[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
FACILITATING CONTINUED INVESTOR
DEMAND IN THE U.S. MORTGAGE MARKET
WITHOUT A GOVERNMENT GUARANTEE
=======================================================================
FIELD HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 7, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-56
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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
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
Larry C. Lavender, Chief of Staff
Subcommittee on Capital Markets and government Sponsored Enterprises
SCOTT GARRETT, New Jersey, Chairman
DAVID SCHWEIKERT, Arizona, Vice MAXINE WATERS, California, Ranking
Chairman Member
PETER T. KING, New York GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois BRAD MILLER, North Carolina
JEB HENSARLING, Texas CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin
JOHN CAMPBELL, California ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan JOE DONNELLY, Indiana
KEVIN McCARTHY, California ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico JAMES A. HIMES, Connecticut
BILL POSEY, Florida GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK, AL GREEN, Texas
Pennsylvania KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois
C O N T E N T S
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Page
Hearing held on:
September 7, 2011............................................ 1
Appendix:
September 7, 2011............................................ 41
WITNESSES
Wednesday, September 7, 2011
Hughes, Martin S., President and CEO, Redwood Trust, Inc......... 8
Lieberman, Jonathan, Angelo, Gordon & Company, on behalf of the
Association of Mortgage Investors (AMI)........................ 13
Rajadhyaksha, Ajay, Managing Director, Barclays Capital.......... 6
Rosner, Joshua, Managing Director, Graham Fisher & Company....... 10
APPENDIX
Prepared statements:
Hughes, Martin S............................................. 42
Lieberman, Jonathan.......................................... 59
Rajadhyaksha, Ajay........................................... 70
Rosner, Joshua............................................... 74
FACILITATING CONTINUED INVESTOR
DEMAND IN THE U.S. MORTGAGE MARKET
WITHOUT A GOVERNMENT GUARANTEE
----------
Wednesday, September 7, 2011
U.S. House of Representatives,
Subcommittee on Capital Markets and
government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:17 a.m., at
the National Museum of the American Indian, The George Gustav
Heye Center, Alexander Hamilton U.S. Custom House, One Bowling
Green #1, New York, New York, Hon. Scott Garrett [chairman of
the subcommittee] presiding.
Members present: Representatives Garrett, Schweikert,
Neugebauer, Hayworth; and Maloney.
Also present: Representative Velazquez.
Chairman Garrett. Good morning. This field hearing of the
Subcommittee on Capital Markets and GSEs is called to order.
I welcome everyone to the field hearing and thank you for
coming out. And I also appreciate all the panelists who joined
us this morning as well.
So we will begin, as is the custom, with opening statements
for those members who would like to make opening statements and
then go from there to our panel.
Thank you.
And so, as we begin, and as we all sit here, we remember
that it was on this day, almost exactly 3 years ago, that the
mortgage giants Fannie Mae and Freddie Mac were placed in
conservatorship by the Federal regulator. And $170 billion in
taxpayer bailouts and counting since then, these two entities
continue to do what? To bleed billions of dollars of losses
each quarter, with no end in sight.
Both of these companies combined, as we know, with FHA,
guarantee or insure around 95 percent of the U.S. housing
market. And so, when you think at the time when this country is
facing huge Federal deficits, the last thing that we should be
doing or even contemplating is permanently adding an additional
$11 trillion of expenses and exposures to the Federal
Government.
There is widespread agreement, it seems, that the
government cannot and should not back our entire mortgage
marketplace, and we all agree with that. I realize that winding
down these two companies must be done appropriately, though,
and, as I have said repeatedly, done so over time.
And why do we do that? Basically, to ensure that you have a
relatively smooth transition, if you will, to a new system, one
that would be a new system backed by private capital. But we
need to begin this transition to that period now. And waiting,
as some have suggested, will only make it worse and more
difficult to transition by ensuring that market participants
are more reliant on the government.
So, that is why we are all here today, here in New York
City, in the world's financial capital, to examine ways to
encourage private capital, private investment to reenter our
Nation's mortgage market and ensure that we have a robust level
of private investment in this market and will remain in the
mortgage market without any more government backstop.
There are a number of reasons why government investment has
been slow to return to the housing sector. I would look at
those and say, first and foremost above those, I believe, is
the government's expanded role in the mortgage market. That has
acted as a roadblock or a hindrance, if you will, to private
capital coming back into the marketplace.
When issuers can find mortgages more cheaply, as they can
by using the taxpayers, it is really not surprising at all for
them to go that route. So, at the end of this month, an
extremely modest drop in the conforming loan limits, as we all
know, is set to occur. And what will it do? It will show that
private capital can, indeed, fill that segment of the
marketplace and that rates will not skyrocket for those
borrowers, as some people would believe.
This will be a good--albeit small, but necessary--first
step towards weaning, basically, the mortgage market off of the
guarantee of government support back to a more private capital
support.
But to make significant headway in our efforts to move the
secondary mortgage market back to this, where we would like to
go, the private sector, we must do certain things. We must
reform the private securitization market and make sure that
investors feel basically comfortable with returning to the
marketplace where they had so many bad experiences over the
last several years.
What do we need to do? I believe one negative aspect of the
securitization market that could be improved upon is the lack
of transparency in the marketplace today. Basically, too many
times during the housing run-ups that we have seen, investors
were sold securities where the underlying collateral specifics
were not properly known or shared, and they were rushed through
into purchasing bonds without having time, basically, to review
them and did not have the prices of other trades on similar
products available to them at the time.
So, what do we do? First, by providing investors more
transparency and additional disclosures, I believe investors
will be able and more willing to return to our mortgage
securitization marketplace.
Second, another area that needs to be addressed is the lack
of legal clarity for these very same investors. Unfortunately,
the rule of law has come into question not only in this area,
but in a lot of other areas as well over the last several
years, and many investors have had their rights, you could say
trampled upon in the aftermath of the housing market bubble.
For investors to feel comfortable again with investing in
the private securitization marketplace, what do we need to do?
There must be legal clarity, and conflicts of interest between
the various parties must be addressed and minimized and
mitigated.
And finally, I believe that increased standardization and
uniformity within our securitization market will help as well.
What will it do? It will help drive long-term and robust
investment back again. Even with Fannie and Freddie's many
defaults, I do believe, that there were some benefits. They did
provide some benefits in the marketplace through their
standardization of underwriting criteria, as well as government
documents of securities.
I believe that if this uniformity was replicated in some
way in the private sector market, the market would become much
more liquid, which is what you want to get to, and many
investors around the world will once again feel comfortable in
participating in that marketplace.
I look forward to the hearing and I look forward to the
testimony from our esteemed panel that we have here today on
specific steps that Congress can take to advance these ideas
and fix the so-called plumbing, if you will, of the
securitization market.
I am also interested in discussing and addressing ideas to
do what? To facilitate the creation of a TBA market, the ``to
be announced'' market, which we have previously.
Some people raise questions as to how that will be
structured or exist going forward. You can do that by
replicating the sameness or the homogeneity and uniformity
within the GSE markets as well. So, what do we need to do over
there?
One final side note, but related to this, there has been
some news, I would say disturbing news from the Administration
in contemplating the United States using the GSEs, if you will,
to conduct a backdoor approach to the stimulus program. Of
course, we will hear this fleshed out on Thursday, I presume,
when the Administration, when the President gives his speech as
to what he feels needs to be done with regard to job creation
and stimulus.
But there are some rumors out there, and the idea that was
floated out--by forcing, on the breaking of any legal and
binding contracts and requirements on these securitizations,
basically, for the GSEs to forfeit their legal standing on
claims to banks that sold them these loans, additionally.
What would this do if it were to go through? This would
potentially subject the GSEs to billions of dollars of
additional losses, and those losses would be passed on to whom?
Of course, they would go directly to the American taxpayers in
the end. So, we will be carefully watching that.
Fannie and Freddie, if you look at them and how they have
been used over the years by decades, by past Administrations,
and now potentially for this, you have to look at them and say
they are not just entities to be used any way you want. They
are not just toys, as some say, to use to test into new ways,
to various new social policies, new social policies'
experiments.
What they are, in fact, are two failed companies that
played a leading role in the crisis of September of 2008,
leading to the financial difficulties that we still find
ourselves in as a country right now. And so, at a time when we
are trying to get private investment back into the housing
market, the last thing we need to do is to give investors yet
another reason not to buy U.S. mortgages.
With that, again, I thank you all for being here, and I
turn to a member who, as you said, makes this meeting today a
bipartisan discussion on GSE requirements.
Ms. Velazquez, you are recognized.
Ms. Velazquez. Thank you, Mr. Chairman, for coming to New
York City to hold this important hearing and for inviting me. I
don't sit on this subcommittee, but I sit on the Financial
Services Committee.
We are here today to examine the conditions necessary to
restore a vibrant private market for residential mortgage-
backed securities. Just 5 years ago, this market was valued at
over $1.43 trillion. In the years since, we have lost over 97
percent of this value.
Our economic troubles started with the housing sector, and
most economists agree that we will not see a return to
prosperity until the housing market has recovered. To do so,
investors must be able to once again buy and sell these assets
with confidence.
Mortgage servicers must be empowered to restructure and
work out troubled loans. And homeowners must have a clear means
of knowing who to contact to prevent a wrongful foreclosure.
Until these conditions are met, the housing sector will
continue to drag on our recovery.
While privately issued mortgage securities comprise just 12
percent of the first lien market, they represent 40 percent of
the loans that are currently 60 days or more past due. These
numbers illustrate the depth of the challenge facing private
mortgages securities. It also highlights the demands these
mortgages are placing on servicers.
Servicers are overwhelmed with the sheer number of problem
loans they must handle on a daily basis. Unfortunately, for
many homeowners, these numbers have resulted in rampant
problems in the foreclosure process. Members of this committee
are all too familiar with the issues of illegal foreclosure and
the debacle caused by robo-signing.
To address these problems, some have proposed establishing
national standards for mortgage servicing, including improved
accounting and reporting requirements. While these proposals
are encouraging, these proposals must also include enhanced
restructuring and loan modification requirements for troubled
loans and provisions to ensure that servicers act in the best
interests of investors and homeowners.
Problems in the RMBS market are not limited to servicers.
There is broad agreement on both sides of the aisle that, while
necessary, the government's current role in this market should
not be made permanent. Few policymakers will support a system
where the Federal Government guarantees 95 out of 100 of
mortgages issued.
Our efforts to reverse this trend and to strengthen our
housing market must acknowledge that the private market will
not return without the participation of investors. By improving
transparency and disclosures in the securitization process, we
can begin to address investors' fears in the market and
encourage more private capital to flow into this crucial
sector. We should also give investors time to better understand
the assets they are purchasing, and that is why a statutory
cooling-off period in the RMBS market is now being considered.
This is not a partisan problem, and I am encouraged by the
bipartisan approach that has been taken in the discussion of
this topic thus far. I hope that this will continue as the
proposal moves forward and will carry over to other areas.
I want to thank Chairman Garrett and Ranking Member Waters
for their leadership on this issue and for holding this hearing
in New York City.
I thank the witnesses for being here today, and I look
forward to hearing their testimony.
I yield back. Thank you.
Chairman Garrett. Thank you.
The gentleman from Texas?
Mr. Neugebauer. Thank you, Chairman Garrett, for calling
this hearing.
As we are looking at how we get America back going again, I
think getting a robust housing finance market operating again
is an important part of that.
And I think it is kind of interesting when we hear people
talk about getting the private sector back, private mortgage
activity back going again, private securitization, as if that
is a new concept. And it is not a new concept. We have had
private securitization. We have had private market activity
throughout the history of the mortgage industry in this
country.
What we do have, though, is we have an entity or a group of
entities that are crowding out the ability for there to be a
robust private market. And as long as you can sanitize those
mortgages using the American taxpayers as the backstop, there
is very little incentive for private activity, particularly in
the subjumbo market.
And so, one of the things that I hope that we will discuss
today are ways for us to create some space for the private
sector. The Administration has talked a lot about that.
Secretary Geithner put out a White Paper, and some of us found
some of the concepts in that paper to be something upon which
we could agree.
Unfortunately, this Administration has not acted on any of
the recommendations that it initially made. And so, Fannie and
Freddie continue to dominate the mortgage market in this
country. As I think the chairman pointed out, about 95 percent
of the mortgage origination today is either FHA-, Fannie-, or
Freddie-guaranteed.
The other thing that I think people talk about is what is
Congress going to do about that? Obviously, Congress has not
been able to move any major reform for Freddie and Fannie, but
does Congress necessarily need to do that?
These entities have their own legal right to reduce, for
example, the size of loans that they will purchase. The FHFA--
Mr. DeMarco has some broad powers as the conservator of that
entity, and one of the things that we have encouraged him to
do--and I think they are working slowly on that--is to increase
the g-fees, and so there to be some financial incentive for
private securitization.
But as long as you can sanitize those loans for a
relatively small risk premium, you are not going to see a lot
of private mortgage activity. And so, we can talk about
standardization and all of those things, and those are great
concepts, but until we get a more competitive environment for
the private mortgage industry, I don't think we are going to
see a lot of movement.
I think as we work on all of these various solutions, we
need to understand that as long as there is a monopoly in the
marketplace by Freddie and Fannie and FHA, it is going to be
extremely difficult to encourage private activity unless we
make it a more competitive environment.
So, Mr. Chairman, I appreciate you holding this hearing,
and I look forward to hearing from these witnesses.
Chairman Garrett. And I thank you.
Again, I welcome our full panel here, welcome your
testimony we are about to hear. Your full statements will be
made a part of the record. You each will be recognized for 5
minutes, and I guess we are going to be a little more liberal
with that than we normally would be back in the hearing room.
We will begin with the managing director of Barclays Banks.
Ajay?
STATEMENT OF AJAY RAJADHYAKSHA, MANAGING DIRECTOR, BARCLAYS
CAPITAL
Mr. Rajadhyaksha. Chairman Garrett and members of the
subcommittee, I thank you for your time.
I am Ajay Rajadhyaksha, in U.S. fixed-income research at
Barclays Capital in New York, including research on housing
finance and the mortgage markets.
As the members have said, as Chairman Garrett has said, the
state of housing finance in the United States, where the GSEs
account for over 90 percent of all mortgage loans currently
made, is problematic. We think there are several ways in which
the government can help change this to encourage private sector
issuance of mortgages.
And what I am going to do is break these proposals into
three areas. The first is about how to incentivize issuers and
underwriters of private label MBS. The second is about making
life easier for investors who will be called upon to buy these
in the primary and secondary markets. And the third pertains to
establishing a benchmark to help the private sector price
mortgage credit.
On the issuance front, there are three specifications to
address. One is to rationalize various regulatory regimes
related to capital requirements. For example, the U.S. banking
system, still very regulated, still follow a ratings-based
approach. Meanwhile, the insurance industry has moved to loss-
based models. In general, we are in favor of loss-based models,
as opposed to the ``black box'' ratings approach.
On that same front, reducing areas of legal uncertainty
with regard to rep and warranty, representation and warranty
enforcement mechanisms, is also important.
And finally, clarifying the rules around risk retention and
disclosures to reduce regulatory uncertainty would go a long
way toward making issuers more involved in this market.
On the investor side, there are a few other things to
consider also. The first is that from the investor standpoint,
we do need a transparent way to enforce reps and warranties. In
the private label transactions in particular, as opposed to in
the agency mortgage markets, in several cases, investors have
had a hard time even getting access to the loan files unless
they own more than a majority of the deal.
We would like MERS, the Mortgage Electronic Registration
System, to be legalized, and the legal process required to
correctly transfer loans will be streamlined from current
levels.
And finally, a number of members also mentioned uncertainty
around servicing. We can reduce this, we believe, from the
policymakers' standpoint, by creating servicing standards that
are similar to those required by FHA and FHFA.
Taken together, the first and second steps, I believe, will
go a long way to reducing legal uncertainty and providing
greater transparency to both investors and issuers. But we are
not convinced that this by itself is enough to jumpstart
private label mortgage issuance.
Policymakers also need to make an effort to replicate the
standardization and uniformity provided by the agency MBS
market in one more way--by providing a benchmark that helps the
private sector price mortgage credit. What I mean by this is
that for decades, the GSEs--Fannie Mae and Freddie Mac--have
actively hedged their interest rate risk in the capital
markets. But as we now know, to the detriment of the taxpayer,
their bigger exposure always has been the credit risk in the
mortgages that they guarantee.
We recommend that the GSEs sell a portion of the credit
risk in their existing guarantee business to the private
sector. I will not go into the exact details in the interest of
time, but I will say that we believe implementing this process
should be relatively easy. The GSEs have the financial
technology to do it. They have done similar one-off deals in
the past. It does not require additional congressional action.
It does not require legislative action.
Selling credit risk to the private sector would also
transfer some of this risk from the taxpayer to the private
sector. But again, the single most important reason to do this,
we believe, is to establish a benchmark against which the
private sector can price mortgage credit.
So what do I mean by that? Consider the loans from 2009
that Fannie Mae and Freddie Mac have guaranteed in the 4.5
percent coupon. There are more than $300 billion of these
loans, and they have been outstanding for more than 2 years.
That is a lot of data that is available. There is a lot of
uniformity around these loans that is available.
This big cohort with so much uniformity, if the GSEs were
to sell part of the credit risk in this pool to the private
sector, what we think it would do is create a considerably more
active market for private mortgage credit. The uniformity, the
size of the cohort, and the available data for more than 2
years as far as credit performance goes, all of that means
private sector investors will have a benchmark against which to
price new deals as they come to the market.
Such a benchmark--and it exists in other markets also--for
example, in the agency debt markets, the swaps market, one of
the reasons why we believe it took off is because agency debt
created a benchmark for that market--is very important for an
active secondary market. In this case, an active secondary
market for mortgage credit. And an active secondary market, as
any participant will tell you, is extremely important for a
primary market for mortgage credit.
Finally, and my last point, while I do believe that the
private label mortgage market needs to be responsible for a
greater share of origination, I would caution policymakers
along the lines of the argument Chairman Garrett made to
closely watch the pace of any such transition. The availability
of mortgage credit is extremely important to the housing
market, especially in its current stage.
I look back to the first half of 2007. The unemployment
rate was at 5 percent when home prices started falling. It was
not because we collectively threw up our hands and decided that
housing was clearly too expensive. The reason that happened was
because at that point, the availability of mortgage credit came
in large part from the nonagency markets. And as primaries shut
down, the housing market started to tumble.
So any transition we believe should happen, but the pace we
hope policymakers will watch very closely. In the near term, I
think the government will need to provide support to housing
finance even as it slowly withdraws away from that market.
Chairman Garrett, members of the subcommittee, I thank you
for your time and attention.
[The prepared statement of Mr. Rajadhyaksha can be found on
page 70 of the appendix. ]
Chairman Garrett. Thank you.
Mr. Hughes, from Redwood Trust?
STATEMENT OF MARTIN S. HUGHES, PRESIDENT AND CEO, REDWOOD
TRUST, INC.
Mr. Hughes. Chairman Garrett, members of the subcommittee,
good morning.
I am Marty Hughes, CEO of Redwood Trust, and I sincerely
appreciate the opportunity to testify here today.
Redwood has a long history as an issuer and an investor in
private prime mortgage-backed securities. Since the market
freeze 3 years ago, we have done only two transactions, fully
private, backed by new issue mortgages. We are expecting to do
a third transaction shortly and would hope to do a fourth by
years end.
My written testimony details specific recommendations on
Dodd-Frank and rating agencies. I thought with my oral
testimony today, I think it is best with a difficult problem
that sometimes it is easier to elevate the view and look at the
markets, the private label markets in context of what any
thriving, healthy market requires.
The underpinnings of those markets are willing buyers and
willing sellers. That is what makes it work.
The buyers on the private label side are major financial
institutions--insurance companies, banks, and money managers.
These investors today are awash with liquidity, looking for
safe, attractive yield. With the 10-year at 2 percent, these
investors have the capacity to greatly reduce the government's
burden that it is taking in the mortgage arena.
I believe a vast pool of these investors will come back and
buy AAA mortgages backed by prime loans with two criteria.
First, they are going to need a modest premium over comparable
agency securities. Again, I think it is modest, perhaps 50
basis points. And in comparison to historical standards, the
historical standard of 25, which was in place for 15 years, was
where the difference between the two different securities
traded.
Second and most importantly, they need to have trust and
confidence in the safety of the underlying securities. In
completing the two transactions that we did, we worked really
closely with AAA investors to win their trust and to meet their
demands, and their demands are pretty straightforward: They
want fully documented, plain vanilla mortgages that borrowers
can clearly repay; downpayments that are real and meaningful;
servicers that are competent and trustworthy agents of
investors' safe and simple securitization structures; strong
and enforceable representations and warranties; and
transparency in disclosures and alignment of interests.
In my opinion, the one gaping hole to restoring investors'
confidence is the unresolved threat from second mortgages. It
was a significant factor contributing to the mortgage and
housing crisis. And the first and most important level of skin
in the game is at the borrower level. If the borrower can
effectively withdraw their skin in the game through a second
mortgage, the risk on default on the first goes up
significantly.
So now, if we were to switch gears from willing buyers to
willing sellers, the sellers in this instance are mortgage
originators, which are dominated by the major banks. Under the
current paradigm, there is little need for these banks to sell
their mortgages through private securitization. Why? They can
sell 95 percent into an attractive, subsidized government
program, and they have excess balance sheet capacity to easily
portfolio the rest.
There is simply no financial incentive for banks to change
the status quo. Necessity is the mother of invention. When you
need to figure things out, you figure things out.
Post-crisis, all of the other ABS markets are up and
running. When you look at how they recovered, it is pretty
simple: Success breeds success. Issuance velocity leads to more
issuance velocity. There are simply too few loans outside the
government's reach to gain any real issuance velocity.
Government subsidies need to be scaled back and loan limits
reduced on a safe and measured pace to level the playing field
and to permit the private markets to flourish.
I would echo the chairman's comments that we need to begin
a process of testing the private market's ability to step in
the breach. Otherwise, we are always going to be stuck in the
circular conversation of, the government can't back out because
the private sector isn't there, and the private sector isn't
there because the government is stifling and crowding out the
private sector.
The perfect test is 3 weeks away. It is when the conforming
loan limit is scheduled--the high-cost loan limit is scheduled
to come down from $729,750 to $625,500. It represents 2 to 3
percent of total originations, and contrary to what many status
quo advocates had been forecasting, there is a smooth
transition under way today towards that lower loan limit. Jumbo
loans above $625,500 are being offered today for closing after
September 30th at only 25 basis points higher to where they
were prior to that date.
In closing, the private markets worked effectively for
years. I really don't think it is that hard to figure out how
to get them back on track. We can go back to when losses were
10 to 25 basis points on prime securities.
So, at Redwood, a small team, we are driven. We have a lot
of passion for doing this. We can figure it out. I think with
the help of this subcommittee, we need to keep pushing it
along, advancing structural policy changes to bring about the
redevelopments on the markets on a broader scale.
Thank you for giving me the opportunity to testify here
today.
[The prepared statement of Mr. Hughes can be found on page
42 of the appendix.]
Chairman Garrett. Thanks a lot. I appreciate that.
From Graham Fisher, Josh Rosner.
STATEMENT OF JOSHUA ROSNER, MANAGING DIRECTOR, GRAHAM FISHER &
COMPANY
Mr. Rosner. Thank you, Chairman Garrett, and members of the
subcommittee, for inviting me to testify on this important
issue.
Between 1989 and today, securitization markets and,
therefore, capital markets replaced banks as the lead funding
mechanism for home mortgages. It is true that excessive social
engineering to overstimulate housing purchase drove
speculation. But in my view, poorly developed and opaque
securitization markets drove excess liquidity and irresponsible
lending and borrowing.
Without the confluence of these issues, we would not have
had the withdrawal of liquidity to the mortgage finance market
and an ongoing cycle of falling housing prices. Today, as it
was in the prelude to the crisis, securitization markets
operate in a ``wild west'' environment, where rules are more
opaque than clear, standards vary, and useful and timely
disclosures of the performance of loan-level collateral is hard
to come by.
Asymmetry of information between buyer and seller is the
standard. To believe that the real estate market or the economy
itself can find a self-sustaining recovery without first
repairing this important tool of financial intermediation is
unrealistic. Nothing has been done to create industry standards
or useful and timely disclosures of loan-level collateral
characteristics.
The primary market for securitizations had been different
from the equity markets. There was no red herring or pre-
issuance road show period during which investors had the
ability to analyze a deal and its underlying collateral.
Typically, deals came to market so quickly that investors
were forced to rely on rating agency pre-issuance circulars,
term sheets, or weighted average collateral data. These tools
have proven inadequate. Moreover, with a lack of pre-issuance
collateral disclosure standards, deals usually came to market
before the collateral pool was even complete.
While this approach worked well in the TBA market, that was
a direct result of clear underwriting guidelines, credit boxes,
and servicing standards. Such standards do not exist today
outside of the agency market.
To ensure adequate transparency in the non-TBA market, data
on specific underlying collateral in each pool should be made
available for a reasonable period before a deal is sold and
brought to market. Such a requirement would enhance investor
due diligence, foster the development of independent analytical
data providers, and reduce reliance on rating agencies.
The automation, standardization, and public disclosure of
key collateral information before securitization is marketed
and at least monthly thereafter is a necessary ingredient to
the development of deep and broad markets necessary to fund our
economy.
Pooling and servicing agreements and representation and
warranties can be several hundred pages long. They define
features like the rights to put back loans that had
underwriting flaws, the responsibilities of servicers and
trustees, and the relationship between the different tranches.
We need to address the lack of uniformity in contractual
obligations between various parties to a securitization. Key
terms that define contractual obligations are not standardized
across the industry, across issuers of securities, or even
within the same type of collateral by particular issuers.
The lack of standardization and length of documentation
contributed directly to problems in the securitization market.
When panic set in and investors began to question the value of
their securities, they knew they didn't have time to read all
of the different several-hundred-page deal agreements. This
reinforced the rush to liquidate positions and supported a run
on the market that caused securities values to fall further
than fundamentals justified.
With the best interest of the investing public and clarity
of contract at their core, legislation should direct regulators
to create a single standard pooling and servicing agreement
governing each collateral class, whether the issued securities
are registered, over-the-counter, or bespoke.
Why standards matter: Legislative and regulatory standard
setters must also focus on addressing a lack of clear
definition in securitization markets. Without a common language
and agreement on the meanings of fundamental concepts, the
value of data is diminished. Conversely, if everybody is using
a common language, it becomes very hard to game the system.
Amazingly, 3 years after the crisis, there is still no
single standard, accounting or legal, of delinquency or
default. Currently, the term ``delinquency'' can be determined
either on a contractual or recency of payment basis. Even among
firms that would define it on the same basis, each servicing
agreement can have different interpretations of the reporting
of delinquencies.
While the conflicts inherent in the public-private
corporate structure of Fannie and Freddie caused great and
significant distortions in the market and led to their ultimate
failure, there are really valuable lessons the GSEs
demonstrate.
Investors can and will support a TBA market comprised of
standardized securities, composed of clearly defined collateral
as long as there are adequate clear requirements and standards
defining credit, documentation, pooling, servicing,
representations, and warranties. Going forward in an absence of
a government guarantee, that TBA market would require a
gatekeeper to oversee an audit compliance with such standards.
Collateral servicing: When a pool of first lien mortgages
is created and sold into a trust, a servicer is chosen to
service the loans, collect the mortgage payments, and direct
the cash flows to investors as defined by agreement. While
investors in different tranches to the securitization may not
always have aligned interests, in light of the significant
number of mortgages today that have negative equity, most of
the remaining holders would be willing to write down the
principal balance of the loan if it would result in re-
performance of collateral, and this would be driven by private
agreement.
Unfortunately, due to an ill-defined legal relationship
between servicer and investor, along with a large common
conflict of interest between servicer and affiliated companies
that own most of the servicers, many servicers do not prefer
this ``less is better than nothing'' approach. The largest
servicers are owned by large banks, banks that hold the
majority of second liens and home equity lines on the
underwater houses.
Remember, the second lien is, by definition, subordinated
to the first. So if the servicer wrote down the principal on
the first lien, it would, where the mortgage is in a
significant negative equity position, completely wipe out the
value of the second lien and cause the bank to experience a
total loss on that loan.
As a result of an unclear duty of servicers, both investors
and troubled borrowers are held hostage to servicing practices
that may seek to protect often under-reserved banks rather than
the investors in the securities.
New rules in securitization should clearly define the
servicer's obligations and require a fiduciary duty to the
investors in securitized pools. Perhaps more effectively,
legislation should specifically prohibit financial entities
from owning servicing where the servicing results in a
conflict.
Four years after the crisis began, we still haven't begun
to have real discussions about either housing policy or the re-
creation of the mortgage finance industry. These are two
different subjects. To reduce the temptation of legislators to
use private markets as tools of social policy, the structure of
the mortgage finance industry must be separated from housing
goals.
We should be seeking ways to credibly shift financial
sector risk back to the private sector, not ways to formalize
the government exposure to that risk. The hope is the original
promise of securitization through which banks could originate
quality loans and sell them to investors who would be better
able to hold the risk of those assets can be realized. This
would free up bank balance sheets to make more loans in support
of financial intermediation and economic expansion.
Thank you for inviting me.
[The prepared statement of Mr. Rosner can be found on page
74 of the appendix.]
Chairman Garrett. Thank you.
And last, but not least, Mr. Lieberman. Thank you for
joining us.
STATEMENT OF JONATHAN LIEBERMAN, ANGELO, GORDON & COMPANY, ON
BEHALF OF THE ASSOCIATION OF MORTGAGE INVESTORS (AMI)
Mr. Lieberman. Thank you, Chairman Garrett, and
distinguished members of the subcommittee.
Thank you for the opportunity to present on behalf of the
Association of Mortgage Investors, to testify and comment on
this critically important topic.
I am head of Angelo Gordon's residential debt business, the
CIO of our REIT, aging mortgage investment trust, which went
public about 6 weeks ago, and also the portfolio manager for
the public-private investment partnership with the U.S.
Treasury.
The U.S. mortgage market is truly an awesome market. It is
$11 trillion. It has the deepest, most diverse investor base in
all of fixed income. It has the most liquidity, and it has been
historically capable of financing all housing finance in the
United States.
Historically, it was built upon three legs of a stool.
Those three legs were bank balance sheets--community banks, big
institutional banks that portfolioed mortgages; as well as
insurance companies, U.S. Government-backed mortgages as well--
Fannie, Freddie, FHA, Federal Home Loan Bank; and then,
finally, private investor capital, predominantly in the form of
securitized product.
Unfortunately, certainly one of the major legs of the
market has basically been shut down. Basically, private
investors have been very, very significantly punished in the
current downturn, have been very, very disappointed about how
the market has conducted itself over the past several years.
And as a result, it is completely shut at this point, other
than a few deals.
There are two major consequences to this. First, it affects
our overall access to capital from main street. The diversity
of financing available to consumers is dramatically diminished.
It creates systemic risk, if anything, even more so than
previously existed in the marketplace.
Opportunities for credit are becoming vastly more
expensive. And the choices that are available to our citizens
are vastly reduced.
With respect to AMI, we have become, we believe, the
primary trade association representing private mortgage
investors. Our members do not control servicers. We do not
foreclose on borrowers. We simply seek to earn a return on
investment in the securities or the mortgages.
For most of our members, all that we are seeking to
retrieve is basically a Treasury return, plus a small premium
to Treasuries. We are not seeking oversized returns for the
vast majority of our membership. It could be as simple as
Treasuries plus 50 basis points or 100 basis points, not
excessive returns, not equity-oriented returns for the vast
majority of our members.
The association has members that basically have investors
that are your life insurance companies, your State pension
funds, your local retirements systems, your endowments, your
retirement systems, your 401(k)s, your mutual funds. We have
sought to develop a set of priorities that we believe will
contribute to the rebirth of the marketplace. AMI has come
together to basically identify obstacles and try to identify
solutions that we believe can be implemented by folks like
yourself.
In summary, the current mortgage investors have basically
suffered from a number of problems in the securitization space.
The market is very opaque, asymmetric in terms of information
flow, and thoroughly lacking in transparency.
Underwriting standards are basically nonexistent to poor.
There has been a lack of standardization and uniformity
concerning transaction documents, delinquency, default status,
advancing status, true sales status, and the list goes on.
There are numerous conflicts of interest among all of the
parties and even the regulators.
So, in terms of conflicts of interest, many servicers are
conflicted that they have outsourced to their own entities
different third-party activity, whether it is property
appraisals, whether it is title, whether it is flood insurance,
whether it is foreclosure management--all of which basically
results in skimming of equity from the property, from the
borrower as well as from investors as well as from the U.S.
Government.
Originators and issuers are not honoring their contractual
representations that they sold into the securitizations. The
past is a prologue, and there are serious assurances that this
will not be repeated in the same bait-and-switch scenario as we
have seen.
The market is generally lacking in sufficient tools to
protect first lien holders, such as recourse to the homeowner
to avoid strategic defaults, and efficient ways to basically
manage second liens to allow the borrower to work out their
loan and stay in their house, as well as protecting first lien
holders.
Servicing practices are antiquated, defective, and
generally unreliable. Information flow is unreliable to
investors. Oftentimes, we cannot reconcile cash that is coming
into us. Oftentimes, servicers come back and 2 years later seek
capital back from us because they have made some error in the
servicing process or reporting process.
Investors lack any sort of effective legal remedies for
violations of RMBS contract obligations or other rights arising
under State and Federal law.
The development of enhanced structures, standards,
safeguards will all contribute to the proper functioning of
capital markets, the proper allocation of capital, the proper
pricing of capital, and ultimately, a more successful main
street that we believe in. Mortgage investors share your
frustration with the slow restoration of the housing market,
relief for homeowners, and finally, the redevelopment of
capital markets in a meaningful way.
We believe that the recommendations that we lay out will
help in developing the market once again in a safe and
competent fashion and incentivize the right positive economic
behavior.
In sum, AMI offers the following recommendations for
enhanced transparency and as an alternative to risk retention
within the capital markets.
We believe that we should be provided with loan-level
information that all investors, as well as regulators, as well
as rating agencies can use to evaluate collateral in an open
and thorough manner for making our investment decision and
continuing to monitor our investment decision. With Fannie,
Freddie, and FHA controlling 95 percent of the market, you
would think at this point in time, they would release the data
necessary for us to do so and conduct that evaluation.
We would require a cooling-off period where asset-backed
securities are offered, where investors have sufficient time to
review and analyze loan-level information before making
investment decisions. We wouldn't expect the investment to be
put together after we purchased the asset.
Make deal documents for all asset-backed securities and
structured finance securities publicly available to market
participants and regulators in a sufficient manner where we can
basically analyze and comment on them in advance.
Develop for each asset class standard pooling and servicing
agreements with model representations and warranties as
nonwaiverable industry minimum standards. To kind of make this
common sense, currently, we have situations where the
definition of a dollar doesn't mean 100 pennies. Everybody in
our market has a slightly different definition of what a dollar
is, what a pound is, what an ounce is. It is very hard as an
investor to basically navigate in a market where basically a
dollar doesn't mean a dollar.
Develop clear standards for the securitization market and
the capital markets. Direct address conflicts of interest for
the servicers and try to basically remediate economic
incentives that are adverse to investors as well as homeowners.
Once again, we should all be on the same page that we are just
getting our Treasury plus yield.
Homeowners, we want you to stay in the house. Nobody is
interested in owning a lot of real estate. That is not our
objective to own these securities.
And come up with a thorough way to restructure, modify, and
work out these assets in advance that all parties are in
agreement on. Inevitably, there will be personal events,
crises, because we are human beings, and we should have a game
plan in place to basically try to modify these loans or
basically do the correct thing in terms of processing the
collateral so that we can continue to offer low interest rates.
Just as the Trust Indenture Act of 1939 requires the
appointment of suitable independent and qualified trustees to
act on behalf of holders of corporate debt securities, model
securitization documents must contain substantive provisions to
protect asset-backed security holders as well.
Asset-backed securities should be explicitly made subject
to private rights of action for fraud and securities disclosure
violations. Certain asset-backed securities can be simplified
and standardized. Fannie and Freddie should be working to help
achieve that.
And rating agencies need to use loan-level data and
basically make their assumptions known in an organized manner
to all investors if they are going to continue to be a central
part of the securitization process. We believe all of these
recommendations will result in more home lending, less
expensive credit, fewer housing foreclosures, and more options
for working-class Americans.
We hope that this is helpful, and we appreciate the
opportunity to share the views of the Association of Mortgage
Investors with the subcommittee, and please do not hesitate to
use us as a resource.
[The prepared statement of Mr. Lieberman can be found on
page 59 of the appendix.]
Chairman Garrett. And I thank you for your testimony.
I see we are joined by the gentlelady from New York, Ms.
Hayworth. It is good to have you with us. Good morning.
We will begin the questions, and I will do my best to keep
it down to 5 minutes, as we have a number of people here.
Just to Mr. Lieberman's comment with regard to the
definition of a dollar, a lot of us realize the dollar is not
just worth what it used to be after all the spending down in
Washington right now. So that may be an issue that we have to
take up. And we will have the answer on that one Thursday, I
think, after we hear from the Administration.
So taking this all from, what, a 30,000-foot level and then
bringing it down into the weeds a little bit, there seems to be
some commonality on the issues of where we were, the problems
that we experienced, and at least some of the solutions on
where we need to get to. There seems to be some sort of a
degree of common thought with regard to not having to the
extent that we have had in the past with regard to government
backstop and to move towards greater capital infusion from the
private sector--all good.
One of the statements I will direct to Mr. Hughes, and
anybody else can join in on these questions. So one of the
questions going on, on the top level is, so is there a problem
with, as some people say, that there is a lack of--maybe Mr.
Lieberman could chime in on this--investor demand on the one
hand, or is it actually an issue of lack of supply on the other
hand?
Or maybe it is--from the testimony, maybe it is a mixture?
Mr. Hughes?
Mr. Hughes. I do think investors--and again, issuers have
to meet all of the investor's criteria for trust and
confidence--are awash with money looking for investments today.
I think the bigger issue is there is very little to buy, and
you can't gain any traction if there is nothing to even buy.
And you can't gain traction on all the best practices that
we are talking about. You can't gain traction on reps,
warranties. What is the best way to do it? We put two deals out
there and let people shoot at them, and if we got something
wrong or we can improve it, we will improve it.
But the only way you can get there is by having a deal
flow. And we are not going to get there if there are really no
loans to securitize.
Chairman Garrett. What is the reason for that?
Mr. Hughes. The government is crowding out the private
sector.
Chairman Garrett. Thank you.
Mr. Rosner, you were shaking your head?
Mr. Rosner. No, I was going to agree that it is a process
of one crowding out. The other side is we had overstimulated
homeownership, which is another reality that we need to
consider, which is homeownership rates, having gone from 64.5
percent in the early 1990s to just over 69.5 percent, have
fallen back.
There isn't the fundamental demand at this point, partially
because there isn't the confidence that we have stabilized
housing. And so, it becomes a virtuous circle that at the point
at which we are able to bring confidence that housing has
started to bottom, maybe we will start seeing increase in
homeownership.
I do fear that when you look at the homeownership rates by
age cohort, they are falling considerably in every grade except
for really the retirement age. And you wonder how much of that
is, unfortunately, a permanent impact of the realization that
maybe homeownership is not always the right answer for every
household.
Mr. Lieberman. Chiming in, I guess we seem to do pretty
well in the credit card market and the auto market, providing
private capital to individuals, Americans, at very attractive
levels. You can go into pretty much any auto dealership, and
they have 24 different lenders that will lend you money at 1,
2, or 3 percent or zero percent, pretty much.
We have, I think, significant private capital that is
looking for attractive investments. But when you are competing
with either the world's largest S&L or the world's largest REIT
that is financed with the cheapest cost of capital and has
basically total access and control over 95 percent of the
market, you take a step back and realize that predominantly you
are going to be adversely selected.
So we might as well wait until the rules are set and we
understand what the real rules are for the process. And maybe
some of the piping, which still has not really been addressed--
Chairman Garrett. Right. Let me be the devil's advocate on
that point. So much of this testimony that we have heard here
today is that we need some degree of uniformity on these areas,
some clarifications and all. We will probably all go into each
one individually, but do you have that in all these other
marketplaces, the same degree of uniformity and government
definitional aspects within all those other marketplaces there
to the same extent that you would have here, that you would
look for here?
Mr. Lieberman. You have much greater uniformity. In the
credit card market, you really only have 6 to 10 parties that
issue credit card securitizations, and they are typically--
Chairman Garrett. But the uniformity doesn't come about
necessarily because of regulations that we have defined and as
far as servicing agreements and all that sort of thing, right?
It comes because of the nature of that marketplace.
Mr. Lieberman. The issuers there have taken a great deal of
responsibility, have built very robust programs and have also
retained a great deal of risk in the programs. So if you buy an
American Express securitization, you know you are going to get
a dollar back, and you know--
Chairman Garrett. Why can't we do that or why can't you all
do that in this area? Mr. Rosner, you mentioned during your
testimony that in some aspects of this, it is taken care of
contractually. Mr. Hughes might want to join in on this as
well.
In your couple of situations, you said here is what we are
going to do, and again, devil's advocate, why can't we just do
this, going forward, maybe incrementally small at first, and
just grow the market from that perspective?
Mr. Hughes. I don't see any reason why it can't grow on
that basis.
Chairman Garrett. Okay.
Mr. Hughes. One thing that I--
Chairman Garrett. So you don't need--so you disagree? You
don't need the extent--
Mr. Hughes. You do need standardization.
Chairman Garrett. Okay.
Mr. Hughes. You need some, but it needs to develop over
time. If we sit back and wait for the perfect legislation, the
perfect process, we will be back here 3 years from now. The way
processes and best practices are going to develop is by testing
them.
Chairman Garrett. Okay.
Mr. Hughes. The second thing I would note is--and I am glad
for this subcommittee--some omnibus oversight of all the
initiatives that are going on. You have stuff under
legislative. You have Dodd-Frank. You have some stuff that has
to happen under the securities law, under Reg. AB. You could
have Garn-St. Germain.
There is an assortment--best servicers, best practices. So
it is great to have a subcommittee of this type where somebody
has a to-do list to figure it out so that all the links in the
chain are pulling ahead, so that we don't--not working on one
while someone else is going to hold things back.
Chairman Garrett. Sure.
Mr. Rosner. I was just going to point out there are some
obvious differences, though, between auto securitizations and
credit card securitizations versus mortgage securitizations in
terms of duration. And there are, by the way, increased
disclosures in static pool data in those other markets that you
don't get in the MBS market.
So I think that standardization is somewhat easier, given
the turnover in the underlying collateral.
Chairman Garrett. Okay.
Mr. Lieberman. I would just add that I think that the
private sector, in order to compete with the public sector,
resorted to certain shortcuts. The way you basically compete
with somebody with the lowest cost of capital and the best
access to product is you basically change the definition of
what a dollar is.
You change the rules of the game. You create opaque
markets. Otherwise, if it is standardized, people understand.
They are just going to migrate to ``the best product out
there,'' which is no risk and--
Chairman Garrett. Right. So this will be my last question,
and then I will turn it over to the other side of the aisle.
One of the areas you will address--and I am sure other will
people want to delve into this and go in more detail--is on
first and second lien situations, that can't be done just--it
could be, but not adequately with regard to a contractual
obligation, based on this last series of answers. So what is
each one of your answers to that solution, question?
Mr. Hughes. To me, I think there needs to be some
limitation on the ability to take out a second mortgage. It
could be a mathematical test of the loan-to-value can't go
above 80 percent. In no other form of lending, whether it is in
commercial loans, corporate loans, can the borrower go out,
take out a primary loan and then go out and be able to impair
their credit condition by taking out a second loan. The first
is going to say ``stop.''
But there is no governor on here, and I think the governor
could be some formula-based, based on a reappraisal. And I
would say it would have three benefits. In addition to
protecting the first, it would have the benefit of protecting
the financial system from banks offering something they
shouldn't and it can protect the borrower from taking and
putting themselves in the position where they shouldn't be in
terms of putting themselves in credit peril.
Mr. Lieberman. I would say that in Texas, they had an
experience where they had an oil bust, and it led to a housing
bust. And I think the response there is they prohibited second
liens for a long period of time.
One of the reasons the Texas housing market has held up
better than any other market in the United States, not only
because of job growth, is also because they truly had equity in
their houses. That law was subsequently changed and modified in
the last 3 years. But still, it was one of the best housing
markets where if a borrower really wanted additional equity,
they had to go refinance their entire first mortgage and could
not put a second lien there.
Chairman Garrett. Ms. Velazquez?
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Lieberman, what is your take regarding voluntary
cramdown?
Mr. Lieberman. I think we would like to see Bankruptcy Code
changes that basically elevate the first mortgage on a house
and allow us to price the credit effectively. And if that
involves cramming down second liens and other obligations, we
believe that if society, government, and the homeowner wishes
to have a very low cost of funds on their first mortgage, that
is something they should think about.
But it is a judgment call. And if the corporation wants
first lien debt and wants a very cheap cost of funds, their
lien has priority over all others, and there can still be
cramdown there.
Ms. Velazquez. Does your organization come out with any
position on this area?
Mr. Lieberman. We have not formally come out with a
position.
Ms. Velazquez. Mr. Hughes, mortgage originators and
securitizers are currently facing numerous lawsuits for the
mortgage-backed securities that were issued prior to the
financial downturn. Are these developments keeping potential
investors from reentering the market for mortgage-backed
securities?
Mr. Hughes. I don't think it is the lawsuits themselves.
But the underpinning of those lawsuits, which were faulty
representations and warranties where the reps and warranties
which underpin these securitizations really failed on three
levels. First, the actual representations and warranties
themselves had little teeth. The second one was they were
unenforceable. So, there was no traffic cop that could actually
take it and determine whether there was a legitimate issue. And
the third was, in many cases, they weren't collectible.
So, on all three levels, it failed. And in our deal, on the
underpinnings of the past, we changed all three levels of the
representations and warranties to give them teeth. We tried to
get the model representations and warranties. We wouldn't buy
loans from anybody unless they are willing to submit to binding
arbitration if something goes wrong.
But, yes, I think it is the underpinnings of those lawsuits
that really have investors alarmed.
Ms. Velazquez. Mr. Lieberman, do you have any reaction to
this question?
Mr. Lieberman. I think I would have to get back to you on
that. Just a clarification on cramdown: The organization, the
Association of Mortgage Investors, believes in the priority of
a first lien under all circumstances. Second liens, we believe,
if there is no equity in the house, should be wiped out to
allow for the first lien to be protected.
Ms. Velazquez. But on the question of the lawsuits that
have been brought up against mortgage originators and
securitizers, do you believe that they have any effect in
keeping investors from reentering the market?
Mr. Lieberman. I think the underpinnings, to Mr. Hughes's
point--if we can't enforce rep and warranty violations and we
cannot be certain about contractual rights that we have,
representations on the quality of the merchandise that we are
buying cannot be protected, we just--investors, like a
taxpayer, need to be protected, and that will affect our
decisions.
As I said, we have to know what the rules of the game are,
and we have to be protected under those rules. Otherwise, we
will take our capital and invest in other markets where we know
what the rules are and we know what the return is.
I come back to, we are really not seeking oversized
returns. We are not trying to be equity investors. That is for
others.
Ms. Velazquez. Understood. Thank you.
Mr. Ajay, I will not dare to pronounce your last name.
Sorry.
But given the failure of rating agencies to perform
sufficient due diligence in the review of private label
securities prior to the financial crisis, what role, if any, do
you think the credit rating agencies should play in this
market, going forward?
Mr. Rajadhyaksha. Thank you for the question.
We are in favor of industries in general moving towards the
approach that the insurance industry has taken, where what they
have done is for individual asset classes, they have decided
that specific loss-based models--in one case by PIMCO, in
another case by Blackrock--will be the model space on which
capital standards will be generated.
For obvious reasons, I think ratings on securitized
products have been found wanting, and at this point, given the
last several years, many investors that we talk to prefer to do
their own due diligence, as opposed to buying an asset because
of a rating.
Ms. Velazquez. Do you believe that the credit rating agency
reforms included in the Dodd-Frank will be sufficient to
restore confidence in the use of credit ratings?
Mr. Rajadhyaksha. I am not sure, to be very honest.
Ms. Velazquez. I expected that answer.
Recent settlement proposals between leading mortgage
servicers and private MBS investors have focused largely on
chain of title provenance and the effort to define who should
have the right to foreclose on troubled mortgages. Is it
reasonable to believe that these parties can adequately resolve
these issues between themselves without the need for government
intervention?
Mr. Rajadhyaksha. That will depend, I suspect, in many
cases on a case-by-case basis. But I will say this. For a
securitized market, that is in many ways a very good thing for
the U.S. homeowner, because you basically have a market which
is attracting capital from the rest of the world to lend to the
U.S. homeowner at the lowest possible rate.
The actual process, the plumbing, in many cases is archaic.
So what we would like is for policymakers to set specific rules
that are clear and then let the capital markets have their way.
Ms. Velazquez. Okay. Thank you.
Thank you, Mr. Chairman.
Chairman Garrett. The gentleman from Arizona?
Mr. Schweikert. Thank you, Mr. Chairman.
I am going to try to bounce around quickly, just get into
some specifics.
Mr. Hughes, you spoke about the second loan problem,
``chewing up the skin in the game,'' I think was your term.
Would it work if the first deed of trust, first mortgage
instrument said if you chew up this equity without getting a
release or an acceptance from the first, the first now becomes
a personal liability? Is that enough?
Mr. Hughes. Potentially. I think the right answer is to
prevent the second loan from coming out in the first place.
Because I always think if you leave it to the borrower and
allow them to pull equity out, even with penalties, I think
that would be bad policy.
Mr. Schweikert. So you would create sort of a first loan
instrument that would--the way however it is recorded and
whether it be the MERS world or the county recorders, there
would be a document saying, oh, by the way, I also pledge that
no secondary instrument is allowed to go behind us?
Mr. Hughes. Yes. I think that one way to do it, and there
are probably a lot of ways to do it is I think you need to--if
you get your loan from ``XYZ'' bank and that is the first,
really what you need is to prevent a second bank from extending
that mortgage.
And I think really the best place to put the control
mechanism in place is if that second bank extends a loan above
some criteria, whatever, it is 80 percent of whatever you do,
is put it somewhere in truth-in-lending so that they can't
foreclose. Put them in a position so that they are not going to
extend a mortgage that a borrower can't afford.
Mr. Schweikert. That is actually a creative idea.
Mr. Lieberman, you have touched on the exact same issue. We
have been playing with some language, saying that if you chewed
up that equity you had pledged in acquiring your first, that
first now became a personal liability. What would you do? How
would you deal with that secondary issue, that second loan
issue?
Mr. Lieberman. I think, going forward, you either have to
prohibit seconds altogether, and the borrower is fully entitled
to take out unsecured debt. But not to basically permit, as Mr.
Hughes said, that second lien holder from either impeding
foreclosure or foreclosing on that borrower.
If you want to have the lowest cost of capital for that
first mortgage, which is ultimately what really drives
homeownership, then basically protect the first lien and take
the second lien holder's ability to seize collateral away. Now
you--
Mr. Schweikert. Mr. Lieberman, I am sorry. I just am trying
to be very efficient here. My understanding is, though, if the
second is foreclosing--I come from a deed-of-trust State--it
has to also still pay off that first. And that is the same in a
mortgage State. So what am I not understanding in those
mechanics?
Mr. Lieberman. I am just saying that basically, if you are
a first mortgage holder, do you want to even get into a
situation where there is a foreclosure action going on because
of a second? Okay, that is really what I am driving at.
It is hard to, if you try to basically nuance it and try to
basically thread that needle so you have seconds that can take
out the firsts, then how do you have a situation where the
second is underwater and can stop the first, other than the
first goes through the foreclosure process and then can't get
rid of the second?
Mr. Schweikert. Okay. Now the second--not to try to be
amusing, but the second part of what you just said or in your
testimony was now the strategic defaults. I have a first. I am
underwater. I am making an economic decision that I am
creditworthy enough. I am going to go buy the house down the
street. I walk on this one.
What would you do in that situation?
Mr. Lieberman. Okay. I have the first mortgage. Josh has a
second mortgage.
Mr. Schweikert. Poor Josh.
Mr. Lieberman. I am partially underwater. Josh is fully
underwater. He won't subordinate. He won't basically give up
his second lien. The only choice for the borrower is to
strategically default.
Even if I want to compromise with that borrower and shave
10 percent off my mortgage, that is a very untenable situation
where I can't create a workout with the borrower, whom I want
to keep in the house. I am going to lose another 30 points if I
have to foreclose, okay, and then I can get rid of Josh's
mortgage. But I am going to lose 30 or 40 points because I am
going to have to go through the whole foreclosure process.
It would be much better if Josh basically can't stand in
the way. He has a choice: Buy me out at par, or let me modify
my loan.
Mr. Schweikert. That would have to be designed very
carefully so as not to create a cascade of where I am now
incentivized to fall a handful of payments behind so I can
actually participate there.
Mr. Lieberman. That is true. That is the conundrum.
Mr. Schweikert. Okay.
Mr. Rosner. You also have to remember that the reality is,
yes, the first has to be paid off on a foreclosure attempt. But
if you have the servicer of the second tied to an affiliated
entity that owns the second, what you will often find is the
bleeding of cash flows from the first to protect the second, to
protect servicing income, etc.
So you are just trying to string it out as long as you can
to maximize your income from the second and from the servicing
of the first, knowing that any advances that you are making on
the first are also going to bring you to the top of the
waterfall, and then you are going to end up taking that back.
So that conflict is, frankly, untenable even where it is
designed to work well.
Mr. Schweikert. I think we are all open to any suggestions
on if you were designing a UCC of private label MBS, what
mechanics or what triggers you put in there.
Trying to do this quickly, you talked about the TBA, the
``to be announced'' market. In your vision, how would you deal
with that?
Mr. Rosner. Look, the reason that we have an effective TBA
market is Fannie and Freddie created a very clear underwriting
box, and they created very clear documentation, rep and
warrant, servicing standards. I don't think it is impossible to
go from one very large underwriting box to five or six clearly
defined underwriting boxes.
Mr. Schweikert. But would you have to basically create a
TBA market that says the only things we will be acquiring--is
it a guarantee into a future, if you were trying to put that
together right now in a private MBS?
Mr. Rosner. Yes. I think it would require that there first
be the definitions of the collateral that could be put into
each of those very clearly. I don't know--at this point, I
think you would probably need a transition period of guarantee
or some form of guarantee to have any comfort there.
But I think that we should start by putting in place the
plumbing to effectively have a private--
Mr. Schweikert. You and Ajay and this plumbing thing.
[laughter]
Mr. Rosner. I think I just took it from him because it
was--
Mr. Schweikert. Yes.
Mr. Rosner. I think, ultimately, we can have a private TBA
market. But again, it would require very clear rep and
warrants. It would require very clear underwriting boxes. And
we haven't seen any effort to do any of that yet.
Mr. Schweikert. All right. Mr. Chairman, thank you. And I
have a few more but will wait, hopefully, for a second round.
Chairman Garrett. Sure. Absolutely.
The gentlelady from New York has also joined us. Mrs.
Maloney?
Mrs. Maloney. First of all, I would like to thank all the
panelists and thank all my colleagues, particularly Chairman
Garrett and my colleague Nydia Velazquez, for coming to New
York and holding this hearing. It is very important, and I
appreciate all the presence here.
And I think we all agree that attracting private pull to
capital is critical to a well-functioning securities market and
that, done well, mortgage-backed securities are an important
source of capital to institutions that allow them to continue
to lend and extend credit. So, I am thrilled with the panelists
here.
I would like to ask a question, if I could, about covered
bonds. I am the lead Democrat on a bill that I have been
working on with Chairman Garrett and the other members of the
committee for, I think it is 4 years now. And this would create
a regulatory structure for a covered bond market.
While I know that covered bonds are not the answer to the
entire problem, it is a source of capital. And so, I would like
all of you to comment on how you think that they could work to
get capital out there like the GSEs did in the housing finance
system. And I think that they are an important tool. They are
not the complete answer, but an important tool.
And can each of you comment for the record on how you see
covered bonds functioning either with or without a government
role in the market? That is my question, and if you could just
go down the line and comment, your comments would be very
helpful to us. We are working on a bill. We have passed it out
of the subcommittee and hope to pass it on the Floor.
So, any comments you can give today or put in writing, we
would appreciate. Thank you.
Mr. Rajadhyaksha. On our side, I should start by saying
that we believe that covered bonds are absolutely a viable
source of funding, an alternative viable source of funding for
the mortgage market in the United States. We have had very good
experience. Barclays actually happens to be one of the biggest
players in the European covered bond markets, where that market
is one of the bigger sources by which mortgages are financed.
For the next several quarters, even if legislation goes
through quickly, we suspect that the overall size of that
market is probably going to be limited to about $300 billion to
$350 billion, which is not small. It definitely doesn't solve
all of our funding problems on the mortgage side.
The reason is because, as you know, the FDIC has mandated
basically that more than a certain amount of bank value sheets
should not have covered bond exposure. So what that basically
means is if you make the argument that in the near term, you
are only talking about big banks being able to issue covered
bonds, then you are talking about maybe a $7 trillion balance
sheet. Four percent of that gets you to about $300 billion,
which is what I talked about.
The one thing I will say is that the most successful
covered bond market is the Pfandbrief market in Germany. It has
very, very clear-cut rules. I do not think you need government
support. What you do need is a legal framework, a legislative
framework. None of that exists in the United States.
Hopefully, the bill that is being proposed takes care of
that. If that happens, then we think the covered bond market
will start to be not the main solution or a silver bullet, but
a viable source of funding for mortgages.
Mrs. Maloney. Any other comments?
Mr. Hughes. I would agree with Ajay and his comments, and I
don't have a lot to add, as really our focus is on trying to
bring back securitization. But I think, certainly, covered
bonds could play a viable role in bringing liquidity back to
the mortgage markets.
Mrs. Maloney. Mr. Rosner?
Mr. Rosner. I think covered bonds have to be considered
very carefully in a world of too-big-to-fail institutions.
Because I think there is a risk that we are creating incentives
for those banks to increase the size of their balance sheet.
Yes, there is an understanding of isolation of those
assets. But I fear that debt investors would, nonetheless,
increasingly assume that the issuing entity is gaining an even
stronger implied government guarantee, much like a GSE on the
debt issued by the entity itself.
Mrs. Maloney. Okay.
Mr. Lieberman. We believe in a hybrid, multi-distribution
model for the mortgage market. It is the broadest potential
distribution will bring down the cost of capital. Covered bonds
are effectively just a form of secured financing, not all that
dissimilar from credit card master securitizations.
And so, I think it is just another form of capital for the
market. It is one of many, including traditional
securitization, that we think is a valuable tool for financing
mortgages in the marketplace.
Mrs. Maloney. Thank you. And any other comments anyone
would like to get in the record, I would appreciate.
I believe my time is up, Mr. Chairman, or do I have time
for another question?
Chairman Garrett. Sure. Absolutely.
Mrs. Maloney. Okay. On securitization, we really have to
get that moving again, and I know that was a subject of your
testimony. I was at three meetings before I got here. This is a
district work period for us, and so we are focused on a lot of
things happening here.
Could I just go down the line again, not in great depth,
but if you had to name the top one thing we could do to get the
securitization working in the markets again, what would it be?
What could government do to help the private sector?
Mr. Rajadhyaksha. Reduce both legal and regulatory
uncertainty, which is stymieing, we believe, both the issuing
side as well as the investor base.
Mrs. Maloney. Thank you.
Mr. Hughes. Something I didn't mention before is that
sometimes when you have a really complex problem, the best way
to solve it is to simplify. And I think one of the things we
might think about is if we are trying to solve all the problems
that were in prime, Alt-A, and subprime, it is really
difficult. Bad things happen to all, but really bad things
happen in subprime.
Is there a way through the securities laws that you could
promote and allow people to use their shelf-registrations for
prime loans, to the extent we define prime loans. Similar to
what they do if you are going public, depending if the first
time, you are an S-1, it takes a really long time to get
public. If we could define a certain type of collateral as
prime and if it is a down the middle definition of prime, then
here is your route to use your shelf registration to securitize
it. If your collateral is not prime, if your deal is overly
structured, if the collateral is weak, you do what they do with
an S-1. You just sit in the penalty box and wait for the SEC to
approve it.
So, really, my thoughts around if you really want the prime
market back as the best place to alleviate the government's
burden, maybe there is a way to subdivide the problem and
simplify it around prime and move away from Alt-A and subprime.
Mrs. Maloney. Mr. Rosner?
Mr. Rosner. I think to simplify at least what I was saying
before, the goal should be to get the borrower and the investor
to actually come as close to each other as they can and take
out the distortions and the arbitrage of the middle, okay?
Because the reality is the interests of the borrower and
the interests of the investor are actually well aligned.
Mrs. Maloney. What about the servicer? They are often in
there. Can you align the servicer with the borrower and the
investor? Because oftentimes that is in there in between. They
buy it. They own it.
Mr. Rosner. The servicer, though, often has other conflicts
in place, which we went through. And frankly, maintaining fees
sometimes protecting affiliates are, frankly, larger
incentives.
Mrs. Maloney. But they are right there in the middle. You
can't--
Mr. Rosner. No, they are in the middle.
Mrs. Maloney. You can't align the investor and--
Mr. Rosner. The testimony was really about servicing
standards, standardizing reps and warrants, standardizing the
issuance of collateral-level information to investors before
deals come to market and on a monthly basis after they come to
market, and making sure that the ability of the investor to
work with the borrower isn't impeded by that servicing
relationship.
Mrs. Maloney. Thank you. That is very helpful.
But on your first question on covered bonds, you said that
covered bonds were going to make banks too big and imply a
government guarantee. There is no government guarantee on
covered bonds. So I didn't quite understand the point you were
making--
Mr. Rosner. No, there is no government guarantee on covered
bonds, but the issuing institutions will be growing their
balance sheet. Some of the assets will be theoretically
isolated, legally isolated through the covered bond. But the
market will likely offer a lower rate of issuance on the debt
of the institution itself because there is an understanding or
an expectation of an implied government guarantee.
I think that has to be something to be thought through and
be careful of because we are also creating again a further
unleveling of the playing field between our small financial
institutions and those handful of largest financial
institutions through the covered bond market.
Mrs. Maloney. And also you know we are no longer too-big-
to-fail. We have in place a law that allows us to wind down
institutions so that--we just had two choices at one point. You
could either bail them out, or they would fail. Neither choice
was appropriate. We now have an FDIC approach for the large
institutions and to wind down in the event of a problem.
Mr. Rosner. That only works if you assume that a single
large institution can go down in isolation without the
correlation of that institution being well related to its
peers, in which case you end up with four or five going down at
the same time, and I don't believe that Dodd-Frank addresses
the ability to deal with that.
Mrs. Maloney. Thank you very much.
Do you have a comment on securitization?
Mr. Lieberman. Yes. I think confidence that if I am lending
yourself money for the next 30 years, that my servicer, my
agent will be able to collect that money and foreclose, if need
be. And the money that is owed to us as an investor, which is
typically a pension fund at the other end, will be respected so
that I have the certainty to make the original investment
decision to lend you the money.
Mrs. Maloney. Thank you, panelists, and thank you, Mr.
Chairman, for coming to New York. Thank you.
Chairman Garrett. Thank you.
The gentleman from Texas is recognized.
Mr. Neugebauer. Thank you, Mr. Chairman.
Mr. Hughes, I know that you all have done a couple of
deals. You said you have one maybe coming out quickly, and then
maybe another one before the end of the year. Why aren't you
doing below jumbo deals?
Mr. Hughes. Right now, we could not be competitive with
Fannie and Freddie pricing.
Mr. Neugebauer. In other words, today, if I had a bunch of
loans that met Freddie and Fannie's criteria, you wouldn't be a
buyer for them because you can't make any money because you
can't--
Mr. Hughes. Correct. We cannot compete at the moment with
their price.
Mr. Neugebauer. If I would take 50 basis points less,
offering you 50 basis points more, would there be a market for
that?
Mr. Hughes. I think if you--yes, I think there is a market.
If you level the playing field, if you went and looked at the
underpinnings of some of the agency securities that are going
out now, there are 8 percent have some MI on it. But if you
look at the vast majority and you look through the FICO scores,
you're at 750, there is 30 percent down on average, these are
loans that the private sector, in my opinion, will buy. They
look a lot like the loans, if you get the low loan size, in the
deals that we did.
So if the borrower is a good borrower, then we just need to
clean everything up. Yes, I see no reason why--Redwood Trust is
prepared to buy any loan of any size, to the extent that it is
a good prime loan. But right now, we can't buy that loan.
Mr. Neugebauer. So if the g-fee was increased to a point
where there is a 50 to 60 basis points premium, that if you had
well-documented, well-underwritten loans where you could offer
the investors another 50 or 60 basis points other than buying
the sanitized version which you get are 50 to 60 basis points
less yield, you say that there is a market for that?
Mr. Hughes. I believe there is a market there, yes.
Mr. Neugebauer. Ajay? I will call you Ajay. You can call me
Randy. How is that?
[laughter]
Mr. Neugebauer. You mentioned something interesting, and I
apologize that I have not had a chance to read the entire
version of your written testimony. But what you are talking
about is selling about $300 billion worth of the guarantee
business that Freddie and Fannie has originated since 2008.
Is that a way to kind of test the market and see if there
are entities out there interested in being in that business?
Mr. Rajadhyaksha. Yes. What we were talking about was
selling what you might call the first loss piece or the credit
risk of those $300 billion. So you are really talking about
selling maybe $10 billion of actual assets into the market,
which is a much more digestible issue for the market.
And there are three or four advantages there. One is, and I
go back to the point one of the other panelists made about a
healthy secondary market being extremely important for the
primary market to pick up.
Mr. Neugebauer. Yes. Because they hold portfolio, they have
some loans in a portfolio.
Mr. Rajadhyaksha. Right.
Mr. Neugebauer. But you are basically just talking about
the guarantee portion now, and somebody would buy that income
stream of those guarantee fees that are coming in on a monthly
basis?
Mr. Rajadhyaksha. That is correct. The goal would be to--if
I may take a step back, if you go back to January 2006, Fannie
and Freddie, which have been a bigger and bigger share of
originations, started to lose market share because the loan
agency market was, quite frankly, doing silly things, right?
But Fannie and Freddie, in an effort to maintain market
share, followed the loan agency market down the credit
spectrum, and that is where the vast majority of their losses
come from, loans made in 2006 and 2007.
What we would do is even if Fannie and Freddie ever felt
the need to do something like that, they would have to go and
then offload that credit risk in the secondary markets. And
chances are the market would--the same reason why the market is
willing to buy mispriced credit risk in the private markets,
they would also be willing to buy credit risk off Fannie and
Freddie's books.
Mr. Neugebauer. Yes. I thought it was interesting that you
were talking about the more recently underwritten loans. I
would think that there would be maybe more interest in the pre-
funny stuff. In other words, more seasoned loans where you have
repayment history. Obviously, the duration of those that cash
flow probably going to be reduced because, what, the average
loan life is, what, about 7 or 8, 9 years or something like
that. And so, the investor would be buying possibly a shorter
cash flow. Is that right?
Mr. Rajadhyaksha. Yes. But the problem with loans
underwritten by Fannie Mae or Freddie Mac before, say, 2008 is
that many of these loans are, quite frankly, very poor credit
quality. By contrast, the loans from 2009 are pristine.
So if you want to test the market, if you want to get a
secondary market up and running, it is much easier to transfer
credit risk from those loans to the private sector.
Mr. Neugebauer. And do you have any reason to believe that
there are companies out there, or is this kind of a
hypothetical thing, or do you have knowledge that you think
there are entities interested in that?
Mr. Hughes. There are entities that are interested in doing
it. And I think, to the extent the thought was if we are going
to wait until some co-op gets built or some utility gets built,
it could take a very long period of time.
What you could look to are the one-off transactions where
the private sector would essentially take the first loss risk
and put Fannie and Freddie in a reinsurance position similar to
Ginnie Mae, similar to the multi-family may go a long way. You
have to think through preserving the TBA status, but basically
de-risking and putting into private sector potentially a
company like Redwood actually taking that credit risk.
Mr. Neugebauer. What I was thinking about, and as you all
were involved in this conversation, is where are we in the
sense that we have the Treasury saying that they will
capitalize Freddie and Fannie to whatever level to meet their
obligations?
Do you believe legally that, in other words, if I bought
these securitizations in the last 2 years, I bought that based
on the assumption I am actually buying sovereign debt because I
have the United States Treasury behind the entity that is--so
if I transfer that, let's just say Redwood wants to buy that.
So if I transfer to--Redwood buys that book of business, $200
million worth of guarantee business, how are we going to
separate that from Freddie and Fannie? Because my interest is,
obviously, getting the taxpayers out of this business.
Mr. Hughes. It wouldn't be that simple. Potentially, but
there is a model out there on the multi-family side, on Freddie
Mac deals right now, they sell off first loss risk to the
people that are putting those down and basically putting
themselves in a second loss position.
There are shelves available currently that the GSEs have
where they can, again, sell off a piece of first loss risk, but
it would be something that we would need it to be carefully
thought through and carefully think through the impact on the
TBA markets.
But I think it is an idea where I think there is an
abundance of capital. And again, we are more credit investors
and that would--to the extent that it met all of the criteria,
we would invest in that and could put the government in a
second loss position. It could really accelerate the process
here.
Mr. Neugebauer. I just wonder if the existing
securitization documents would allow it?
Mr. Rajadhyaksha. There is a way to make it simpler. We
have actually been discussing this with Treasury and the
regulators, FHA and FHFA, for a while now. And the GSEs
absolutely have the financial technology to do this, right? The
key, as Michael said, is that the TBA market is not being
backed up. The way that they do that is what Fannie and Freddie
sell would be new debt, which behaves the way a first loss
piece will behave.
So, the mortgage side of it would not be impacted at all,
except that the performance of that first loss piece of debt
that they sell. They have done this before. For example, the
GSEs a few years ago started selling what was called final
maturity bonds, which are, again, debt. It was not mortgage-
backed securities, but it behaved the way a certain pool of
mortgage-backed securities that they were referenced to
actually behave.
Mr. Neugebauer. So it would be a synthetic, basically?
Mr. Rajadhyaksha. The problem with synthetic is that
counterparty risk comes into the question, right? So you would
actually sell that. You would get cash, and that will end up
building, starting to develop an insurance fund immediately.
And what you would pass on is part of the g-fee from the
mortgages that you already originated.
Mr. Neugebauer. So it is a reinsurance thing for Freddie
and Fannie, basically?
Mr. Rajadhyaksha. To allow the private sector to take on
that--
Mr. Neugebauer. To take on that risk.
Mr. Rajadhyaksha. Yes.
Mr. Hughes. You could do it, one way to do it is you could
do it through some form of synthetic, but it would need to be
fully funded so that you didn't have the counterparty risk of,
hey, it is an insurance company. Who insures the insurance
company?
So, yes, I would think it would have to be fully funded up
front, similar to a transaction on the private side.
Mr. Rajadhyaksha. Sell it for cash.
Mr. Neugebauer. Table number two have some thoughts on
that?
Mr. Rosner. Yes. I think your concern about the transfer of
risk is the correct one, and I don't know how you would
actually make investors comfortable that what was an implied
government or at this point functionally explicit government
guaranteed asset, it will no longer be once it is in the hands
of private investors or purchased outside of the GSEs.
Mr. Neugebauer. But if Freddie and Fannie, I guess, stay in
the chain here, is--I think is being implied where they are
just then selling that risk off. In other words, they are
buying--
Mr. Rosner. Then I am not sure it really actually
represents a real tracking instrument, as you are intending.
Mr. Neugebauer. Yes?
Mr. Lieberman. I would agree with Ajay that Freddie Mac has
done what they call the K series deals in the multi-family
world. They sell off the first loss piece. It trades between an
8 and 10 percent yield. It seems a very attractive level for
Freddie to sell that risk off, an 8 to 10 percent yield for
first loss piece.
And I think the thing that should be taken advantage of,
over the last 5 years, private investors have developed quite a
bit of credit expertise on housing. Maybe not because they
wanted to, but unfortunately, we have all become experts in
credit, and we have all basically halted any sort of reliance
upon rating agencies.
And it would seem that you would have a very, very deep and
broad market to sell credit risk off on the GSE portfolios, and
there is a variety of ways to do that, some more complicated,
some less. But the investor appetite is there. The capital is
there. It is just a question of the willingness to allow a
little bit of sunshine into that market and see how it
progresses.
Mr. Neugebauer. My last question is just a quick one. We
are talking about creating a space for the private market and,
obviously, with the loan limits coming down at the end of this
month. But what if Freddie and Fannie said, for example--and
they have the ability to do this--that instead of 125 percent
of the medium price, that we are going to do 110 percent of
medium price?
How much new space does that create for--do you have just
an idea? I know that requires some statistics. But would that
create 10 percent new demand in the private market?
Mr. Rajadhyaksha. At current credit levels, it would
probably create 10 to 15 percent more demand, we expect, in the
private market. But one thing I would add to that is that now
is as good a time as any to transition to the private sector as
far as new origination goes because credit standards for new
origination for Fannie Mae and Freddie Mac are also reasonably
tight.
So what you are looking at is there is not going to be if
the private sector ends up replacing Fannie and Freddie, you
should not get a drop-off in mortgage credit availability,
which is the biggest concern for all of us here.
Mr. Neugebauer. So if you lowered, you don't think you are
going to see a drop-off in availability?
Mr. Rajadhyaksha. I do not think you will see a drop-off in
availability right now because the loans that, like Marty said,
Fannie and Freddie are originating post 2009, the new loans,
that is, are very tight credit, have a very tight credit space.
Mr. Neugebauer. So, that would create some space then. It
would create some space? Yes.
And without--Ajay, I think what I am hearing is without
causing a lot of major disruption in the credit availability
based on the current conditions?
Mr. Rajadhyaksha. Yes. If you transitioned, if you had
tried to transition, say, 5 or 6 years ago when Fannie and
Freddie were a much bigger share of the market and the credit
box was looser than--
Mr. Neugebauer. You might have created some space. Mr.
Rosner, 110 percent?
Mr. Rosner. I think it would free up--I agree with Ajay
generally. I think the big question is does it do anything to
really restart the private label market, as opposed to it just
ending up on bank balance sheets, which is fine, to some
degree, to take that pressure off of the government and put it
back on private balance sheets.
But I still think we need to first address the plumbing--
sorry to use that again--and documentation and origination
issues.
Mr. Lieberman. I would assume that it would open up some
room, but I don't have a figure in mind on how much room would
open up.
Mr. Neugebauer. Thank you, Mr. Chairman.
Chairman Garrett. Thank you.
The gentlelady from New York is recognized.
Dr. Hayworth. Thank you, Mr. Chairman.
It certainly sounds as though, fundamentally, what we are
talking about is essentially rationalizing the mortgage
marketplace to make it appealing for private investors, to make
it a common-sense decision to do that. Right now, we don't have
that because the Federal Government has so intervened against
common sense in the marketplace.
Is that a correct impression? Essentially, what you are
saying, Ajay, is that Fannie and Freddie now have adopted
behaviors that come closer to resembling what a marketplace
would demand?
Mr. Rajadhyaksha. Right. So if I may take a step back? Of
the $5 trillion or so of the agency mortgage-backed securities
market that is currently outstanding, our sense is that suppose
Congress decided that tomorrow morning they wanted to
transition to the private sector, right, all in one day? Fifty
percent, about 50 percent of that market, worth $2 trillion to
$2.5 trillion, should be able to transition without their
mortgage rates going up.
Another $1.5 trillion or so, another 25 percent, will be
able to transition with the mortgage rates rising by 100 or 150
basis points.
Dr. Hayworth. Because right now they are just too low?
Mr. Rajadhyaksha. That is correct. And the bottom 15 to 20
percent will have rates that are considerably higher. The
point, though, is that the loans that have been currently
originated even by Fannie and Freddie are in the top 50
percent.
Dr. Hayworth. Right.
Mr. Rajadhyaksha. So that transition should not be--we want
it to happen smoothly and slowly, but it should not be too much
of a problem.
Dr. Hayworth. So, we have made movement toward that kind of
a transition, in a sense. We are preparing the housing
marketplace in general and the mortgage marketplace in general
in the United States for that to happen? Okay.
I had a question regarding something a bit more specific,
if I may? There is a program called PACE, Property Assessed
Clean Energy, and in mid-2010, FHFA determined that
participants in--which is 90 percent of mortgage holders in the
United States, those who have mortgages backed by Fannie Mae
and Freddie Mac, homeowners, property owners--could not
participate in Property Assessed Clean Energy programs.
Are those familiar to everyone here? Because it represented
essentially senior debt, and in the case of foreclosure, FHFA
determined that that would be an obstacle to collecting on the
loan.
I have introduced legislation to enhance the appeal of the
program to FHFA so that they will be assured that the
likelihood of PACE participation getting in the way of recovery
would be very low. Do you think the private marketplace would
have any similar difficulties in accepting a PACE assessment as
part of a property owner's range of obligations? Any of our
panelists or all of them?
Mr. Rajadhyaksha. I, unfortunately, don't know enough about
the details of this program.
Dr. Hayworth. Just briefly, the PACE programs allow
property owners to make energy-saving improvements on their
homes or structures and to finance them through a property tax
assessment that is allowed by the issuance of municipal bonds
from a special taxing authority that is granted to a community.
And every State has to authorize this kind of a program for its
communities. New York has a PACE program, as do 26 other States
and the District of Columbia.
But currently, as mentioned, as of June 2010, when FHFA
took receivership of Fannie Mae and Freddie Mac, they were
excluded, 90 percent of mortgage holders were excluded from
participating in PACE. And in this kind of environment, given
that we would like contract just to go back to work, we would
like to encourage energy-saving practices, PACE seems like a
win-win.
So I am endeavoring, along with colleagues in our House, to
make it possible for FHFA to find its way to allow Fannie Mae
and Freddie Mac mortgage holders to participate. But because it
is viewed as--if there were a foreclosure, it would be viewed--
obviously, it is a tax-related obligation. It would be viewed
as senior debt. They view it as problematic, even though the
rate of foreclosure for PACE property, PACE assessment holders
is actually lower than that for those who don't have them. So--
Mr. Rajadhyaksha. I think if it occupies the same position
in the pecking order when they went to foreclosure as property
tax liens do, then--which already exists--then I cannot know
why--it would just have to be very clear cut in that situation.
Dr. Hayworth. Okay. Thank you.
Any of our other panelists?
Mr. Lieberman. I think investors price a mortgage based
upon three general characteristics--credit, character, and
collateral--the ``three Cs'' of old-fashioned banking. If a
PACE loan jumps ahead of the collateral, your house that you
are going to foreclose upon, that is going to affect the
valuation of that secured interest. And you are going to either
have to price the mortgage higher, or you are going to have to
decide that the collateral is not worth as much and the
recovery is not going to be as much. And it will affect
pricing.
A tax lien is typically maybe 1 to 2 percent of assessed
value, and you can figure out what the timeline is for
foreclosure and how much is going to accrue and factor that
into the loss.
On the PACE side, if you give a loan to a borrower and then
a year later, they put a $50,000 solar panel complex on top of
the house that jumps in front of your mortgage, it is certainly
going to add value to the house. But you are uncertain what has
happened to your collateral package. I think that throws some
doubt in there.
Dr. Hayworth. So, there have to be ways in which we can
consider the technical aspects, if you will, of the financing.
Yes, sir?
Mr. Hughes or Mr. Rosner?
Mr. Hughes. I would agree with Mr. Lieberman.
Dr. Hayworth. It wouldn't necessarily exclude a property
owner from having a privately secured--
Mr. Lieberman. It wouldn't exclude it. But I would think
that there probably has to be some upper boundary to the amount
that can jump in front of the lien. There has to be some way to
quantify it. Otherwise, we can't price for the risk, and it
becomes, once again, very much like, unfortunately, the
securities we already own, where we thought we had an owner-
occupied house and it turned out to be an investor house.
So that, subsequently, down the road a year or two later
turns out to be something else, we are not going to,
unfortunately, get our capital back.
Dr. Hayworth. Understood. Thank you.
Chairman Garrett. And I thank you.
That concludes the first round, and I see we are
approaching the top of the hour. So what I thought we might
want to do is our all-famous lightning round at this point and
just allow, since some of the members indicated they may have a
couple of other questions, just 2 minutes for each member.
My vice chair said he will be strict on the time clock
mechanism here, and then we will allow the panel to be
dismissed.
Going very quickly, I think Ajay's comment will be the
take-away from today, that now is as good a time as ever to
move on these areas. So, I think that will be the take-away
from this panel discussion.
Let me just run down a couple things just to reaffirm. On
TBA, which I questioned Mr. Rosner on--and others talked about
as well--it seems as though we could actually re-create a
different type of TBA market, as long as we get the
underwriting standards, homogeneity in the marketplace there,
uniformity in the underwriting standards. Correct? Okay.
To that, a side note, though. Mr. Hughes made some
comment--I don't know if this is on point or not--saying that
some of our suggestions that have been out there floating is to
say that we come up with some standards as far as what is
prime, what have you, and some have suggested that you have
multiple, prime and subprime.
So, again, you would have some--you all would be able to
take a look at and whether you just come and put one or, some
have suggested, sort of a good, a bad, and a not so good. Your
comment was that you really only need one on that area?
Mr. Hughes. No, no. I think you need multiple definitions.
Chairman Garrett. Okay.
Mr. Hughes. So that we are clear what a prime loan is, the
Alt-A loan is, and the subprime loans are. That is what we
need, a distinction.
Chairman Garrett. Good. I just wanted to clarify that.
Ajay, on your opening comment with the--and Randy followed
up on with regard to the credit risk aspect of it, that is a
neat idea there. One, I guess, upside of that--I guess, is
maybe this is where you were going--is that if you did that
tomorrow, that would be able to help the market be able to do
what? To be able to price the g-fees effectively is the way I
am understanding this.
Mr. Rajadhyaksha. Right. It would help the market to price
mortgage credit, more like a benchmark or--
Chairman Garrett. Yes. So I got that the first time, but
Randy's comment, sort of following up on that, says another
aspect of that is actually pricing what the g-fees should be,
going forward.
Mr. Rajadhyaksha. That is correct. That is correct, and
then you, as Congress, get to decide whether you want to
subsidize certain out of the mortgage universe and would you
increase loan subsidy costs here.
Chairman Garrett. Right. And so, if you do that, you price
that, you set g-fees, that goes to Mr. Hughes's comment or
questions on that with Mr. Hughes as far as them being able to
say if they are priced correctly, that market basically opens
up.
Mr. Hughes. The market opens up. And again, if you did that
on a basis where the private market was pricing effectively the
credit, you would need a rating agency, which is an obstacle
right now, an impediment of getting real velocity on the
package--
Chairman Garrett. And the last point, just running through
this, with regard to the whole second lien issue here, we
understand the problem as it exists today, most of us
understand that in the market today, it is particularly tough
to get a second lien anyway out there.
I just want clarification that if tomorrow we were to
change the law one way or the other, and you have different
variations on what these tools should be in regard to the limit
on second liens, if you will, what does that look like in the
marketplace, going forward, as far as my ability to own a home,
to have a first mortgage? What does that do to my ability to go
out and get a line of credit or anything else like that at
second lien?
Mr. Hughes. Your ability, I believe you couldn't use your
house as an ATM.
Chairman Garrett. Correct.
Mr. Hughes. You use it on a responsible basis so that if
you put 20 percent down and your house went up by 10 percent,
you could borrow 10 percent of the original amount. But you
can't just go out the next day and withdraw your equity in the
house--
Chairman Garrett. Interesting. I said that was my last
question, but I just want to ask one last question. What does
that do as far as structured in what way? Were you basically
saying that the initial first mortgage holder is--on the first
mortgage or the limitation on--
Mr. Hughes. The bank you go to initially has to sign off on
that. It doesn't have to enforce the--it doesn't have to
necessarily raise the rates that you would have to have for the
second lien unnecessarily high.
Chairman Garrett. So, that would not be the solution to
doing that?
Mr. Hughes. Correct.
Chairman Garrett. Okay. Any other comments on any of the
questions I had?
Mr. Lieberman. I want to add that basically putting some
controls around the second lien will stabilize home values
going forward. You will have less potential volatility, and so
there will be more equity offered on homes to absorb that
volatility.
You actually may increase the velocity of home sales
because you have access once again. Your house went up in
value, you basically could go out and sell the house and you
could buy a new one, which adds viability to commercial
outcomes for the borrower as well as for--
Chairman Garrett. That is interesting. What that actually
proves then--that this proves that this is good for the real
estate market. It is actually good for those who are actually
certain they want to sell and they could have an availability,
what-have you, and you can actually see that long term.
Mr. Rosner. It would be great if this committee could
promote the ideas of allowing second liens because it is really
not anywhere. It has fallen through the cracks. Every time we
talk to somebody, they mention [inaudible], but we can't touch
it.
And so, it would be great if this committee could put
forward ideas on different ways--there are lots of different
ways to do it. But I think it would be warmly embraced by
private investors to know that the first lien would be this
protected.
Chairman Garrett. That is something that is part of our
role.
I thank the panel for all their answers.
The gentlelady from New York is recognized.
Mrs. Maloney. Thank you, Mr. Chairman, for having this
meeting, this hearing.
[Inaudible] testified before the Subcommittee on Financial
Services that 25 percent of our economy is healthy, and if we
can't figure out how to move this forward and solve this
problem, it is going to continue to drag down our economy.
I also want to note that it is the 10th anniversary of 9/
11, and I want to thank my colleagues who were part of that
recovery effort here in New York. Most of your districts sent
people who worked and helped us recover. We appreciate that.
And after this, after the 9/11 recovery, we are meeting on
9/11. We are still recovering, still working on it.
I want to ask Mr. Rosner a question really that concerns
Attorney General Eric Schneiderman. He recently was thrown out
of a coalition by Attorney General Tom Miller of Iowa, a
coalition of attorneys general who were seeking to get
something on financial institutions, and Attorney General
Schneiderman said he didn't believe that there had been enough
effort to investigate servicers, and he was asked to be removed
from the coalition.
So I would like to ask you, do you think that the 50 State
attorneys general have robustly investigated the servicers'
actions?
Mr. Rosner. No.
Mrs. Maloney. You do not?
Mr. Rosner. No.
Mrs. Maloney. Do you want to elaborate on how you don't
think they robustly--
Mr. Rosner. I think that there has been very little
investigation, discovery, very few depositions. We have had a
rush to settlement, it seems, which is beyond just on the
original robo-signing that was talked about. So it would
include at least the liabilities for front-end issues and
servicing broadly without any real investigation.
I don't think Attorney General Schneiderman being thrown
out of the committee matters very much because, at the end of
the day, he would have to sign on to any agreement for it to be
a 50-State agreement.
But I don't think there has been a real consideration, and
I think, frankly, these suits that continue demonstrate that
there has not been enough investigation, which would help
private parties if there was more as well.
Mrs. Maloney. So, in other words, you think that Attorney
General Eric Schneiderman is correct to continue investigating
servicers before signing on and that this is an important part
of moving forward.
I want to thank all of you. I think I have met a new source
of people to call for input on many things that are happening
before this committee.
Again, thank you, Mr. Chairman, for bringing this hearing
to New York. We appreciate it.
Thank you.
Chairman Garrett. Mr. Schweikert?
Mr. Schweikert. Thank you, Mr. Chairman.
And coming from Arizona, you have this funny thing that
falls out of the sky here.
[laughter]
Mr. Schweikert. I live in the middle of the desert. That is
actually funny. And actually, as you notice, I didn't turn on
the timer when the chairman was speaking. You learn how to kiss
up to your chairman.
Okay. Let's do some of this quickly.
Mr. Lieberman, externality on the pricing of loans is one
of the discussions we keep having. Arizona is a deed-of-trust
State. It can theoretically foreclose in 91 days. A mortgage
State could take you a year, with much higher litigation costs.
Should that be priced into the loan?
Mr. Lieberman. I believe it is already. When we price, we
price in the actual process, and we also price in who is
servicing the loan currently. Different servicers have
different processes.
Mr. Schweikert. Okay. And then, Mr. Hughes, when you were
buying your loans to package up and securitize and sell them,
did you look at them geographically to see if they were in
higher regulatory or difficult areas to--
Mr. Hughes. When we analyze loans, we analyze them by MSA
or by zip code, and we have an opinion on every single zip
code.
Mr. Schweikert. Okay. And I assume within that formula is--
Mr. Hughes. Absolutely. There are different timelines, and
I think one other thought here is probably the best thing we
can do is put more efforts in preventing foreclosures than
mechanisms on the back end. And I am serious about that. If we
can make sure borrowers can--day one, a borrower can clearly
afford the house.
Mr. Schweikert. Part of that question is coming. Because
certain States create greater impediments, and--
Mr. Hughes. Absolutely.
Mr. Schweikert. --if you have a federally-backed system,
the rest of the taxpayers across the country are basically
subsidizing the impediments from that State and getting
subsidized by other States having more efficient systems.
So, it is sort of an externality question that is a little
ethereal, but he only gave me 2 minutes.
Ajay, one quick one. When you say selling off the first
loss piece--
Mr. Rajadhyaksha. Right.
Mr. Schweikert. First, how big? If you and I were looking
at it in strips of the loan--
Mr. Rajadhyaksha. Sure.
Mr. Schweikert. --what part would I be actually looking at?
Mr. Rajadhyaksha. What would you be looking at is,
basically, debt that corresponds to the hit that the mortgage-
backed security would take on liquidation, which is--
Mr. Schweikert. Okay. So I would be discussing, basically,
the subordinated strip?
Mr. Rajadhyaksha. It would be, absolutely. In a capital
structure, that would be what the subs will be called, yes.
Mr. Schweikert. And you think that might be a way of
helping finance a, we will call it a guarantee?
Mr. Rajadhyaksha. It does two or three things. Number one
is it immediately starts to build up a cash insurance fund for
Fannie Mae and Freddie Mac, which they do not have right now.
Number two, and most importantly, it does provide a benchmark
for the private sector to price mortgage credit off of. And
number three, even the GSEs for a while are going to continue
originating loans. It gives them a market-based signal on
whether the g-fees that they are charging are market-based or
not or whether they are way off market.
Mr. Schweikert. All right. Ajay, thank you.
Thank you, Mr. Chairman.
Chairman Garrett. The gentlelady is recognized.
Dr. Hayworth. Thank you, Mr. Chairman.
I am thinking synthetically in a sense. When we had a
covered bond hearing, I believe it was in April, Mr. Chairman,
a representative of the community banks was concerned about the
developing covered bond marketplace because, as I am recalling,
if I am recalling correctly, there was a certain amount of fear
that community banks would have not the wherewithal, if you
will, to use a very broad term, to participate in it.
Would developing--and I am thinking of underwriting
standards as well because our community bankers will contend,
and certainly intuitively it makes sense. They know their
mortgage holders well. So, there is that relationship. There is
that quality of the character reference, if you will. There is
a relationship with the communities. We have a lot of community
banks in our district. I am sure that is true pretty much of
districts across the country. And we have big banks, too.
Would a fuller development of a private residential
mortgage-backed securities marketplace alleviate some of those
concerns, if you will, on behalf of our community banks
regarding covered bonds?
Mr. Rajadhyaksha. I think, absolutely, it would. It is a
fair point that the covered bond market would be far more
accessible to big banks, but you can also make that argument
about the corporate bank market. Banks are allowed, last I
checked, to issue corporate debt, right?
It is true that a securitization market would probably
provide a concertedly more level playing field. It would not be
named specific, and community banks will have a greater shot at
funding their mortgages.
Mr. Hughes. Another mechanism that I believe could work
that could provide liquidity to the community banks if they
don't have portfolio capacity is to aggregate the loans that
they have. You would probably have to use the Federal Home Loan
system and have them intermediate and sell it to a company like
Redwood Trust, where you can make sure that the Federal Home
Loan System is not taking any risks, but you would funnel it
through in a way that would bring liquidity for jumbo mortgages
and others that they couldn't otherwise sell.
Because otherwise, right now, if you are a small community
bank, you can't portfolio it. You are forced to sell it to a
bigger bank, and generally, you lose your customer when you do
that. But I think that is another opportunity.
Dr. Hayworth. Thank you.
Mr. Rosner?
Mr. Rosner. I agree.
Dr. Hayworth. Okay. Mr. Lieberman?
Mr. Lieberman. I agree.
Dr. Hayworth. Thank you all.
Thank you, Mr. Chairman.
Chairman Garrett. And the gentleman from Arizona is
recognized yet again.
Mr. Schweikert. Mr. Chairman, thank you.
And this is--some of us have already had this conversation
over the last few months. I am hunting for ideas on the
aggregator portion of, loan is written by the community bank,
money center bank, mortgage banker.
How is it being collected and moved up to the securitizer,
and if you were to do that on a very large-scale basis? And I
would be elated for some suggestions because I have looked a
little bit at your model and wondered how it would scale.
Mr. Hughes. I think it could scale very well. I think you
have--there are certain of the Federal Home Loan Banks that
were aggregators in the past. I think, to use a word that has
been used a lot, they have all the plumbing to be the
aggregation source. And then I think the real trick, at that
point in time, is to companies like Redwood would look to buy
those loans.
We would, again, draw an underwriting box so if it looks
like this, we would buy it, but I think there would be a vast
amount of capital.
Mr. Schweikert. Mr. Chairman, to everyone on the panel, do
you like the idea of using the Federal Home Loan Bank--
Mr. Hughes. On a de-risked basis--
Mr. Schweikert. Yes.
Mr. Hughes. --where really a true, true--
Mr. Schweikert. Yes, I was about to say with the caveat
that there is a wall so the possibility of liability does not
transfer into the participating institutions.
Chairman Garrett. Can you do that?
Mr. Hughes. I think you could do that. You can.
Mr. Lieberman. I think it depends on if they are just
another name for Fannie and Freddie.
Mr. Schweikert. Okay.
Mr. Lieberman. If they are truly--are they providing a
wrap? Are they providing just the plumbing, or are you
basically just creating 12, or however many Federal Home Loan
Banks there are, new Fannies and Freddies.
Mr. Schweikert. Yes. The concern would be the true classic
aggregation. They acquire, they hold for 90 days. It is a tiny
bit of seasoning until someone comes in and buys it.
Mr. Hughes. I think you could buy them right at the time--
we could make it a commitment. And again, there are two of the
banks--actually, the primary one is the Federal bank in Chicago
that has all the mechanisms in place right now, and I think you
could distribute through them, and a company like Redwood will
buy the loans.
Mr. Schweikert. Okay. We may have some future because this
ties back into the ``to be announced'' market that I have been
trying to finish that piece of the package.
So, Mr. Chairman, thank you. And gentlemen, thank you.
Chairman Garrett. Again, thank you, all of the members of
the panel. Thank you to all of my colleagues for joining us
here in New York.
The Chair notes that some members may have additional
questions for the panel which 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 response in the record.
And with that, the hearing is adjourned.
[Whereupon, at 12:20 p.m., the hearing was adjourned.]
A P P E N D I X
September 7, 2011
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