the three options, we clearly 
eliminated a couple of additional options that we debated and 
excluded. One was a no guarantee system and one was a much 
larger guarantee system. We recognize that there would be a 
guarantee literally in all three of those options, at a minimum 
for FHA and underserved families. But I have been through 
market cycles before and I have seen private capital exit and 
return. They have done so under various terms. One of those 
terms is to come with stabilized home prices. As home prices 
continue to decline, it creates trepidation from private 
investors to come into that market. Another is return on 
investment, that the credit risk has to be priced appropriately 
for private capital to engage.
    I think the White Paper is very careful in spelling out 
that while we need to wind down Fannie Mae and Freddie Mac, 
this is a multiyear process to be done very carefully, this 
idea of transition. And as we transition and we begin to take 
the first steps, we will have test points to see how private 
capital reengages. But I want to be clear: I am confident--
having been in these cycles before, never to this extreme, but 
I have been in these cycles when private capital exited 
markets--that capital returns when it believes that the 
investments are safer, sounder, and more secure and at the 
return rates that are needed to make sound investments. And 
that is what we will have to test as we engage with policy and 
look to see signs that market is returning.
    Chairwoman Biggert. Then isn't one of the lessons that we 
have learned from the crisis that it may not be feasible for 
everyone to own a home at this time, and some may be in a 
better position to rent? In your testimony on page 2, you 
mention that the Administration will be looking for reforms 
that balance the impacts on low- and moderate-income families 
as you consider further FHA reform.
    Can you describe what that balance would look like?
    Mr. Stevens. Yes. And I think that is absolutely critical. 
Everybody has to recognize that not everybody should have owned 
a home in this past period. We created a bubble based on stated 
income, 100 percent financing, exploding loans that ultimately 
damaged the wealth and credit histories of those families who 
took out those programs in search of perhaps more instant 
wealth in that process. That was irresponsible.
    Secretary Donovan, this Administration, has been very clear 
that we need a much more balanced housing policy. And you can't 
have a balanced housing policy without a specific focus on 
rental housing.
    And so in the White Paper, we talk about it. We look 
forward to engaging in a dialogue with Members of Congress on 
going forward and making sure that there is safe, affordable, 
accessible housing, and that there is explicit focus on making 
sure that there is liquidity behind that market.
    That could come with a couple of suggestions we have in the 
White Paper. One is looking at smaller rental properties. 
Today, it is difficult to find financing for multifamily 
properties in the 50-unit range, particularly in many urban 
markets where there is older multifamily housing stock. Another 
is making sure that there is rental housing in rural markets 
where traditionally the multifamily investment market and 
rental investment market hasn't really concentrated. This is an 
area we think needs to be looked at as we look at balancing the 
ownership/rental markets to make sure America is well housed 
generally, whether they own or rent.
    Chairwoman Biggert. Thank you. My time has expired.
    Mr. Sherman is recognized for 5 minutes.
    Mr. Sherman. Thank you.
    First, I want to comment that even in good economic times, 
divorce, unemployment, death, illness--and we hope the health 
care bill will diminish the economic impact of illness, but it 
can cause people not to be able to work--all those things 
happen. They happen to such a large percentage of mortgages--
not a huge percent, but a large percentage, so that the private 
sector is going to be reluctant to get into this market unless 
they are confident that if they need to foreclose, the housing 
market is going to be a stable market. And with the work that 
government is doing now, we are not going to convince the 
private sector that we have stabilized housing prices.
    You can make the ideological argument that today's problems 
are because we have strayed from the principles of Ayn Rand or 
not, and I am not here to have that ideological argument. But 
we do need to prevent a collapse now in a market that is what 
it is, whether it conforms to anybody's ideology or not.
    First, Mr. Stevens, a recent report showed, as I mentioned 
in my opening statement, that only three banks originated over 
half of the mortgages. Does this concern your department? And 
what can be done about it?
    Mr. Stevens. This is an absolutely important part of the 
discussion that we all need to engage in. Concentration risk, 
``too-big-to-fail'', those kinds of statements are being made 
in headlines as we talk about the participants in the mortgage 
market going forward. I think we are very careful in the White 
Paper to express concern for community banks and smaller 
financial institutions to access and participate in the 
mortgage market.
    You are absolutely correct that we have seen the market 
consolidate. Reports have come out in the last couple of days 
giving new data in that regard. And much of that has to do with 
the broad weakness in the financial services system and some of 
the larger institutions' ability to use the capital and balance 
sheet to continue to engage in this market.
    We need to make very certain that as we think about policy 
going forward, particularly the options that we have laid out 
in the White Paper, that they don't, as a result--you talked 
about unintended consequences--create the unintended 
consequence of forcing even greater consolidation in the 
market. We benefit greatly by a broadly distributed housing 
finance system. This country has traditionally operated under 
that construct. Today we are in very unique times, and a policy 
that we think about has to address that on a go-forward basis.
    Mr. Sherman. The FHA was designed to fill the gap when the 
private market is unavailable. Is that what the FHA is doing 
now?
    Mr. Stevens. Yes, it is. Absolutely. It is absolutely 
filling that gap. I think this question has to come into play: 
If FHA is financing 3 percent down mortgages at $729,000, is 
that the principle under which it was originally designed? I 
think the other way to ask the question is: Are there borrowers 
in that population who could come up with a larger downpayment 
and are using the FHA program simply because it doesn't require 
it?
    And those are the considerations that we think are very 
important because, without question, one thing I have come to 
appreciate is FHA has some of the best employees and committed 
people I have ever seen in the housing finance system, but they 
are limited by appropriations and budgets, and they just can't 
handle an endless amount of volume and risk coming onto that 
balance sheet.
    Mr. Sherman. If I could just interject, we lost a fortune, 
the Federal Government. We failed to prevent a collapse, we 
failed to prevent a bubble, and a decision was made that I 
certainly didn't agree with, that we would honor the implicit 
guarantee as if it was a real legal guarantee, penny for penny.
    Those decisions have been made. The question is not whether 
FHA, Fannie, and Freddie may lose money on loans written up 
until today. The question is, how much is it costing to allow 
you to go forward in the future? What does the CBO think that 
it costs to allow the FHA to do through the end of this fiscal 
year exactly what you are planning to do? I know everybody can 
argue with the CBO, and I still think the Lakers won the game 
last night, but the ref said otherwise. So the CBO is the 
accepted referee. Go ahead.
    Mr. Stevens. I appreciate that question, Congressman 
Sherman. Let me just give you the critical data. At the time 
they scored the budget, OMB estimated--I want to show the two 
numbers--OMB estimated that FHA would generate $5.7 billion in 
negative subsidy, meaning receipts to the taxpayer. CBO scored 
it at $1.8 billion, a much lower number.
    Mr. Sherman. So these folks are just arguing about how much 
money you make. And does that take into account the actuarially 
best determined cost of the guarantee you provide? That is not 
just a cash receipts kind of a thing--
    Mr. Stevens. No. It absolutely takes into account an 
actuarially sound expectation of losses against the backdrop 
of--
    Mr. Sherman. So you are making money for the Federal 
Government on the best analysis that we can provide from OMB 
and CBO.
    What about Fannie and Freddie, not looking at the fortune 
they lost on previously existing mortgages. Are they making 
money or losing money for the Federal Government? Best estimate 
of the CBO.
    Mr. Stevens. I do not have the CBO estimates of Fannie Mae 
and Freddie Mac.
    Mr. Sherman. OMB? My time has expired.
    Chairwoman Biggert. The gentleman from Virginia, Mr. Hurt, 
is recognized for 5 minutes.
    Mr. Hurt. Thank you, Madam Chairwoman.
    In a report released in December of last year, the 
Congressional Oversight Panel wrote, ``In some regards, HAMP's 
failure to make a dent in the foreclosure crisis may seem 
surprising. Yet despite the apparent strength of HAMP's 
economic logic, the program has failed to help the vast 
majority of homeowners facing foreclosure.'' It is my 
understanding that HAMP has resulted in only 483,000 permanent 
mortgage modifications, far short of the 3 to 4 million that 
the Administration predicted when the program was unveiled.
    Ms. Caldwell, I was hoping that you could respond to that 
criticism.
    Ms. Caldwell. Thank you for the question.
    First of all, I would say that HAMP has not been a failure. 
While it has not achieved as many modifications as we would 
have hoped, we have to keep in mind that close to 600,000 
families have had their loans modified in an affordable and 
sustainable way, and that number continues to grow each month.
    Second, I think we have to keep in mind that before HAMP, 
there were no standards for the private market to modify loans 
this way. And by looking at loans and running them through a 
net present value model, modifications are now done when it is 
in the best interest of the investor and the financial system 
to have that homeowner in a sustainable modification. So while 
it hasn't achieved the volume, I think it is very important to 
keep in mind what it has done, the successes it has had, and 
the families who have been helped.
    Mr. Hurt. An additional criticism is that the terms have 
been changed again and again, and servicers have said that 
every time, a change to HAMP requires a costly investment of 
time, personnel, and technology, and that the changes have 
created confusion in the marketplace.
    Do you believe that confusion has made it more difficult to 
reach the 3 to 4 million that were predicted?
    Ms. Caldwell. As I said at the beginning of my testimony, 
the servicing industry was set up to collect payments and was 
ill-equipped to handle the crisis of this response.
    I think when we talk about changes to the program, it is 
very important to keep in mind that the terms and structure of 
the modification for HAMP have stayed the same throughout the 
program. What has changed throughout this couple of years is 
how to get these servicers to implement the program correctly. 
And one of the things that we learned, we learned early on they 
had no way of figuring out how to reach homeowners, so we had 
to put systems in place to do that. They had no way to respond 
to checks and balances, so through our compliance mechanisms we 
asked them to go back and reevaluate people and do things. They 
could not implement a net present value model, so we had to put 
in procedures.
    So the more procedures that we put in place, it did slow 
time as they made investments in systems, but had they not, 
millions more American families would have gone to foreclosure.
    Mr. Hurt. Do you think that homeowners are shopping around 
for the best government deal and then holding out for the best 
Federal assistance that they might get in trying to seek these 
modifications? And if so, do you think that hinders private 
sector capital from coming into the market?
    Ms. Caldwell. One of the things we have learned in the HAMP 
program is that mortgages and mortgage securities may look 
identical at the securitization level, but you don't know about 
the underlying homeowner until they pick up the phone and 
identify themselves.
    What we see is homeowners who are struggling and confused 
and frustrated and sometimes in this position for the first 
time in their life.
    Does that mean that there aren't some in a broad swath of 
people who may be shopping, we can't really say that. What we 
do say is that we have, at least for those modifications that 
are getting taxpayer subsidy, we have fraud controls; we have 
hardship affidavits; and we try to make sure that we are only 
using taxpayer resources for those homeowners who need help.
    Mr. Hurt. This morning we heard from Mr. Angelides, who is 
chairman of the Financial Crisis Inquiry Commission. And one of 
the things that I thought was surprising in his report was how 
government housing policy contributed very little if anything 
to the crisis that we are now trying to understand and prevent 
in the future.
    Do you believe that the government housing policy 
contributed nothing to this, to our current crisis, and if so, 
why?
    Ms. Caldwell. Right now--that is a very important question 
and one that has been debated in the past and will continue to 
be debated about the future of housing finance reform.
    I think the one thing that we are focused on in terms of 
foreclosure prevention is the one thing that we can all agree 
on, and that is a homeowner who is behind on their mortgage 
payments who doesn't get help will ultimately go to 
foreclosure, and it is in the best interest of the financial 
system to avoid those foreclosures to the extent possible.
    So really I think it is--you can talk about stabilizing the 
market, addressing the problem now and in the future. We are 
focused on addressing that problem.
    Mr. Hurt. Ms. Caldwell, thank you for your answers.
    Chairwoman Biggert. The gentleman's time has expired, even 
though the clock was off.
    The gentleman from Missouri, Mr. Clay, for 5 minutes.
    Mr. Clay. Thank you so much, Madam Chairwoman, and thanks 
for conducting this hearing.
    Commissioner Stevens, according to a recent report by the 
Special Inspector General for TARP (SIGTARP), only 15 FHA short 
refinances have been completed so far. Why has there been such 
a lack of participation in this program?
    Mr. Stevens. Just to be clear, the number is higher but not 
much higher, but that was their most recent report.
    Without question, the FHA short refi program has been a 
difficult one to get off the ground, for several reasons. One 
reason is that it is optional. The participants in the program 
have to choose to do principal write down. But with roughly 27 
percent of all American homeowners underwater today, there is 
certainly an opportunity.
    We have begun to talk to institutions that are beginning to 
create the capabilities to do short refi, but it requires an 
operations investment. They have to invest in technology and 
systems. It is almost like creating a new product. We think 
that will have some impact on the numbers.
    Without question, however, this is an area in which we 
continue to focus. We believe that principal write down is 
absolutely needed. It is one of the key variables left to 
address, outside of modifications, to get this housing economy 
right-sized. But it does require, again, the voluntary 
participation of servicers and investors.
    These are awkward handoffs. And there has been some natural 
resistance to wanting to engage by some, and we continue to 
work with them.
    Mr. Clay. Any examples of success in prodding any of the 
institutions to come along?
    Mr. Stevens. I can't name institutions without--they would 
have to--I would prefer that they announce that they are going 
to participate. But I will tell you that I had conversations 
with the CEOs of virtually all the major lenders in this 
country on this process. So has the Secretary and so has 
Secretary Geithner.
    And I do know a couple of the large ones are actually 
building out the capability to be able to roll out the program. 
We do need more. And there is no question about it that we 
maintain and continue to maintain that this is an area that 
needs continued focus and pressure to get this market right-
sized.
    Mr. Clay. Thank you for that response.
    Mr. Tozer, can you expand on Ginnie Mae, on how Ginnie Mae 
has handled the housing crisis we are facing differently from 
Fannie Mae and Freddie Mac?
    Mr. Tozer. Thank you, Congressman Clay.
    Basically, Ginnie Mae's role is completely different than 
the GSEs, Fannie and Freddie. Fannie and Freddie are in a 
situation where they insure the borrower. Like a lender that 
would originate a loan, Fannie and Freddie buy it; they buy 
without recourse. So if a lender follows the rules, the lender 
has no legal obligation to have any financial obligation to any 
losses that occur. Fannie and Freddie take all losses. They 
also take those loans, create a Fannie and Freddie security 
they are obligated for, and at that point, the security then is 
their obligation, and they have to make good to the investor if 
the borrower goes delinquent.
    Ginnie Mae is different in the fact that we do not buy any 
loans. The lenders take their loans, and they are insured by 
FHA, VA, various government programs. They create a security. 
That security is the obligation of that lender. And what we do 
is, for a fee we will put a government wrap on that security so 
that we are guaranteeing to the investor that if that servicer 
cannot perform the obligation of making the principal interest 
payment for delinquent borrowers, we will then step in and make 
sure there is a servicer who will make those payments.
    So we basically are almost like a surety bond making sure 
that the servicer performs their obligation. And what happens 
if an issuer cannot revoke their obligation and fails, we then 
would actually take the servicing, all their servicing that is 
Ginnie Mae and move it to another servicer. So, from that 
perspective, we are never taking any credit, borrower credit 
exposure, except for the fact however much it stresses the 
issuer. Because like I said, the issuer has to make all the 
payments to the investor, all the way through to the time that 
they buy it out of a Ginnie Mae security.
    They can buy it out as early as the borrower being down 
three payments or wait all the way through to foreclosure. But 
as soon as they buy it out of the Ginnie Mae pool, our 
guarantee no longer applies to that loan. So once we move the 
servicing, it is pretty--it is easy to move because most of the 
delinquent ones have been bought out so most servicers will 
take on the business. That is the reason why our guarantees 
come into play so few times.
    But in the uncertainty in the capital markets, having the 
government guarantee has allowed us to make markets for FHA/VA 
loans, to central bankers, to insurance companies because of 
the uncertainty in the capital markets for what they are going 
to get. That way, they know they get their principal and 
interest.
    Mr. Clay. I yield back, Madam Chairwoman.
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from North Carolina, Mr. McHenry.
    Mr. McHenry. Thank you, Chairwoman Biggert.
    Mr. Stevens, are HUD and the Administration currently 
contemplating any loan modification or principal reduction 
programs or changes?
    Mr. Stevens. We are not contemplating at this point any new 
modification programs. FHA has always operated in a very unique 
way. We have a long history of modification programs.
    Mr. McHenry. But certainly, you would be a part of that 
discussion if they changed these?
    Mr. Stevens. Absolutely.
    Mr. McHenry. Okay. Are you aware of any--let me just 
restate this one more time to give you an opportunity. Are you 
aware of HUD or the Administration contemplating any new loan 
modification or principal reduction programs in connection with 
a possible resolution of the current Federal and State attorney 
general review of the robosigning related problems at the major 
banks?
    Mr. Stevens. Thank you for that clarification of your 
question. We are in discussion with 11 regulators, the State 
attorneys general, the Department of Justice, in talking 
directly about several large servicers that we have publicly 
mentioned in terms of this effort working together, with one 
possibility being enjoining in some sort of settlement with 
these institutions.
    This is premature. There would not be necessarily any--
there would not be any new program created that doesn't exist 
already in anything we have been discussing.
    Mr. McHenry. Will there be new funds?
    Mr. Stevens. There would not be new funds associated with 
this program, with any settlement that we have been discussing 
to date.
    Let me just step back for a moment, because what is said in 
this regard is very important. We have a significant 
foreclosure crisis. All the regulators, especially since the 
robosigning news that became so prevalent in the fall, have 
gone onsite and done various levels of investigating or looking 
into servicer performance standards. Most of the regulators 
found something that others may not have. We were very open at 
HUD stating that we had found some irregularities and variable 
performance.
    And there are two ways we can proceed to a conclusion here. 
We can work with the other regulators to try to come up with 
one set of solutions, assuming the general findings are the 
same, or we can proceed individually, and that process is being 
worked through right now.
    But none of this involves Federal funds in any settlement 
or if any fines or penalties will be assessed to institutions 
in due course based on the authorities that we currently have 
at HUD for example.
    Mr. McHenry. Can you describe--you described the 
consideration. Will you commit that any such programs that are 
proposed and funded through the regular budget process with 
Congress and subject to congressional authorization, will you 
come back to us for authorization?
    Mr. Stevens. So if I can--sorry to answer with specificity, 
but I would like to make sure that I am not saying something 
that is incorrect. If there is anything associated with a 
potential settlement that involves the creation of a new 
program or new subsidies, I will absolutely come back.
    Mr. McHenry. So with the settlement money, how will you 
allocate that, will you come back to Congress for authorization 
on how that is allocated?
    Mr. Stevens. The settlement money would be penalties 
assessed to institutions within existing authorities at HUD. We 
have assessed penalties or taken action against over 1,800 
institutions since I have become FHA Commissioner. We have a 
mortgagee review board that assesses penalties on a monthly 
basis.
    Mr. McHenry. I certainly understand that.
     But we are talking about a larger magnitude than those 
previous numbers. Will you come back to Congress with 
authorization of how to allocate those resources?
    Mr. Stevens. If authorization is required, we will come 
back to Congress.
    Mr. McHenry. I am asking you, will you come back regardless 
of what you think your current opportunity is under the law to 
ask for authorization?
    Mr. Stevens. I cannot commit to that at this time.
    Mr. McHenry. Okay.
    Ms. Caldwell, I want to follow up with you about the same. 
Are you a part of these discussions as well?
    Ms. Caldwell. I am part of some of them but not all of 
them. I am generally aware.
    Mr. McHenry. Generally aware. What is your awareness on how 
this will come about, or what will come about, rather?
    Ms. Caldwell. I think it is important to keep in mind that 
while Treasury is one of the Federal agencies that is involved 
in the process, Treasury is not a primary regulator of any of 
the institutions, so we do not have the authority, as Mr. 
Stevens referenced that HUD may have.
    Mr. McHenry. What part of the discussions are you involved 
in?
    Ms. Caldwell. We are involved in both the discussions with 
the servicers as they relate to the HAMP program and the 
discussions among those agencies that have chosen to describe 
some of the things that they have found.
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from Illinois, Mr. Dold, is recognized for 5 
minutes.
    Mr. Dold. Thank you, Madam Chairwoman.
    If I could, Mr. Stevens, I just have a quick question for 
you. I think you said during your testimony that about one-
third is the market share that the FHA has right now in terms 
of single-family lending at this point in time; is that 
correct?
    Mr. Stevens. Actually, it has dropped. The current FHA 
market share levels are closer to 20 percent today.
    Mr. Dold. Closer to 20 percent.
    Mr. Stevens. Yes.
    Mr. Dold. What is the optimal market share in a normal 
market?
    Mr. Stevens. I would be glad to share with you as a follow 
up and sit down and go over market shares in the history of 
FHA. It has ebbed and flowed over the years. The traditional 
market share has been somewhere in the 10 to 15 percent range.
    I do think it is important, however, to recognize, and 
let's just use one different market correction, the oil patch 
crisis, FHA's overall market share remained in the teens, but 
we were as much as 40 percent of the market in States like 
Colorado, Texas, and Oklahoma during that period. But the 
overall national market share was able to remain very low. And 
again, that is more of a normalized market.
    Mr. Dold. What policy changes would you recommend for this 
body to be considering to promote a more healthy role for the 
private sector or private capital in mortgage finance?
    Mr. Stevens. I very much look forward to that dialogue. I 
would like to share with you the policies we have taken over 
the last couple of years: three mortgage insurance premium 
increases; changing FICO requirements; changing actual 
underwriting policies of programs. Our market share from first 
quarter of 2010 to fourth quarter of 2010 per Inside Mortgage 
Finance dropped from 24 to 14 percent in the fourth quarter, 
14.8 percent. That is their data.
    We have already clearly seen from the policy changes we 
have implemented a reduction in FHA shares of market. As I said 
in the opening comments to the chairman, there are several 
levels we can work on, but clearly, pricing the risk 
appropriate to the mortgages we are insuring is a critical 
component. I think we have done an outstanding job on this with 
the help of Congress in giving us more authority.
    Mr. Dold. What do you deem in the next 18 months will be 
success if you are able to accomplish or we get what part of 
the private sector in, what will you deem a success in the next 
18 months for FHA?
    Mr. Stevens. I would encourage us all, as we are working 
together on this process, to make sure that we don't act too 
quickly with the absence of private capital. I am a huge 
supporter of private capital; it is my entire background, 
coming into the market.
    Mr. Dold. That is why I am asking.
    Mr. Stevens. But I will say this. Ultimately, the policies 
we put in place, and as I said earlier, we are going to have 
test points along the way with loan limits will be--my 
estimation will be the next round, along with these price 
changes we have currently put into place. We will see how 
private capital is reengaging. Assuming a normalized rate of 
reentry of private capital in the market, I think we should 
strive to get FHA's market share level back down to its more 
normalized market share.
    As I quoted our fourth quarter data, we actually could be 
on a trend of returning closer to that level rather than the 
levels we have been at for the last couple of years. And all of 
that I think we need to be sensitive about. I would love to 
have an ongoing dialogue with all of you, and you specifically 
as you are interested, to talk about what is happening in the 
market more broadly so we don't create this double dip or 
unnatural outcome that can harm families even more.
    Mr. Dold. Some have suggested, and again, I am sorry to 
continue to focus on you, Mr. Stevens, and I apologize to the 
other panelists, and please chime in if you feel it necessary.
    Higher downpayments have been talked about in terms of 
asking homeowners. We have seen it going back to previous 
generations. They saved, they saved, and they had to put down 
20 percent. And that obviously was a big difference, I think, 
in what is going on today as we have seen those capital 
requirements for downpayments drop significantly. What are your 
thoughts with regard to requiring additional capital for home 
buyers?
    Mr. Stevens. If I can answer it this way, I have been doing 
this for 3 decades in the finance system. I bought my first 
home with an FHA loan back in the 1970s with a 3 percent 
downpayment, believe it or not, because they did it the same 
way back then.
    The problem ends up being if you have too broad a box in 
which you can originate FHA loans, the market people are going 
to naturally use that program, even when home buyers could come 
up with a larger downpayment and they don't necessarily meet 
the original objective of FHA.
    I do think a small downpayment provides a value, 
particularly for underserved families who may not have the 
additional disposable income to save up, virtually trapping 
them in a world where they can never become homeowners because 
they will never be able to save for a downpayment, even though 
they have a good job, they have a family, and they can afford a 
home. So I believe targeted assistance in those markets should 
continue.
    But I do believe, if it is the trend of the questions you 
are asking, that we clearly need to contain and reduce the 
footprint of FHA over time safely, but we do need to reduce the 
footprint so it isn't playing the kind of role it is today and 
perhaps providing financing at low cost to families who could 
otherwise come up with a downpayment.
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from Ohio, Mr. Stivers, is recognized.
    Mr. Stivers. Thank you, Madam Chairwoman.
    I would like to thank Mr. Stevens for what FHA has done to 
address their risk pricing and modernize the agency a little 
bit.
    I do have a couple of specific questions for Mr. Stevens 
about FHA with regard to condominiums. You changed your rules 
last year with regard to spot approvals, with regard to 
concentration, with regard to having at least 50 percent of the 
units pre-sold, and I know that has reduced your concentration 
in condominiums. I know condominiums were part of the problem.
    But I have heard from some constituents in my area that we 
have a lot of bank-owned condos and now it is really hard to 
get financing for those and they are stuck in sort of limbo, 
because the bank took it back. Now you can't get an FHA loan. 
You can't get a conventional loan, and therefore those condos 
are sort of stuck. Has FHA and anybody on the panel looked at 
that issue, and is there a way out of that, because obviously 
we need to get those properties in productive use?
    Mr. Stevens. Congressman, I very much appreciate the 
question, and it is an area that we have spent an extraordinary 
amount of time focusing on. I think, as you may know, we 
actually put a temporary extension in, we have now done it for 
2 years in a row, to provide more lenient policies to the 
condominium market. Keep in mind most of this relates to new 
condominium approval.
    Mr. Stivers. Right.
    Mr. Stevens. We are currently one of the few institutions 
that will insure a condominium, particularly at a high loan to 
value. Most of the private insurers will not engage in this 
market. And so we are the sole source provider. And FHA has 
experienced some fairly significant losses on condominium 
buildings that went completely belly up during this last 
economic crisis.
    But we also recognize that condominiums are often an entry 
point for first-time home buyers. And in underserved 
communities, it is really important we provide that service. It 
is a difficult position that we are in to be responsible to the 
taxpayer and to make sure we are providing needed liquidity. I 
meet frequently with the National Association of REALTORS and 
the home builders, mortgage bankers, all who constantly want to 
discuss these policies. I am very open to discuss them.
    Today we have--I have given temporary extensions to 
policies at much more lenient levels because of the concerns 
you have, but I would be very interested in any insight or 
input that you or your staff would have.
    Mr. Stivers. I do have some input. Is there some 
flexibility we could give you to charge risk-based pricing on 
those condominiums that are obviously different because your 
risk is higher than other places? And I know currently you 
don't offer a lot of differentiation. Have you looked at that 
as a way to offset that--
    Mr. Stevens. You know, Congressman--
    Mr. Stivers. --and have people pay for what they need.
    Mr. Stevens. We have been looking at ways to implement a 
risk-based pricing pilot, as we are authorized to do by 
Congress. Actually, it is an interesting idea. It is one I 
would like to go back and look into, and I would be glad to 
follow up with you on how and if we could do something like 
that.
    Mr. Stivers. And I would love if you could follow up with 
me in my office because it is impacting a lot of our districts, 
but especially, again, on whole projects that have fallen into 
bank foreclosure now, if over 50 percent of them are--it is 
just hard. They can't get private financing. They are having 
trouble getting FHA financing. I sympathize with folks trying 
to get that property in productive use.
    So that was the thing I really wanted to get at in today's 
hearing because I heard from a constituent on this issue and 
wanted to follow up on it, and I would love to follow up with 
you.
    I yield back the balance of my time, Madam Chairwoman.
    Chairwoman Biggert. Thank you.
    Mr. Duffy from Wisconsin, you are recognized.
    Mr. Duffy. Thank you, Madam Chairwoman.
    I yield my time to my colleague from North Carolina.
    Mr. McHenry. I thank my colleague from Wisconsin for 
yielding, and just wanted to follow up on my previous line of 
questioning.
    Mr. Stevens, in terms of the settlement contemplated or 
being discussed that you mention with the 11 regulators and the 
servicers, what is the magnitude and dollar amount that we are 
talking about?
    Mr. Stevens. I am actually glad you got the time back 
because I wanted to--this is a great opportunity to follow up. 
First of all--
    Mr. McHenry. What is the magnitude and dollar amount?
    Mr. Stevens. The magnitude is in a broad range.
    Mr. McHenry. What is the broad range we are talking about?
    Mr. Stevens. It would be premature to even give a dollar 
amount because we are not there yet.
    Mr. McHenry. Are you talking billions?
    Mr. Stevens. We are talking a range that could be above or 
below.
    Mr. McHenry. Okay, I am hearing ranges in the tens of 
billions range. Is that--would you say that is not correct.
    Mr. Stevens. Here is what I can tell you. That the range--
this comes down to, what are the actual violations that have 
been identified? We haven't aggregated those. What are the 
potential costs that each individual agency and State attorney 
general could ultimately assess against these institutions? We 
need to understand what that total potential estimation could 
be. And off of that, that is what we will have to work on to 
determine if there is a way we can come together and make this 
less disruptive in the market. So I cannot give you the--
    Mr. McHenry. Okay. I understand that, I understand that. Is 
there a timeframe we are looking at? Is this something that is 
going to happen in the next month?
    Mr. Stevens. We would like it to be sooner rather than 
later. As you can imagine, I am relatively new to government, 
but we are working with multiple agencies, multiple regulators 
that have different obligations, but we would like it to be 
sooner rather than later.
    Mr. McHenry. Is it this quarter? Is it this month?
    Mr. Stevens. I would say a month timeframe is probably in 
the reasonable range if we are to reach some sort of 
conclusion.
    Mr. McHenry. Are there discussions about what the money 
will then be used for in this settlement?
    Mr. Stevens. There are a variety of discussions. There are 
different views that we are working on.
    Mr. McHenry. Are there some options that you are 
contemplating or you are recommending?
    Mr. Stevens. There are options that we are contemplating. 
It could include anything from what you suggested in terms of 
having them modify loans so they stay performing in the market, 
which would improve the economy. There are options also just to 
purely collect penalties and have those deposited in the 
Treasury, and there are whole varieties of--
    Mr. McHenry. Are principal reductions being one of the 
options?
    Mr. Stevens. Yes.
    Mr. McHenry. Thank you.
    Ms. Caldwell, in terms of your involvement, have you been 
involved in these discussions that I have questioned Mr. 
Stevens about?
    Ms. Caldwell. I have been involved in some of them, yes.
    Mr. McHenry. Have you been in the room with various 
regulators when these discussions are going on.
    Ms. Caldwell. With some, yes, particularly as--
    Mr. McHenry. What regulators?
    Ms. Caldwell. --it relates to foreclosure prevention. As 
you said earlier--
    Mr. McHenry. What regulators, if you might inform us?
    Ms. Caldwell. Actually, most of the Federal regulators that 
regulate these institutions.
    Mr. McHenry. Okay. Are you there in terms of, using this in 
terms of HAMP or a different type of HAMP program, using the 
settlement money towards that?
    Ms. Caldwell. At this stage, there are no contemplated 
changes to HAMP in terms of--
    Mr. McHenry. No, I mean, in these discussions, why are you 
there?
    Ms. Caldwell. Primarily because of my expertise and 
experience in foreclosure prevention servicing practices and 
loss mitigation in overall housing finance.
    Mr. McHenry. So the regulators don't have that expertise is 
what you are saying, so you have to be brought in from Treasury 
to provide that?
    Ms. Caldwell. No. Treasury is there in Treasury's role. And 
you asked specifically what role I am playing. There are a 
number of people at Treasury who participate, and you asked 
specifically for mine, and it is with respect to that area of 
expertise.
    Mr. McHenry. Okay. In terms of HAMP, have there been 
discussions about a second HAMP, a HAMP 2?
    Ms. Caldwell. That is a good question. I think it is 
important to remember--
    Mr. McHenry. And that is why I am asking. I hope you give 
me a good answer.
    Ms. Caldwell. I think the answer is, based on the authority 
we have under EESA, there cannot be any new programs in HAMP 
that were not in place as of June of 2010. We do not have 
authority for new programs. We continue to get ideas.
    Mr. McHenry. Could you use settlement money in order to 
create a new program?
    Ms. Caldwell. As I said, at this point, there are--we do 
not have authority for new programs.
    Mr. McHenry. Even if you have a settlement in the terms of 
billions of dollars, that could not be used for principal 
reduction is what you are saying?
    Ms. Caldwell. I would just say one of the focuses of HAMP 
has not been the need for more funds. The focus of HAMP has 
really been getting more attention on homeowners to make sure 
we use the funds that are available.
    Mr. McHenry. Madam Chairwoman, I know my time has expired. 
If I may ask Ms. Caldwell one final question? Do you believe 
that HAMP has been a success?
    Chairwoman Biggert. Mr. McHenry--
    Mr. McHenry. It is a simple yes-or-no answer, Madam 
Chairwoman. Do you believe that HAMP has been a success?
    Ms. Caldwell. I believe that HAMP has been a success at 
reaching the people it was intended to reach with a 
modification that is sustainable in changing the industry.
    Chairwoman Biggert. The gentleman from New Jersey, Mr. 
Garrett, is recognized for 5 minutes.
    Mr. Garrett. Thank you. I may not use the whole 5 minutes, 
but thank you.
    Mr. Tozer, I just came back from another hearing. Secretary 
Geithner is just down the hall, actually in the other building, 
and made reference to the fact that we just had a hearing in 
the committee with regard to the GSEs and GSE reform and the 
like. And in that hearing, we discussed ways to treat the book 
of the GSEs and basically put it on the book of the Federal 
Government, the liabilities and the assets. And one of the 
comments that was made by one of the witnesses was that if you 
do that, it may actually have a negligible impact on the 
balance sheet, so to speak, because the assets basically would 
offset the liabilities.
    And that if you put it on the books of the U.S. Government 
as the GSE securities began, the short-term securities would 
begin to run off, right, you would reissue U.S. securities to 
back it, okay. And the reason you would do that is because the 
spread is a little bit different between them, about 25 basis 
points, and theoretically you would save money over time which 
would be good for the taxpayers because we are basically 
funding them right now.
    So just if you could comment: (a) on a proposal about 
putting it all on the balance sheet; and (b) are there any 
practical implications with regard to if we did all that over 
here with the GSEs and how that might affect the pricing of 
Ginnie Mae securities?
    Mr. Tozer. Again, since I really haven't seen the proposal, 
but as I understand what you are saying is that as GSE's 
liabilities roll off, you would replace them with government-
guaranteed liabilities on the liability side of the balance 
sheet, as I understand what you are saying.
    Mr. Garrett. Yes.
    Mr. Tozer. From my perspective, I would indicate from 
Ginnie Mae, it should probably have a negligible impact. The 
reason I would say that is, and again not understanding all the 
facts of it, but the fact that since we are in a situation 
where we are dealing pretty much with a 30-year fixed-rate 
market and our issuers are creating 30-year securities, you are 
really dealing with two different investor bases. You have 
people who invest in short-term assets, which are going to be 
more banks, money markets and so forth. Our investor base is 
more central bankers, pension funds, insurance companies. So I 
would think from that perspective from what you said, I would 
say it would have a negligible impact because of the long-term 
investors for us and short-term ones for the short-term 
liabilities.
    Mr. Garrett. Okay.
    And the second question is for Commissioner Stevens. You 
made some more comments which I agree with, with regard to as 
we all go through the process here of GSE reform, we sort of 
have to do it at the same pace or track, if you will, with 
regard to FHA reform at the same time, right.
    Mr. Stevens. Yes.
    Mr. Garrett. And I think that is crucial because I guess if 
you don't do that, if all of a sudden we do all the reform 
tomorrow and that is not a timeline, but on the GSEs, then 
what, everything will just--if you begin to do as the 
Administration says, try to move that in a more private fashion 
that could have the effect of funneling a lot of the business 
over to FHA, right.
    Some of the Treasury proposal says that over time their 
proposal is to change the downpayments for the GSEs to 10 
percent. So if you have that effect over here in the GSEs and 
you guys are over here at what, 3.5 percent, the natural 
implication is that part of that book will just extend over to 
you folks. They also--I think they discussed in their proposal 
as far as raising the GPs over at Fannie and Freddie, so the 
same thing. If it is getting more costly over here, what is the 
natural implication of that? Folks are just going to be coming 
over to FHA, right?
    Mr. Stevens. If we do nothing, that is correct. We have 
done three premium increases at FHA in the last year alone, and 
I just increased premiums on Monday one more time. And so I 
think, to that extent, there are levers you can address within 
FHA to make sure that there is balance in any steps that take 
place to change the size and scope of the FHA footprint.
    On the downpayment piece, we are looking forward to the 
dialogue on downpayments. Today, FHA doing minimum downpayments 
up to $729,000 is something that we clearly endorse with a 
White Paper to say that needs to scale back. And that is why we 
do believe, however, there needs to be--
    Mr. Garrett. Scale back?
    Mr. Stevens. Scale back at least at a minimum at the end of 
the year to HERA levels. And as the White Paper states, we 
believe we should have a discussion about whether we should 
increase those further.
    Mr. Garrett. As far as those limits. And as far as the 
downpayments then for them, how would that go?
    Mr. Stevens. The same issue on the downpayments. I think 
there is a good dialogue in the White Paper that gives this as 
a suggestion: We need to make sure that we provide within the 
role of FHA a much reduced footprint that has explicit support 
for underserved families that otherwise would not have the 
disposable income or means to potentially ever buy a home. So 
you can scale that market down by looking at loan limits and 
other measures. And for the remainder of the portfolio, you 
could theoretically change downpayment requirements.
    We talk about an explicit funding mechanism that would be 
budget-neutral in the White Paper that would help support 
downpayment assistance. And if that was created, you could 
clearly adjust loan to values within the FHA program.
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from Texas is recognized for 5 minutes.
    Mr. Green. Thank you, Madam Chairwoman.
    Again, I thank the witnesses for appearing. And I also 
thank the witnesses on the second panel, and apologize that I 
may not be here to hear your testimony, but I assure you I will 
review it.
    Just for edification purposes I would like to take a moment 
and explain that when we talk about reforming a system, we 
impact more than the buyers and the sellers. I think it is 
important to what we do at the banks, especially small banks, 
and what we do with the consumers, the actual persons who are 
purchasing homes, is important.
    But also we have Realtors who are in this process. And I 
can tell you--I meet with them, talk to them--Realtors are very 
much concerned about how we will reform this system because 
they understand how the loans move from the portfolio of the 
bank to some other entity, and then it gets securitized. They 
have a lot of consternation about this. And we don't hear a lot 
from them. I suppose they are quietly suffering, to a certain 
extent.
    But I want to be a voice for them and let people know that 
Realtors are very much concerned about what will happen when we 
start to reform, if you will, the system.
    And I do advise, as I have been advised, that we proceed 
with a great degree of caution because the system is very 
fragile right now. And while there is a movement toward 
recovery, we can, if we are not careful, do things that may 
thwart the recovery in an effort to be helpful. So we have to 
be very careful as we move.
    I would like to move next to Mr. Tozer. Am I announcing 
that correctly, sir?
    Mr. Tozer. Yes, you are.
    Mr. Green. Okay.
    Mr. Tozer, sir, some things bear repeating. You have given 
us a good deal of intelligence about Ginnie Mae. We understand 
that it originated out of Fannie Mae: Fannie Mae in 1938; 
Ginnie Mae in 1968. But you talked about the layers of 
protection and you talked about how you don't come into play as 
often as some of the other agencies. Can you better define for 
us how often you come into play with these mortgage-backed 
securities?
    Mr. Tozer. In the past year, we have had four issuers we 
had to deal with their servicing. And in reality, out of the 
four, two of them were ones where they were banks that received 
the FDIC. So the servicing was fine. There was no problem with 
servicing. We were able to move it, because again, it was an 
FDIC issue that made us move them. The other one, we actually 
were able to move the servicing to someone else, too; then put 
a mortgage banker. So really we have had to deal with our 
guarantee as far as ceding the servicing four times. Only one 
time we even had to even get involved long term. And even with 
that, it didn't cost us anything. Because what we did was we 
took the servicing. We have two back-up servicers, people who 
are willing to service for a fee for us, and they are servicing 
on our behalf.
    So as of this point, the four organizations that have 
failed this year to this point have not cost the guarantee any 
money because we were able to replace the servicing. Because 
that is the key. Our guarantee comes into play if the 
servicing--the whole servicing pool, not just the ones that are 
bad, but the whole servicing pool, because these servicers are 
paid a fee to service a portfolio, and it is a very lucrative 
fee.
    So when we go out to put the servicing out to the private 
market, as long as there is enough current loans, we can place 
it and not cost our fund any money at all. It has really not 
come into play, and it has worked very well.
    Mr. Green. You have indicated, and I will restate this, you 
don't originate loans. You don't purchase loans. You don't sell 
securities. As a matter of fact, you really are not involved in 
derivatives, are you?
    Mr. Tozer. No. Again, our whole position is that we have 
lenders that have taken FHA/VA insured or guarantee loans, 
government housing, and they have created pools, basic almost 
like private label pools. What we have done is we have wrapped 
those securities. So really we don't get involved in 
derivatives.
    The only thing we are involved with is we do offer a REMIC 
program, again to help create liquidity for the Ginnie Mae 
security. But it is not really a derivative; it is more of a 
situation of just kind of helping the market. But overall, we 
are not involved with derivatives. Again, we are truly just an 
insurance company.
    Mr. Green. My time is about to expire. Let me just ask you 
one additional thing. You deal with institutional investors, 
correct?
    Mr. Tozer. That is correct.
    Mr. Green. Could you just quickly define this so that there 
won't be any question as to what an institutional investor is, 
please?
    Mr. Tozer. The institutional investors that buy our 
securities are mutual funds like Vanguard. It is central 
bankers around the world. It is pension funds. It is insurance 
companies. It is the people who have a natural interest in 
long-term investments and that like the government guarantee 
because that way they know they have liquidity to get in and 
out of the security business. But it is mainly like central 
bankers, insurance companies, mutual fund owners.
    Mr. Green. Thank you, sir. My time has expired.
    Thank you, Madam Chairwoman.
    Chairwoman Biggert. Thank you.
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. So, without objection, the hearing record will remain 
open for 30 days for members to submit written questions to 
these witnesses and to place their responses in the record.
    And I would like to thank the panel for spending this time 
with us and for being very patient before we started. So, with 
that, thank you, thank you very much.
    We will move to the second panel as quickly as possible. 
While we are moving quickly to the second panel, I do want to 
acknowledge something, so if I could have your attention 
please. This committee has also acknowledged this, but I would 
like to recognize a senior professional staff member, Cindy 
Chetti, for her decades of service to this committee and this 
institution.
    Cindy, thank you, thank you, thank you for your service to 
this committee. And as you all know, Cindy is leaving us or 
retiring, we could say, but to a new career, and we wish her 
the best, and thank you so much.
    I now recognize the second panel. And I thank you for your 
patience. Certainly, I hope there weren't any airplanes that 
were leaving now.
    Our second panel consists of: Douglas Holtz-Eakin, 
president, American Action Forum, and former Director of the 
Congressional Budget Office from 2003 to 2005; Michael Farrell, 
chairman, CEO, and president of Annaly Capital Management, 
Incorporated; Faith Schwartz, executive director, HOPE NOW 
Alliance; and Julia Gordon, senior policy counsel, Center for 
Responsible Lending.
    And as we said to the first panel, without objection, your 
written statements will be made a part of the record, and you 
will each be recognized for a 5-minute summary of your 
testimony.
    We will begin with Mr. Holtz-Eakin for 5 minutes.

 STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION 
 FORUM, AND FORMER DIRECTOR OF THE CONGRESSIONAL BUDGET OFFICE 
                       FROM 2003 TO 2005

    Mr. Holtz-Eakin. Madam Chairwoman, Mr. Clay, and members of 
the subcommittee, thank you for the chance to be here today.
    You do have my written statement, so I will be brief. Let 
me make two major points about the role of government policy in 
housing recovery. And the first has to do with the broad 
macroeconomic recovery that the United States is engaged in at 
the moment where I think housing enters in two important ways.
    The first is that an important feature of this economic 
setting is the bad damage to household balance sheets during 
the financial crisis and recession, housing being a key part of 
that. It is one of the reasons that I do not believe that any 
consumer-led strategy will be successful in generating faster 
economic growth.
    Housing policy enters there in that the sooner the 
valuations are settled in the housing market, the better. And I 
at least have come to the conclusion that I am skeptical that 
any government intervention can speed the clearance of excess 
inventories from the market and otherwise stabilize housing 
values. The quicker this gets done, the better, and I think 
getting government out of the way is the fastest way for that 
to happen.
    The second is that in the end, this recovery will be 
powered by investments, business spending in workers, plant 
equipment, and in residential and nonresidential construction. 
There, I think the most important thing is to settle the rules 
of the road. Some of this debate is familiar. What will be the 
future of tax policy past 2012 now? What will be the nature of 
regulatory burdens, where we have seen over the past year a 
record number of Federal Register pages with regulations coming 
from Dodd-Frank, now the Affordable Care Act, EPA, all of which 
have impacts on housing construction, but also the future of 
mortgage finance, where it will be essential for folks to 
understand how exactly this is going to be operated?
    There I think it is worth stepping back quite a bit and 
looking at what the objectives are. And I would say, broadly 
speaking, the U.S. tradition of subsidizing debt-financed 
owner-occupied housing in ways which are invisible and not 
transparent for the taxpayer has been a great disservice to the 
taxpayer, certainly to homeowners in the end and to those in 
the housing community.
    The mortgage interest deduction is a classic example of 
rewarding debt finance of owner-occupied housing, not merely 
owner-occupied housing. And the implicit subsidy provided 
through the GSEs with affordable housing goals off the books 
that left taxpayers massively exposed is a very indirect and 
inefficient subsidy to policy goals.
    And so I think the primary objective for the members would 
be to identify policy roles clearly. Are they to subsidize 
housing or is it owner-occupied housing, or is it debt 
financing of owner-occupied housing where we reward leverage? 
But identify the goal and provide those subsidies in a budgeted 
fashion, put them on the budget so that they are transparent to 
taxpayers and to members, and they control those subsidies; 
target them as directly as possible on the communities you wish 
to affect, low-income Americans, veterans, as it may be, and 
not indirectly through secondary mortgage markets, which make 
it very difficult to have efficient subsidies and end up 
costing very, very much.
    So I think that there is a lot to be done and it must be 
done relatively quickly. Because until this is settled, where 
the housing finance industry is going, what then you can plan 
in the way of sensible transitions in phasing out, clearly, the 
taxpayer finance hedge fund that was Fannie Mae and Freddie Mac 
portfolios, and indeed, in some circumstances, phasing out the 
guarantee function, which you could easily do in a future 
government-free housing finance world; the sooner that is 
settled, the more clarity you will have and the faster we will 
get genuine recovery in both the housing sector and also the 
larger economy of which it is such an important part.
    I thank you for the chance to be here today and I look 
forward to answering your questions.
    [The prepared statement of Mr. Holtz-Eakin can be found on 
page 96 of the appendix.]
    Chairwoman Biggert. Thank you so much.
    Mr. Farrell, you are recognized for 5 minutes.

     STATEMENT OF MICHAEL A.J. FARRELL, CHAIRMAN, CEO, AND 
           PRESIDENT, ANNALY CAPITAL MANAGEMENT, INC

    Mr. Farrell. Chairwoman Biggert, Mr. Clay, and members of 
the subcommittee, my name is Mike Farrell. I run Annaly Capital 
Management. I am the chairman and CEO and the founder.
    We are a large residential mortgage real estate investment 
trust, or a REIT, listed on the New York Stock Exchange. 
Collectively, between Annaly and the other companies that we 
run, we run about $100 billion worth of mortgage-backed 
securities and mortgage loans through our portfolios as 
investors.
    I represent an important constituency in the housing 
market, the secondary mortgage investors, who provide a 
majority of the capital to finance America's homeowners. Just 
for the Annaly family companies, we estimate our shareholders 
collectively help finance the homes of 1 million American 
households or 3 million American citizens.
    I would like to begin by focusing on the fact that the 
secondary mortgage market investors provide 75 percent of the 
U.S. housing market capital. That is approximately, of the $10 
trillion in outstanding home mortgage debt, about $7.5 trillion 
is funded by mortgage-backed securities and investors that fund 
those securities. Of that $7.5 trillion about $5.5 trillion is 
in the government-guaranteed mortgage-backed securities and 
about $2 trillion in so-called private label mortgage-backed 
securities. The balance, or $2.5 trillion, is held in loan 
form, primarily on bank balance sheets.
    Since our country's banks have about $12 trillion in total 
assets, there is not enough money in the banking system to fund 
our Nation's housing stock for cash, at least not at today's 
current levels. It is axiomatic that without a healthy 
securitization market, our housing finance system would have to 
undergo a radical transformation.
    Right now, securitization is attracting significant amounts 
of private capital, at least to that part of the NBS market 
that is government guaranteed. The problem is that in the 
nonagency part of the sector or the so-called private label 
market, it is dormant, and only one small deal has been done in 
the last 2\1/2\ years.
    I now would like to discuss several reasons why the private 
label market is not restarting. First, the economics don't 
work, for a number of reasons but mainly because mortgage rates 
have to rise in order to compensate investors for the risk that 
they are taking in those securities.
    Second, there is a higher yielding alternative for 
investors who want to take a residential mortgage credit risk, 
older private label mortgage-backed securities and seasoned 
loans that have been repriced and are cheaper by the market 
after the events of the past few years. As long as this 
disparity exists it will impede the restart of the new issue of 
private label market.
    The third reason is the difficulty in sourcing enough newly 
originated loans. Without the outlet to sell mortgages and 
securitizations, banks have gotten more comfortable holding 
nonconforming loans on their balance sheet, not only by 
tightening underwriting standards but including sizable 
downpayments. In short, banks are only willing to make loans to 
highly capitalized borrowers.
    The fourth reason is the uncertainty over the future 
regulatory environment. The many different mortgage 
modification programs and delays in foreclosures have made it 
difficult for investors to analyze cash flows.
    Finally, I want to get to the heart of the current debate. 
Can the private label mortgage-backed securities market come 
back and fill the gap that is currently filled by the GSEs? The 
short answer is, yes, it can, but not at the same price and not 
in the same size.
    Most investors in agency mortgage-backed securities won't 
invest in private label mortgage-backed securities at any price 
or only in much reduced amounts because their investment 
guidelines preclude taking credit risks. These investors 
include money market funds, mutual funds, banks, foreign 
investors and governmental agencies. Some investors could cross 
over, but we don't know how many or at what price, and we won't 
know until we have a lot more information to make that analysis 
clear.
    But back at the end of the day, I have to refer to my two 
market truths: first, securitization is a source of about 75 
percent of the capital to the housing market; and second, the 
private label securitization market is not working right now.
    I thank you for your time today, and I look forward to your 
questions.
    [The prepared statement of Mr. Farrell can be found on page 
56 of the appendix.]
    Chairwoman Biggert. Thank you.
    Ms. Schwartz, you are recognized for 5 minutes.

   STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, HOPE NOW 
                            ALLIANCE

    Ms. Schwartz. Thank you, Chairwoman Biggert, and members of 
the subcommittee.
    Thank you for having me come today and testify before you. 
I am Faith Schwartz, the executive director of the HOPE NOW 
Alliance. And I have served in that capacity since 2007, where 
I work with servicers, nonprofit housing counselors, 
regulators, and the government to help homeowners avoid 
foreclosure.
    The comments I make today are my own and represent my 
experience at HOPE NOW and my breadth of experience in the 
capital markets prior to HOPE NOW. I will focus my oral 
testimony on the HOPE NOW data collected over the past 3 years; 
the state of the market, including government programs; and 
summarize issues to consider associated with a return of 
private capital.
    Foreclosure intervention programs have contributed to a 
record number of borrowers seeking help to avoid foreclosure 
and have assisted millions of borrowers stay in their homes. 
These public-private efforts have also contributed to longer 
foreclosure timelines across the country. The information 
shared today should assist you as you think about the important 
issue of bringing the private capital back.
    In early 2010, we had over 4 million borrowers who were 60 
days or more past due on their mortgages. The industry 
completed 1.7 million loan modifications. Of that, 1.2 million 
were private industry modifications and another half million 
modifications were done through the HAMP program, the 
government program. To keep it in context, you should compare 
that with 1 million foreclosure sales that happened through the 
same year of last year.
    What has changed from 2007 through 2011? Early on, the 
efforts on foreclosure prevention were focused on subprime 
securitizations, freezing interest rates, capitalizing 
arrearages, and extending terms of mortgages to keep them 
intact. There were few government program resources focused on 
foreclosure prevention, and the industry did pull together with 
government to collaborate and with nonprofits to keep people in 
their homes. The scale of the problem remained large, and the 
government got more involved.
    Some of the government programs rolled out were as follows: 
FHA HOPE for Homeowners. It is a targeted refinance program 
with servicers and investors willing to write down principal 
and consumers have to equity share with the U.S. Government. 
The HARP program was a GSE refinance program targeted at loans 
at 80 percent up to 120 percent for negative equity borrowers 
at risk of default. Making Home Affordable, HAFA, a short sales 
and deed in lieu program focused on detailed processes for many 
players, forgiveness of a deficiency if you sell the home lower 
than what is owed on the loan and extending the timeline of 
loans up to 120 days.
    Making Home Affordable. HAMP--government loan modifications 
that set standards; safe harbors and PB tests focused on 
affordability; tools including 31 percent DTIs; rate reduction 
to 2 percent; extension of terms of 40 years. And a detailed 
review on HAMP is in my lengthier written testimony.
    Treasury also rolled out $7.5 billion to the hardest hit 
States--18 States and the District of Columbia--to address 
unemployment, principal reductions, and other modification 
supplements to the current modification efforts going on.
    Lastly, on the government intervention, we have had the 
State mediation guidelines that have been rolled out from 26 
States that have a lack of uniformity in them, but their 
intentions are good: to keep people meeting with each other 
prior to going to foreclosure. What we recommend, however, is a 
comprehensive review for the various programs which are all 
unique to create universal documentation requirement standards 
and agreements on how to measure success.
    Our proprietary solutions and modifications have been up to 
3.5 million since July of 2007. This is without taxpayer 
dollars, and it happens only after a loan has been considered 
for a government modification and is ineligible for a 
government modification.
    The efforts have improved, and the modifications are more 
sustainable and affordable. And permanent solutions for 
borrowers who are seeking to stay in their home are now getting 
permanent affordable payments: 84 percent of the proprietary 
mods have an initial duration of set rate of 5 years or 
greater; 81 percent have lower principal and interest payments; 
and 80 percent of the proprietary mods, on average, are less 
than 90 days past due that have been performed over this past 
year.
    Summary and recommendation: Foreclosure timelines have 
increased considerably. While effective interventions have made 
a difference to millions of homeowners and investors, 
homeowners and communities have also experienced tremendous 
losses. Vacant housing abounds, and the foreclosure process 
remains drawn out. The average delinquency of a foreclosure in 
2008 was 300 days, and in September 2010, it was 500 days 
across the country.
    Measuring risk has been difficult in the changing 
marketplace. Investors will want to see standards and 
uniformity. Whether it is State or Federal programs, uniformity 
and improved execution will be important to improve the cost of 
servicing, managing multiple programs, and mandates.
    Clear reps and warranties need to be in place. 
Identification of roles and responsibility of the servicer, of 
the borrower, and of the investor will be spelled out and the 
terms of the contract must be enforceable.
    Duration and prepayment risk, credit risk, and all of the 
Federal programs will also add to the uncertainty for 
investors.
    Thank you.
    [The prepared statement of Ms. Schwartz can be found on 
page 101 of the appendix.]
    Chairwoman Biggert. Thank you.
    Ms. Gordon, you are recognized for 5 minutes.

 STATEMENT OF JULIA GORDON, SENIOR POLICY COUNSEL, CENTER FOR 
                      RESPONSIBLE LENDING

    Ms. Gordon. Thank you, Chairwoman Biggert, Mr. Clay, and 
members of the subcommittee. I serve as senior policy counsel 
of the Center for Responsible Lending, a nonprofit research and 
policy organization dedicated to protecting homeownership and 
family wealth. We are an affiliate of Self-Help, a CDFI that 
finances safe and affordable mortgages and small business 
loans.
    Over the next several years, the toxic combination of 
unsustainable loans, high unemployment, and underwater 
borrowers could mean a stunning total of more than 13 million 
foreclosures during this crisis, which is about a quarter of 
all the mortgages in the country. The spillover effects of 
these foreclosures will cost our Nation billions if not 
trillions of dollars, and the additional excess supply of homes 
will drive still further declines in home values.
    Things did not need to be this bad. Mortgage servicers are 
supposed to be capable of handling loans even when problems 
arise, but the profits made during the years when servicing was 
simple were not reinvested to prepare for the rainy days. 
Instead, nearly 4 years since the start of the crisis, the 
industry is still struggling to catch up to the new reality.
    If market principles applied here, customers would have 
voted with their feet by now. But mortgages are not like cell 
phones; homeowners do not get to choose their servicer or 
switch providers if service is poor. Even investors have very 
little control over the servicing of the loan pools on which 
their income depends. For this reason, it made a lot of sense 
for the government to offer tools to help servicers do a better 
job of protecting the assets of both investors and homeowners.
    HAMP, the principal government effort, has proved 
disappointing, in large part because it is a voluntary rather 
than a mandatory program. And servicers who failed to make the 
modifications they were supposed to suffered little consequence 
for these failures. But it is not productive to respond to 
HAMP's tepid performance by throwing our hands up and declaring 
that we will just let foreclosures continue to wreak havoc on 
America's families, neighborhoods, and cities.That is reckless 
endangerment of the housing market, not to mention an 
abandonment of the interests of every homeowner in the Nation, 
all of whose wealth is reduced by continued foreclosures. 
Rather, it is time to do what we should have done all along: 
require all servicers across the entire industry to review all 
loans for alternatives to foreclosure and enforce that 
requirement.
    There is little disagreement that affordable loan 
modifications are a win-win. Not only do they give families a 
shot at keeping their homes, but they provide greater returns 
to investors even when many of those homeowners redefault. 
There is also consensus that for vacant homes and for homes 
that the borrower cannot possibly afford, it is best to free up 
that home for a new family. But the servicing system simply 
cannot sort out which is which right now. It is crippled by 
overwhelming volume, and the financial incentives don't line up 
with investor and homeowner interests. More than 60 percent of 
borrowers in trouble have had no evaluation of their situation 
at all. In other words, many foreclosures that shouldn't 
happen, happen; and foreclosures that should happen languish in 
the vast shadow inventory.
    A few commonsense principles are crucial. Servicers should 
review loans for alternatives even before foreclosure 
proceedings are started, and loss mitigation and foreclosure 
processes should not go forward on a dual track. Servicers 
should provide borrowers a single point of contact to guide 
them through the modification maze. Banking regulators should 
enforce existing rules and establish additional duties and 
standards to prevent detrimental servicing practices.
    Last but not least, as we retool the mortgage finance 
system, consider that any market needs a continuous influx of 
new customers, especially at a time when we suffer from an 
oversupply of homes. The failure to meet the needs of first-
time homebuyers and customers from low-wealth backgrounds could 
be catastrophic for market recovery and growth. It is important 
to note that the current crisis was not caused by first-time 
homebuyers who constituted only 10 percent of those who 
received risky subprime loans. Rather, it was caused by 
existing homeowners being refinanced by predatory lenders into 
bad products.
    Excessive fees and large mandatory downpayments that keep 
people out of the market are the wrong way to keep the market 
safe. Instead, a healthy market needs sensible rules resulting 
in affordable, safe, sustainable loans. And we should make sure 
that lenders don't discriminate against people who have the 
ability to pay for a mortgage but who live in a low-wealth or 
minority neighborhood.
    Thank you for your time. And I look forward to your 
questions and to working with you to restore health to the 
housing market and economy.
    [The prepared statement of Ms. Gordon can be found on page 
60 of the appendix.]
    Chairwoman Biggert. Thank you.
    I now recognize the committee for 5 minutes for questions, 
and I will yield myself 5 minutes.
    Uncertainty seems to be the word that I am hearing here and 
we heard in the former panel. Uncertainty is a theme.
    Ms. Schwartz, can you just tell a little bit from your own 
experience about the impact uncertainty is having on 
participation of private capital in the mortgage finance?
    Ms. Schwartz. I am relating it to servicing and the 
investment. In a mortgage as a whole, you have to have care of 
how you process a loan in the servicing department and also 
through the foreclosure process. And the uncertainties abound 
in the length of time it takes to just foreclose on a loan, and 
someone might have abandoned the house. So we have overlapping 
government programs in that Fannie, Freddie, FHA and HAMP, all 
really well-intentioned, I work well with all of them, but they 
have different processes and procedures to do likely the same 
type of things. We would really benefit from more uniformity 
and create less uncertainty in timelines and getting through 
the system.
    Chairwoman Biggert. Thank you.
    And Mr. Farrell, in your testimony you talk about 
uncertainty over the future regulatory environment, and the 
many different mortgage modification programs and delays in 
foreclosure have made it difficult for investors to analyze 
cash flows.
    Could you elaborate a little bit about how the 
Administration is exploring the option of implementing national 
servicing standards with no real timeframe for a decision? And 
the avalanche of rules resulting from Dodd-Frank are still in 
the pipeline. So are you concerned that this will really make 
much more uncertainty about private capital coming into the 
market?
    Mr. Farrell. I think that the uncertainty of regulatory 
capital, charges on banks, the changes that have emerged in 
coordination with other central banks, Basel 3, etc., are 
unquestionably creating an uncertainty of commitment of capital 
to the market in some respects and in some asset classes.
    If we go back to 2008 during the middle of the crisis, 
virtually every mortgage security--which is unquestionably just 
a cash flow that needs to be analyzed by investors and compared 
to other allocations of other cash flows--all of the mortgages 
in the United States at that point in time were considered to 
go bad by investors. And the assumptions that were being taken 
into the market for secondary mortgages as well as for primary 
mortgages was that there was going to be a much higher default 
rate than actually what has occurred, the severity rates, the 
recovery rates, etc. That uncertainty only bleeds over into the 
kind of dialogue that we have had about the servicing standards 
that are going to emerge out of this, the continuation of 
Fannie Mae and Freddie Mac.
    We have to complete globally for this capital when we go 
out and we try to raise it to compete for other asset 
allocations. When we look at the influence of cash flows on our 
earnings and our returns to our investors--who are primarily 
domestic investors, everyone from individual investors to 
institutional funds--we need to be able to clearly explain to 
them what we think the variance in those earnings are going to 
be. And the uncertainties of policy, modification, tinkering 
with the cash flows, all lead to us having to essentially take 
a discount and hair-cut those cash flows, and therefore raise 
interest rates, in effect, in the private market.
    So my short answer is yes, that uncertainty is there. There 
is capital to do that, but it is exacting a higher toll in 
terms of the absolute rates that people need to pay for their 
mortgages.
    Chairwoman Biggert. Thank you.
    And then I would like to move on to Dr. Holtz-Eakin. You 
also talk about the uncertainty and the stress. You talk about 
the stress that housing valuations have caused homeowners and 
how they restrict their spending.
    Have you identified any policies as having a destabilizing 
effect on the housing valuations?
    Mr. Holtz-Eakin. I think at this point, the sad reality is 
the best thing we can do is to let housing markets clear. And 
prices will decline where they have to to get excess 
inventories off the market, and at that point they will 
stabilize and we will also hopefully begin to create some jobs. 
You will get a somewhat closing of the gap between the 
underlying household formation and demographic demand for 
housing, which is probably double the housing starts we have 
right now and the actual demand we see due to diminished wealth 
and low income.
    So I have thought for 2 years now, if not longer, about 
housing policies that might speed this, and I have come to the 
reluctant conclusion that there are no magic bullets out there. 
You can't fool Mother Nature. We are going to have to just let 
this play out.
    Chairwoman Biggert. Thank you. I yield back my time.
    The gentleman from Missouri is recognized for 5 minutes.
    Mr. Clay. Thank you, Madam Chairwoman.
    And let me start with Ms. Schwartz on a district-specific 
question. Would you be able to supply me with any data on how 
many permanent loan modifications HOPE NOW has performed in the 
First District of Missouri?
    Ms. Schwartz. I can't on a district basis, but I can on a 
State basis. I can have that data for you.
    Mr. Clay. That would be fine. Thank you.
    Let me ask you a series of questions to get a feel for your 
take on servicing reform, and these are basically yes-or-no 
questions.
    Would you support servicing reform that mandates a single 
point of contact for borrowers for the life of their loan 
modification?
    Ms. Schwartz. I would support reform to make sure borrowers 
had someone to talk to, who knew their situation and could help 
them, but that might look differently to different companies.
    Mr. Clay. Okay. How about would you support mandates, 
disclosure of the complete chain of title, and whether or not 
the servicer used a loss note affidavit in the notice of 
default? Support or oppose?
    Ms. Schwartz. I think that there should be a clear chain of 
title, and you should be able to find it and use loss note 
affidavits as needed.
    Mr. Clay. Would you require in contracts a formula that 
would govern how second liens had to be written down in the 
event of a first-lien modification?
    Ms. Schwartz. I support the co-modification of a second 
lien and a first lien in the new MP program level.
    Mr. Clay. Would you require that an independent master 
servicer provide oversight and resolve disputes regarding 
servicers' actions?
    Ms. Schwartz. I am probably not familiar enough with the 
master servicer rule to answer that.
    Mr. Clay. What in Ms. Gordon's suggestions would you 
support to improve modification?
    Ms. Schwartz. We both were talking and we both were in firm 
agreement that simplicity--and this complex system of 
modifications can be simplified to help more people and be more 
effective.
    Mr. Clay. I see. Thank you for your responses.
    Ms. Gordon, the Federal Housing Finance Agency has 
announced that it would like to make changes to how servicers 
of loans guaranteed by Fannie and Freddie are compensated. The 
reason for this change is that the FHFA has recognized that 
servicer compensation leads to misaligned incentives and harm 
the investor and the homeowner. Can you comment on FHFA 
initiative and the impact it would have on changing the 
misaligned incentives?
    Ms. Gordon. We welcome this initiative, which is not just 
FHFA, it is also FHA and VA as well. That is a conversation we 
hope to be participating in, because we do think the question 
of servicer incentives has likely impacted the performance of 
the servicers during this crisis.
    Mr. Clay. All right. Thank you for that response.
    And Mr. Farrell, the future of the housing market going 
forward, according to your testimony, does not look that 
promising. Not to say that your testimony brought a dark cloud, 
but I guess it is more realistic than anything else as far as 
what we can expect going forward with homeownership and people 
actually securing mortgages. Is that what I heard? Did I hear 
that correctly?
    Mr. Farrell. I would say I am a realist, but I would also 
say I am a total optimist. I think that this clearance will 
happen. I think that at the end of the day, as an asset 
allocator and a cash flow allocator, the resounding message 
that we have received from the markets in our business model--
which is a very circular business model, the Reid model--and I 
would congratulate Congress for the 1960 rule that put Reid in 
place, which I think have really served the Nation very well 
over the past few years and helped stem some of the crisis in 
terms of capital raising and allocation.
    But when we talk to investors, they have to make a choice 
about where they are going to put their money and what that 
return is going to look like. And the resounding message that 
we have heard from investors is that they would rather lend to 
their neighbors at 6 percent than to another sovereign credit 
at 6 percent. It is up to us as a Nation to figure out what is 
the process and the price of that credit and how that sovereign 
credit will work versus the private market credit, but I am 
confident that we will figure it out.
    Mr. Clay. Thank you, Mr. Farrell.
    I yield back.
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from Virginia, Mr. Hurt, is recognized.
    Mr. Hurt. Thank you, Madam Chairwoman.
    This is really a question for all four, and maybe we can 
start with Dr. Holtz-Eakin.
    This morning we heard from the Chairman and the Vice 
Chairman of the Financial Crisis Inquiry Commission, and one of 
the statements that was made in the majority report that I 
found interesting was that government housing policy did not 
play any significant factor, was not a significant factor in 
the crisis that we are now going over with a fine-toothed comb 
and trying to assess and trying to find ways to make sure that 
we prevent this in the future.
    I was wondering, in light of the fact that I think 
certainly my constituents would believe that irresponsible 
lending led to the subprime mortgage crisis, it seems to me 
that government housing policy may actually have a lot to do 
with where we are and how we got here. I was wondering if each 
of you could maybe speak on that briefly and maybe offer the 
top government policy that you think that we need to examine, 
change, and shoot for in order to address this.
    Mr. Holtz-Eakin. I will try to be brief.
    Having issued a dissenting report from the majority, I will 
not relitigate all of the things I think they got wrong. But I 
would point out that Fannie Mae and Freddie Mac may not have 
caused the financial crisis, but they are the poster child for 
many of the phenomena that we highlighted in our dissent. They 
were key in the securitization chain, which during the panic 
did not serve us well. Its opacity contributed to what was a 
plain financial panic. They are the poster children for excess 
leverage, very little capital backing, implicit backing only by 
the taxpayer. They were the biggest phenomenon of ``too-big-to-
fail'', and the quandary that policymakers were faced with in 
September 2008 about which institutions to aid and not to aid, 
and they were the most expensive to rescue.
    So the policy that I think is absolutely imperative to 
reexamine is those housing subsidies which are off the Federal 
budget, which are implicit in their nature, which in the end 
become most dramatic when things fall apart. They are the best 
example of that and certainly worth reconsidering.
    Mr. Hurt. Thank you.
    Mr. Farrell. I would say that my view of the crisis as an 
investor was and is being addressed by the legislature now, 
which is the amount of leverage that was embedded in the 
balance sheets of the GSEs. As they were reporting to the twin 
masters of Congress and to the capital markets. The allocation 
and the misallocation of pricing in terms of allowing their 
balance sheets to grow to $1 trillion-plus balance sheets 
forced other lenders to do things that were creative and modify 
loans and loan terms and make reps and warranties that were 
incorrect.
    I think that it is wise to downsize those portfolios. I 
don't think that the government should be in the portfolio 
business. People like me do that for a living. We live with the 
consequences of that, day to day, in terms of the scrutiny of 
not only regulators, but the shareholders and the investors who 
have to allocate capital to do that.
    So I think that if I had to point towards one critical 
moment during the past 25 years of looking at the market, I 
would think it is once those balance sheets began to balloon to 
levels of unsustainable growth, that is when lending practices 
were forced into different players that do different things. 
And I commend the Congress and the Administration for looking 
to downsize those.
    My one recommendation as an investor to remove the 
uncertainty would be to not let that take a long time, because 
that inventory overhang is just as serious in the securities 
market as it is in the actual allocation of houses that we have 
in inventory around the Nation. Those securities need to be 
cleared; we have to find clearing prices for them.
    The capital markets are ready to do that. We prove that 
every day, and we raise money against that every day. And the 
quicker that uncertainty is out, at that time we will know the 
true price of what that premium is worth.
    Mr. Hurt. Thank you.
    Ms. Schwartz. I think it is fair to say that the early part 
of this crisis was led by risk-layering on loans that fell 
largely outside of the GSEs, Alt A, and subprime; however, they 
participated in some of that as well.
    My recommendation on how to think about government 
involvement in all of this is, had we been able to detect 
things earlier, systemwide, on performance of loans in addition 
to the front end of the loans, and linking the two makes some 
sense for the regulatory review of systemic risk. So that would 
be my other observation.
    Mr. Hurt. Thank you.
    Ms. Gordon. Much of what I would say was already said by 
Mr. Farrell and Ms. Schwartz. Irresponsible lending was most 
certainly a key driver of the crisis, but most of that lending 
was backed by private capital. And the GSEs actually maintained 
standards for their loan purchases that would have excluded 
many of the toxic loans that were so problematic. It was an 
instance here where the bad money was crowding out the good 
money. And without the standards that Fannie and Freddie did 
have, I don't know how much farther these bad products, these 
toxic products, unsustainable loans, could have gone.
    That said, going forward, the Dodd-Frank Act creates a 
framework for safer lending, and that should provide some 
protections. But the system is always evolving. New ideas come 
up, and it is important to--the government has an interest in 
making sure that lending is safe beyond just protecting the 
individual homeowner. As a Nation, we have an interest in 
helping people build wealth and in helping people be housed.
    And so as we go forward in reforming this system, it is 
important to remember that government has played an important 
role in that for a very long time now. Really, nobody here 
remembers the time before that.
    Mr. Hurt. Thank you.
    Chairwoman Biggert. Thank you.
    The gentleman from Wisconsin, Mr. Duffy, is recognized for 
5 minutes.
    Mr. Duffy. Thank you, Madam Chairwoman.
    I appreciate the witnesses coming in this afternoon and 
testifying.
    Ms. Gordon, just to clarify your testimony, is it your 
position that folks who have come into risk with other 
mortgages and are potentially near foreclosure, that we should 
provide them alternatives to modify their loans; is that right?
    Ms. Gordon. When it would return a greater amount of cash 
flow to the investor to modify the loan rather than not modify 
it--and if you don't modify it, generally it goes on to 
foreclosure--then it does make economic sense to modify that 
loan. That is why all of the contracts that you look at will 
contemplate the possibility of modifying loans.
    Mr. Duffy. But should that be the choice of the investor or 
should that be the choice of government to step in and dictate 
that cash flow?
    Ms. Gordon. Right now it is--the spread sheet that the 
servicers run has to do with the amount that would be returned 
to the investor. The government actually doesn't play a role in 
making that decision.That decision is made by the private 
servicer.
    Mr. Duffy. So you are not advocating that government should 
step in and help play a bigger role in writing down principal 
or being part of renegotiating interest rates, are you?
    Ms. Gordon. Unfortunately, the private system has failed us 
here in terms of their capacity and their competence.
    Mr. Duffy. But government does have a role in doing that?
    Ms. Gordon. I think that government has a role in helping 
the servicers figure out a way to make the choices that help 
not just investors, but help the whole housing market recover. 
Honestly, I don't think that government has deployed the right 
tools to do that or deployed them forcefully enough.
    Mr. Duffy. So even when a homeowner and a bank have entered 
into an agreement, two private parties, you believe that it is 
the role of government to step in and potentially negotiate a 
resolution by a potential principal writedown or a decrease in 
interest rate?
    Ms. Gordon. I should add that in the HAMP program, for 
example, as one of the principal government programs, the 
servicers have entered into a contract there with Treasury, 
under which they receive financial incentives to do the job 
that, frankly, they are obligated under all of their contracts 
with private parties to do anyway.
    Mr. Duffy. And Ms. Schwartz, one part of your testimony, 
you indicated that the foreclosure times from 2008, 300 days, 
have gone up to now 500 days in 2010. What impact does this 
have on prolonging this housing crisis?
    Ms. Schwartz. I think it gets at the bigger issue, that we 
kind of have overlapping inefficient processes through the 
foreclosure prevention. And some of it is good because you are 
protecting consumers who might have fallen through the cracks, 
but a lot of it has drawn out housing that otherwise should go 
to foreclosure, like abandoned houses. And the deterioration of 
neighborhoods happens when you have longtime lines of empty 
houses of 2 years, because that is an average of 500 days. So 
investors need certainty on what they are investing in in the 
mortgage business, in the mortgage markets, to get back to kind 
of normal timelines.
    Mr. Duffy. Is it fair to say that we want to work through 
this crisis as quickly as possible, hit our bottom, and 
hopefully rebound? Is that a fair assessment of what you think 
is an appropriate--
    Ms. Schwartz. I think that is right. I think we have to get 
through the delinquent and past-due loans and get through them 
and hopefully save as many people who are eligible for a loan 
modification, and then get them foreclosed--or do a short sale 
and a deed in lieu. There are other methods; it is not just a 
foreclosure.
    Mr. Duffy. And maybe to the whole panel, are the policies 
that we have in place right now facilitating a movement of 
these bad mortgages through the process so that we can bottom 
and hopefully come back up? Are the policies helping or hurting 
the movement?
    Ms. Gordon. Something that I think is important to 
recognize is that there is no bottom that you and I can look at 
and say, oh, look, the bottom is right over there, we need to 
get into it. Foreclosures beget more foreclosures. As you have 
more foreclosures in the neighborhood, there are price 
declines. As people are underwater on their mortgages, they are 
more vulnerable to any kind of income interruption, and in that 
case, they end up going to foreclosures.
    We can talk about letting the markets clear, but the 
markets can clear at various levels. And the importance of 
keeping people in loans when they can afford them and when they 
return a greater value for their investment--
    Mr. Duffy. My time is almost up. When we have this 
timeframe go from 300 days to 500 days, when it prolongs the 
foreclosure process, doesn't that put more pressure on the 
housing market because there are more foreclosures on the 
market and we haven't worked through them, Mr. Holtz-Eakin?
    Mr. Holtz-Eakin. I would say yes. Everyone has the ideal 
notion that if there is an economically rational workout that 
could be done between private parties, it should happen. When 
you start intervening in dramatic ways, two things happen: one, 
the rules aren't clear and it leads to uncertainty; and two, 
there is an actual incentive to wait for a better deal. Maybe 
taxpayers will stick a little more money on the table. What 
happens next? And this has slowed down, not speeded up, the 
overall housing adjustment.
    Mr. Duffy. Thank you.
    Chairwoman Biggert. The gentleman yields back.
    I would like to thank the panel for their expertise. And 
the Chair notes that some members may have additional questions 
for this panel that they may wish to submit in writing. Without 
objection, the hearing record will remain open for 30 days for 
members to submit written questions to these witnesses and to 
place their responses in the record.
    Again, thank you very much for being here, and thank you 
for your patience.
    This hearing is adjourned.
    [Whereupon, at 5:15 p.m., the hearing was adjourned.]


                            A P P E N D I X



                           February 16, 2011


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