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


 
                    THE U.S. HOUSING FINANCE SYSTEM 
                   IN THE GLOBAL CONTEXT: STRUCTURE, 
                 CAPITAL SOURCES, AND HOUSING DYNAMICS 

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                         INTERNATIONAL MONETARY

                            POLICY AND TRADE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 13, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-73


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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 International Monetary Policy and Trade

                  GARY G. MILLER, California, Chairman

ROBERT J. DOLD, Illinois, Vice       CAROLYN McCARTHY, New York, 
    Chairman                             Ranking Member
RON PAUL, Texas                      GWEN MOORE, Wisconsin
DONALD A. MANZULLO, Illinois         ANDRE CARSON, Indiana
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan


































                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 13, 2011.............................................     1
Appendix:
    October 13, 2011.............................................    43

                               WITNESSES
                       Thursday, October 13, 2011

Dorfman, Richard A., Managing Director and Head of Securitization 
  Group, The Securities Industry and Financial Markets 
  Association (SIFMA)............................................     9
Farrell, Michael A.J., Chairman, CEO, and President, Annaly 
  Capital Management, Inc........................................     7
Veissi, Moe, 2011 President-Elect, National Association of 
  REALTORS......................................................    11
Wachter, Susan M., Richard B. Worley Professor of Financial 
  Management, The Wharton School, University of Pennsylvania.....    13

                                APPENDIX

Prepared statements:
    Miller, Hon. Gary............................................    44
    Dorfman, Richard A...........................................    47
    Farrell, Michael A.J.........................................    67
    Veissi, Moe..................................................    70
    Wachter, Susan M.............................................    78

              Additional Material Submitted for the Record

Wachter, Susan M.:
    ``Research Paper No. 06-12, The American Mortgage in 
      Historical and International Context,'' by Richard K. 
      Green, George Washington University, and Susan M. Wachter, 
      The Wharton School, University of Pennsylvania, dated Fall 
      2005.......................................................    82
    ``The Rise, Fall, and Return of the Public Option in Housing 
      Finance,'' by Adam J. Levitin, Georgetown University Law 
      School, and Susan M. Wachter, The Wharton School, 
      University of Pennsylvania, dated September 12, 2011.......   105


                    THE U.S. HOUSING FINANCE SYSTEM
                   IN THE GLOBAL CONTEXT: STRUCTURE,
                 CAPITAL SOURCES, AND HOUSING DYNAMICS

                              ----------                              


                       Thursday, October 13, 2011

             U.S. House of Representatives,
             Subcommittee on International Monetary
                                  Policy and Trade,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Gary G. Miller 
[chairman of the subcommittee] presiding.
    Members present: Representatives Miller of California, 
Dold, Huizenga; McCarthy of New York, Scott, and Perlmutter.
    Also present: Representatives Garrett, Green, and Watt.
    Chairman Miller of California. This hearing will come to 
order. Without objection, all members' opening statements will 
be made a part of the record. The hearing today is entitled, 
``The U.S. Housing Finance System in the Global Context: 
Structure, Capital Sources, and Housing Dynamics.
    I ask unanimous consent that Mr. Garrett and Mr. Green, 
both of whom are members of the Financial Services Committee, 
be permitted to sit with members of the Subcommittee on 
International Monetary Policy and Trade for purposes of 
delivering an opening statement, hearing testimony, and 
questioning witnesses.
    We have limited the opening statements to 10 minutes for 
each side. With the ranking member in agreement, I recognize 
myself for the first 5 minutes.
    Today, the subcommittee meets to discuss the U.S. housing 
finance system in the global context: structure, capital 
sources, and housing dynamics. As Congress grapples with how to 
change the current U.S. housing finance system, it is important 
to understand the domestic and global economic implications of 
such changes.
    In addition, as we contemplate changes to our system, it is 
useful to consider differences between the U.S. mortgage 
structure and housing finance systems in other countries. Our 
goal today is to shed light on these important considerations. 
There is no question that instability in the housing market is 
harming our U.S. economic recovery. Housing has historically 
led economic recovery in this country, and if you look back at 
every recession, it has always been there. This time it is not.
    According to the Federal Reserve, the slowdown in the 
aggregate demand is centered on the household sector. People 
are not consuming because of the wealth lost in the housing 
sector. We must stabilize the housing market.
    The importance of the U.S. mortgage market to the global 
economy is substantiated by the average amount of agency 
mortgage-backed securities traded each day. In the second 
quarter of 2011, it was $302 billion. Only the U.S. Treasury 
had a higher trading volume, of over $600 billion.
    Given this significance, changes to the U.S. housing 
finance system have the potential to impact the national 
housing markets, financial markets, and the domestic and global 
economy. Banks, pension funds, insurance companies, and foreign 
investors are the most significant non-U.S. Government 
investors in agency mortgage-backed securities, MBS--meaning 
Fannie Mae, Freddie Mac, and Ginnie Mae securities.
    Foreign sources of capital include investment companies, 
foreign wealth funds, and other government entities. Foreign 
investors hold approximately 14 percent of agency MBS. Risk-
averse investors, both foreign and domestic, prefer agency 
mortgage-backed securities because of their safety and 
liquidity.
    The U.S. securitization process facilitated private 
investment capital from investors around the world that has 
flowed to U.S. home mortgages. Change to the safe investment 
options of agency MBS could impact investment decisions for 
these investors and, as a result, limit the flow of capital to 
the mortgage market.
    Such a result could cause a reduction in the availability 
of, and increase in, the cost of mortgage credit. This would 
impact lenders, investors, consumers, and ultimately the 
domestic and global economy.
    The ideological approach in the discussion about what 
changes need to be made to the U.S. mortgage finance system has 
resulted in a stalemate on reform. This is not what working 
Americans need. It is leading to confusion and a lack of 
consumer confidence. People need to be confident that their 
home price will not continue to fall.
    It does not help consumer confidence in the housing market 
when proposals are being considered in Congress to eliminate 
Freddie and Fannie, with no viable replacement and no concern 
for the health of the housing sector.
    The American people deserve better. We need to put 
ideological absolutes and politics aside and have a thoughtful, 
honest, and constructive discussion about a U.S. housing 
finance system that is based in fact. We must be mindful how 
critical the housing market is to the economy, and not 
contribute to uncertainty in the housing marketplace with 
conversations about unrealistic policy approaches.
    Today's hearing is about getting the conversation about 
U.S. mortgage finance back on track. It can be instructive to 
compare the structure of the U.S. market with other countries. 
The size of the U.S. mortgage market is greater than any other 
country in the world. It exceeds the entire European mortgage 
market combined. While there is not a housing system in another 
country that is directly comparable to the United States, 
characteristics of the U.S. market are found in other housing 
systems.
    At today's hearing, we will focus on the following: the 
relation between the health of the U.S. housing finance system 
and global financial stability; how the U.S. mortgage market 
structure compares to other countries, including with respect 
to the U.S. securitization system and a mortgage product 
offering; the unique features of the U.S. finance housing 
system and the benefits and weaknesses of the characteristics; 
and foreign involvement in the U.S. housing finance system, 
including the motivations for foreign investors to purchase 
residential mortgage-backed securities.
    I look forward to hearing from the distinguished panel 
today. I strongly believe that housing is a critical and 
stabilizing force in the economy. The housing market requires 
action now. There is no question that private capital must be 
the dominant source of mortgage credit in the future, but we 
have to get to the point that we can attract private capital 
back to the market. A viable secondary marketplace is key.
    I introduced a bill with my colleague, Ranking Member 
McCarthy, to refocus the debate on real solutions now. Our bill 
presents a way forward for the mortgage finance system. We 
provide comprehensive reform of the housing finance system to 
other countries in desperate need. While this is not a 
legislative hearing on that specific legislation, I do think 
our witnesses will help us begin the process of refocusing the 
conversation to ensure that this confidence and liquidity in 
the U.S. market is achieved.
    We have to do something in Congress other than just talk. 
Talking and offering different confusing directions, without 
moving in any given direction, is creating so much instability 
in the marketplace that it is hampering the recovery. We need 
to do something to focus the debate on what is good for the 
American people, how do we return mortgage value to the 
housing, and how do we get the market stabilized.
    And I yield to the ranking member for 5 minutes.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman. And I 
thank you for holding this important hearing. I also will say 
that I stand by your words.
    Restoring our housing market is a vital component to our 
economic recovery. The Financial Stability Oversight Council 
recommended comprehensive reform of our housing financial 
system, which the Treasury Secretary reaffirmed when he 
testified before the full committee last week.
    As we contemplate how to reform our housing system, it is 
important to understand its role in facilitating the flow of 
private capital and liquidity to our mortgage market. Through 
our securitization system, private capital provides the 
liquidity necessary to fund mortgage lending. Because of the 
integration of housing finance into marketplaces, the United 
States has formed a strong link to global capital markets.
    Traditional housing finance that was limited and funded 
through savings deposits has increased through the transition 
to market-based systems. Although there is not a housing system 
in another country that exactly mirrors the U.S. model, we must 
find characteristics of other housing systems that are similar 
to our own.
    I look forward to hearing from the witnesses today, and 
learning more about how other countries have structured their 
housing systems, as well as the successes and failures of those 
systems.
    Most importantly, we must keep in mind that any reforms 
instituted in our housing finance system have the potential to 
impact the Nation's housing market, the financial markets, and 
the domestic and global economy. That should serve as a stark 
reminder that we must proceed with reforms that bring 
confidence, stability and certainty back into our housing 
market. Without a stable housing system, we cannot achieve a 
full economy recovery.
    With that, I yield back the balance of my time.
    Chairman Miller of California. Thank you.
    Mr. Dold is recognized for 2\1/2\ minutes.
    Mr. Dold. Thank you, Mr. Chairman. And I certainly want to 
thank you and the witnesses for your time here today. The 30-
year fixed-rate mortgage has been the primary American mortgage 
financing instrument for many decades. But from a lender's 
perspective, it is a very difficult loan product, assuming a 
reasonably low 30-year fixed-rate.
    Carrying a particular individual borrower's credit risk for 
34 years is a particularly difficult proposition, and a 30-year 
fixed-rate loan subjects the lender to 30 full years of 
interest-rate risk and 30 full years of inflation risk.
    Even if the borrower fully performs, inflation over 30 
years can effectively reduce or eliminate the lender's real 
inflation-adjusted returns. Meanwhile, both increasing and 
decreasing interest rates over 30 years can negatively impact 
the lender, as many of you know.
    Increasing interest rates leaves the lender with capital 
tied up in long-term assets that produce lower returns than 
those available at the higher subsequent market rates. 
Decreasing interest rates leads many borrowers to refinance and 
return to lender's capital when the lender's capital 
redeployment will likely result in lower returns than those 
that had existed under the original loan.
    To help deal with these and other problems, the Federal 
Government and the American housing finance system developed 
the GSEs and securitization. Lenders could now always transfer 
mortgages directly or indirectly to the GSEs or to private 
investors while also having access to GSE credit default 
guarantees.
    So lenders could offer mortgages with reasonably low 30-
year fixed-rate interest rates, while diminishing or 
eliminating long-term credit risk, inflation risk, and interest 
rate risk. The system worked reasonably well for many years. 
However, beginning in the early 1990s, the Federal Government 
went much further in promoting homeownership by pressuring the 
GSEs and private sector lenders to substantially reduce 
traditional underwriting standards and by turning the GSEs into 
the always-available market outlet for lower-quality loans.
    Over time, more and more lower-quality loans entered the 
system. Inevitable increasing default rates led us to the 
financial crisis, as the mortgage-backed asset values decreased 
suddenly and dramatically.
    Mark-to-market accounting immediately degraded the bank 
capital ratios, and the credit market fear and uncertainty 
quickly imperiled liquidity and solvency. Housing prices 
declined severely, and the Federal Government made the American 
taxpayer liable for hundreds of billions of dollars in GSE 
losses.
    And now, those same troubled GSEs that exposed taxpayers to 
so much liability are essentially the only remaining market 
participant in the mortgage industry as private sector lenders 
and investors have abandoned the field. So we need to somehow 
create the conditions for more private sector entities to 
reenter the mortgage market, diminish the taxpayer liability 
risk, and stabilize the housing market.
    I look forward to hearing your testimony today, and I 
appreciate your time.
    Mr. Chairman, my time is up, and I yield back.
    Chairman Miller of California. Thank you.
    Mr. Scott, you are recognized for 3 minutes.
    Mr. Scott. Thank you, Chairman Miller and Ranking Member 
McCarthy, for holding this very important hearing. The Dodd-
Frank financial reform legislation addresses a number of 
weaknesses in the financial regulatory system--in particular, 
Title 14.
    It responded to pervasive concerns about lending practices 
in the mortgage lending market that produce loans that had 
great uncertainty of being repaid. This practice thus adversely 
impacted the loan holders as well as the borrowers, who often 
did not have a complete understanding of the agreement or did 
not have the means to repay the loan.
    Title 14 was enacted to correct such abuses, including new 
duties on the part of the mortgage originators to act in 
consumers' best interests, ensuring that they will have the 
ability to repay such loans. Clearly, the crisis in our housing 
finance has contributed to the domestic economic climate we all 
face now.
    Many Americans continue to struggle to stay in their homes, 
especially in my congressional district in Georgia--I represent 
the suburbs of Georgia--where the problem is very, very 
serious. Most recent data shows that in my district, 12 percent 
of mortgages are over 90 days delinquent, and nearly 4 percent 
of homes are in foreclosure.
    And this is why, each year, I bring the banks, I bring the 
lenders, I bring Treasury together and hold a major, major home 
foreclosure prevention event in my district, which has been one 
of the most successful ventures that we have done to correct 
this problem.
    In some cases, my constituents purchased homes obtaining 
mortgages that many of them originally thought they could 
repay. However, with unemployment passing 10 percent in my home 
State--in many communities, it is over 20 percent--many 
Georgians are finding it very difficult to do just that.
    I know that the reforms enacted by the financial reform 
legislation will prevent Americans from falling into similar 
situations when seeking to purchase a home. But despite the 
progress in the United States, I am concerned about the 
implications that a financial crisis in other nations could 
have on the economy in our own country.
    I am interested to know if the lending practices that 
contributed to the United States' financial crisis are still in 
use in other countries. This is important for us to find out, 
and how this might affect our own economy.
    Also, I am curious to know if there has been similar 
legislation enacted to prevent such abuses. So I want to thank 
the witnesses for coming and I particularly want to say hello 
to Dr. Susan Wachter of the Wharton School of the University of 
Pennsylvania. I received my MBA from the Wharton School of 
Finance. So when you go back, please give my regards to 
Dietrich Hall.
    I yield back, Mr. Chairman.
    Chairman Miller of California. Thank you.
    Mr. Garrett, you are recognized for 1\1/2\ minutes.
    Mr. Garrett. I thank the chairman for holding this hearing. 
And because the focus of the hearing is to look at the U.S. 
housing market and policy in a global context, I went back and 
reviewed an analysis by the International Monetary Fund back in 
April on housing finance issues.
    And in it, it says, ``Compared to other developed 
countries, only a couple even come close.'' According to the 
economist and one of the authors, John Kip, ``Everything you 
could possibly name for supporting homeownership for everybody, 
regardless of whether they can afford it or not, it's all in 
the United States.''
    The IMF report states, ``Since the 1930s, the U.S. 
authorities have provided a wide range of support to facilities 
to access mortgage credit. And while this has provided access 
to stable and affordable long-term mortgage financing, there is 
very little evidence that it has actually boosted 
homeownership, made the system more efficient, or provided 
buffers against economic stress.''
    ``Meanwhile,'' it said, ``it may have exacerbated the boom-
and-bust cycle.'' The report went on to note, ``During the pre-
crisis boom period, government participation in housing finance 
tended to amplify the relationship between housing prices and 
mortgage credit growth, particularly in advanced economies.''
    ``Also, countries with more government participation 
experienced,'' note, ``a deeper house price decline in this 
recent crisis. These findings suggest that the government 
participation exacerbates house price swings for advanced 
economies over a long period of time.''
    Further, it said, ``The results might reflect both the 
lower cost of pre-crisis due to government subsidization, and a 
relaxation in lending standards by the private sector due to 
increased competition between the private sector and the 
government.'' That is all in the report.
    And so, it is clear that with the extraordinary and 
unprecedented levels of subsidy the United States provides this 
mortgage market directly, it benefits mortgage market 
participants before us today.
    There is much less evidence that all these subsidies 
actually provide much benefit to the borrower. In fact, based 
upon the objective look of the IMF and the terrible impact on 
our country's housing finance policies we have had, I believe a 
strong case can be made that at least some of these policies, 
at the end of the day, do more harm than good.
    And with that, I yield back.
    Chairman Miller of California. I would like to welcome our 
distinguished panel today.
    Mr. Michael A.J. Farrell is the chairman, CEO, and 
president of Annaly Capital Management, Inc., the largest 
residential mortgage REIT in the country.
    Prior to founding Annaly, Mr. Farrell was the managing 
director of Wertheim, Schroder & Company, Inc. in the fixed 
income department. He had previously served on the executive 
committee of the Public Securities Association, Primary Dealer 
Division. And as chairman of the Primary Dealer Operating 
Committee and its mortgage-backed securities division, Mr. 
Farrell served on the executive board of the National 
Association of Real Estate Investment Trusts. Welcome.
    Dr. Richard Dorfman is managing director and head of the 
securitization group in the Securities Industry and Financial 
Market Association, SIFMA. Prior to joining SIFMA, Mr. Dorfman 
was the president and CEO of the Federal Home Loan Bank of 
Atlanta. Prior to that role, he was managing director and head 
of the U.S. agencies and mortgage business at ABN AMRO. He also 
worked for Lehman Brothers mortgage division as the managing 
director and head of the organization for U.S. Government and 
agency business. Welcome.
    Mr. Moe Veissi is the 2011 president-elect of the National 
Association of REALTORS. Mr. Veissi has been a Realtor for 
over 40 years. He is a broker-owner of Veissi & Associates in 
Miami, Florida. Welcome, sir.
    Dr. Susan Wachter is the Richard B. Worley professor of 
financial management and professor of real estate and finance 
at the Wharton School at the University of Pennsylvania. Dr. 
Wachter served as Assistant Secretary of Policy Development 
Research at HUD and was Principal Adviser to the Secretary, 
responsible for national housing and urban policy.
    Dr. Wachter is the author of over 200 publications 
regarding housing and real estate finance. She served as 
president to the American Real Estate and Urban Economic 
Association and co-editor of Real Estate Economics, and 
currently serves on multiple editorial boards.
    It is a distinguished panel. We are glad to have you here.
    First of all, I would like to thank you all for your 
flexibility. We have had this hearing scheduled, as you know, 
on numerous occasions and had to reschedule it. I want to thank 
you for being here today. Without objection, your written 
statements will be made a part of the record and you can 
summarize your statement in a generous 5 minutes, as you so 
choose.
    And Mr. Farrell, you are recognized first for 5 minutes.

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

    Mr. Farrell. Good morning. My name is Michael Farrell. I am 
the CEO of Annaly Capital Management, the largest residential 
mortgage real estate investment trust, or REIT, in the country.
    Through Annaly and our subsidiaries and affiliates, we own 
or manage a wide range of mortgages and other real estate-
related assets, including agency and non-agency residential 
mortgage-backed securities or MBS.
    I represent the mortgage REITs and the other secondary 
mortgage market investors who provide the majority of the 
capital to finance America's homes. Through our MBS holdings, 
my company and its affiliates alone are responsible for funding 
almost 1 million American households.
    At this point in history, while our Nation's banks have 
about $13 trillion in total assets, the amount of mortgage debt 
outstanding totals about $10.5 trillion. There is not enough 
capacity in our banking system to hold the outstanding mortgage 
debt. And as a result, about two-thirds of that total, or $6.8 
trillion, is held in securitization, $5.5 trillion in agency 
mortgage-backed securities, and the balance in private-label 
mortgage-backed securities.
    The American mortgage finance system needs to have an 
effective long-term holder of mortgage credit outside of the 
banking system. It is thus axiomatic that without a healthy 
securitization market for our housing finance system, we would 
have to undergo a radical transformation. Some have argued that 
this should not be a problem because other countries have 
similar homeownership rates and manageable low mortgage costs. 
These arguments miss some very significant points.
    First, the U.S. mortgage market is unique. In the United 
States, securitization is the largest mortgage funder, with 
banks a distant second--while Europe is almost exactly the 
opposite, with about two-thirds of mortgages funded by bank 
deposits, covered bonds a distant second, and very little 
securitization.
    So the European model is largely dependent on the deposits 
and individual credit ratings of European banks. As proof, 
consider that in the United States, bank assets total about 80 
percent of GDP, while in Canada, Denmark, France, Germany, and 
Spain, bank assets are anywhere from 2 to 4 times their GDP.
    Moreover, most mortgages in other countries are recoursed 
to the borrower, shorter term, pre-payable only with a penalty 
and a variable rate, which makes it a much more different 
product than the typical American mortgage with much different 
risks for the borrower and the lender.
    Second, our current housing finance system is the most 
efficient credit delivery system in the world. Securitization 
allows borrowers of similar creditworthiness using similar 
products to receive the benefits of scale and pricing. In 
addition, the government guarantee to make timely payments of 
interest and principal of a large portion of these mortgages 
scales the process even further.
    The TBA, or To Be Announced, market is the window through 
which much of this scale occurs. It maintains a consistent 
underwriting standard, levels the playing field for smaller 
loan originators and community banks, and enables lenders to 
offer longer-term rate locks to borrowers. It is an important 
tool for making possible the availability of the very popular 
30-year fixed-rate pre-payable mortgage with a manageable 
downpayment for a wide swath of creditworthy borrowers.
    Third, unlike the smaller domestically-financed housing 
markets of other countries, our system attracts a much broader 
investor base for residential mortgages, including 
institutional investors here and around the world.
    These investors include U.S. and foreign banks, central 
banks and sovereign wealth funds, mutual funds, State and local 
governments, and the GSEs themselves. According to Freddie Mac, 
foreign investors constitute the third largest single holder of 
agency MBS. What attracts these investors to fund U.S. 
residential mortgages? It is the size, scale, and flexibility 
of the agency MBS market, its homogeneity, liquidity, ease of 
pricing and, importantly, their capital risk weightings.
    Finally, I want to get to the heart of the matter of the 
current debate. Can the private label MBS market come back and 
fill the credit gap that is currently filled by the GSEs? The 
short answer is, not at the same level of mortgage rates, and 
certainly not in the same size. Many, if not most, investors 
and agency MBS will not invest in private label MBS at any 
price or in any reduced amounts because of their need for 
liquidity or the restrictions of their investment guidelines.
    Some of these are so-called rates investors, and they could 
cross over. And investors in other asset classes might be 
attracted to a deeper private label MBS market, but we cannot 
say for sure how many or at what price or in what timeframe.
    Analysts at Credit Suisse have estimated that the U.S. 
housing market could lose $3 trillion or $4 trillion in funding 
from domestic and foreign investors if agency MBS were replaced 
by credit-sensitive products. The impact of this loss could 
have adverse consequences for the housing market and the 
economy for years to come.
    In conclusion, the American mortgage market and the sources 
of funding for Americans' mortgages are unique. The domestic 
and global investors who provide so much capital to buy 
American homes will adapt to whatever Congress decides to do 
with housing finance policy, but they may adapt by not 
investing at all.
    I believe that a housing finance system that does not 
include the homogeneity of liquidity made possible by 
government involvement will be smaller, more expensive, and 
potentially have negative consequences for home prices and 
homeowner flexibility.
    I welcome any questions that you may have.
    [The prepared statement of Mr. Farrell can be found on page 
67 of the appendix.]
    Chairman Miller of California. Thank you very much.
    Mr. Dorfman, you are recognized for 5 minutes.

STATEMENT OF RICHARD A. DORFMAN, MANAGING DIRECTOR AND HEAD OF 
  SECURITIZATION GROUP, THE SECURITIES INDUSTRY AND FINANCIAL 
                  MARKETS ASSOCIATION (SIFMA)

    Mr. Dorfman. Good morning, Chairman Miller.
    Chairman Miller of California. I think you need to turn 
your microphone on. We will start your time over. Thank you, 
sir.
    Mr. Dorfman. There we go. Good morning, Chairman Miller, 
Ranking Member McCarthy, and distinguished members of the 
subcommittee. I am Richard Dorfman, managing director and head 
of securitization for the Securities Industry and Financial 
Markets Association, known in the trade as SIFMA.
    We appreciate the opportunity to discuss key issues 
affecting housing and housing finance from the perspective of 
international products, policies, and practices. I am 
personally pleased to have played a central role in the 
development of international markets. And certainly, I am 
honored to be here today.
    We estimate that non-U.S. investors currently hold 15 
percent of all mortgage-backed securities or privately issued 
non-agency MBS and government-guaranteed agency MBS. The 
markets for both agency and non-agency MBS have become truly 
global markets.
    Further, concerning unsecured longer-term debt, the GSEs--
Fannie, Freddie and the Federal Home Loan Banks--have 
historically seen about 20 percent of their debt investors come 
from the global markets. At that market's high point in 2008, 
approximately $3.2 trillion was outstanding. And that figure is 
today approximately $2.3 trillion, with about 20 percent still 
held abroad.
    However, in terms of late news, we are concerned, according 
to press reports, that a growing number of central banks are 
reporting not feeling comfortable with the U.S. Government 
guarantee of MBS and implied guarantee of debt products, and so 
may be progressively withdrawing from that market, with some 
concern.
    Foreign holdings of both agency and non-agency MBS create a 
strong correlation between the health of the U.S. housing 
finance system and global financial stability. I note that only 
a few years ago, I observed that The Economist news weekly 
carried a cover story about the U.S. housing market being the 
dominant driver of the U.S. economy, and perhaps even of the 
world economy. Over the last 20 years, the housing sector has 
represented approximately 15 percent of U.S. GDP.
    U.S. MBS structures are generally based on traditional 30-
year, fully-amortizing, fixed-coupon and fixed-payment-
structure home loans, although there are MBS based on 
adjustable-rate mortgages and other more complex secured loans. 
Other countries prefer to seek a different balance of these 
risks, through adjustable rate or renewable loans. In these 
instances, the interest rate risk portion of the loan 
dominantly remains with the borrower.
    We caution, however, about direct comparisons to other 
nations. Although instructive, they are not determinative. The 
size of the U.S. mortgage market enormously exceeds other 
mortgage markets. Additionally, it differs in that the funding 
of the U.S. mortgage market is largely through securitization, 
whereas in many countries securitization is less prominent and 
mortgage lending is more of a bank balance sheet activity.
    Foreign investors, especially central banks, hold vast sums 
of U.S. dollars. Therefore, foreign investors hold vast sums of 
very liquid, low-risk agency MBS and debt, especially Ginnie 
Mae MBS. Some foreign investors became significant players in 
the markets for non-agency MBS until those markets froze in 
2008. Foreign agency MBS far exceeded non-agency investment 
because many foreign investors simply will not invest in 
products with credit risk.
    The critical TBA, or To Be Announced, trading market 
provides vast liquidity and plays a key role in attracting 
tremendous global capital. The TBA market also gives the 
consumer the important ability to obtain long-term rate locks, 
by allowing lenders the ability to confirm forward MBS sales 
into a liquid market and, through this mechanism, to recycle 
investment capital back into the community as rapidly as 
possible.
    The daily trading volume and TBA markets over the past 3 
years has, indeed, exceeded $300 billion a day, second only to 
U.S. Treasuries and fixed-income markets. We discuss this 
market extensively in our written testimony.
    The U.S. housing finance system has features that create 
both historic benefits and current policy questions that must 
be addressed in the near term. A few such examples are long-
term fixed-rate loan structures and their relation to the 
distribution of interest-rate risk. And secondly, U.S. home 
mortgage loans have more recently featured downpayments below 
the traditional 20 percent, implying lower credit standards, 
but greater homeownership accessibility.
    It is critical for our country that we restore, modernize, 
and rationalize the housing business model in order to restore 
housing markets, including those for housing finance and 
securitization, to their maximum sustainable potential.
    Without this important engine of housing driving the U.S. 
economy, we will continue to see weak growth in jobs, income, 
and the overall economy. The global financial markets have been 
a critical component sustaining the financing of housing in 
America, and we must ensure that this continues in the future.
    I thank you very much for this opportunity and, of course, 
I will be pleased to take your questions.
    [The prepared statement of Mr. Dorfman can be found on page 
47 of the appendix.]
    Chairman Miller of California. Thank you, sir.
    Mr. Veissi, you are recognized for 5 minutes.

    STATEMENT OF MOE VEISSI, 2011 PRESIDENT-ELECT, NATIONAL 
                    ASSOCIATION OF REALTORS

    Mr. Veissi. Chairman Miller, Ranking Member McCarthy, and 
members of the subcommittee, thank you for holding this 
important hearing to examine the United States housing finance 
system.
    My name is Moe Veissi, and I am the 2011 president-elect of 
the National Association of REALTORS, which represents 1.1 
million members. They all practice some area of residential or 
commercial real estate. When my father purchased his first home 
for my mother in the late 1960s, it was more than just an act 
of love or even an investment. For a first-generation European, 
it was a symbol of a place to celebrate family, friends, and to 
help knit a broader base for the community that he and my 
mother lived in. It was both of their American dreams realized.
    So in addition to our members, it is my honor to give voice 
to the 75 million Americans who own a home, of which 50 million 
have mortgages, as well as the 310 million Americans who 
require shelter and want to own a piece of the American dream. 
I would like to share NAR's review on why the U.S. housing 
finance system and its key product, the fixed-rate mortgage, 
remain the key element in the system for the American consumer.
    Realtors believe that the U.S. housing finance system, 
which utilizes securitization to recapitalize mortgage lenders, 
works best for a nation like ours, the size of ours, and with 
the population who have a deep desire for homeownership. This 
does not mean, however, that Realtors are opposed to reforming 
the current system. To the contrary, Realtors have indicated 
time and again the need for repairs to the U.S. housing finance 
system.
    It is our strong belief that from its creation in the 1930s 
until very recently, the underlying system worked well to 
provide well-qualified American families the ability to 
purchase a home. Realtors are some of the most fervent 
believers in free markets. However, our members are also 
practical and understand that in extreme economic conditions, 
private capital will retreat from the housing market.
    They understand that a well-functioning housing market, 
indeed a well-functioning economy, requires mortgage financing 
available to qualified buyers in all markets, regardless of 
economic conditions.
    And finally, Realtors agree that taxpayers should be 
protected. Private capital must return to the housing market, 
and the size of government participation in the housing sector 
should decrease if the market is to function properly. Where we 
continue to disagree with some is how these aspirations would 
be accomplished.
    Congress has chartered Fannie Mae and Freddie Mac to 
support homeownership and provide a solid foundation for our 
Nation's housing finance system. The Government-Sponsored 
Entities' housing mission and the benefits that are derived 
from it, such as long-term fixed-rate mortgages, have played a 
vital role in the success of our Nation's housing system and 
its overall economic growth.
    As the market turmoil reached its peak in late 2008, it 
became apparent that the role of the GSEs, even in 
conservatorship, was critical, as private mortgage capital 
effectively fled our marketplace. If no government-backed 
conventional mortgage market entity existed as private mortgage 
capital fled to the sidelines, the housing market would have 
receded even more significantly and thrown our Nation into an 
even deeper recession and maybe even a depression.
    Currently, consumers are moving toward the 30-year fixed-
rate mortgage more than ever before. It is the financial 
product of choice because of its easily-understood terms and 
predictability in its payment schedule. In these uncertain 
times, predictability becomes even more important to consumers.
    For this reason, the 30-year fixed-rate mortgage has been, 
and continues to be, the bedrock of the U.S. housing finance 
system. If there is a full privatization of the secondary 
mortgage market, we run the real risk of elimination of long-
term fixed-rate mortgage products and an increase in the cost 
of mortgages to consumers.
    In fact, based on early data from a survey that NAR is 
conducting on the impact of new lower FHA and GSE loan limits, 
we are already seeing that consumers looking for mortgages 
above the conventional conforming loan limit are experiencing 
significantly higher interest rates and are being required to 
come up with substantially larger downpayments. Making matters 
more difficult, according to this data, this experience is 
leading to a loss of interest in real estate sales.
    Lose a healthy real estate market and you jeopardize any 
chance of economic recovery. I encourage you to resist this 
course of action. Realtors firmly believe that comprehensive 
reform of the secondary mortgage market is in the best 
interests of the consumer and the long-term viability of 
America's housing finance market.
    Toward that end, the National Association of REALTORS 
supports H.R. 2413, the Secondary Market Facility for 
Residential Mortgages Act of 2011. The legislation, introduced 
by Chairman Miller and Ranking Member McCarthy, will serve 
homeowners today and generations into the future, as well as 
support a strong housing market and economic recovery.
    It offers a comprehensive strategy for reforming the 
secondary mortgage market. It gives the Federal Government a 
continued role to ensure a consistent flow of mortgage credit 
in all markets, all economic conditions, and it protects the 
taxpayers and ensures safety and soundness through appropriate 
regulation and underwriting standards.
    Moreover, the bill supports and emphasizes the use of long-
term fixed-rate mortgage products in a manner that is 
consistent with qualified residential mortgages, exemptions to 
the Dodd-Frank Act as it was crafted by Senators Isakson, 
Landrieu, and Hagan. This is important. The bill's 
comprehensive reforms will open the door to lenders of all 
sizes, without favoring large lenders over small or mid-size 
institutions.
    In conclusion, I thank you for the opportunity to present 
our thoughts on the U.S. housing finance system, which we 
believe is unique and serves a unique group of people who 
strongly desire to own a piece of America and participate in 
our country's community fabric.
    As always, the National Association of REALTORS is at the 
call of Congress as we continue to work toward the best 
solutions for consumers, the housing industry, the economy, and 
our Nation.
    Thank you very much.
    [The prepared statement of Mr. Veissi can be found on page 
70 of the appendix.]
    Chairman Miller of California. Thank you, sir.
    I ask unanimous consent that Mr. Green, who is a member of 
the full Financial Services Committee, be allowed to 
participate in the subcommittee. Without objection, it is so 
ordered.
    Ms. Wachter, you are recognized for 5 minutes.

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

    Ms. Wachter. Thank you, Chairman Miller, Ranking Member 
McCarthy, and members of the subcommittee.
    The U.S. housing finance system relies on global capital 
sources for funding. The mortgage-related bond market, as of 
the second quarter of 2011, amounts to approximately $7 
trillion, most of which today is securitized and guaranteed by 
the U.S. Government.
    As the subprime crisis demonstrated, disruptions in the 
U.S. mortgage system destabilized financial markets across the 
world. The structural soundness of this sector is important for 
U.S. home borrowers, the U.S. economy, and for overall global 
financial stability.
    The U.S. housing finance system prior to the crisis was 
financially sound. The system prevalent in the United States 
provided U.S. homebuyers, unlike buyers elsewhere, a choice of 
fixed and variable rate mortgage products, and provided 
financial stability for mortgage borrowers and for global 
capital markets.
    The unique features of housing finance in the United 
States, which undergird the system, include access to stable, 
long-term, fixed-rate mortgages and the financing of these 
mortgages by a sound securitization system. The long-term, 
fixed-rate mortgage prevalent in the United States, what 
Richard Green and I term the ``American mortgage,'' in research 
that I request be entered into the record, is unique to the 
United States.
    In most developed countries, with few exceptions, the 
adjustable rate mortgage prevails. The fixed-rate pre-payable 
mortgage, with the ability to lock in financing at the point of 
home selection, is found solely in the United States. While 
adjustable rate mortgages are a good and safe alternative to 
fixed-rate mortgages in periods of stable or declining interest 
rates, the weakness of such mortgages is that they threaten 
borrowers with payment shock when interest rates rise.
    Shocks to household balance sheets due to rising interest 
rates or limited availability of finance threaten the financial 
system as a whole in a system of variable rate mortgages. 
Indeed, versions of this scenario played out in the subprime 
crisis and in the Great Depression.
    The U.S. mortgage system also differs from most of our 
developed country peers in the use of securitization, as 
opposed to the holding of mortgages on bank balance sheets. In 
research with co-author Adam Levitin, which I also request be 
entered into the record, we show why the fixed-rate mortgage 
requires securitization.
    Securitization first arose out of the need to replace 
short-term, variable rate mortgages with so-called ``bullet 
payments'' implicated in the high foreclosure rates of the 
Great Depression. While the fixed-rate, long-term, self-
amortizing mortgage developed in the aftermath of the Great 
Depression protects borrowers against interest rate spikes, as 
shown by the savings and loan crisis, short-term demand 
deposits cannot be relied upon to fund these long-term 
mortgages.
    Securitization is a necessary replacement for demand 
deposit bank portfolios, and can appropriately deal with 
interest rate risk. The system of fixed-rate mortgages financed 
through stable securitization provided for a period of 
remarkable stability in the U.S. economy, coinciding with what 
economists termed, ``the Great Moderation,'' a period of 
economic growth, sustainable homeownership, uniform and 
intrinsically safe underwriting practices, and, importantly for 
the committee, the ability to access global capital markets.
    This system underwent major shifts beginning in the late 
1990s. The changes over the subsequent decade caused the system 
to fail, undermining global financial stability with outcomes 
that still threaten the U.S. economy. In the period from 2000 
to 2006, non-traditional mortgages, previously niche products--
such as adjustable rate teasers, subprime, interest-only with 
bullet payments--grew to represent, in 2006, almost half of 
mortgage originations.
    The origin of the mortgage system failure was credit 
expansion through private-label securitization accompanied by 
the undermining of lending standards, despite the Triple-A 
credit rating granted for much of the MBS debt. Global capital 
funded this expansion, in part relying on credit ratings. 
Foreign investors purchased residential mortgage-backed 
securities guaranteed by Fannie Mae and Freddie Mac, and they 
did so because these instruments are perceived to have 
essentially no credit risk.
    Private-label securities, which were also purchased by 
foreign investors, were understood to have little credit risk, 
in part due to high credit ratings, and in part because the 
U.S. mortgage and housing market was perceived to be impervious 
to decline. The expansion of credit that this perception 
allowed, and the deterioration in lending standards, fueled the 
price bubble and bust when the limits to lending expansion were 
reached, accompanied by the epidemic of foreclosures and value 
destruction that we currently face.
    Failure in the U.S. mortgage system directly caused the 
2009 recession. We were not alone in this. The United Kingdom, 
Spain, and Ireland suffered recessions, accompanied by mortgage 
market crises and sharp housing price declines. Nonetheless, 
the size of the U.S. market means that it relies on global 
finance, and the failure of the U.S. financing system put the 
global finance system at risk.
    The response in the United States--bailouts of failing 
financial institutions and the conservatorship of Fannie and 
Freddie--is ongoing. Private securitization has not come back 
and we are reliant on a Federalized system.
    The key in moving forward is rebuilding confidence in the 
U.S. mortgage system. This is necessary for potential 
homebuyers to come back to the market, and is also key for 
global investors on whom this market depends to provide capital 
for what, once again, must be perceived to be, and must be, a 
system that is structurally sound and safe for home purchasers, 
investors, and the overall economy.
    I thank you.
    [The prepared statement of Dr. Wachter can be found on page 
78 of the appendix.]
    Chairman Miller of California. I want to thank the 
witnesses very much. I will now recognize myself for 5 minutes.
    There is little doubt that the GSEs went beyond the intent 
of their original mission, and reform is necessary. But if the 
United States were to end all government guarantees for housing 
products, how would that affect the overall economy? And what 
are the consequences of actually delaying GSE reform?
    Anybody who would like to answer? Yes, Mr. Farrell?
    Mr. Farrell. We operate three public companies, Annaly, 
Chimera, and Crexus. Chimera does non-agency securities in a 
residential side. The securitization market in that part of the 
credit curve is extremely difficult to price at the current 
interest rate levels.
    We estimate from our research that in order to get 
securitizations operating in the private sector for all of the 
re-pooling of these assets would probably be 200 to 300 basis 
points higher in terms of cost to the consumer. You can see 
that in the fall-off of private securitizations over the past 
couple of years especially. So it would be a very painful 
experience to move to that kind of rate structure.
    The GSE balances have changed in terms of what those 
origination fees are. And, in fact, we have found that 
investors still continue to embrace that. We have grown 
dramatically over the past few years especially, and navigated 
through 2008 with a company that was totally exposed to agency 
debt.
    So globally, we still think that there is a market for this 
which is well-structured and financed, but it is important to 
understand that there are two sides to the market: the assets; 
and the liabilities.
    The assets themselves, that we have all described here 
today, are part of an important infrastructure within the 
United States to provide credit. The liability side, much of 
this secures bank balances and credit balances from investments 
throughout the world that are all dollar-denominated that would 
need to be filled by some other entity that would be similar in 
credit structure. If not, they will have a higher price.
    Chairman Miller of California. Mr. Dorfman, you had a--
    Mr. Dorfman. Thank you, Mr. Chairman. It was very 
appropriate that Mr. Farrell speak first because, really, it 
must be understood that as we engage in reengineering the 
mortgage financing system in the United States, the final 
judge, the court of appeals so to speak, will always be the 
institutional investor.
    Will the institutional investor invest? Will they come to 
the bid? And what will they bid at what spread, at what price? 
What will it cost the consumer in order to participate in a 
given structure?
    So it is important to note that the institutional investor, 
in the end, is the final determinant, and must be convinced by 
traditional, respected, analytical methods and models that any 
substitute idea which may evolve for the U.S. Government 
guarantee is creditworthy and worthy of the institutional 
investor's attention and bid at a level that works for the 
consumer.
    It is also very important to recognize that no matter what 
anyone may wish or believe in terms of whether the government 
guarantee is good or not good, we must take the market just as 
we must take the golf ball, if I may say, where it is and play 
it from where it is.
    And where it is today is that the government guarantee 
provides the degree of security to the vast world of non-credit 
risk investors who will not buy that product without the 
guarantee or whose participation will be diminished or at a far 
higher price.
    Thank you for recognizing me.
    Chairman Miller of California. On that, could it be 
structured in a way where the taxpayers' exposure is minimized 
and the long-term benefits are basically capitalized on, 
expended? Because the goal right now is making sure we protect 
taxpayers.
    Mr. Farrell. I would say, my perspective as a risk taker 
who has to go around the world and raise this capital to 
provide the return for investors, it essentially negotiates a 
compromise between borrowers and lenders in our structure.
    There are two elements that I think really need to be 
understood. And the perspective that I want to bring to it is 
that when you look at the guarantee fee and what went off of 
the wheels in the 1990s--from the perspective of a private 
company operator providing private capital--if we did not have 
Fannie Mae and Freddie Mac's balance sheets at the size that 
they were in the late 1990s, trillion-dollar companies who 
essentially were serving two separate masters--they were 
serving Congress and they were serving the private markets 
simultaneously as listed companies. And were, as we viewed 
them, friendly competitors in the market.
    Once those balance sheets went over a trillion dollars 
each, that created a competitive edge in the markets for others 
to go in and dilute the credit. If we were not still unwinding 
those legacy portfolios, I would suggest to Congress that the 
total balance and issues that we have been faced with would be 
similar to what we faced in the RTC on a inflation-adjusted 
basis. We would already be past this and moving on.
    So the structure that you suggest in your legislation I 
think is very important because it discusses a well-priced 
insurance ``G'' fee, no portfolio intervention by the 
government at any level--I do not think there is any appetite 
for that any longer--and let the private market everyday do 
what we do, which is price that against its benchmarks off of 
either treasuries or corporate rates.
    That, to me, is the way it would work and it would minimize 
the risk to the taxpayers.
    Chairman Miller of California. Hopefully, we can come back. 
My time has expired.
    The ranking member is recognized for 5 minutes.
    Mrs. McCarthy of New York. Thank you.
    Dr. Wachter, at what point do we begin to see less 
investment in the securitization markets due to the uncertainty 
of the GSE reform as well, as our own long-term economic 
recovery?
    Ms. Wachter. That is a very difficult, but very important, 
question. I do not think there is a definitive answer.
    I think, as we have heard from Mr. Dorfman, that markets 
may already be, to some degree, considering risk issues. That 
is, will there be a replacement to Fannie and Freddie that 
brings about a safe and sound investment structure?
    Mortgage markets are forward-looking. And, indeed, if there 
is not in place a structurally sound mortgage system, then 
today's investors in these long-term instruments will begin to 
appreciate the risk. Exactly when that will happen, exactly how 
that will unravel, is very difficult to say. But clearly, 
uncertainty will have a potentially dire impact at some point.
    Mrs. McCarthy of New York. Mr. Veissi, what impact do the 
legislation proposals aimed at reforming the GSEs have on the 
30-year fixed-rate mortgage products?
    Mr. Veissi. Would you repeat that question?
    Mrs. McCarthy of New York. Sure. What impact do the 
legislative proposals aimed at reforming the GSEs have on the 
30-year fixed-rate mortgage products?
    Mr. Veissi. Let me first say that while we concentrate on 
the secondary market and the investor side of the secondary 
market, we pay less attention to the consumer invested in the 
performance of both the purchase and the sale of a real estate 
home.
    They do not have the expertise, nor do they care to become 
invested in understanding the expertise of the secondary 
market. What they do know and what they do understand is that 
they have been privileged to have the benefit of a marketplace 
that offers them a fixed-rate mortgage for a long period of 
time with no uncertainty. They know what their payment is going 
to be.
    The average holding time for that mortgage is about 7 
years. Now, that was not the case during the period of time 
from 2005 to 2007. It was a much smaller period of time, about 
2 or 3 years. So on average, the investor is expected to have 
the mortgage, that 30-year mortgage, satisfied in the average 
time of about 7 or 8 years, and in good times, was about 2 or 3 
years.
    When you take away the opportunity for an individual to buy 
with the kind of securitization that they feel comfortable 
with, especially the ones that show less than 20 percent down, 
NAR has found that about 70 percent of every new home or first-
time homebuyer uses an instrument that has less than a 10 
percent, or a 10 percent down, structure.
    So all of those instruments are important to our 
marketplace and important to the first-time homebuyer and to 
American homebuyers. To take that away from the home-buying 
market might further cause a recessionary cycle, and certainly 
would inhibit both the construction of residential and 
commercial property and the resale properties which generally 
help us assume a better economic spiral.
    Mr. Dorfman. Thank you, Mrs. McCarthy.
    I wanted to further comment very briefly that in terms of 
the GSEs going forward, first, SIFMA, on behalf of its members, 
absolutely applauds each and every bill that comes to the 
table. That contributes to the dialogue that is so difficult 
and so necessary to repair the housing finance system. And that 
is important. Every bill is a contribution.
    Now having said that, in terms of GSEs, the market, the 
institutional investor, again, must come to the view, 
necessarily, that the GSEs have products that have integrity, 
are assembled with skill; that the guarantee of the GSE without 
the government behind them is immensely creditworthy and 
believable; and that there is integrity throughout the process.
    Next, it is essential that GSEs be able to finance 
themselves as efficiently and as liquidly as they have in the 
past. High volume and liquidity hold each other's hands. They 
work together. And we must be very careful that GSEs, whatever 
they may be in the future, are able to address the market with 
their individual securities perhaps with a single combined 
security.
    Whatever that form may be must be a huge predictable flow 
that will serve the liquidity needs of investors worldwide who 
use those investments from the GSEs just as though they were 
United States Treasury securities with the same liquidity and 
the same utility.
    If we do not achieve that, it may be all right. But the 
price to the consumer will be higher, as every cost will be 
traced back to the homeowner. We want to be protective of that 
homeowner, and we want to be protective of the housing market 
in the United States.
    Mrs. McCarthy of New York. Thank you.
    My time is up.
    Chairman Miller of California. Mr. Huizenga, you are 
recognized for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman, and I appreciate 
that.
    I just wanted to maybe continue that conversation, Mr. 
Dorfman. If I recall, what you were just saying in your closing 
is you want to protect the homeowner and protect the 
marketplace. Is that correct?
    Mr. Dorfman. Yes, sir.
    Mr. Huizenga. Obviously, there have been actions that did 
not do that. And you have to understand my perspective. I am a 
former Realtor. My family has been involved in construction 
for about 40, 45 years. I have been a developer, primarily 
single-family housing. I have been extremely concerned about 
what happened.
    And one of my concerns has been, when first getting out of 
college, doing my first real estate development, the lesson I 
learned is that you owned the lot. You used that lot as 
collateral to go get a construction loan. Now, I am not saying 
that the 50 percent down that my parents used was maybe a good 
number, but having significant skin in the game.
    For me, buying my first home almost 20 years ago and seeing 
those standards of 20 percent down being the norm and being 
able to make that up with PMI, private mortgage insurance, was 
a positive thing. But we saw the 20 percent become 15, become 
10, become 5, become 2, become zero, become 120 percent loan-
to-value. And that concerns me because we have now put people 
into homes that they frankly cannot afford.
    And I take blame for that as somebody involved in the 
construction industry. Speaking as a 42-year-old, I will take 
blame for a generation that demands it now. ``What do you mean 
I cannot have the three-car garage and a walk-in master 
bathroom suite? We have expectations, and doggone it, they 
better be met.'' We have distorted the marketplace here.
    And I think the question is, how do we restore that common 
sense? How do we get back to an equilibrium here, where we have 
good, solid housing stock that people can afford and they can 
be in? And, now with the literally hundreds of millions of 
dollars that people are upside down in their homes across the 
Nation, that does not add to that.
    Mr. Veissi, I think you were just sort of wanting to 
address that a little bit?
    Mr. Veissi. Yes. Your questions are pointed, and they are 
fair and accurate. Our problem, especially during the middle 
part of the 2000s, was maybe that we did not understand the 
value of real estate and the longevity of real estate.
    Real estate has never been a short-term investment. It 
never has been a turn-and-flip. If you want to do that, you go 
into equities. Vegas might even be a better place than real 
estate. But real estate on a long-term investment has always 
has been a substantial wealth-builder.
    The other thing that is really interesting, your comment 
about skin in the game is important. And my knee-jerk reaction 
would be yes, the more cash you put in the less likely you are 
to walk away from that deal.
    But I take a look at some of the mortgages that are out 
there today--especially those that were put forth in 2004, 
2005, and 2006--and those underwriting standards were horrible. 
They were not horrible; they were atrocious. They should never 
have been placed. The consumer should never have had that 
responsibility for those underwriting standards because they 
just did not exist.
    Take VA for example, with a zero downpayment. One of the 
lowest, as a matter of fact the lowest foreclosure rate in the 
entire country is a veteran loan. And there are two good 
reasons for that. Number one, education. The veteran is 
educated on what happens: one, if they should get into trouble; 
two, what they do immediately upon getting into trouble; and 
three, how they react when that situation occurs. And, too, 
their underwriting is absolutely terrific.
    Mr. Huizenga. Very different standards, yes. And I believe 
that. When I was first in real estate, it was extremely unusual 
to have an FHA loan. And now, everybody has FHA loans. What is 
it, about a third of all transactions, roughly, something like 
that?
    Dr. Wachter?
    Ms. Wachter. Yes. Thank you for recognizing me. The 
deterioration in underwriting conditions that Mr. Veissi just 
referred to is absolutely key here. A very large percentage of 
the homes that are in foreclosure and in default in fact were 
10 percent and 20 percent down loans. And part of the reason 
that they are in foreclosure and default today is that loan 
values were artificially propped up.
    With a 30 percent decline in home values--and in fact, in 
the United States, home values on average declined 30 percent. 
Even with 20 percent down, you will have underwater loans, and 
you will have few options if you lose your job and do not have 
an income flow but to go through default and foreclosure.
    What we must avoid going forward is volatility in housing 
prices, to which underwriting deterioration contributed.
    Mr. Huizenga. I think my time is up. But ultimately, this 
is about making sure people have jobs. We have to create an 
atmosphere here that is going to allow people to have a good, 
solid job. I just want to make sure when that is happening--as 
someone who lost a significant amount of his value on a home, 
all in those areas of those years--we have to make sure then 
that we have some sort of reasonable level of skin in the game, 
from my perspective.
    And I do not think that there is anything magical about 2 
percent or 20 percent. But somewhere in there, we have to make 
sure that consumers know what they are getting into and that 
there is significant responsibility with that.
    My time is up. Thank you, Mr. Chairman. I appreciate that.
    Chairman Miller of California. Mr. Scott is recognized for 
5 minutes.
    Mr. Scott. Yes. Thank you very much.
    Let me just start off with a general question that each of 
you might answer very quickly for me. You have great expertise. 
I would be interested to know, how much longer do you think 
that we have before we can dig our way out of this hole and get 
back to normalcy, or do you we think ever will? Is it too deep?
    Mr. Veissi. Let me give you really quick numbers that might 
help you out. I am from Miami, Florida. During the period of 
time when you could fog up a mirror and get a mortgage, about 
2006, we were consuming, or absorbing, about 1,000 brand new 
condo units a year. That is not used product. That is just 
brand-new condo units.
    We had on the books--permitted, ready to come out of the 
ground or coming out of the ground--at that same time, 67,000 
units: almost 70 years' worth of inventory.
    Mr. Scott. Right.
    Mr. Veissi. Now, about a third of those never got built. 
Folks walked away from their deposits. About a third of those 
are holes in the ground in Miami. But about 20,000 to 25,000 
got built. The reality is that most people looked at that and 
said, ``How are you going to absorb 20 years to 25 years worth 
of brand-new condo inventory?''
    Mr. Scott. I know, Mr. Veissi.
    Mr. Veissi. It is almost gone.
    Mr. Scott. Right. Is there anybody here willing to say 5 
years, 10 years? To give us some hope about how long you think 
it is going to take for us to--
    Mr. Veissi. Some of the statistics that we see, we think 
places that were overbuilt like Miami--portions of California, 
Arizona, Nevada, but especially Miami--may see double-digit 
appreciation even in 2012, predicated upon the absorption of 
existing oversupply.
    Mr. Scott. Five years from now, do you see us being in this 
same mess?
    Mr. Veissi. No, absolutely not.
    Mr. Scott. Right. Anybody? Three, four years? What is our--
    Mr. Farrell. I would say that, from our view, the 
underwriting standards tightened up in 2007. So we are in the 
fourth year of the recovery of underwriting standards that were 
diluted.
    And just to weave this into the previous testimony in 
question, with a 45-year history in the family of building 
properties, this window of dilution, and this reach for 
homeownership up into the 70 percent range, is a very small 
sample, but a very powerful deterrent to what has happened in 
underwriting and dilution of underwriting to get there.
    So for the past 4 years, we have been underwriting loans 
and accepting loans in our secondary market companies with much 
better underwriting standards and, as a result, much better 
performance.
    Mr. Scott. I only have 2 minutes left, and I have another 
question. I want to get to Dr. Wachter here. You all are 
hopeful that, let us say within the next 5 years, we will be 
above water on the situation of housing?
    Mr. Dorfman. I think that is fair.
    Mr. Scott. All right.
    Mr. Dorfman. But it must be added that whatever set of 
reforms we come to institute through the U.S. Congress must be 
right the first time.
    Mr. Scott. Okay.
    Mr. Dorfman. Therefore, we must not take this cake out of 
the oven before it is baked.
    Mr. Scott. Very good. All right. Thank you.
    Dr. Wachter, let me ask you this: My concern is what 
happened overseas and some of the abuses. Were the abuses 
experienced in the United States mortgage market present in 
other countries?
    Ms. Wachter. Yes, sir.
    Mr. Scott. And how have these other countries responded?
    Ms. Wachter. They are also undergoing a period of 
tightening of underwriting standards similar to that in the 
United States and are also considering long-term reforms. I 
must say, a country which did not experience our turmoil, 
Canada, is considering reforms at this point.
    Mr. Scott. Would you say, then, that we do not have 
anything to fear from these other countries having a negative 
impact on our own economy?
    Ms. Wachter. No, by no means. I do think we have a 
tremendous amount to fear from these other countries coming 
through sovereign debt failure. For example, Spain has a 
banking crisis which is very much related to its housing and 
mortgage market.
    Mr. Scott. And they have GSE structures in these other 
countries, as well. Are there any differences--
    Ms. Wachter. I am sorry. I missed that point.
    Mr. Scott. The GSEs? They have GSEs?
    Ms. Wachter. No, they did not have GSEs in Spain. They had 
a similar problem, but without the GSEs. It is a bank-led 
crisis with underwriting. And it was essentially with the 
cajas, which are similar to savings and loans.
    Mr. Scott. With these other GSEs that are overseas, what 
are the differences in the structure between the GSEs that are 
in foreign countries and our GSEs?
    Ms. Wachter. Most other countries do not have GSEs. What 
they have is a banking system which has implicit and explicit 
government backing. The governments come to the rescue of 
failed banks, for example, Northern Rock in the U.K.
    So these large banks, four or five large banks, in some 
sense, operate as though they are GSEs, with implied, and in 
some cases explicit, government backing.
    Mr. Scott. And is there any reason why some countries have 
put together GSEs and others have not?
    Ms. Wachter. Absolutely. Countries with fixed-rate 
mortgages have securitization systems. We have a few examples 
other than the United States. There is Denmark, and to some 
degree Germany as well.
    Germany did not have a crisis. It maintained lending 
standards. That is a fixed-rate system, and they maintain 
lending standards. No crisis. Denmark did have a crisis. There 
was a bubble and a bust, and the bust was associated with a 
sudden shift to adjustable-rate mortgages.
    Mr. Scott. Thank you. My time has been expired. Thank you 
for giving me a few extra seconds there, Mr. Chairman. I 
appreciate it.
    Chairman Miller of California. Vice Chairman Dold, you are 
recognized for 5 minutes.
    Mr. Dold. Thank you so much, Mr. Chairman. I appreciate it.
    Mr. Dorfman, if I can start with you, in your testimony you 
talked about the housing industry in the United States 
representing roughly 20 percent of the GDP. That has fallen to 
about 15 percent of GDP. What share of the GDP does the housing 
market represent in other developed nations?
    Mr. Dorfman. In other developed nations, as a general 
statement, it is significantly less.
    Mr. Dold. Ballpark? Five percent, eight percent, roughly? 
It depends, obviously, on the nation. But can you give me a 
ballpark figure?
    Mr. Dorfman. Can be. It is a big world. Those numbers are 
fair to work with.
    Mr. Dold. Okay.
    Dr. Wachter, if I can just jump to you for a second. 
Government guarantees obviously are, I think, one of the 
reasons why we are in part of the mess that we are in. We have 
the guarantee, and yet we still have the private sector upside 
with the GSEs.
    Why has the government guarantee been so important in the 
United States, when many other countries around the world do 
not provide that government guarantee?
    Ms. Wachter. If I may, Congressman, other countries do 
provide government guarantees to the banking system and make 
loans through the banking system. In our country, we have made 
loans, to some degree, through the banking system.
    And again, we have implied guarantees, or explicit through 
demand deposit, and also securitization--and up until the 
conservatorship, there was an implied guarantee. So I would say 
that most countries do have implied guarantees.
    Mr. Dold. Okay. I appreciate it. Then just building on 
that, not only for you, Dr. Wachter, but for the rest of the 
panel as well. When we look at that guarantee, certainly we 
know that an overhaul of Fannie and Freddie, I think, is 
certainly something that we are talking about over here.
    What should we be doing? What should this panel take away 
and bring back to our colleagues in terms of saying, what do we 
need to do to make it better, more efficient, for the housing 
sector and for our economy in general?
    Ms. Wachter. I think the legislation that has been already 
presented is a very good starting point. And I would say that 
in whatever legislation that you go forward with, the key is 
transparency.
    The problem in the 2000-2006 deterioration was that the 
deterioration in underwriting standards was not known except 
anecdotally. So we need to have transparency in the mortgages 
that are being underwritten and in the structure of the 
securitizations themselves so regulators can track and 
investors can also can bring market discipline to bear.
    Mr. Dold. By all means, Mr. Farrell, please chime in.
    Mr. Farrell. Thank you. I would like to introduce the 
thought that if we did not have the GSEs today, we would be 
trying to create them, because of the support that they have 
created over the past few years. And, in fact, when Congress 
created the GSEs, they were dealing with the same sorts of 
issues of private mortgage capital, along with public capital 
and GSE fees dealing with it.
    I think it is extremely important to understand the 
structure of the United States for jobs when you talk about the 
government guarantee. And that is the perspective that I think 
we need to really think about how we re-craft the government 
guarantee, if it is to be done.
    The 30-year mortgage, and the GSE fees nationally, allow 
American consumers the flexibility to move to where the jobs 
are. And if you look at the 1930s, you were not able to do that 
nationally because you could not sell your house with the 
certainty of pricing in one State and moving to another State 
to move to jobs.
    If you are moving from New York to Texas, or you are moving 
from New Jersey to California, one of the things that the GSE 
market allows you to do is have capital formation for 120 days, 
as a family, to make that move. And to have the certainty that 
that mortgage is going to be available for you when you buy 
your house under the same standards.
    That is much different than any of these other countries, 
and it is very unique to the United States and it is unique to 
the structure of the United States. And I think that needs to 
be respected in the way that we think about the legislation and 
the way we think about what we want to provide our homeowner 
population with.
    I am not saying that we should be 70 percent. I am saying 
that we should find a balance between whatever the right 
insurance amount is at the GSE form, and allow that flexibility 
for consumers to continue to move between States to where the 
jobs are.
    Ultimately it led to job creation, for most of my life. 
Unfortunately, for a 10-year period in there, it has now led to 
a bubble that is broken and being cleaned up. That will be 
dealt with. But the purity of the mobility in the United States 
and job creation off of that I think is an important feature to 
understand.
    Mr. Dold. Mr. Dorfman?
    Mr. Dorfman. Very briefly, I would just like to cite a 
historical example. We, as Dr. Wachter said, look to Canada 
today as an excellent example of a banking system and a housing 
finance system that has been relatively unaffected by this 
crisis. And they have done many things right.
    I had the privilege of helping to create the first 
mortgage-backed security in Canada, and that security was 
issued and remains under the guarantee, and remains guaranteed 
directly by the Crown, as they call it. Treasury directly 
guarantees Canadian securities.
    So when you go outside the banking balance sheet into the 
global capital markets, some anchor of credit must be there to 
give confidence to all of those who are rapidly making choices 
about whether to invest or not, and at what price.
    Mr. Dold. Can you give us a better understanding in terms 
of the underwriting principles that they are putting in place?
    Mr. Dorfman. I am sorry, I missed--
    Mr. Dold. Underwriting principles? Obviously, that would be 
one of the problems I would argue that the GSEs--yes.
    Mr. Dorfman. Underwriting principles, or the larger 
rubric--which I like, regrettably, to call the failure of 
discipline across the industry--are absolutely essential to 
have integrity in their creation and integrity in their audit 
and review and enforcement. All levels, private and public, who 
are looking at mortgages must be acutely conscious of quality.
    Mr. Dold. Thank you, Mr. Chairman.
    Chairman Miller of California. Mr. Perlmutter, you are 
recognized for 5 minutes.
    Mr. Perlmutter. Thanks, Mr. Chairman.
    That last question by Mr. Dold prompts a question for me. I 
would like to break this down into two timeframes, if we could: 
all time; and then that period from 2004 to 2007. Because 
having sat on this committee now for several years, there were 
some abuses in the period of 2004 to 2007.
    Mr. Dorfman, you mentioned the fact that there was a big 
accumulation of foreign holdings of our Fannie Mae and Freddie 
Mac types of debt. There was a whole foreign policy aspect to 
this to repatriate money from other countries that then may 
have let us get into some poor underwriting standards.
    So let us go back to the underwriting standards question 
Mr. Dold just asked. In that period, we had loose underwriting 
standards. Would you agree, Mr. Dorfman?
    Mr. Dorfman. Progressively?
    Mr. Perlmutter. Looser. Answer it however you want.
    Mr. Dorfman. Yes. Ever more loose until we had a crash.
    Mr. Perlmutter. And now the pendulum has swung to the other 
side, which is very restrictive. Pretty loose, pretty 
restrictive, and we need to get back in balance so that we can 
sell some houses out there, in my opinion. But how, in these 
two different periods, did our Federal Home Loan Banks, which 
are other GSEs that we have, compare to Fannie Mae and Freddie 
Mac?
    Mr. Dorfman. Federal Home Loan Banks as a group 
outperformed, meaning they did not suffer anything close to the 
economic financial demise of Fannie Mae and Freddie Mac. And 
the essential reason for that, despite the fact that Federal 
Home Loan Banks are as large as Fannie Mae, is that the Federal 
Home Loan Banks own virtually no mortgages for their own 
accounts on their balance sheet.
    The hundreds of billions of dollars held by Federal Home 
Loan Banks are held as collateral against obligations of member 
banks, not as directly-owned assets of the Home Loan Banks 
themselves.
    Mr. Perlmutter. Okay.
    Mr. Farrell, you talked about the RTC for a moment. Is 
there a way, as we go through this process--because I believe a 
lot of this had to do with the underwriting standards in that 
period of time of 2004 to 2007, which may have been appropriate 
for other reasons, but ultimately were not so good for the 
housing market.
    Is there a way to do a good-bank/bad-bank kind of a system, 
where maybe we do not throw Fannie Mae and Freddie Mac out with 
the bathwater, but we separate what appears to be a period of 
time where we had some lousy loans and put that over here. Just 
deal with it, pay it. If we owe China, if we owe Saudi Arabia, 
if they are the investors in that, we continue to pay it--that 
is a foreign policy decision we are making--and then just move 
forward with Fannie Mae and Freddie Mac?
    Can we do that? And I will just add one more thing--in this 
public-private setting that exists for those two entities?
    Mr. Farrell. I would say two things. If I may, one of the 
things that we need to understand as a nation is that there are 
only two companies in the entire world that can do what Fannie 
Mae and Freddie Mac do. And that is Fannie Mae and Freddie Mac.
    And I would argue--and I have discussed this in our 
earnings calls with investors and discussions with investors 
globally--that they are, for many of the elements of what they 
provide, a national asset that needs to be protected.
    And I am not sure that we are protecting them right now. 
What I mean by that is, if you look at them as an integral part 
of the banking system, they hold insurance deposits, municipal 
escrow receipts. They take cash flow monthly from investors and 
borrowers throughout the world, and flow it through into the 
banking system.
    And we are certainly not creating jobs there, where 20-
somethings are coming in and going to build their career. Those 
systems are extremely unique. I have watched them my entire 
career. They are a valuable asset to the government. And I urge 
you all to consider that they need to be protected in some way, 
shape or form.
    And, in fact, I agree with the precepts of this legislation 
that Congressman Miller has put in, about merging those two 
companies to get the best, strongest asset that we can, 
nationally, to do that. That servicing aspect is an extremely 
important piece of the way that our Nation's mortgage market 
works. And a bad step for us would be that anything happen to 
that. A disgruntled East German hacker breaking into that 
system? You want to break into a bank? They are over there.
    So I would say, yes, the RTC concept is doable. There is 
the ability to have a bad-bank/good-bank scenario. We need to 
allow clearance of prices, which means the unfortunate pieces 
of having some parts of the system fall to distressed prices 
that would occur faster than they would have occurred if we had 
not tried to manage the spiral down the way we have.
    But I would be the first one to get on the road and go get 
the money to do that. The RTC was a pretty good example of 
bipartisan work in putting that together to cleanse the system, 
do it quickly, provide risk capital standards and risk-takers 
the window to come in and provide tax receipts ultimately back 
to the government.
    Mr. Perlmutter. Thank you.
    Thanks, Mr. Chairman.
    Chairman Miller of California. Mr. Garrett, you are 
recognized for 5 minutes.
    Mr. Garrett. And I thank the Chair.
    I thank Dr. Wachter for her comments, early on, with regard 
to the problems here with this housing market in this country 
causing the ripple effect, if you will, over in Europe as well 
as on the results that came from it. And also to the point as 
to what this all caused, which was one of the seminal questions 
of the chairman.
    And, Mr. Dorfman, I think you answered this and said what 
is the overall cost. And other members of the panel, too, 
answered that question as far as what is the cost if we did not 
have the GSEs and what is the cost of, basically, in essence, 
answering that in terms of we are going to see higher basis 
points of 100, 200, 300 basis points.
    I guess that is one way of putting what the price is, what 
the cost is to the system as if you did not have the GSEs there 
as the backstop, if you did not have the taxpayers there as a 
backstop to the system, that you would see higher basis points.
    I guess I look at it, though, in a different way. I look at 
the fact that we did have the GSEs, and what was the fact that 
they basically drove the market off the cliff and what that 
cost has been overall to the economy. That cost has been 
without a price. The fact that people have lost their homes is 
a cost. The fact that people have lost their livelihoods has 
been an insurmountable cost.
    The fact that we have an economic situation in this country 
of 9 percent sustaining unemployment and people cannot ever 
again get jobs in the later part of their lives now, that is a 
cost that we cannot put a price on. That is a significant cost 
because of the fact that we have relied upon these two entities 
for so long.
    There is a cost also to the taxpayers. There is a cost 
right now of around $150 billion. There is a cost over the next 
10 years up to $400 billion. Now, how does that relate to what 
we do in some other things?
    This past week, I have had people meeting with me in my 
office saying, ``What is Congress going to do in the area of 
more dollars for breast cancer research? What is Congress going 
to do in the area of more money and more investment in the area 
of Alzheimer's research? What is Congress going to do in the 
area of benefits for senior citizens and their needs?''
    And we have to say, ``We are in deficit now.'' And they 
say, ``Where is all the money going that we pay in taxes?'' And 
one of the quick answers I can say is, ``To bail out the GSEs 
to the tune of $150 billion, to the tune of over $400 billion, 
and who knows how much more than that.'' But it is going to all 
the myriad of other programs, good and bad, that Congress has 
put in place since that time to try to help sustain some of the 
neighborhoods.
    Maxine Waters is not here. But she can speak most 
eloquently as to what is happening in neighborhoods because of 
the effects of the GSEs, and the fact that they have created 
bubbles in the marketplace, and neighborhoods are now 
devastated. And now, we have put in place other programs to try 
to stabilize those neighborhoods.
    That is a cost that I think goes beyond when we make 
somewhat of a trite answer, and say, ``It is going to be a 
little bit more expensive in the future if we do not have the 
backstop of the GSEs there.''
    I know we are talking about a global message, a global look 
at this. I looked at it from a U.S. perspective and sort of a 
back-of-the-envelope sort of analysis. What do we have here so 
far to try to make sure that we have a housing market of 
whatever range--5, 10, 15 percent of the marketplace? This is 
what we have.
    The range for institutional backstop, if you will: the FHA 
as a government mortgage insurer; Ginnie Mae as a government 
MBS guarantor; Fannie and Freddie as GSE guarantors--we have 
had those--Fannie and Freddie as a GSE portfolio investor; we 
have had that. Federal Home Loan Banks as GSE lenders through 
their advanced program; we have had that. Federal Home Loan 
Banks as the GSE portfolio investors through their housing 
programs, we have had that.
    What else do we have? We have the promotion of affordable 
housing generally. FHA, Fannie, and Freddie affordable housing 
goals, HUD's National Homeownership Strategy, Community 
Reinvestment Act, HUD's best practices initiative, Federal Home 
Loan Banks Affordable Housing Program.
    On top of that, what do we have? Promotion of additional 
borrowed leverage and increased reliance on debt. You have 
FHA's leadership and loan downpayment lending, HUD's 
regulations of the GSE affordable housing, Fannie and Freddie's 
leverage in preferred stocks, risk-based capital rules, stable 
rules for secondary mortgage lending, tax deductibility of 
interest, overreliance on the Fed of lower interest rates.
    On top of that, you have limited use of prepayment 
penalties, de jour and de facto limits on recourse and 
deficiency judgments, liberal capital gains exceptions, 
procyclical loans. We have all that here.
    Can anyone on the panel compare this to any other country 
in the world that has anything close to this, any other country 
in the world that has anything close to this that manages 
theirs in an effective, perfect implementation of these?
    And if so, how is it that these other countries without 
this myriad--and I did not go into all of them; this is just 
what we came up with--are able to sustain their mortgage rates 
and not have the crisis that we have had in this country in 
housing?
    Mr. Dorfman. Your examples, your exhaustive examples, are 
compelling and accurate, and I would add the postscript that 
before Fannie Mae and Freddie Mac and others throughout the 
housing and finance system lost all discipline and success went 
to their heads, and then some--
    Mr. Garrett. By the way, Dr. Wachter said that was in the 
2000s. That really goes back to 1992 or so, is that not, when 
it began--
    Mr. Dorfman. Oh yes, but there certainly was a time when 
they were, Fannie and Freddie, great net Federal taxpayers and 
far more simple than they were in the days of demise. So may I 
argue on behalf of SIFMA? It is not necessarily true that the 
fundamental architectures of Fannie and Freddie are useless and 
decrepit, but how did something good become so bad?
    Chairman Miller of California. Your time has expired.
    Mr. Garrett. I think, Mr. Farrell, you want to--
    Mr. Farrell. If I may add to that, I think when I listened 
to that litany of programs and elements of government support, 
many of those programs were Band-Aids for problems that were 
bleeding out of different cuts in the housing system.
    I would question today, and I am sure this is part of your 
thought too, how valuable those are and how active are they? If 
we look at some of these other programs that have been 
implemented only in the past few years with the genuine goal of 
trying to keep people in homes, very few people qualify for 
those programs. And, in fact, they are very hard to put through 
the system.
    And I would say, as a mortgage investor, that, ultimately, 
mortgage investors are going to judge the cash flow of American 
mortgages against the cash flows of any other asset class on 
the debt side, including Greek debt. And one of the things we 
need to decide as a nation, is do we support our neighbors or 
do we support Greek debt and other asset allocations like that?
    So I would be in favor of a complete review of a lot of 
these programs, and trying to figure out exactly how effective 
they have been and how much support do they cost and why we are 
doing them.
    Mr. Garrett. It is pretty hard to get rid of a program, I 
will tell you that.
    Ms. Wachter. If I may quickly just say that many other 
countries have much deeper involvement in the housing market 
than the United States. Canada is an example of a country with 
government guarantees, both implicitly and explicitly, whose 
system works quite well.
    I also just quickly wanted to address that it is not simply 
a matter of 200 to 300 basis points if we withdraw Fannie and 
Freddie. It is probably a matter of a second double-dip, a 
recession, for the United States.
    Chairman Miller of California. Thank you.
    Mr. Green is recognized for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank you and the 
ranking member for allowing me to participate in the hearing.
    It seems that invariably when we have these hearings, we 
get into a discussion of what actually caused the crisis, and 
we relate that to Fannie and Freddie. Before I go on, I would 
like to say to Mr. Farrell, I just want to thank you and other 
members for some of your comments, your comments about Fannie 
and Freddie, that if we did not have it, we would probably try 
to create it. That is a pretty strong comment, and it is not a 
comment that you hear too often. Thank you for taking a 
position with reference to an institution, or institutions, 
that were of benefit to us.
    Now back to where I was. When we talk about Fannie and 
Freddie and what caused what we will call, for my purposes, the 
demise of Fannie and Freddie, we do not always remember that 
the products they received became the problem. And they 
received faulty products because of changes in the law in 1980 
and 1982.
    In 1980, we did away with the usury rates. We made it 
possible for loans to become predatory, in a sense, by not 
having those usury rates. Then in 1982, we passed the 
Alternative Mortgage Transaction Parity Act. And that one 
allowed for a lot of what we call the exotic products, because 
it allowed for us to go to the adjustable rates.
    For a long time, we had the 30-year fixed-rate mortgages. 
And then when we got into adjustable-rate mortgages, we had 
prepayment penalties that coincided with teaser rates. We 
decided that we would have 3/27s and 2/28s and they became 
almost commonplace. So a lot of the products created the 
problems that we ultimately had to, and still are, dealing 
with.
    So I just want to get that side of the record out there, 
that Fannie and Freddie continued to do what they were designed 
to do. But the products, when you have originators who no 
longer concerned themselves with the quality of the mortgage--
just the quantity they can originate--that has an impact, and 
it had an impact.
    They were originating these products and pushing them into 
other markets, and not concerning themselves with whether the 
person who qualified for the teaser rate would qualify for the 
adjusted rate. And we are still having some of that to contend 
with currently.
    So the products became a real problem for us. And I cite 
two laws, the Alternative Mortgage Transactions Parity Act of 
1982 and the Depository Institutions Deregulation and Monetary 
Control Act of 1980 as part of the problem.
    Having said that, I want to now ask--let us start with Ms. 
Wachter, is that correct? You said a very strong statement. You 
said only the United States has a fixed-rate long-term product. 
Did I correctly state your position?
    Ms. Wachter. There are other countries with fixed-rate 
products. A 30-year product is unusual. But more to the point, 
a pre-payable with lock-in capacity is unusual. In fact, all of 
those features together are characteristics solely of the 
United States.
    Mr. Green. All right. Now, what I would like to ask each of 
you is this. Give me the one difference between the GSE's as 
currently structured, or perhaps the system as constructed 
before FHA-FHFA took over the GSEs. The difference between that 
structure and the structure being proposed that is important? A 
significant difference.
    And if you could each just give me one quickly, I would 
greatly appreciate it. If my time expires, I will accept that 
it is expires.
    Mr. Farrell. I would say it is most important that the 
government does not run portfolios, and that capital is brought 
in by the private sector. Where I think the wheels went off the 
bus was in trillion-dollar balance sheets at the Fannie Mae and 
Freddie Mac level, which essentially forced the banking system 
into a lot of dilutive activities.
    Mr. Green. Thank you.
    Mr. Dorfman?
    Mr. Dorfman. I want to agree with Mr. Farrell entirely. It 
was as I mentioned before, the portfolios as the mark of 
difference between Fannie Mae and Freddie Mac and the Federal 
Home Loan Banks, for example. Or between the U.S. GSE's and 
Canada. There is no need for those Enterprises to be investment 
companies.
    Mr. Green. And this new system would prevent that?
    Mr. Dorfman. As I read it.
    Mr. Green. As you read it.
    Okay. Mr. Veissi?
    Mr. Veissi. I would say the explicit government guarantee 
that backs those is enormously important, plus one thing we 
have not said. We have talked about underwriting standards. We 
have talked about the impractical investment standards in the 
2006-2007 era. We never talked about educating the public about 
the instrument itself. And you are right.
    Mr. Green. Ms. Wachter?
    Ms. Wachter. I think the portfolios are a key difference.
    Mr. Green. Okay.
    Thank you, Mr. Chairman. I apologize for going over.
    Chairman Miller of California. We are going to go a second 
round of questioning. I think this is a very informative panel. 
If we are in agreement with that, does the panel agree to a 
second round of questioning?
    There has been a lot of discussion in Congress about 
Freddie and Fannie and the marketplace. And a lot of it is 
justified. Freddie and Fannie made some big mistakes. The 
problem with much of the debate is Freddie and Fannie are 
outperforming the rest of the marketplace.
    So, are they the largest? They are. Is their default rate 
less than the private sector? It absolutely is. Have they made 
mistakes? Without a doubt, they have made mistakes.
    A lot of the problems that we have seen out there were 
caused by underwriting standards. They did not have them. If 
you could sign your name on the line, people made a loan, and 
that was a problem. And the bill the ranking member and I 
introduced deals specifically with that. You have to be an 
approved lender. If you do not comply with underwriting 
standards, you buy the loan back. Very simple.
    This should have been the case with Freddie and Fannie. I 
think the biggest problem that went wrong with Freddie and 
Fannie was they went public. All of a sudden, they were looking 
for market share, rather than looking to be a conduit for 
secondary money into the market, as they were intended to be.
    And as they fought for a market share they lowered their 
standards, closed their eyes. And many things Congress did 
enabled them to do that, and encouraged them to do that. Some 
say that there is a secondary market out there without 
government involvement. If you are talking about Countrywide, 
that has to be the greatest example of what went wrong in the 
marketplace.
    They were trying to emulate the GSE's in coming up with a 
mortgage-backed security that looked like a GSE. But the 
problem is, it was not. They were junk bonds. I know in 2000, I 
started introducing language in this committee that said we 
should define predatory versus subprime, got it to the Senate 5 
times, but could never get the Senate to act on it.
    Had we done that, we could have defined what a good 
subprime loan was versus predatory, which is what they were 
making, in the last few years, that basically were bad. The 
best loans the GSE's are making today are in the high-cost 
areas. They have written underwriting standards that are very 
good, solid. And these loans are performing very well.
    The problem I have with putting our head in a hole like we 
have done, and allowing GSE's to continue as they do today, is 
we are continuing to lose money and the taxpayers are going to 
pay for it. You have reviewed my bill. If you took and put all 
the assets of GSE's into that bill, allowed them to take the 
foreclosures, hold them for up to 5 years, lease them out, they 
would recoup all of their money invested. And they would not 
continue to lose money in the future.
    So the problem is, by doing nothing, they are putting the 
taxpayers more at risk. Would you agree or disagree with that 
today? Anybody on the panel?
    Mr. Dorfman. Certainly, doing nothing allows the clock to 
tick and the calendar to turn. American taxpayers and American 
homeowners are suffering every day. And SIFMA members are 
acutely aware of this.
    On the other hand, as I said before, we cannot take this 
cake out of the oven before it is baked. As we have seen by all 
these intelligent questions this morning, this is an enormously 
complex issue that resists easy resolution. But the debate has 
to occur. The debate absolutely, sir, yes, has to occur. And I 
applaud this committee for pushing it on, and SIFMA is prepared 
to study exhaustively each and every proposal coming out of 
Congress and to render a view.
    Chairman Miller of California. One question I will let each 
of you answer if you would like to, the housing bubble was, in 
part, the result of increased access to credit in the form of 
mortgages. Without correct balance of risk assessment analysis 
and financial controls, how can that balance be corrected?
    Mr. Farrell. I think that the market has corrected. 
Darwinism has taken place.
    Chairman Miller of California. I agree. I wanted to hear 
you say that.
    Mr. Farrell. We cannot fund--and everyone who is in the 
mortgage market, including us, we just celebrated our 14th year 
as a public company--navigated that differently. And some of us 
navigated it better than others. One of the most interesting 
aspects, I think, of the past 3 years' experience for me, is 
that for the first time in my career, I am not competing with 
Fannie Mae and Freddie Mac for issuance in the market for their 
portfolio.
    And in fact, mortgage REITs have absorbed almost the entire 
net supply being created out of the 95 percent market share 
that the GSE's create today. Private capital is available. It 
is mostly domestic. It comes to us in the form of REITs and 
REIT-share offerings. So we have a domestic solution for a 
domestic problem.
    This is clearly, in our business model, investors 
nationally and internationally and of all sizes supporting 
their neighbors. And we have these solutions in place. The 
underwriting standards that occurred were unfortunate, but 
recognizable by significant players. And I always go with the 
one-man statement. If one man could recognize it, whether he is 
running a hedge fund or a public company, and he can identify 
that risk, then those information points were open to everybody 
and all could have avoided it.
    But the markets run on two aspects, greed and fear. And as 
Warren Buffet would say, it is best to be greedy when everyone 
else is fearful, and it is best to be fearful when everyone 
else is greedy. And I think that Darwinism has already occurred 
in these markets, and that a lot of the instruments that 
existed will not exist because the history now is out there.
    Chairman Miller of California. I agree with you. I think 
whatever facility is created to replace the GSE's, these will 
actually act as a conduit. As the private sector is willing to 
step up, the GSE or facility should step down in percentage. 
They should not fight for 60 or 70 percent of the marketplace 
or even 50 percent. If they are only needed for 30 percent, 
that is adequate if the private sector is putting the funds in 
there.
    But when they start to recede, and the private sector is 
not available, that is when the facility needs to step back up 
to keep liquidity in the marketplace and the balance in the 
marketplace. But the big mistake, like I said, I believe is 
when they went public they started fighting for market share. 
They should never be put in a position to fight for market 
share. They should strictly be a conduit.
    I yield to the ranking member.
    Ms. Wachter. I have a partial disagreement with Mr. 
Farrell, although I agree with almost everything he has said. 
However, regarding the statement that what was known to a few 
was therefore known to everybody, or knowable to everybody, it 
certainly was known to insiders that credit conditions were 
deteriorating and how they were deteriorating
    However, it was not systematically known. It was 
anecdotally known to regulators, and even to the Federal 
Reserve Board. In 2006, according to the public record, the 
Federal Reserve Board did know that housing prices were 
probably in a bubble of about 20 percent. But they did not have 
systematic information on the nature of the underwriting 
conditions.
    It would have been very difficult to actually take note of 
all of the possible ways that underwriting was being 
undermined. Also, the validity of the data, of the reporting of 
the underwriting data, is clearly in question. Now going 
backwards and attempting to verify the underwriting is 
difficult.
    Chairman Miller of California. The ranking member will be 
recognized for 5 minutes.
    Mrs. McCarthy of New York. Thank you.
    This has been actually very educational. One of the things 
that I have been doing, not only on this committee, but also on 
the Education Committee, is financial literacy. You brought 
that up as far as people do not really understand what their 
debt ratio is or anything like that.
    In the housing market, we have found that those who went 
for counseling to buy housing--it is not just a mortgage, it is 
the insurance, it is your taxes, it is utilities--these are all 
things that add up. So people who were buying homes and were 
not educated about what they were doing obviously got into 
trouble.
    And some the instruments that were being used, in my 
opinion, were way out of line. Someone who is earning $40,000 a 
year should have never been allowed to buy a $700,000 house. 
That is common sense. And yet it was happening, and we saw it.
    There are two questions that I basically want to ask, one 
to Ms. Walker?
    Ms. Wachter. Ms. Wachter. Thank you.
    Mrs. McCarthy of New York. Wachter, sorry.
    One of the things, basically for this hearing was talking 
about what other countries are doing on how they do their 
mortgages. So how do mortgage products offered in other 
developed countries shape views on homeownership?
    We have been pushing homeownership. That is the great 
American dream. And yet I know that over in Europe, 
homeownership is there, but it is not as prevalent as here, or 
they do not seem to be pushing it as much.
    The second part, for Mr. Farrell, and I am not sure whether 
anybody can answer this, when we look at the private mortgages 
and the mortgage market, it is another part of the economy. Our 
pension funds that have invested. And they can only invest in 
something if it is backed, basically, by the Federal 
Government.
    So if we could have those two answers?
    Ms. Wachter. Yes. It is very difficult to make 
homeownership comparisons that are fair across countries. Many 
countries do not have a vibrant rental market. In fact, the 
expansion of REITs is now ongoing in other countries to 
establish financing for a rental market.
    There may be rent controls or social housing for rentals. 
However, because of this, many countries do not have the option 
for renting. Homeownership is very high in these countries.
    Other countries do have a vibrant rental market, and some 
of them, with mortgage markets similar to ours have lower 
homeownership rates. In particular, Germany has a homeownership 
rate which is significantly lower--in the 50 percent range.
    Mrs. McCarthy of New York. Mr. Dorfman? I saw you shaking 
your head ``yes.''
    Or Mr. Farrell?
    Mr. Dorfman. I was only agreeing with Dr. Wachter.
    Mrs. McCarthy of New York. Oh, okay. I am sorry.
    Mr. Dorfman. Thank you very much.
    Mrs. McCarthy of New York. I thought I saw you shaking your 
head when I was talking about the securities market.
    Mr. Farrell. I would like to, if I may, answer the second 
part of your question about the private mortgages. First off, 
there is a very good report, with a summary of comparisons, 
that I would like to make available for everyone on the 
committee--that was sponsored by the Research Institute for 
Housing American Mortgage Bankers Association--called, ``The 
International Comparison of Mortgage Products Underwriting'' by 
Dr. Michael Lee, which gives you a full picture of the 
different products and the different kinds of policy measures 
being taken in different countries.
    But to your question to me about investment, one of the 
characteristics of mortgages is their cash flow. And that is a 
characteristic that is endemic to every investment, whether it 
is an equity or a debt instrument. And big investors and small 
investors alike--but for the most part people who are making 
significant amounts of capital injections into the market 
everyday, whether they are rolling over debt or they are 
purchasing new debt for a liability that they have, a pension 
fund, retirement fund, etc.--essentially are analyzing those 
cash flows.
    And they will price on top of that what they think that 
guarantee is. I would submit that most sophisticated mortgage 
investors never valued private mortgage insurance as added into 
cash flow, because mortgager products in general, that 
guarantee, is extremely difficult to put back through the 
system and get claims on. It is not an efficient thing.
    So you need to compare the post-bubble market and the pre-
bubble market the same way, as though mortgage insurance would 
not pay off. In the case of Fannie Mae, Freddie Mac, and Ginnie 
Mae, that mortgage insurance has proven to be reliable. It may 
be mispriced, it should have a higher guarantee fee against it, 
which should be beneficial for the communities and beneficial 
for the taxpayers. It should provide some sort of revenue 
income.
    But there is a risk in unwinding that guarantee too 
quickly. Because many investment entities across the globe are 
invested on the precept that guarantee is sacrosanct. And 
because of that, they trade it and they give it a benchmark 
status in terms of risk status, risk-adjusted status, on their 
balance sheets. And that includes our own pension funds here, 
our own banks, and other investment companies throughout the 
world that we speak to.
    I would say that one of the most interesting outcomes in 
the past 50 years for me personally has been that you would 
have thought that the safest mortgage market in the world was 
the Irish mortgage market. It was almost 100 percent variable 
rate, so it would have adjusted with anything that happened in 
interest rates and, in fact, had a homeownership rate around 50 
to 60 percent. When in fact, Ireland has suffered the most, and 
they had no government guarantee behind it. It was all linked 
into the banking system.
    So this was almost inescapable. It is unfortunate that it 
has leaked into the government's coffers the way it has, but 
this is global problem. We can be the first out. And we have a 
huge opportunity in front of us if we get this answer correct.
    Mrs. McCarthy of New York. Thank you. My time is up.
    Chairman Miller of California. Thank you.
    Vice Chairman Dold is recognized for 5 minutes.
    Mr. Dold. Thank you, Mr. Chairman. And I certainly want to 
thank you again for your time. It has been informative.
    One of the things that I think we have not really discussed 
as much in the hearing is foreign investment in the U.S. 
market, and certainly with our mortgage-backed securities. What 
I would like to do if I can is just talk about the structure 
that we have right now.
    Do foreign investors still consider the United States a 
good place to invest in terms of our mortgage-backed 
securities? Are they an attractive investment?
    Mr. Farrell. I would say there are questions about the 
ongoing commitment because of the noise and the actions that 
have happened over the past 2 years. But I would say 
domestically that gap is being filled by investment companies 
within the United States. Certainly, as I said earlier in my 
testimony, we have absorbed in the mortgage REIT industry 
almost all of the supply that has been created over the past 3 
years, primarily through domestic investments.
    Some of that is linked to the dollar, the weakness in the 
dollar and the currency transactions against it. That is one of 
the judgment calls. We have investment pools throughout the 
globe. It is easier to do it in the United States today than it 
is to do it offshore.
    Ms. Wachter. Absolutely key to the stability in the housing 
market and recovery of the overall economy is the willingness 
of foreign investors to hold Fannie and Freddie mortgage-backed 
securities. In fact, the ability of the Fed to assist the 
overall economy in keeping interest rates low, at historic 
rates--and that is the one major plus for the U.S. economy 
today is low mortgage rates--is, hand-in-hand, requiring also 
confidence by foreign investors and domestic investors. But in 
mortgage-backed securities, and the guarantee by the Federal 
Government at this time.
    Mr. Dorfman. There are certainly a significant number of 
foreign investors who simply will not buy an un-guaranteed 
mortgage-backed security. However, there are also a significant 
number, especially those who are heaviest in investable funds, 
who recognize that behind the guarantee there ought to lie, 
there must lie, and at an earlier time, did lie an underwriting 
checks-and-balances system that was intended to ensure that the 
guarantee would never have to come to be exercised.
    Unfortunately, that came out rather differently. But it is 
very critical to stress, as many of you have, that the quality 
of the product going into the process is the very first step to 
ensure that it is going to go out the back end to an 
institutional investor, whether domestic or international, on 
terms that are eagerly bid for and on spreads that are 
ultimately affordable in financing costs to the U.S. worker and 
taxpayer.
    Mr. Dold. Thank you, Mr. Dorfman.
    There is no question, when we talk about underwriting 
standards of old and how we got into this mess, that we are 
longing to try to make sure we are holding more people 
accountable, which I think, Dr. Wachter, goes into your 
transparency argument.
    If we can, obviously, I am of the belief that the GSEs hold 
far too much of the mortgage market right now. I think that is 
not really healthy, from my perspective. But can you, Mr. 
Farrell, talk to me--or anybody else on the panel--with regard 
to, if we were to go in more of a privatized route.
    You were talking about the REITs taking up and soaking up a 
larger portion, or putting additional capital at play. How 
would that affect foreign investment? How does that affect 
foreign investment, especially if we are going to see 
additional--
    Mr. Farrell. The REITs are internationally accepted. In 
fact, many countries are trying to replicate the U.S. REIT laws 
in order to create the same kinds of liquidity that we have in 
this Nation. In fact, REITs, whether they are property REITs or 
mortgage REITs, have indeed absorbed much of the supply from 
the de-leveraging that is going on globally across the world.
    We have done transactions in the U.K., taking back U.S. 
assets into the United States. So it is a recognized, 
internationally recognized, investment vehicle to do that. That 
capital in the private capital sector is available. It is not 
available at the same price as it was 2 years ago. We would 
concur with you that the GSEs hold way too much debt.
    We think that overhang needs to be cleared out. It is like 
an overhang of inventory that needs to be cleared out into the 
secondary markets. We will be in favor of a more rapid 
downsizing of those portfolios to establish those clearing 
prices into the private sector while the environment is in the 
position it is today to finance that.
    Mr. Dold. Okay. And, obviously, the glut of excess 
inventory, if you will. How do we get around that? Because that 
is obviously significant. And I talk to a number of people who 
are in the financial markets. They are saying we have way too 
much inventory out there right now.
    How do we solve that? How do members of this panel try to 
deal with that? Is there some suggestions that you have? And I 
recognize that my time has expired, but that is obviously a 
critical point that we need to address.
    Ms. Wachter. That is the key question. And that goes back 
to the previous point that we do need to, at some point deal 
with the portfolio. But at this point, there is no way that the 
portfolio can be priced and absorbed by investors without a 
guarantee behind it.
    If it were, it would not be a matter of 200 or 300 basis 
points. It would be a matter, I believe, of a perception of a 
much greater risk to the overall economy.
    Mr. Dold. And I know I am stating the obvious, but is not 
it any investment that is guaranteed always a more attractive 
investment? Of course--
    Ms. Wachter. And it is a question of the moment of time.
    Mr. Dorfman. Not necessarily. It is always a question of 
what is the risk versus what is the return. So, clearly your 
lowest risk, the guaranteed product, is going to get you a 
return which is commensurately less because it is less risky, 
and vice versa.
    If I may just take an additional second to expand on Mr. 
Farrell's comment, there is no question that REITs are playing, 
and growing in their activity to play, a critical role in this 
market in terms of absorbing flows of product. On the other 
hand, it also needs to be recognized that in terms of 
maintaining that critical global sector, a key factor, 
especially for a foreign central bank, is liquidity.
    The ability to trade at or near par at a moment's notice 
because central banks have certain duties, including defending 
the national currency when they need cash quickly. The way you 
get liquidity is through uniformity. And guarantee is an 
immense help there because it takes away the question is there 
a credit risk here. We are only dealing with interest rate 
risk. That is, too, a factor to be borne in mind.
    Chairman Miller of California. Mr. Green, you are 
recognized for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Chairman, I would like to take just a moment and thank 
you and the ranking member for this straightforward piece of 
legislation. I think it deals with the concern raised about the 
explicit nature of the guarantee, which is something that seems 
to be of paramount importance in terms of impacting the global 
markets.
    Have we done enough to deal with the underwriting 
standards? Are there some things that we should do more to help 
with underwriting standards? Because those standards did have a 
significant role in the crisis that was created.
    So if I may, I will start with the lady and just this time 
go from my right to left.
    Ms. Wachter. I do not believe we have done enough, 
Congressman. I think that we need more transparency going 
forward. If there was more transparency, then we would have 
more involvement from the private sector at the table. And the 
private sector itself would be more assured, going forward, of 
investor discipline.
    I believe that the Office of Financial Research, the new 
office under Dodd-Frank, could have a role to play in the 
tracking, transparently, of underwriting standards and how they 
evolve over time. Today's underwriting statements, as has 
already been noted, have swung the other degree of the 
pendulum.
    That approach will not and should not be maintained going 
forward. But where will the pendulum swing? Will it swing all 
the way over to the other side again? I do not think so, not in 
the short run. But who knows? And that very uncertainty is, I 
think, troubling and will, going forward, undermine confidence 
in the housing and mortgage market.
    I think we need to take that on. So to address the question 
that was raised earlier by the Chair regarding predatory 
subprime lending, we need to be able to track--in this 
important capital market for homeowners and for the United 
States--the conditions of the underwriting. We need to do a far 
better job of that than is currently being done.
    And that means that there need to be additional steps. 
Whether they are on the regulatory side or on the legislative 
side, they need to be forward.
    Mr. Green. Mr. Veissi?
    Mr. Veissi. The buyback rate, as you mentioned, from Fannie 
and Freddie was probably 3 percent or 4 percent during the same 
period of time as the major banks were at 15 percent and 18 
percent of foreclosure base. What was said here is enormously 
important to understand, especially in the marketplace. And 
that is that you can go to Fannie and Freddie and their 
parameters for accepting a loan are fairly adequate.
    But the lenders are so conservative today that they have 
constricted themselves not to be in a position to be forced to 
buy back any loans at all. So, if you do not have a 800-plus 
credit score, if you are not lily-white, if you do not have 20 
percent down, if you do not register all those things--which 
you do not have to do to sell that loan back to Fannie or 
Freddie--but if you do not do that, they will not loan.
    So yes, the underwriting standards are enormously important 
both in the areas of the 2005-2006 area, where it was 
completely out the window, and today where it swung in the 
opposite direction.
    Mr. Green. Thank you.
    Mr. Dorfman?
    Mr. Dorfman. Just a few comments. First, the market, 
largely because of huge losses taken, has self-cleansed. There 
is no bid for trash. The trash business is finished.
    Second, consumer education is absolutely critical. SIFMA is 
a large supporter of consumer education. Homebuyers, 
homeowners, must understand, as you illustrated before, that 
there is a whole lot more than the mortgage coupon involved in 
owning a house. It is a compendium of expenses.
    And third, and very importantly, just as consumers must 
know what they are doing, institutional disclosure laws and 
institutional due diligence laws--in other words, explain in 
high detail what you are selling and understanding in high 
detail what you are buying and that your price is reasonably 
arrived at--has been introduced. It is under consideration, and 
will ultimately be a tremendous additive to the overall health 
and growth of the market.
    Mr. Green. Thank you.
    Mr. Farrell, I am going to have another question for you. I 
apologize. I will get your answer, but I have another question. 
You mentioned the $1 trillion threshold. And are you 
referencing this number as it relates to the share of the 
market that Fannie and Freddie had at that moment in time? 
Hence it could be a trillion, but if the share of the market is 
a lot less, then it could be acceptable.
    Could you just give me a brief explanation?
    Mr. Farrell. Sure. Thank you for letting me clarify that. I 
am speaking about their debt-to-equity on their balance sheets 
as publicly traded companies, which we estimate from our 
research was around 77-to-1 debt-to-equity when you include 
derivatives.
    So it is not about market share, per se, as it was actually 
the stretch of those balance sheets and the ability to hedge 
those balance sheets, and using tools and techniques that 
really proved unworthy of the size of the dimensions of that 
balance sheet.
    But to answer your other question, I would say that you 
have gotten a very good summary from my colleagues here. I 
would agree with all their bullet points. But I would offer 
also one or two observations.
    From an investor's point of view, the consumers actually 
behave very rationally. When we give them money for nothing, 
they take it. When we offer them 4 percent money, and they have 
to bring more money to the table in order to provide that rate 
because underwriting standards are tight, they are doing that.
    For the first time in my career, most of the closings that 
are going on now involve consumers bringing money to the table 
that they did not have to bring before in order to keep their 
loan-to-value ratios in time. So the Fannie-Freddie credit 
stack, if you will, is getting much stronger as we sit here 
today because of rational behavior by consumers.
    Where we failed was offering them an un-rational rate and 
an un-rational expectation about what the buyout would lead to 
in terms of house price depreciation, etc. None of the models 
could do that. And I think that is--to my colleague's 
statement--``trash is no longer for sale.''
    For a long time, as investors we assumed that house prices 
would always go up 3 percent to 5 percent per year. Every 
investment model also agreed with that. In fact, when it went 
flat and it went negative, that is what destroyed these assets.
    Mr. Green. Thank you, Mr. Chairman.
    Chairman Miller of California. Mr. Garrett, you are 
recognized for 5 minutes.
    Mr. Garrett. Just very quickly, because I was due on the 
Floor 5 minutes ago.
    The entire panel believes that there should be more 
transparency in underwriting. Yes? So there should be more 
transparency in the securitization process? And would there 
also be more transparency as long as we have the GSEs, as far 
as going to fair-value accounting for the GSEs?
    Mr. Farrell. Yes, I think GAAP accounting is extremely 
important.
    Mr. Garrett. Okay for that. So basically the GSEs, both 
their debts and their liabilities, should be corporately 
represented on the balance sheet?
    Mr. Dorfman. In order to attract private capital, private 
capital must know what it is buying into.
    Mr. Garrett. Right. And so far, the Administration has 
opposed all of that. But you would all support that?
    Ms. Wachter. I have not spoken to that.
    Mr. Garrett. Okay. So you disagree?
    Ms. Wachter. I do not have enough information to respond.
    Mr. Garrett. I would like to take a look at that. Because 
that is something that we will be looking at.
    Ms. Wachter. Absolutely, sir.
    Mr. Garrett. Also, because my time is limited, I would 
appreciate--in my opening comments, I spoke about the IMF 
report back in April. And you do not have to give me your 
opinion now, but I would appreciate--since they seem to be 
somewhat contrary to some of the opinions here, where they said 
their study showed, with regard to these, that there is limited 
evidence that it boosted homeownership, made the system more 
efficient, and provided buffers against economic stress. So I 
would appreciate that.
    And finally, on the issue of foreign investment, I think 
Hank Paulson wrote the book, ``The Brink.'' And in it, he 
talked about the fact that somewhere in the year 2008 when all 
this was all happening, there were phone conversations between 
some of our largest foreign investors, which would be Russia 
and China--the largest investors, holders of the GSE debt--that 
perhaps they should get together and begin dumping that on the 
marketplace. You probably heard those stories back then.
    If that is true, and I realize, Mr. Dorfman, all of your 
comments with regard to the importance of foreign investors. Is 
that really something that we need to be concerned about? That 
we are looking to those very same type of investors to be 
holding the debt that potentially could put us in this quagmire 
again?
    Mr. Farrell. I think international investment is an 
important piece of any diversification. The large outstanding 
share of United States GSE debt, I would say more than 78 
percent is held domestically.
    Mr. Garrett. And what was the percentage back in the 1990s, 
ball park?
    Mr. Farrell. That study is actually in this paper here. I 
think that it is pretty consistent that it would be somewhere 
in the 75 percent to 80 percent range.
    Mr. Garrett. Yes.
    Mr. Farrell. It is mostly held by the banking system. REITs 
have grown. We were 1 percent a few years ago, and now we are 
at 3 percent to 4 percent because we have been filling the gap. 
So other domestic entities have grown to do that.
    But I think you do need diversification of capital across. 
It becomes a currency issue, if I may introduce that thought. 
If we are doing trade with China and we are doing trade with 
Russia, and they are getting dollars back, they are going to 
look for the highest investment asset that they can put that 
into.
    And in many cases, it is going to wind up being things that 
are not linked to treasuries. They are not going to buy 
treasuries.
    Mr. Garrett. So you also agree, from their comments, that 
they probably have other interests other than economic. They 
have political issues, as well.
    Mr. Farrell. I would love to have a self-dependent, 
independent United States.
    Mr. Garrett. Yes. And just a clarification. I think it was 
Mr. Green, but maybe not--someone made the point with regard to 
the nature of the defaults that are out there and the fact that 
we have all the 30-year fix. That is what everybody wants and 
that sort of thing, and they are sort of better for various 
reasons.
    But generally speaking, the default rates that we are 
looking at right now, is it not something like 80 percent or 88 
percent of the defaults that you are looking at are in the 30-
year fixed marketplace?
    Mr. Farrell. That is because the vast amount of our assets 
are 30-year fixed--
    Ms. Wachter. But the fixed-rate mortgages have lower--
    Mr. Garrett. So then, basically--
    Ms. Wachter. If I may say so, the fixed-rate mortgage 
rates, all else being equal, have a lower rate of default.
    Mr. Garrett. How can that be? What is the percentage?
    Ms. Wachter. A lower rate of default. But as we just heard 
from Mr. Farrell, they comprise a very large part of the 
market.
    Mr. Garrett. Yes.
    Mr. Dorfman. Yes. If I may?
    Mr. Garrett. Sure.
    Mr. Dorfman. Investors everywhere ought to responsibly 
review their holdings and rebalance, or even enter or exit 
markets completely as they see fit, in their own self-interest.
    Mr. Garrett. Okay.
    Mr. Dorfman. One. And so in your example, China, Russia, 
whoever it may be--and we hold no brief for anyone for or 
against them--whatever they may be, they are very likely not 
suicidal. And the idea, if that is the idea, of a rapid-fire 
wholesale dumping-off of a portfolio would be suicidal. Its 
value would plummet, and that becomes a very problematical 
scenario.
    Mr. Garrett. Sure.
    Mr. Dorfman. I thank you very much.
    Mr. Garrett. Thank you.
    Chairman Miller of California. I want to thank the 
witnesses. You are very, very wise in what you have said. You 
are educated. You spoke from your heart. I think we have come 
away with something I have believed all along, that we have to 
do something to correct the problem. This economy is not going 
to start to turn until we correct the housing problem.
    If you just could put that sector back to work again, the 
unemployment rate would be well below an acceptable rate. And 
the problem that many have and they do not want to accept is 
that GSEs have done poorly but they are doing better than the 
private sector as far as default rates. They just happen to be 
the large elephant in the marketplace. They have the largest 
holdings.
    I agree with you. We need to move forward with something 
that is very thoughtful. We need to not have a knee-jerk 
reaction. Whatever we do, we need to do it right, do it the 
first time. We need to create stability in the marketplace, 
confidence where people do not assume that their house is going 
to be worth less next year than this year.
    We have to do something to stop these foreclosures being 
thrown to the marketplace, further driving the value of homes 
down and creating just unrest out there. I know a lot of 
builders are having problems because their appraisals are 
coming back with liquidation values rather than completion 
values, and it is killing them as far as being able to get 
loans.
    That concludes our hearing. The Chair notes that some 
members may have additional questions for the panel--and I want 
to thank you for your time on that again--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 responses in 
the record.
    At this point, the hearing is adjourned. Thank you.
    [Whereupon, at 12:12 p.m., the hearing was adjourned.]
























                            A P P E N D I X



                            October 13, 2011

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