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



 
                     H.R. __, THE PRIVATE MORTGAGE
                     MARKET INVESTMENT ACT, PART 2

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 7, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-91



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
KEVIN McCARTHY, California           ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
BILL POSEY, Florida                  GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK,              AL GREEN, Texas
    Pennsylvania                     KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 7, 2011.............................................     1
Appendix:
    December 7, 2011.............................................    41

                               WITNESSES
                      Wednesday, December 7, 2011

Calabria, Mark, A., Ph.D., Director, Financial Regulation 
  Studies, Cato Institute........................................    10
Fleming, Mark, Ph.D., Chief Economist, CoreLogic.................    12
Katopis, Chris J., Executive Director, Association of Mortgage 
  Investors (AMI)................................................     8
Poole, William, Ph.D., Distinguished Scholar in Residence, 
  University of Delaware.........................................    17
Salomone, Tom, 2012 Director, REALTOR Party Activities, National 
  Association of REALTORS (NAR).................................    15
Stevens, David H., President and CEO, Mortgage Bankers 
  Association (MBA)..............................................    13

                                APPENDIX

Prepared statements:
    Calabria, Mark A.............................................    42
    Fleming, Mark................................................    52
    Katopis, Chris J.............................................    59
    Poole, William...............................................    81
    Salomone, Tom................................................    86
    Stevens, David H.............................................    94


                     H.R. ___, THE PRIVATE MORTGAGE
                     MARKET INVESTMENT ACT, PART 2

                              ----------                              


                      Wednesday, December 7, 2011

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:08 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Schweikert, 
Biggert, Hensarling, Neugebauer, Campbell, McCotter, McCarthy 
of California, Pearce, Posey, Hayworth, Hurt, Grimm, Stivers, 
Dold; Waters, Sherman, Lynch, Miller of North Carolina, 
Maloney, Donnelly, and Green.
    Ex officio present: Representative Frank.
    Chairman Garrett. Good morning. The Subcommittee on Capital 
Markets and Government Sponsored Enterprises is called to 
order. For this hearing, as previously agreed to with the 
ranking member, each side will have 10 minutes for the purpose 
of making opening statements. And now, we will begin that.
    I recognize myself for 2\1/2\ minutes as we begin this 
hearing on the Private Mortgage Market Insurance Act, Part 2.
    Today, the subcommittee is holding a second legislative 
hearing on the Private Mortgage Market Investment Act. The 
subcommittee held a hearing on this bill on November 3rd. Since 
then, I have been actively reaching out to and working with 
regulators and market participants and other members of this 
subcommittee to make improvements to the bill. I understand 
this is a very complex issue and I welcome another opportunity 
to hear from the public on the merits of this bill.
    Currently, the Federal Government is guaranteeing or 
insuring over 90 percent of the U.S. mortgage market. Everyone 
on both sides of the aisle and all market participants claim 
that they support efforts, then, to bring additional private 
capital back into the secondary mortgage market.
    There are two things that must be done to have private 
capital brought into this space: first, we must begin to roll 
back the government's involvement in the housing market; and 
second, we must take actions to facilitate and increase 
investors' interest in the secondary mortgage market. By 
facilitating continued standardization and uniformity within 
the marketplace, and increasing transparency and disclosure and 
providing legal certainty through the clear rule of law, there 
will be a robust investor participation in the housing market 
without--and this is important--exposing the American taxpayer 
to trillions of dollars of additional risk. So the legislation 
we are discussing today essentially sets up a new qualified 
securitization market.
    The FHFA is tasked with establishing a number of categories 
and mortgages using traditional underwriting standards that 
have different levels of credit risk associated with each one 
of the categories. Also, they are responsible for creating 
standardized securitization agreements in this marketplace. So 
these securitization agreements will standardize the servicing 
contracts, modification process, and reps and warrants, all 
things that provide the investors the ability to put back 
nonqualifying loans.
    The legislation also removes one of the biggest regulatory 
impediments to private capital reentering the market by 
striking the risk retention provision under the current law. 
Now, I do agree that risk retention does have benefits, but the 
way it is currently being implemented will create a multitude 
of negative unintended consequences, we have been told.
    So to bring private investment back to our mortgage market, 
it is essential that the rule of law is clear, specific, and 
upheld; investor rights and contracts must be honored; and by 
facilitating the adjudication of disagreements between 
investors and issuers, clarifying the rules around the rights 
of first lien holders and preventing government-enforced loan 
modifications that could negatively impair investor returns, 
investors will return and have the certainty they need to 
reenter the marketplace and invest in our Nation's housing 
market.
    Finally, in regard to additional transparency and 
disclosure, investors should be empowered and enabled to do 
their own analysis of the assets underlying the securities that 
they invest in. So by disclosing more detailed loan-level data, 
while protecting the privacy of borrowers, and by allowing more 
time for investors to study that information, investors will be 
able to conduct more due diligence and less reliance on the 
rating agencies.
    With all that being said, I look forward to today's hearing 
and a panel engaging in a very productive debate with other 
members of this committee as we try to seek a solution to this 
very most important problem facing the country.
    With that, I will yield 4 minutes to the gentleman at the 
end of the row from Massachusetts.
    Mr. Frank. The subject is obviously of great importance 
because any doubts about the centrality of a healthy housing 
market to our economy or at least--not the centrality but its 
being an important element has clearly been reinforced, and so 
we should be moving forward. And there are some elements of 
this bill where there will be some agreement, but there are a 
couple of things that I wanted to focus on that concern me.
    In particular, I am opposed to the notion of a complete 
repeal of a risk retention requirement. All the studies of the 
problems that led us to the crisis of 2007 and 2008 focused on 
the ability of people to originate loans without any real 
concern for the repayment rate, and to then pass them along to 
securitizers who also were not on the hook for failures.
    The bill does empower the Federal Housing Finance 
Administration in effect to replace that with a series of 
fairly elaborate requirements and it is an interesting increase 
in the regulatory role for the FHFA. Mr. DeMarco has commented 
that it would require a FHFA very much like the current one, 
even if there was to be a complete abolition of the GSEs. But I 
don't think that is an adequate substitute for risk retention. 
It is a reliance on government regulation, which has a role, 
but I still believe that the risk retention method is the best 
because it gives a market incentive to the direct participants. 
It is in the statute as a responsibility for the securitizer, 
with the securitizer legally allowed to work that out with the 
originator.
    I particularly note--and maybe I misread the bill--that 
what it seems to me the bill does is to repeal risk retention 
for all asset-backed securities, but proposes a substitute form 
of safety only for residential mortgages, so that asset-backed 
securities not dealing with residential mortgages are back to 
where we were.
    And as I read, whether it is Gillian Tett in ``Fool's 
Gold,'' or ``The Big Short'' by Michael Lewis, that troubles 
me. I do not think a system in which people can make loans--and 
I will give you an example of a nonmortgage situation. Henry 
Kravis told me publicly at a meeting, that a few years before 
we had talked, he wanted to get some bank loans so he could buy 
a company. Obviously, he didn't want to advertise it for too 
long; he didn't want to bring in a lot of competitors, as I 
have noted. I think the favorite spectator sport of most 
American businesses is competition; they very much like to 
watch other people engage in it. As to being a player, 
sometimes that makes them a little nervous. But Mr. Kravis 
asked a group of banks on Friday afternoon--he told me to let 
him know by Tuesday if they would participate in this loan. He 
thought he was giving them too little time, but by Sunday, he 
was oversubscribed. He said, not wanting to look a gift horse 
in the mouth, he had asked one friend who had offered him a 
loan how he could have possibly done the diligence between 
Friday afternoon and Sunday to tell him that he would subscribe 
to the loan? And the answer was, ``Oh, I just had to ask one 
question. I called in my people and asked them if we could sell 
the loan, and when they told me we could sell the loan, that is 
all the diligence I had to do.'' Now, we will go back to that 
situation if we repeal risk retention entirely and put nothing 
in its place.
    We do have, it seems to me, an overreliance on the ability 
of the FHFA to do it, but at least there is a potential or 
proposed substitute for it there. But doing away with risk 
retention entirely in matters unrelated to residential 
mortgages and leaving no protection against that kind of risk-
free lending seems to me to be a grave error.
    Chairman Garrett. The gentleman yields back.
    The gentleman from Arizona is recognized for 1\1/2\ 
minutes.
    Mr. Schweikert. Thank you, Mr. Chairman. I first want to 
give a gigantic thank you to my chairman for jumping in, wading 
into this. It is like the gigantic onion. Every time we peel 
one layer back, we find out there are dozens underneath it with 
more and more complications and details.
    One thing I will particularly ask the panel to do is as you 
look at the Garrett bill in the outline, details, mechanics--
and when providing those details a little less of here is how 
we used to do it, you know; in 2006, this is what the TBA 
market did, how it functioned; this is how correspondent 
lending worked.
    It is what do you believe that type of market is going to 
look like in the coming years. I am reading a number of 
articles where correspondent lending may shrink down 
dramatically. The mechanics of what would a to-be-announced 
market really look like if you and I were trying to create the 
design of future mortgage lending and securitization and 
keeping a safe, protected system working.
    So much of what my minute-and-a-half here is to ask all of 
you to reach into your thoughts, and provide us as much detail 
as you can so we can craft as quality a piece of legislation as 
possible. I yield back, Mr. Chairman.
    Chairman Garrett. And the gentleman yields back.
    The gentlelady from California is recognized for 3 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. As you know 
and as you said, this is the second hearing we have had on your 
discussion draft to reform the private mortgage-backed 
securities market. I appreciate that this hearing is another 
opportunity to hear from stakeholders, particularly since the 
first hearing we had on this draft didn't include the full 
range of industry perspectives.
    As I said at our last hearing a month ago, I believe that 
bringing certainty and uniformity to how mortgage-backed 
securities are underwritten, securitized, and sold is a useful 
goal. Again, I am also pleased that you recognize that 
government should have a large role in creating clear rules of 
the road for this market. Specifically, I appreciate that this 
bill includes reforms to the mortgage servicing industry, 
something I have been advocating for quite a long period of 
time. Servicer conflicts of interest clearly need to be 
prohibited.
    I also think that some of the disclosure requirements in 
this bill will be very useful in creating transparency, thus 
bringing confidence and certainty to the market. Such 
provisions, if they had been implemented earlier, could have 
prevented much of the litigation we see today between mortgage 
investors and entities that securitized and originated 
mortgages.
    However, with that said, I would like to reiterate my 
concern and disagreement with you, Mr. Chairman, on your goal 
of repealing the risk retention requirements in Dodd-Frank 
provisions included in this bill. More than that, I would like 
to again express my concern about how this bill fits with the 
larger context of GSE reform. The bill does not address whether 
or when Fannie Mae and Freddie Mac should be wound down. It 
says nothing about the transition to the new system. It is 
silent on all of the tough questions that Congress should be 
wrestling with.
    Mr. Chairman, do we even know if this bill will ever be 
marked up in full committee, or will it languish in 
subcommittee like the other housing finance bills we have 
considered?
    I raise these questions because I am concerned about how 
the Congress will move forward on this issue. I think we need 
to stop pursuing GSE reform in a piecemeal fashion. Currently, 
there are three comprehensive reform bills that have been 
introduced in the Congress: one comprehensive GSE privatization 
bill from Representative Hensarling; and two bipartisan reform 
bills from my colleagues in California--one from Representative 
Miller and the other one from Representative Campbell.
    Clearly, if Representative Garrett's bill were adopted, at 
least one of those comprehensive reform bills would need to 
supplement it in order for the country to transition to a new 
housing finance system.
    It is my belief that in addition to the reforms to private 
labor mortgage-backed securities contemplated in Representative 
Garrett's bill, there should be some government role assuring 
liquidity for access to our mortgage market. So I would urge my 
colleagues to consider a bipartisan, comprehensive approach 
along those lines rather than continuing to pursue piecemeal 
reform.
    With that, I thank you, Mr. Chairman, and I yield back the 
balance of my time.
    Chairman Garrett. And the gentlelady yields back.
    We turn now to the gentleman from New York for 1\1/2\ 
minutes.
    Mr. Grimm. Good morning, everyone. Thank you, Chairman 
Garrett, for holding this hearing, and thank you to the 
witnesses for being here to testify.
    I think we can all agree that the current situation in the 
mortgage market is not sustainable over the long run. 
Currently, the United States underwrites or guarantees in one 
form or another over 90 percent of new mortgages. And while 
this could arguably have been necessary over the last several 
years in the wake of the financial crisis and the obvious 
withdrawal of private capital from the mortgage market, it is a 
situation that cannot continue indefinitely.
    It is of vital importance that we take seriously the need 
to create a workable framework where private capital will feel 
secure in returning to the U.S. mortgage market. I think we can 
all agree that the need to clarify issues surrounding 
underwriting standards and representations and warranties is 
critical in regaining that confidence in both the originators 
of mortgage securities as well as mortgage investors.
    However, I do acknowledge that there remain many 
differences of opinion on how to best go about achieving this 
goal, while realizing that the process of reducing the 
government's role in housing finance is one that cannot be 
taken lightly. For example, in my hometown of New York City, 
real estate and related industries account for 25 percent of 
the economy. A sudden shock to an already battered real estate 
market would do great harm to that local economy.
    That is why I look forward to hearing our witnesses' views 
on the legislation. And I do believe that your views will, when 
shared with us, aid us in the process of shaping a 
comprehensive solution going forward. And again, I thank you. I 
yield back.
    Chairman Garrett. The gentleman yields back.
    The gentlelady from New York is recognized for 3 minutes.
    Mrs. Maloney. Thank you. Thank you, Mr. Chairman. And 
welcome to the witnesses. I respect Chairman Garrett's hard 
work, but on this bill, I do not support it and I have 
significant concerns.
    An effort to restart the private securitization market is 
an important one, especially since we can't continue to have 90 
percent of the mortgages guaranteed by the government. I do 
support some parts of the bill, such as standardized 
documentation and mortgage servicing standards, but I am 
completely opposed to any repeal of the risk retention 
requirements of Dodd-Frank. The bill repeals all of the risk 
retention requirements for all securities, not just mortgages, 
which is the topic of the bill.
    Section 941 of Dodd-Frank would be repealed without 
providing any alternative other than giving discretion to the 
regulators. And that is exactly what happened leading up to the 
crisis of the ``Great Recession.'' Repealing 941 would remove 
the market mechanism in Dodd-Frank to make sure that 
securitizers don't swindle investors, and it would return to us 
the attitudes and actions that led to the recession. At that 
time, no one cared about the quality of the loans they were 
making. That is how we got no-doc loans, how we got no 
information, no downpayment. The joke in New York was if you 
can't afford your rent, go out and buy a house; it is so easy, 
they don't ask you anything. They will sell you the house and 
turn around the next day and securitize the loan with no skin 
in the game. And it led us up to the crisis that we are now 
trying to recover from.
    I really do believe that risk retention is a key safety and 
soundness principle which, if anything, we should make stronger 
not delete, as this bill does.
    I also question why the FHFA is the regulator, and not the 
SEC. The SEC oversees securities and the bill exempts mortgage-
backed securities from oversight, but does not replicate the 
SEC's investor protections. If anything, Dodd-Frank directed 
the SEC to strengthen the MBS market. I don't see how this bill 
provides any equivalent protections.
    So I look forward to the testimony and I do think we need 
to look at ways that we can reform the whole GSE process, but 
we should not do it in a way that weakens safety and soundness. 
I yield back.
    Chairman Garrett. Mr. Dold is recognized for 1\1/2\ 
minutes.
    Mr. Dold. Thank you, Mr. Chairman, and I certainly want to 
commend you for your hard work and leadership on this issue 
which I believe is so very important for our economy and for 
American families.
    So far, the GSE losses have amounted to nearly $200 
billion, and American taxpayers are already stuck with that 
bill. Things are likely, in my opinion, to get even worse. On 
top of that nearly $200 billion in existing and indefinite 
losses, taxpayers are also effectively responsible for all the 
losses that will ultimately arise from over $5 trillion in 
existing total mortgage debt that the GSEs now own or 
guarantee.
    And even with taxpayers remaining exposed to this enormous 
and unsustainable liability, our housing market remains 
severely challenged. Private sector investors and lenders have 
been driven completely out of the market. Consequently, 
families struggle to get new mortgages to buy a home. 
Homeowners frequently can't sell or refinance their homes, and 
house values continually decline. This situation is plainly 
unsustainable for taxpayers, for homeowners, for home buyers 
and, I would, argue for our economy as well.
    Clearly, our mortgage financing system is badly broken, and 
I believe it must be fixed. Instead of a mortgage market 
dominated by the Federal Government and taxpayer guarantees, we 
need bold new solutions that will create the conditions for the 
private sector's return to the mortgage financing market 
without the taxpayer guarantee. To create those private sector 
conditions, we need a legal framework that establishes and 
enforces uniform standards, transparency, and legal certainty 
for the private sector lenders and investors.
    So I look forward to hearing from our witnesses today and 
working with my Democratic and Republican colleagues to 
effectively address what I believe is a critical problem for 
our country. Thank you, and I yield back.
    Chairman Garrett. The gentleman yields back.
    The gentleman from Texas is recognized for 1\1/2\ minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. I would like to 
applaud you for your work on the Private Mortgage Market 
Investment Act, which is obviously designed to stimulate 
private investment in our mortgage market.
    We all know that today the status quo of government 
domination is totally unworkable and totally unsustainable. 
When we have 90 percent of all originations and roughly 99 
percent of all securitizations that are government-guaranteed, 
this cannot remain. It is an unacceptable risk for the American 
taxpayer at a time when their Nation is, unfortunately and 
regrettably, on the road to bankruptcy.
    Clearly, the private market cannot compete with government 
guarantees. It can't be done. Even the Obama Administration has 
agreed and said, ``Private markets should be the primary source 
of mortgage credit and bear the burden for losses.''
    So with the losses in Fannie Mae and Freddie Mac tipping 
the scales at roughly $200 billion, it is now time to begin 
winding down this financial commitment so the taxpayers are 
protected and private markets can begin to compete. Eliminating 
the government-sanctioned duopoly of Fannie and Freddie is only 
part of the solution. We also have to cultivate the private 
mortgage market, and that is why this Act is a very important 
first step.
    The legislation also would repeal the risk retention 
provisions of Dodd-Frank, which are at odds with our attempts 
to reduce the government footprint in the housing market and 
have been universally panned as completely unworkable.
    I look forward to working with the witnesses, and I yield 
back the balance of my time.
    Chairman Garrett. The gentleman yields back.
    We have two more speakers, for 45 seconds each. The 
gentleman from California is recognized for 45 seconds.
    Mr. McCarthy of California. Thank you, Mr. Chairman. I will 
therefore make it brief. It has been said that there are things 
about this bill on which there is agreement and things on this 
bill on which there is not. But I think the greater question 
is: Is this bill the solution to our housing finance crisis, 
and is this the comprehensive solution? I think the answer is 
clearly no; that bits of it may be a part, but that there is a 
lot more that needs to be done. And I will be interested in 
hearing from the panel on that point, as I think you have heard 
other people say, is that there will be a lot more that needs 
to be done if we are to fix housing finance and thereby housing 
and thereby the economy. I yield back.
    Chairman Garrett. The gentleman yields back.
    The gentlelady from New York for 45 seconds.
    Dr. Hayworth. I thank the chairman and I thank him 
especially for his work on this crucial issue. I note the 
presence of Peter Wallison here, whose dissent from the FDIC I 
recommend to everyone who may not have read it. The marvelous 
concept we are honoring here is that we are endeavoring as 
expeditiously as possible to remove the moral hazard that is 
implicit in a Federal guarantee of the mortgage marketplace. So 
by whatever means we can accomplish that crucial goal and put 
responsibility and trust back in the hands of those who confer 
mortgages and those who create securities, we will advance the 
prosperity of the American people.
    I look forward to your comments, and I think it is crucial 
that we continue this work with all due speed. Thank you, Mr. 
Chairman.
    Chairman Garrett. That concludes the opening statements.
    And now, we will hear from the panel. Again, as I said 
before, thank you very much to the entire panel for coming here 
and sharing with us your two cents and answering any questions 
that will follow. You will each be recognized for 5 minutes. 
Your complete written statements will be made a part of the 
record. You can summarize your statement, hopefully, within 5 
minutes.
    We will begin with Mr. Katopis from the Association of 
Mortgage Investors.

STATEMENT OF CHRIS J. KATOPIS, EXECUTIVE DIRECTOR, ASSOCIATION 
                  OF MORTGAGE INVESTORS (AMI)

    Mr. Katopis. Thank you, Chairman Garrett. Good morning, 
Ranking Member Waters, and distinguished members of the 
subcommittee. Thank you for the opportunity for the Association 
of Mortgage Investors to testify on these important concepts 
and the proposed draft legislation.
    To make sure everyone is on the same page, let me briefly 
summarize some facts about the mortgage market that was. The 
U.S. mortgage market is awesome, $11 trillion of mortgage loans 
arising from three--and only three--sources; bank balance 
sheets which we know are full and stressed; the GSEs; and 
private capital through securitization.
    At its height, 60 percent of the mortgage loans were 
securitized. Today, that has ground to a halt. It is not our 
choice. Representative Schweikert runs around Arizona saying 
Mortgage Investors are on strike. We have billions we would 
like to put into the mortgage market, but we can't for the 
reasons that are the purpose of today's hearing.
    I just want to note for everyone's benefit who Mortgage 
Investors really is. We are not just a bunch of investment 
companies; we partner with public institutions like pension 
funds, retirement systems, university endowments, unions, and 
life insurance companies. So we are working with Main Street to 
put money into the mortgage market. When we can't, that hampers 
returns. It also hurts people in your district like seniors, 
first responders, and others. So we are eager to work with you 
on solutions.
    We also feel it is abused by some of the big box servicers, 
as some people in your district. And we want to work with you 
on solutions to addressing elements of the mortgage crisis, and 
how to help distressed borrowers.
    So with that, let me talk about the bill and the text and I 
want to start by first sincerely commending you, Chairman 
Garrett, for acknowledging the issues facing Mortgage 
Investors. We are very humble that it seems you read our White 
Paper and took many of the issues from our White Paper and put 
those concepts into the legislative draft that we are looking 
at today. We would like to work with you on fine-tuning those 
concepts.
    As AMI has testified before, we testified in September, 
there are a number of issues that face investors, including the 
servicer conflict of interest, and the breakdown around reps 
and warranties. Our written testimony details extensively the 
problems investors are having with trustees whom we believe are 
not honoring their contractual obligations under the PSAs. They 
are not abiding by their common law obligations. So there are a 
number of concepts you touch on. We would like to work with 
you. The truth is, investors price risk; we cannot price the 
unknown. So to get back into the market, we need the clear 
rules of the road that were alluded to. We need certainty, 
transparency, and uniformity. We need the execution of 
contracts, rule of law. So we appreciate all the work the 
committee is doing.
    I want to say that the Investors do appreciate a role of 
government in the mortgage market to be a prudent regulator, to 
set standards, systems, and structures to move forward. We do 
not want to see government burden taxpayers with the liability 
around the unsound mortgages, so we appreciate your work in 
that respect, your work in leveling the playing field, and we 
also want to mention the work that you have done regarding 
leveling the playing field by eliminating the government 
subsidy and raising G fees with bills such as H.R. 1222. That 
is appreciated.
    But the staff has also encouraged me to drill down on some 
concepts that we would like to see fine-tuned in the bill. I 
just want to mention that we last year joined a number of 
financial services trade associations praising the FCC's Reg 
AB, which did a number of things, including providing a 
cooling-off period, and enhanced disclosure, things that are 
included in this bill.
    In terms of skin in the game, in terms of protecting 
investors, one thing we would like to see is some entity 
policing the trusts. You have touched on that concept in this 
draft. Page 11 provides for an independent third party. We 
would like to work with you to refine that, among other things. 
I just wanted to highlight that.
    The SEC proposed something called the credit risk manager, 
which is sort of a supertrustee. We think that is a more robust 
regime to police trusts. So I would like to continue this 
dialogue with you at the appropriate time and work with you on 
a number of concepts to bring Mortgage Investors back to the 
crowd in private capital, including working on enhancing the 
plumbing of the mortgage finance system as well as fixing 
things like the national note recordation system, maybe a MERS 
II one day.
    Thank you, and I am happy to answer any questions and take 
any comments.
    [The prepared statement of Mr. Katopis can be found on page 
59 of the appendix.]
    Chairman Garrett. I thank you, and I appreciate the detail 
of your testimony in the past, and that you have provided to 
the committee today as well.
    Moving on--Dr. Calabria, welcome once again to the 
committee.

   STATEMENT OF MARK A. CALABRIA, PH.D., DIRECTOR, FINANCIAL 
               REGULATION STUDIES, CATO INSTITUTE

    Mr. Calabria. Thank you, Chairman Garrett, Ranking Member 
Waters, and distinguished members of the subcommittee. Thank 
you for the invitation to appear at today's hearing. I also 
want to commend the chairman for his efforts.
    While I believe we cannot replace our current mortgage 
system completely with private-label mortgage securities, I do 
believe the draft legislation before the committee is an 
important step. I would also prefer to see much quicker efforts 
to eliminate Fannie and Freddie. I do believe fostering 
alternatives in the interim is much better than doing nothing 
at all. I think we should bear in mind that as long as the 
heavy hand of subsidized government is tilting the scales, any 
private market solution is going to be hobbled.
    My testimony will focus on the discussion draft before the 
subcommittee. But I want to make some specific comments, that 
we should bear in mind that you can have too much 
standardization and too much uniformity. I like to have a 
little variety in the marketplace. I think we should have a 
diversity of options. I think one objective of our Federal 
mortgage policy should be to have a wide variety of options 
available to borrowers without unduly advantaging any 
particular product.
    The approach of Title I of the draft is that of 
standardizing mortgage pools by risk, and allowing those 
standardized pools to have an exemption from the registration 
requirements under the 1933 Securities Act. I believe this is a 
reasonable approach to fostering a liquid market for private-
label securities.
    And while I do question the expertise of the Federal 
Housing Finance Agency in the area of securities disclosure, I 
would prefer the SEC. With that said, I believe the structure 
of Title I and the involvement of FHFA is a reasonable interim 
step. Perhaps to keep it as an interim step, the subcommittee 
could include a reasonable sunset provision for the authorities 
under Title I. I would suggest something like 6 years.
    But moving on to what I think is maybe the most 
contentious, but certainly the most important part of Title I, 
is the repeal risk retention provisions of Dodd-Frank contained 
in section 1 or 2 of the discussion draft. I believe this is 
one of the more crucial provisions of the draft, and I strongly 
encourage its inclusion. I say this with all due respect to the 
effort that was put in by the Members, and the statements of 
the Members this morning, but I think that is built upon a 
false premise, which is that various participants did not 
obtain sufficient risk. For instance, the bulk of losses that 
Fannie Mae and Freddie Mac suffered are from the credit 
guarantees of their MBS. If Freddie and Fannie had not obtained 
that credit risk, and instead flowed to the holders of the 
mortgage-backed securities, the taxpayer would be better off 
today.
    The same holds with the various off-balance sheet entities 
used by the largest commercial investment banks. The primary 
problem with these special investment vehicles was that the 
sponsoring bank did retain the credit risk rather than transfer 
it.
    So to summarize, one of the problems of our existing 
securitization model is it too often allows for securitization 
without the actual transfer of risk. I will also note that 100 
percent retention of the credit risk did not prevent the S&L 
crisis. So, again, you can have all sorts of credit risk 
retention, but I don't think that is a fix. Again, I would 
mention as well, if credit risk retention is such a great 
thing, why do we exempt FHA? If it is terrific, it should be 
for everybody, in my opinion.
    Moving on to Title II disclosure requirements for non-
exempted securities, I quite frankly prefer to have these 
standards drafted by private market participants. As many of 
these ongoing private sector initiatives were mentioned at the 
previous hearing, I am not going to repeat them today, but I 
would only suggest that since these private efforts are 
currently under way, I believe Title II could be absolutely 
deleted completely without an adverse impact to the bill.
    Moving on to Title III, while the presence of a second lien 
is undoubtedly a risk factor, I have concerns about section 
301(a) and 301(b) as they would, in my opinion, rewrite 
existing contracts, something which I believe is always and 
everywhere harmful and destructive to the trust in our markets. 
I will note it does not matter whether a rewriting of a 
contract is meant to benefit the borrower or lender. For 
instance, I read section 301(a) as essentially a forced 
transfer from borrowers to servicers. So I would argue for 
deleting those sections.
    Regarding 302, while there are clearly substantial 
conflicts of interest to servicers of a second lien themselves 
or holders of a junior lien, I think a blanket prohibition on 
future interest by mortgage servicers is much too broad. There 
may well be situations where a junior interest held by 
servicers is beneficial to both junior and senior lien holder. 
So I think you need to rethink some modification to section 
302.
    I again want to emphasize, I commend the chairman for his 
efforts. I think much of the modification of this bill would 
make it something that would work and a lot of sense. I also 
emphasize I can't think of an issue that I think should be 
higher up on the priorities of the committee and the 
subcommittee than reform of our mortgage finance system.
    I would emphasize as well that I have worked on a number of 
pieces of legislation in my time, and read a number of pieces 
of legislation in my time, but I have yet to see a perfect 
bill. So I don't think my criticisms should be taken to say we 
should not move forward. I do think the effort merits 
considerable consideration.
    [The prepared statement of Dr. Calabria can be found on 
page 42 of the appendix.]
    Chairman Garrett. I thank you for your testimony. I also 
thank you for that last comment because I was getting a little 
worried as you were going along there.
    Mr. Fleming, we appreciate you being with us today. You are 
recognized for 5 minutes.

  STATEMENT OF MARK FLEMING, PH.D., CHIEF ECONOMIST, CORELOGIC

    Mr. Fleming. Chairman Garrett, Ranking Member Waters, and 
distinguished members of the Subcommittee on Capital Markets 
and Government Sponsored Enterprises, CoreLogic appreciates the 
opportunity to submit its testimony regarding Congressman 
Garrett's proposed bill addressing our country's residential 
mortgage securitization market, the Private Mortgage Market 
Investment Act.
    My name is Mark Fleming, and I am chief economist of 
CoreLogic. CoreLogic is a leading provider of consumer, 
financial, and property information, analytics and services to 
business and government. Our company combines public, 
contributory, and proprietary data to develop predictive 
decision analytics, provide business services that bring 
dynamic insight to our customers in the residential mortgage 
origination, securitization, and servicing markets, as well as 
other private sector institutions in government.
    CoreLogic's information resources include over 500 million 
historical real property and mortgage transaction records; 
monthly performance information on the vast majority of 
conforming as well as private-label securitized loans; insight 
in a majority of loan applications being originated today; and 
the Nation's largest contributory mortgage fraud database.
    CoreLogic is supportive of the return of robust loan 
origination servicing, trading, and securitization markets as 
over 1 million users rely on CoreLogic to assess risk, support 
underwriting, make investment and marketing decisions, prevent 
fraud, and improve their business performance.
    Unfortunately, many of our customers are being severely 
impacted by the lack of liquidity that has pervaded the non-
agency residential mortgage-backed securities market for 
several years. The housing market is beset by headwinds. The 
shadow inventory is currently 1.6 million units, or a 5-month 
supply. While down 16 percent over a year ago, this is 
primarily driven by the declining rate of serious 
delinquencies.
    There are 22.1 percent, or 10.7 million mortgage households 
underwater in the third quarter, down from 23 percent in the 
second quarter, but primarily due to foreclosures as opposed to 
house price gains. There are 22 million, approaching half of 
all mortgaged households, who have either insufficient or 
negative equity; that is, greater than 80 percent current 
combined loan-to-value ratio. And many have well above current 
market interest rates. Negative equity will persist for years 
to come, taking more than 10 years in some markets for the 
average underwater borrower to regain positive equity.
    No one single policy or prescription can heal the housing 
market, but regulatory certainty, establishing underwriting 
uniformity, standardization of legal documents, and 
transparency is critical to the future of efficient allocation 
of private capital to finance mortgage assets.
    Any resolution will require that the Private Mortgage 
Market Investment Act identifies as crucial: uniformity of 
underwriting standards of securitized assets; standardization 
of the securitization process; and granular loan-level 
understanding of the credit risk associated with residential 
mortgage-backed securitizations.
    The return of private capital to the residential mortgage 
market hinges on the return of liquidity, which in turn is 
dependent on at least four elements: trust in what is being 
offered; understanding of the product; sufficient information 
upon which risk-adjusted pricing can be agreed upon; and 
monitoring of the investments and purchases made.
    One of the greatest failures of the RMBS market was the 
mistaken belief that an upfront outlay for appropriate loan 
diligence was not worth the cost; that the ever-rising house 
price market would cover any deficiencies that may have existed 
in the loan underwriting process.
    Empowering investors with the necessary data to use the 
many solutions available today to better measure credit risk 
and perform appropriate levels of due diligence--that is, trust 
but verify--is critical to regaining the trust and 
understanding of what is being offered in the RMBS security.
    Had RMBS transaction participants employed even a few of 
the available diligence tools at the time of securitization, we 
believe substantial losses could have been avoided.
    Data and analytics providers to the securitization industry 
are actively making comprehensive information more available 
than ever before. With gains and technology in data mining and 
the incorporation of scientifically validated methodologies, 
these analytics will not only uncover deficiencies at the time 
of origination or securitization, but during the life of the 
loan and the security within which it resides.
    The ability of third parties and investors to independently 
assess the accuracy of issuer-provided information creates a 
framework for issuers that we believe can enhance the goal of 
skin in the game.
    CoreLogic is thankful to Congressman Garrett for his 
efforts in promoting rational securitization practices through 
his introduction of the Private Mortgage Market Investment Act. 
As provider of the transparency-based information that PMMIA 
calls for, we are encouraged by the recognition of how data and 
analytics can help lead the way toward the restoration of a 
liquid residential mortgage-backed securities market.
    Thank you. I will be glad to answer your questions.
    [The prepared statement of Dr. Fleming can be found on page 
52 of the appendix.]
    Chairman Garrett. I thank you as well.
    Mr. Stevens, good morning and welcome.

  STATEMENT OF DAVID H. STEVENS, PRESIDENT AND CEO, MORTGAGE 
                   BANKERS ASSOCIATION (MBA)

    Mr. Stevens. Good morning. Thank you, Chairman Garrett and 
Ranking Member Waters.
    While my written statement is far more comprehensive, I 
would like to open with some brief comments. The proposed 
Private Mortgage Market Investment Act is aimed at achieving 
our shared goal of opening a pathway to a sustainable real 
estate finance system. As the MBA has consistently stated, the 
current environment in which the Federal Government owns, 
securitizes, or guarantees nearly every mortgage is both 
unsustainable and undesirable. I am pleased that we agree on 
the most important fundamental point: Private capital must be 
at risk, bearing the first loss, and private capital must be 
the primary source of liquidity for the mortgage market.
    I would also like to mention other features that MBA's 
recommendations share with the legislation we are discussing 
this morning. For instance, we agree that the secondary market 
needs common standards, consistency, and transparency for all 
market participants in order to attract private capital. Your 
bill, Mr. Chairman, offers a way to accomplish these goals.
    By facilitating predictability and reliability, 
standardization helps investors measure the risk exposure, 
particularly in the TBA market. MBA also appreciates that the 
bill provides for the establishment of different classes of 
standardized mortgage properties. Safe, well-defined product 
standards help consumers compare financing options. For 
investors, the core market will establish performance standards 
for pricing purposes.
    I also want to comment on the bill's repeal of Dodd-Frank's 
risk retention requirements. A key issue for our residential 
and commercial members is this particular provision. Risk 
retention is a well-intended means for better aligning the 
interests of mortgage market participants, and the MBA was a 
leading advocate for establishing an exemption for safer 
Qualified Residential Mortgages, or QRM. Regrettably, the 
proposed rule with its QRM definition and creation of a premium 
capture cash reserve account, loan-to-value requirements, and 
debt-to-income ratios is so deeply flawed that we seriously 
question whether it reflects congressional intent or can ever 
be successfully implemented. Until we see a final rule, it may 
be premature to call for repealing this provision, though I 
fear that day may not be far away.
    In my remaining time, Mr. Chairman, I want to turn my 
attention to the broader issue of GSE reform. Your legislation 
helps build a bridge to a future housing finance system, but 
determining what that system will look like is also of 
paramount importance. We believe the financial crisis proved 
that some form of government support is required to keep the 
mortgage market open during times of severe distress.
    The current dearth of activity outside of government-
supported liquidity channels exemplifies the transient nature 
of private capital. When the market becomes unstable, private 
investors will exit and will be less apt to buy assets, even in 
good times, if they doubt their ability to sell them in bad 
times.
    To be clear, MBA believes the government's role should be 
to promote liquidity for mortgage finance, not to provide the 
capital for it or absorb all the risk itself.
    MBA has proposed an FDIC-type insurance structure, fully 
funded by private capital, from risk-based fees on market 
participants, and limited to core mortgage products. As with 
the FDIC, taxpayer funds would only come into play if the 
capital of the securitizing entity and the insurance fund were 
both exhausted. Again, like the FDIC, taxpayer funds would be 
returned as the fund is replenished.
    It is important to note that the absence of a guarantee 
does not mean that the government will not be forced to step in 
during a crisis. In fact, GSE securities have always stated 
they are not backed by the government. The most recent crisis 
has shown the government's willingness to support even 
institutions that lacked an explicit guarantee. The taxpayer is 
better protected and the market will operate more efficiently 
if the rules of the road are clearly stated upfront, and 
government guarantees are clearly delineated and paid for 
before the crisis occurs.
    I want to conclude by mentioning that even though a new 
housing finance system may be years away, the steps we take 
today will influence the system's ultimate design. With that in 
mind, it would be inefficient, if not downright wasteful, to 
dismantle portions of the existing infrastructure before a 
proven new structure is in place. The existing system, market 
practices, and human capital are the result of decades of 
effort, public investment, and billions of dollars of private 
capital. Retaining these assets through an orderly transition 
is in all of our best interests and will promote a smoother 
economic recovery. Thank you.
    [The prepared statement of Mr. Stevens can be found on page 
94 of the appendix.]
    Chairman Garrett. Mr. Salomone?

   STATEMENT OF TOM SALOMONE, 2012 DIRECTOR, REALTOR PARTY 
      ACTIVITIES, NATIONAL ASSOCIATION OF REALTORS (NAR)

    Mr. Salomone. Good morning, members of the Capital Markets 
Subcommittee. On behalf of the 1.1 million members of the 
National Association of REALTORS, thank you for holding this 
important hearing on increasing private capital participation 
in the secondary mortgage market.
    My name is Tom Salomone of Coral Springs, Florida. I am 
NAR's committee liaison for the issues of mobilization, 
political involvement, and REALTOR political action 
committees.
    I have been a REALTOR for more than 33 years, and I am the 
owner of Real Estate II and Real Estate II of Margate, both in 
Florida. The firm specializes in residential real estate. As 
with many of my colleagues who have testified before this 
committee in the past, my life, my passion, is real estate.
    REALTORS agree with Chairman Garrett that greater 
transparency is needed in the trading of mortgage-backed 
securities. We believe that concepts within this legislation 
are a good attempt to bring stability and confidence back to 
the housing finance sector. The concept as posed in this 
legislation that focuses on standards and uniformity and 
transparency dovetail nicely within with NAR's first principle 
for second mortgage market reform that states: An efficient and 
adequately regulated secondary mortgage market is essential to 
providing affordable mortgages to consumers.
    Also, REALTORS agree an increase in private capital to the 
secondary mortgage market will help reduce the need for large-
scale government involvement in this portion of the housing 
finance sector. However, we do believe that even with the 
influx of private capital, it remains a role for the government 
and the conventional conforming space. Therefore, to restore 
confidence in the market, improve the efficiency and 
effectiveness of the housing finance system going forward, and 
to ensure the continued availability of mortgage capital under 
all economic conditions, concepts from this proposed 
legislation must be coupled with the comprehensive strategy for 
reforming the entire secondary mortgage market, including 
Fannie Mae and Freddie Mac.
    REALTORS believe examples of bills that this legislation 
could be paired with are H.R. 2413, introduced by 
Representatives Gary Miller of California and Carolyn McCarthy 
of New York; and H.R. 1859, introduced by Representatives John 
Campbell of California and Gary Peters of Michigan.
    REALTORS believe that the secondary mortgage market should 
be reformed to strengthen it for the long term. In fact, we 
agree with lawmakers in the Administration that taxpayers 
should be protected, private capital must return to the housing 
finance market, and that the size of government participation 
in the housing sector should decrease if the market is to 
function properly. Those who advocate for constraining or 
removing entirely government participation from the secondary 
mortgage market need only to look to the current minuscule 
activity in the jumbo and manufactured housing mortgage markets 
to understand the implications of private capital as the sole 
participant in the secondary mortgage market. The result of 
this is a tightening of credit that has prohibited well-
qualified borrowers from accessing funds required to purchase a 
home.
    Unique to the U.S. housing finance sector is the 
availability of long-term fixed mortgages like the 30-year 
fixed-rate mortgage. We believe that full privatization of the 
secondary mortgage market, even with the rules put in place by 
the Private Mortgage Market Investment Act, could foster 
mortgage products that are not adequately aligned with the 
needs and in the best interests of the Nation's housing 
consumer.
    Ultimately, REALTORS believe that moving to a fully 
private secondary mortgage market could make the affordable 30-
year fixed-rate mortgage disappear. In fact, early NAR survey 
data shows that consumers who are now above the new lower GSE 
loan limit are experiencing significantly higher interest rates 
and the need for substantially larger downpayments in order to 
receive scarce mortgage funding. This is leading to a loss of 
interest in real estate.
    Finally, REALTORS fear that in times of economic upheaval, 
a fully private secondary mortgage market will largely cease to 
exist, as has occurred in the jumbo and commercial mortgage 
markets. This would be fatal to the entire economy because the 
disappearance of affordable, predictable long-term mortgage 
funding would no longer be available, which would cripple the 
wide variety of industry supported by the residential housing 
market.
    In conclusion, the National Association of REALTORS 
applauds Chairman Garrett's efforts to bring back stability and 
confidence in the private-label mortgage securities market 
space. Again, we believe that this bill will be most effective 
if coupled with the legislation that supports the secondary 
mortgage market model that includes some level of government 
participation, while protecting the taxpayer and ensuring that 
all creditworthy customers have reasonable access to mortgage 
capital.
    Thank you for this opportunity to present our thoughts on 
the Private Mortgage Market Investment Act. The National 
Association of REALTORS is anxious to work with the chairman 
and our industry partners on this thoughtful piece of 
legislation, which is an excellent first step toward finding a 
solution that best meets the needs of the U.S. housing consumer 
and the desire for homeownership. And I thank you.
    [The prepared statement of Mr. Salomone can be found on 
page 86 of the appendix.]
    Mr. Schweikert [presiding]. Thank you.
    Dr. Poole?

  STATEMENT OF WILLIAM POOLE, PH.D., DISTINGUISHED SCHOLAR IN 
               RESIDENCE, UNIVERSITY OF DELAWARE

    Mr. Poole. Mr. Chairman, and members of the subcommittee, I 
apologize for being so late. Allowing an extra 75 minutes was 
simply not enough for driving here from my home.
    Mr. Schweikert. Dr. Poole, may I beg of you to pull the 
microphone just a bit closer?
    Mr. Poole. I am sorry?
    Mr. Schweikert. Pull the microphone closer if you can.
    Mr. Poole. Is that better? Okay.
    I confess I am also a bit discombobulated from being in the 
traffic and the rain, even though I lived here for quite a 
while and should be used to that, but you get away from it 
after awhile and you forget just what it can be.
    Okay. I have a fuller set of comments for the record and 
those will be submitted. Probably the most relevant part of my 
background for this discussion is that for 10 years, I was 
President and CEO of the Federal Reserve Bank of St. Louis, and 
of course we had a lot of responsibilities not only for 
monetary policy, but for monitoring developments in the 
financial markets.
    I believe that the way that we ought to go is to move 
toward a fully privatized market in mortgage finance. I didn't 
hear everyone here, obviously. I disagree with the position 
that says that we need to have a large government role. There 
are many capital markets that work just fine without a 
government role. Examples would be: automobile lending, another 
asset market; corporate finance; and mortgage markets in other 
countries. And what we are seeing today is the residue, the 
very unsatisfactory residue of decades of heavy Federal 
involvement. It is exceedingly strange that we talk about the 
need to have a Federal backstop when it was exactly the Federal 
backstop that created so much of the current problem, the 
financial crisis.
    The detailed specification that is in the draft bill, I 
quite frankly believe is the wrong way to go. It seems to me 
that is trying to design complicated products in Washington. I 
do not believe that Washington would try to design a computer 
or cell phone or a piece of complicated software, and I don't 
understand why you should expect that you would be able to 
design a mortgage instrument correctly and keep up with the 
times, which change.
    Moreover, here is the result: This is what I had in my 
latest refinancing of my mortgage. So this is the consequence: 
this document, pages and pages of fine print. It is a 
consequence of Federal involvement and State of Maryland 
involvement in the mortgage business. And as I read this draft 
bill it would deepen that--it would make this kind of document 
larger, and I don't think that is the way we ought to be going.
    Let me also make just a few comments on Fannie Mae and 
Freddie Mac, and of course we have other GSEs to worry about in 
the housing space, as we put it, the 12 Federal Home Loan 
Banks, the FHA.
    Let me concentrate on Fannie Mae and Freddie Mac. What I 
believe ought to be done with those firms is to phase them out 
altogether. They ought to become artifacts of history and 
should no longer be active firms. It is not hard to design a 
process that will accomplish that end. Two things need to be 
done: first, the conforming loan limit needs to be phased down, 
not all at once, but over a period of years; and second, the 
securitization fees need to be on a schedule of increase.
    I would urge you to go that route, and I would also urge 
you to put those--phasing schedule into the law, rather than 
have it at the discretion of regulators. The discretion of 
regulators is very likely to be on the way. Some reason to 
stop--in fact, we have seen that already because there was a 
scheduled reduction in conforming loan limits. That has been 
suspended at least for the time being.
    Let me finish with a comment about the scale of the 
subsidies that have gone into housing. Those subsidies are very 
large.
    The way we ought to look at all the elements of our Federal 
budget is to ask whether we would be willing to ask Social 
Security recipients to accept a 10 percent reduction, let's 
say, in their benefits, including current recipients. It has 
been 70 years since the attack on Pearl Harbor occurred. I have 
no doubt what the answer would have been 70 years ago. And in 
fact, we know that an enormous number of our citizens 
volunteered, and gave their lives in that cause.
    Do we really believe that subsidies for housing, for 
ethanol, for high-speed rail and so forth are--would we ask our 
citizens to give up Social Security benefits for those things? 
I don't think so.
    Mr. Schweikert. Dr. Poole, I let you go over about a 
minute-and-a-half; I am sorry.
    [The prepared statement of Dr. Poole can be found on page 
81 of the appendix.]
    Mr. Schweikert. Should we start with a few questions just 
to sort of get our heads around the variety of information 
here?
    Mr. Fleming, from CoreLogic--with some of the discussions 
we have been having, everything from the risk retention to how 
do you make sure--if the underlying reason for risk retention 
is ultimately that we don't want someone to not be able to keep 
their home, that we don't want bad paper, ultimately, to be 
moving through the system, and ultimately the holder of the 
bond to be holding impaired paper.
    CoreLogic's ability to analyze data--we have had 
discussions of whether ratings on bonds are really the quality 
stamp for the bond investor, for the pension system, for the 
retiree who is going to buy the bond, or should we almost put a 
data field that is actually at the loan level that would allow 
risk analysis up and down, and how public should that data be? 
For someone like CoreLogic, you can demand that data be copy-
written, be proprietary; or can we actually, through 
legislation, say here is the base field that you are going to 
have to disclose, and you may sell the algorithm. Give me your 
comments.
    Mr. Fleming. Sure. I think there are two levels to it. One 
is the concept of risk retention in many ways is sort of trying 
to address the principal agent problem; that is, that we want 
to incent the appropriate behavior, the risk transfer behavior 
between principals and agents, and that is an important factor 
there.
    But we also believe that through the use of data and 
analytics that are available today and that have been available 
for a number of years, one can measure more dynamically through 
monitoring or surveillance types of techniques the performance 
of bonds, and let market forces drive pricing, right? It 
becomes a very straightforward process, where if a bond starts 
to perform away from expectations based upon the data, then the 
market can reprice that bond and sort of there is an enforcing 
mechanism in the pricing of those bonds and the recognition of 
the quality of the securitizers, the counterparty issuing those 
bonds, sort of counterparty risk rating kinds of programs can 
be done by investors.
    So that is why we believe strongly in the idea of the 
concept of the transparency of the data and it being something 
that is used to allow the markets to really drive pricing 
behavior and enforce good transparent risk management 
techniques. We already know and we do today use loan-level 
modeling and analytics. A lot of the loans that are in these 
securities are tied at the loan level and can be modeled and 
measured that way. So we believe in the idea of modeling those 
and having that data be available.
    In many ways, it is like the credit score that is attached 
to the loan application that passes its way through the process 
and is always a valuable piece of information throughout. The 
data and analytics that are attached to the loan at origination 
can be passed to the different parties along the way.
    There is the sort of information asymmetry problem that we 
had in the market of the past, which was that at each level of 
transfer, less and less information was being passed, right? 
And when you have markets--
    Mr. Schweikert. That is part of the discussion we keep 
having up here, is literally, do you create a number of data 
fields in a standardized format that are attached at the loan 
level and are always moving through? They are just there. So if 
you are the California Teachers Retirement System and you are 
considering buying into this bond, you can run your own risk 
analysis and it is actually at loan level. Am I going in the 
right direction?
    Mr. Fleming. Yes. It exists today. So it is already out 
there and can be used and is used by market participants.
    Mr. Schweikert. Forgive me if I mispronounce it, Mr. 
``Katopis?''
    Mr. Katopis. ``Katopis.''
    Mr. Schweikert. Give me your understanding from your 
Association, from your view, the current QRM rules, risk 
retention, what do you think that--how that changes both your 
business and the availability for future homeowners to find 
credit?
    Mr. Katopis. Certainly, risk retention is a concept related 
to skin in the game. We do believe the best skin in the game is 
an effective reps and warranty regime that can be enforced.
    Mr. Schweikert. Could we stop right there? To that point, 
could I get a couple of comments of how many of you believe 
that a well-designed reps and warrants mechanics is also every 
bit as important, or maybe even more effective? I just thought 
we would do a quick rundown. Yes? No?
    Mr. Fleming. Yes.
    Mr. Stevens. Absolutely.
    Mr. Poole. I am sorry; I didn't catch the question.
    Mr. Schweikert. A quick discussion of the reps and warrants 
mechanics actually in many ways provides as much quality 
coverage as a QRM or risk retention.
    Mr. Poole, would you turn on your microphone, please?
    Mr. Poole. My view is that the government ought not to be 
in the business of designing this product, and I said that 
before. The market makes those judgments all the time, and I 
would not see a role for the government to force it down a 
particular direction.
    Mr. Schweikert. Mr. Katopis, I am sorry. One last, and then 
I am way over my time.
    Mr. Katopis. We think an effective reps and warranty regime 
would not necessarily rely on government enforcers, but you 
would have private--you would have all the pension funds. You 
would have CalPERS, the Carpenters Union, whoever runs your 
TSP, trying to make sure that there are economically viable 
mortgages in the trust.
    Mr. Schweikert. Thank you.
    Ms. Waters?
    Ms. Waters. Thank you very much.
    I am going to call on Mr. Fleming again. Recently, I read 
an article from BankThink authored by you, ``Mortgage Principal 
Can Be Cut Without Moral Hazard,'' and you discuss quite 
thoroughly the possibility of principal mortgage deduction, 
which is a very controversial concept with some. And I notice, 
of course, in this legislation Chairman Garrett in one section 
here says, ``Prevention of forced principal writedowns with 
respect to a securitized mortgage loan: No Federal department 
or agency, including the Board of Governors of the Federal 
Reserve System and the Bureau of Consumer Financial Protection, 
may require reduction in the principal amount owed on such 
mortgage loan.''
    I have been discussing with my staff, and you discuss 
somewhat in this article, the advantages of principal writedown 
and how they can be done in a creative way so as to reduce the 
cost to the banks and the taxpayers. I have also been 
discussing with my staff recent information about how Fannie 
Mae's financial statements show that they are selling their 
REOs for around 55 percent of the unpaid principal balance of 
the mortgage. So isn't it possible to reduce principal in a way 
that both helps the borrowers and reduces loss to the 
taxpayers? I would like to hear your thoughts on that, Mr. 
Fleming.
    Mr. Fleming. Sure. As you said, with the losses that the 
GSEs are suffering on foreclosures, foreclosure is a very 
expensive proposition from a loss perspective to the mortgage 
industry. And the concept of principal reduction is slightly 
different from, say, a cramdown concept of forcing it. It is 
the idea that it can be and should be considered as one of the 
many choices, and using the idea of sort of the net present-
value testing of the value of a loan. It is consistently a 
choice that can be net present-value beneficial amongst all the 
other ones that are out there, other forms of modification, 
refinancing, short sales, all of these alternatives that are 
out there. Appropriately structured principal reduction can be 
a net present-value benefit, and therefore would be something 
that would be of value that would reduce losses to the investor 
in those loans. If it was a GSE loan, it would be the GSEs.
    So it is not that it should be forced, but it can be 
considered as one of the many options. The important aspect to 
take into account there is to address the moral hazard risk. 
And the best way to think about that is, we do it all day long 
in our daily lives with our auto insurance and our health 
insurance. They have moral hazard clauses in those contracts, 
too, and they address them through things like deductibles.
    So the key with doing principal reductions in the mortgage 
space is to have some kind of equivalent to the deductible 
concept to incent the appropriate behavior and mitigate or 
moderate the moral hazard. Something like a shared appreciation 
mortgage is one of the ones that is out there today being used 
effectively to do that.
    Ms. Waters. And we are thinking about looking at that 
possibility with the shared appreciation. We think that makes a 
lot of sense.
    What about, again, the REOs? As I said, they are selling 
these REOs for about 55 percent of the unpaid principal balance 
of the mortgage. Should we not have anything in law that would 
prevent principal writedowns, allow them perhaps not to be 
forced but to be considered as a possibility? Because while 
there are some good things in Mr. Garrett's bill, this section 
would prevent forced principal writedowns altogether.
    Mr. Fleming. I think that gets more to the concept of 
honoring the contracts that are out there and making sure that 
the industry, particularly the private market, is going to 
enter an industry only when they can be assured that the 
contracts that are negotiated are withheld--or are held up.
    So, as I said, it is one of those ones where it is an 
option amongst many that, if done appropriately and 
objectively, can be of value. Any legislating or forcing one 
way or another gets away from the idea of letting the markets 
use the data and the analytic information that they have at 
their disposal to make the best decisions.
    Ms. Waters. Yes, but there is so much discussion about how 
this crisis in our housing market is continuing to cause us so 
much economic displacement, and that if we are to revitalize 
this economy, we have to do something about the housing market. 
Wouldn't principal writedown help us to stimulate the economy 
in some way?
    Mr. Fleming. Yes. I think in terms of, if you address the 
moral hazard risk and do it using these net present-value type 
of tests or models, yes, because negative equity is a 
significant drag on the housing economy and the economy as a 
whole today, and that is one of the fastest ways, if you will, 
to get rid of that negative equity risk.
    Negative equity reduces turnover, mobility. It reduces 
household sales demand. Currently, at the moment, it is locking 
people into their mortgages at higher interest rates, so it is 
not freeing up on their household balance sheet money that they 
could spend and consume otherwise.
    I think one of the benefits of the HARP II program will be 
that borrowers are being put into lower interest rates and that 
money is flowing back out through consumption expenditures. It 
doesn't actually do anything significantly with regard to the 
housing market in terms of reducing equity risk or anything 
like that, but it is an economic stimulus in many ways. So ways 
to address reducing negative equity more quickly than time 
would do on its own, certainly would benefit.
    Ms. Waters. Thank you. I would like to talk with you 
further about shared appreciation, because we are going to try 
and get our colleagues to agree to something.
    Thank you very much. I yield back the balance of my time. I 
am sorry; I have no more time.
    Mr. Schweikert. Mr. Grimm? And if we go fast enough, we 
will hopefully get a second round.
    Mr. Grimm. Thank you, Mr. Chairman. Again, thank you to 
those testifying today. We we do appreciate it.
    Mr. Stevens, I believe your testimony notes that the 
alternative QRM proposal, which would require a 10 percent 
downpayment, would be as bad or even worse than the original 20 
percent requirement. Obviously, that seems a bit 
counterintuitive. Why would reducing a downpayment requirement 
to 10 percent be worse? Could you please explain?
    Mr. Stevens. First and foremost, I think the most critical 
variable we all have to pay attention to is the enormous role 
that the FHA is playing in the purchase market today, and that 
is singly driven by the fact that downpayment is the single 
biggest barrier to homeownership today. If you put the 
downpayment requirement at 20 percent, that guarantees, quite 
frankly, an outcome that we are going to have more mortgages 
using a government-subsidized outcome, as opposed to allowing 
any opportunity for private capital to come back into the 
markets. And it will make it very difficult for borrowers to 
have access to anything except a government-subsidized finance 
system.
    By reducing the downpayment to 10 percent, which is the 
alternative option, our concerns have to do with how capital 
markets' execution will occur. In other words, a smaller market 
with only a 10 percent downpayment requirement would leave a 
much smaller liquid market available to trade in the private 
market space.
    To put it another way and try to put it more simply, if the 
downpayment level was set at 10 percent, it means that anybody 
with less than 10 percent would have a difficult time getting 
any market execution, other than going to FHA, which would 
ultimately then be under even greater pressure to do more 
purchase volume because it would be an illiquid market in that 
remaining space.
    So our view is that we don't support a downpayment 
requirement in either proportion in the QRM rule. While 
respecting much of what is good in QRM, the concerns about 
putting these bright-line underwriting standards may ultimately 
become a barrier to engaging private capital back into the 
mortgage markets. And that is one of the things that I think we 
need to consider as we look at that rule.
    Mr. Grimm. Continuing on that, given the uncertainty 
regarding the GSEs--I think you have stated it, but I want to 
make it clear what your opinion is. Is now the right time to 
change the structure of servicing compensation?
    Mr. Stevens. We have looked at the proposed servicing 
standards that FHFA has put out for comment. We do not believe 
now is the time to change servicing compensation. And 
particularly to your question with the uncertainty in the 
housing finance system and the uncertainty in the housing 
recovery, changing servicing standards before we have even 
established servicing compensation, before we determine what 
servicing standards are, seems to me to be in reverse order.
    I think we first need to determine what are the servicing 
obligations going to be of the industry going forward, and then 
determine what compensation should be in accordance with that. 
To change that right now could even disrupt further the 
availability of mortgage credit to consumers across the 
country.
    Mr. Grimm. Thank you. And I will open this up to the panel. 
We have just under 2 minutes.
    In your opinion, are we going down the same road, possibly, 
of some of the things we did with Dodd-Frank in the sense that 
we are giving too much authority to the regulators? FHFA, right 
now, you are talking about reps and warranties, credit and 
quality standards, underwriting standards. We can go on and on 
and on. Is there not enough definition, not enough clarity, and 
we are going to make the same mistake again? And I will open 
that up to the panel.
    Mr. Katopis. Congressman, let me make one comment on behalf 
of the investors who share the goal of crowding in private 
capital. Today with the contracts, the PSAs, we have 300 kinds 
of contracts out there with one commonality: They don't really 
work. There needs to be standardization. And the conversation 
about whether FHA versus SEC is the better organization to 
create those standards is an open dialogue, but I think it is 
different than relating it to the Dodd-Frank experience.
    Mr. Calabria. I would say as an overall point, we are 
absolutely making the same mistakes that we seem to make after 
every housing boom and bust. You can go back and look at the 
things that were done after the savings and loan crisis, and in 
many ways they mirror what was done, with one exception: At 
least, we did have sort of a prompt, corrective authority 
regime that was put in, in the 1990s that tried to reduce 
forbearance, because one of the problems in the marketplace 
today is we seem to be unwilling to shut banks when they need 
to be shut down. So this sort of extend-and-pretend that 
dominates the markets, we didn't learn from that.
    But I would say in many ways you really do need to limit 
some of the discretion of what the regulators can do. They had 
tons of discretion before the crisis and that simply did not 
work then. So I am very much concerned that we are repeating 
some of the same mistakes.
    Mr. Fleming. I would just say I think we never really know 
for sure where we draw the line of balance between regulation 
or setting of standards, which is sort of the government role 
versus allowing the private market. And it is good that we can 
have the debate here to try and find those lines and know that 
probably, invariably, we get it wrong, and times change and it 
always needs to be revamped.
    Mr. Grimm. I am going to yield back, and the Chair can 
decide.
    Mr. Schweikert. Thank you, Mr. Grimm.
    Mr. Frank?
    Mr. Frank. Thank you. First, let me follow up with Mr. 
Katopis. You say you would prefer to leave the authority to the 
SEC rather than the FHFA; is that correct?
    Mr. Katopis. No, Ranking Member Frank. We share the goal of 
standardization--
    Mr. Frank. I didn't ask that. I am sorry, but we only have 
5 minutes. You say here you would rather have the SEC, we 
believe the SEC responded. So did I misread this?
    Mr. Katopis. No, no. I think you are misconstruing it. We 
have supported the Reg AB proposal in the past. We like what 
the SEC put out in the past in terms of moving forward on the 
standardized reps and warranties. It is an open question. We 
have not decided whether--
    Mr. Frank. So it is an open question for you.
    Let me ask Mr. Calabria. You lament the legislation 
restricting--to require the government to insist that people 
use the rating agencies. Remember, we don't say people can't 
use them on their own. I was a little surprised that Cato was 
in favor of the government insisting that private parties use 
it rather than leave it up to themselves.
    But having said that, let me ask you, would you evaluate 
the rating agencies' role in rating these things in the past; 
and do we have any reason, if you don't think that they did a 
good job, why they would be better?
    Mr. Calabria. I will reiterate, as I say in my written 
testimony, that ultimately we should be moving toward a world 
where we have far less reliance on the rating agencies. 
However, we are stuck in a bad world--
    Mr. Frank. Okay. But answer my question, please. Again, I 
will repeat. I was struck that Cato is saying, ``Hey, 
government, make them do it,'' rather than what I thought--
    Mr. Calabria. With all due respect, I don't believe 
anywhere in the testimony I say--
    Mr. Frank. No. What we did was to say not that people 
couldn't use the rating agencies, but that the government 
couldn't require them to. And I would have thought Cato would 
have been with us in saying it is up to you; if you want to use 
the ratings agencies, use them, but the government can't order 
you to do it.
    Mr. Calabria. Nowhere in my testimony do I say that the 
government should require people to use--
    Mr. Frank. I thought that is what--
    Mr. Calabria. What I talk about is there is the section in 
Dodd-Frank that the current--was it 4-something G that exempts 
rating agencies from Section 11 liability, and then once you 
have that, the ABS market shut down because--
    Mr. Frank. So you don't object to the part of the bill that 
says that no government agency should require people to use the 
rating agencies?
    Mr. Calabria. I absolutely agree with that part. We are on 
the same page.
    Mr. Frank. Okay. I misread that. As to the rating agencies, 
how would you evaluate their past performance?
    Mr. Calabria. The rating agencies?
    Mr. Frank. Yes.
    Mr. Calabria. Not good.
    Mr. Frank. What reason do we have to think they will get 
any better? Is there any reason to think that, absent any 
government intervention, they will get any better?
    Mr. Calabria. Again, I want to move to a world where we 
have--
    Mr. Frank. I am sorry, Mr. Calabria. That is a fairly 
straightforward question. Do you have any reason to think they 
will get better, absent some outside intervention?
    Mr. Calabria. I think if we don't bring competition to that 
market, no.
    Mr. Frank. Okay, thank you.
    Mr. Stevens, I know you don't want to use downpayments and 
my letter--also no bright lines about debt-to-income or loan-
to-value. Let me ask you, looking back at the way residential 
mortgages used to be used, what in that system would you 
change? That is, how would you have us going forward be 
different than the way they were 3 years ago? It is a very 
specific question.
    Mr. Stevens. Yes. I think what you put in--
    Mr. Frank. No, no. How would you change it?
    Mr. Stevens. We support what is in QRM that eliminates 
negative amortizing loans, interest only, balloons, extended 
loan terms, prepayment penalties--
    Mr. Frank. You would get rid of the bad stuff.
    Mr. Stevens. --understated income, no income verification, 
points and fee caps. You have owner-occupied restrictions.
    Mr. Frank. Let me just ask, those all are in there to say 
that you need to comply with that to have a qualified mortgage. 
So from your standpoint, there should be no difference between 
the qualified mortgage and the Qualified Residential Mortgage. 
That is, if it meets the qualified test, then there should be 
no further restriction?
    Mr. Stevens. That is actually not necessarily correct.
    Mr. Frank. What is your position?
    Mr. Stevens. We wouldn't object necessarily if that was the 
outcome, but QRM--
    Mr. Frank. Tell me what your position is. I am glad you 
wouldn't object, but what would you be for?
    Mr. Stevens. A qualified mortgage allows second homes, 
investment properties, where QRM does not.
    Mr. Frank. Okay. But people in my business, when we say we 
do not object, that means we don't want to really tell you what 
we think, because ``do not object'' doesn't mean what I think. 
What do you favor in terms of--are there any restrictions you 
would put on mortgages to qualify for no-risk retention, other 
than simply meeting the basic qualified mortgage test?
    Mr. Stevens. I don't consider the list of provisions that 
Congress passed in Dodd-Frank on the QRM standard is a small 
list. It is a significant--
    Mr. Frank. No, I didn't ask you that. So the answer is no, 
in effect?
    Mr. Stevens. No, we support everything that--
    Mr. Frank. No. If it meets the qualified mortgage test, 
then it would automatically get a QRM test as well? That is not 
a hard question.
    Mr. Stevens. The QRM test, the qualified mortgage extends 
beyond that.
    Mr. Frank. So I think saying that you don't have any 
requirement to avoid risk retention or debt-to-income, loan-to-
value, or downpayment, is really asking us for further trouble.
    Thank you, Mr. Chairman.
    Mr. Schweikert. Thank you, Mr. Frank.
    Mr. Dold?
    Mr. Dold. Thank you, Mr. Chairman.
    Dr. Calabria, just starting with you, do you believe that 
the government should play any role in preserving the 
availability of credit during times of stress; and, if so, can 
the government do this through other means besides Fannie and 
Freddie?
    Mr. Calabria. I would say, ultimately, no. I do think we 
need to recognize that the Federal Reserve has set a precedent 
of buying $1 trillion-plus in mortgage-backed securities. The 
ECB has bought almost half a trillion in covered bonds. You 
have a catastrophic backstop in place both here and in Europe, 
so we shouldn't deny that fact. But ultimately, I would want to 
even limit those abilities as well.
    Mr. Dold. Can you just talk to me for a second about why it 
isn't desirable to have a mortgage market where 90-plus percent 
of all the mortgages have some form of government support?
    Mr. Calabria. I think you lessen the incentive. Again, the 
whole structure of sort of risk retention and all these things 
is try to align incentives properly. But if you don't have the 
downside, and you only have the upside and the taxpayer takes 
the downside, you have eliminated those incentives for proper 
underwriting.
    The way markets should work is mismanagement, bad products, 
should all go out of business. Companies should fail. They 
should get weeded out. Instead, when we save them and we keep 
them around indefinitely, you propagate and sustain bad 
practices.
    So certainly, part of the need for all of this regulation 
is because we continue to have a massive safety net for the 
financial system. We need to get rid of that safety net so 
these bad firms go out of business.
    Mr. Dold. So you also believe that the GSEs underprice 
risk?
    Mr. Calabria. Absolutely. And I think the fact that they 
have close to $160 billion in losses is proof enough.
    Mr. Dold. Mr. Fleming, would you also agree that the GSEs 
underprice credit risk?
    Mr. Fleming. I think that one of the reasons that private 
capital is not coming back into the marketplace is because the 
underpricing of risk makes it non-economically feasible for it.
    Mr. Dold. And as we look at how big this is right now, Mr. 
Fleming, and the way to get around this, how do we best bring 
private capital back into the marketplace? How would you best 
do it?
    Mr. Fleming. A lot of the things that are being talked 
about today are certainly there, the things I mentioned in my 
testimony: the creation of trusts; the honoring of contracts; 
the creation of some more standardization. I think there is a 
very clear benefit the GSEs provided to the mortgage market 
that is not really obvious in direct financial markets, and 
that is the creation of a very standardized and efficient 
process for origination of the loan all the way through to 
securitization.
    In principle, those concepts can be applied to the private 
marketplace to also create that level of efficiency which 
brings liquidity, which as we note today and have known even in 
a well-functioning housing market, the GSEs brought a lot of 
liquidity. And that is the key to what we are looking for in 
the private market.
    Mr. Dold. Mr. Stevens, you have said, or at least you have 
written in your testimony, that you believe the necessary 
tools, materials, and expertise currently exist to begin 
building a bridge towards a more sustainable real estate 
finance system. What are those tools and why aren't they 
currently being used?
    Mr. Stevens. I think there are three interesting 
requirements that we continue to struggle with as we talk about 
the recovery, the housing finance system, and bringing finance 
into the marketplace.
    The first is to make sure that we have standardization in 
terms of the marketplace understanding what those standardized 
terms would look like. That exists currently in the TBA market 
in the securities issued by the GSEs. It also exists in 
Congressman Garrett's bill. That is one of the provisions he is 
trying to protect, the expertise to design that. What is in 
that credit box for standardization clearly exists in the 
industry today. That can be defined through Congressman 
Garret's bill, as it is with GSE production.
    The second is liquidity, to make sure there is enough 
capital coming into the system to create tradable currency, a 
security that markets will buy into. I think that comes a bit 
from standardization. And by creating large enough pools of 
standardized products, you can create liquidity.
    I can give you a detailed version of that. Fannie Mae MBS, 
which is trading $70 billion roughly per day, is right now 
trading a full point through Freddie Mac mortgage-backed 
securities because they trade such lower volumes of currency, 
it is a less liquid security today. We are already seeing price 
differential because of large liquid pools.
    Congressman Garrett's bill could potentially ultimately 
resolve in testing whether we can create enough liquidity to 
have pricing power into that market.
    The third then ends up being the backstop: Who has the 
capital markets' guarantee behind the provision? We have 
traditionally--today, we rely on the government to give that 
triple A guarantee behind the security. That is what creates 
investors coming into the market.
    The question will be, under the provisions that are created 
in this proposed legislation, will there be investors willing 
to come in? Because the counterparty backstop won't be the U.S. 
Government in that structure; it will be individual companies 
that have created those mortgages. And I think that is going to 
be the most interesting part about testing the viability of 
what is in this proposed legislation, if it ultimately comes to 
market, is can you bring the liquidity in simply based on 
having standardization in mortgage pools.
    Without question, the expertise exists in the housing 
finance system to help design those structures. The question 
will be, will the capital come into the market? And I think 
that is something that everybody here would be interested in 
finding out.
    Mr. Dold. Thank you. I yield back.
    Mr. Schweikert. Mr. Lynch?
    Mr. Lynch. Thank you, Mr. Chairman, and I want to thank all 
of the witnesses for coming and testifying and helping this 
committee with its work.
    For starters, I have to address Mr. Stevens, representing 
the Mortgage Bankers Association. I have a matter in my 
district, and I just need to put you on notice on this. 
Originally, Ms. Debra Still was supposed to testify in your 
stead. She is the new incoming chairman of the board of 
directors, as I understand, for the Mortgage Bankers 
Association. She is the principal for Pulte Homes.
    I have a couple of Pulte Homes projects in my district, a 
very bad situation where a number of carpenters, about 59 to 60 
carpenters were hired on those projects, a number of them with 
questionable immigration status, by Pulte Homes through a 
subcontractor, Nunez Construction.
    To make a long story short, Nunez Construction, after the 
project was completed, skipped town. I think they may have gone 
back to Brazil, leaving about 60 carpenters in my district 
without pay 3 weeks before Christmas. They are owed a total of 
about $150,000 in wages. I hate to lay this on you, it is not 
your doing, but I have a feeling that the original witness was 
changed because I was going to confront her with this dilemma 
that I have.
    So, while it is not your matter, it is a reflection on the 
Mortgage Bankers Association, because she is the new Chair 
coming in. I have this, I am confronted with this, like I say, 
less than 3 weeks before Christmas, and I have all these folks 
owed a lot of money for wages and benefits. So that being what 
it is, I just want to put you on notice on that.
    With respect to the Private Mortgage Market Investment Act, 
I do want to just reiterate my concern about the elimination of 
risk retention. I think that if we go to a standard where we 
have warranties and representation clauses as our insurance in 
this matter, we are going to end up with a system that creates 
very well-written representations and warranty clauses. We 
won't end up with very well-constructed, asset-backed 
securities and mortgage-backed securities. That is my concern.
    And the reason that these bad toxic securities, mortgage-
backed securities, went viral was because the way they were 
constructed and the way we have the law, it allowed people to 
escape liability if they just pushed them out the door. Just 
get them out. It doesn't matter if they are exploding, just get 
them out the door. Once you get them out the door and they are 
in somebody else's hands and they blow up, it is okay. You make 
your money, you push the product out the door.
    We can't go back to that type of system. That is the 
concern that I have. And I don't think that going to the 
representations and warranties standards, if you will, will 
cure that.
    I think we do have some common interest in the definition 
or the standard, the rule being proposed for QRMs, the 
Qualified Residential Mortgage. I think a 20 percent 
downpayment is too high. We are going to squeeze a lot of 
people out of that market, and we have to figure out a better 
combination, a better set of standards that brings people back 
in the market, allows the private market to take a much, much, 
bigger role, and moves the GSEs out to a more historic level 
with their involvement.
    But I think absent the elimination of risk retention, that 
is a bad idea. And we have to figure out a way to make sure 
people have skin in the game. Otherwise, we are going to go 
back to the bad old days.
    But on this other matter of how do you get that exemption, 
what are the standards for a QRM that give you that exemption, 
we have to make that much more realistic, much more workable in 
terms of how we get there. I agree that a 20 percent 
downpayment is too high. I like the idea of an 80 percent loan-
to-value ratio. I think that creates a buffer so that we are 
not going into a negative position if we have a little dip in 
the real estate valuation market. There has to be a better way 
to do that.
    But Mr. Stevens, with respect to the risk retention 
argument, what are your proposals in terms of making sure that 
people do have that skin in the game going forward?
    Mr. Stevens. So, very briefly, given the time constraints, 
I would say this: If you go back--I have been in this industry 
for 30 years. We did 5 percent downpayment transactions back in 
the 1970s for owner-occupied, primary residence, fully 
documented, safe and sound, fully amortizing mortgages. You 
protect all of those provisions in the Dodd-Frank QRM rule, 
which we support.
    When you throw in the downpayment provision, either 10 or 
20 percent, all that ends ends up doing is drawing a line that 
will directly impact first-time homebuyers, borrowers of color 
in this country, just the way the demographics work, and it 
draws a barrier that doesn't necessarily reflect performance.
    And the one variable I would ask everybody to look at is 
the Freddie Mac and Fannie Mae owner-occupied, 30-year fixed-
rate, primary residence, fully documented mortgage portfolio. 
The cumulative default rate on that portfolio is still in the 
very low single digits. It is the other stuff, the neg ams, the 
piggybacks, the subprimes. Those products ended up creating 
these 20-plus percent default rates, which Freddie Mac and 
Fannie Mae also bought in their portfolios.
    You have done a great job, Members of Congress have, to 
create boundaries without drawing this arbitrary line in the 
sand that says 10 percent. So if you are a first-time homebuyer 
or you are a family without large inherited wealth, you are 
going to have to go to FHA, and we will have this separate but 
equal finance system as a result.
    So I think what Congress did in Dodd-Frank was outstanding 
as it relates to QRMs. It is what ultimately came out in the 
proposed rule from the six regulators that we take significant 
issue with, because we think that creates barriers that are 
unnecessary in this housing society.
    Mr. Lynch. Thank you, Mr. Chairman. I yield back.
    Mr. Schweikert. Thank you.
    Ms. Hayworth?
    Dr. Hayworth. Thank you, Mr. Chairman.
    A question, and Mr. Stevens, I apologize if this is 
redundant, but regarding the alternative QRM proposal for a 10 
percent downpayment being as bad or even worse than the 20 
percent, can you just explain the negatives of that? It seems 
to be a little counterintuitive otherwise.
    Mr. Stevens. Sure. It is interesting, Dr. Poole actually 
made a very good point, which is we are designing very 
technical products through a political process, which makes 
this very complicated. But here is the essential premise: If 
you fully document a borrower for sustainability, the risk of 
default won't vary with a 5 percent downpayment, or a 10 or a 
20 percent downpayment.
    What happens is in the event something disrupts their 
lifestyle--job loss, etc.--your default risk then increases 
with a low downpayment because you don't have enough equity to 
get out of a home.
    Those performance differences are actually fairly marginal. 
So if you look at actual performance with a 5 percent down loan 
or a 20 percent loan, protecting for all the other provisions 
in Dodd-Frank, you actually get pretty good performing loans in 
both categories. The reality is the private sector has always 
underwritten these loans.
    So a 5 percent down loan, with mortgage insurance, has 
always had much tighter qualifying ratios required by the 
mortgage insurance companies, longer histories of job 
stability, higher credit score requirements, even sometimes 
restrictions on the type of property in order to ensure 
performance. Bigger downpayments get more flexibility. That is 
always handled on sort of a natural risk scale, the way 
underwriting has been done by the private sector.
    What QRM does is put just an arbitrary line in the sand 
that everybody gets treated the same. It takes away this nuance 
that really makes the credit markets work in this country for 
housing finance.
    Dr. Hayworth. Right. And what you are talking about 
fundamentally is bringing rational analytics back into the 
process, as opposed to a laudable but fiscally irresponsible, 
unfortunately, social goal which has ill-served our public.
    Dr. Calabria, was it you in January who testified as a 
member of a panel about the mortgage marketplace crisis at that 
time, and I think--was it you I asked a question about the 
contribution of the GSE debacle to our national unemployment 
rate? I think it was you who said it contributed about 1 
percentage point because people were underwater and couldn't be 
mobile.
    Mr. Calabria. There is a fair amount of literature that 
says the higher your homeownership rate, the higher your 
structural unemployment. And this has been looked at across the 
country, and this has been looked at across States.
    And I want to emphasize it is not simply Freddie and 
Fannie. It is the broader array of things that we did to get 
higher homeownership rates and locks people in.
    Dr. Hayworth. Absolutely. I appreciate your argument, Mr. 
Stevens. It makes sense, and it really reflects back into the 
risk retention piece as well. If we put the trust and the 
responsibility in the hands of those who are conferring the 
loan or are making the investment, we will have more sense and 
more opportunity ultimately. Is that something that, as a 
principle, the panel would accept, and any specific comments?
    Mr. Stevens. If I could, the one thing I would just caveat 
is what we have seen in this search for profit at any return 
without tested modeling, we have seen risks that occurred from 
the 2005, 2006, 2007, and 2008 books where a lot of new 
products that had been untested with models were passed into 
the system and rated at levels that were clearly not 
appropriate with the sustainability factor. I think what 
CoreLogic and other companies bring to the table is if we can 
get more data and more transparency, we will do it better, with 
a better ability to price and evaluate risk in the marketplace.
    Dr. Hayworth. No question. And part of that is the ratings 
for government-backed securities were higher than was 
justified. Isn't that a big part of the problem as well, 
fundamentally?
    Mr. Calabria. If I can make a point that I think is 
important to keep in mind--it doesn't matter whether it is the 
market, it doesn't matter whether it is government. We don't 
know ahead of time everything we think we know. For instance, I 
helped draft, with many people in the room, the American Dream 
Down Payment. We put lots of provisions in there where we 
thought we could give downpayment assistance and it would 
perform well. It did not perform well. Sometimes, you just 
learn these things after the fact.
    My point here is that I do worry about having too much 
rigidity to the standards, because then you stick them in 
place, when you only later learn that they weren't really the 
right standards that you wanted anyhow. So there has to be 
flexibility in the system.
    Dr. Hayworth. And you put unjustified faith in them, and 
that leads to a whole cavalcade of consequences.
    I know my time has expired. Thank you, Mr. Chairman. Thank 
you, panel.
    Mr. Schweikert. Mr. Miller?
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    One issue on which I have introduced legislation that is 
also an issue covered in Mr. Garrett's legislation is servicers 
of mortgages in securitized pools, the beneficial owners are 
Mr. Katopis' clients but not the servicer. But then the 
servicer is an affiliate of a bank that has second mortgages, 
second liens on the same property. And that is an area that Mr. 
Garrett has said he would work with me on.
    I have asked before a panel of servicers, what is the 
advantage, if any, of being affiliated with a bank that might 
have second mortgages on the same property? And they kind of 
drew a blank. I think they eventually said something like, 
``Some people like to deal with just one bank for servicing 
their first mortgage and their second mortgage and their credit 
cards and everything else,'' which did not seem like the most 
persuasive argument I have heard.
    Mr. Katopis, do you see any necessary--anything that 
requires the servicers to be affiliates of banks? Is there any 
reason the servicers should not--that the banks should not be 
required to spin off their servicing affiliates?
    Mr. Katopis. Thank you for that question, Congressman. I 
don't know if you heard my opening statement. I was lavishing 
praise on some of the Members. Certainly, you are at the top of 
the list for being thoughtful about private--
    Mr. Miller of North Carolina. You can repeat all that if 
you would like.
    Mr. Katopis. You got that? But let me say that we 
appreciated your legislation, and I cannot see a reason why 
these conflicts should continue. In fact, to the degree Members 
care about modifications and other issues in the housing 
ecosystem, it does seem odd. I think it would be very 
worthwhile for this committee or GAO to look at the mod rates 
when a servicer owns both the first and the second, rather than 
otherwise.
    So there are a number of conflicts. We think this is 
hurting private capital, it is hurting investors, and we 
appreciate yours and Chairman Garrett's interests in this 
issue.
    Mr. Miller of North Carolina. A second issue, one that Mr. 
Fleming talked about earlier in answer to questions, and it may 
have been covered in the opening statements as well, and also 
that Mr. Grimm discussed in his questions, is that the Garrett 
bill gives the FHFA pretty broad authority to develop servicing 
standards and loss mitigation procedures. But the FHFA has been 
reflexively against principal reductions to reduce loss, even 
in the face of studies that pretty clearly show, and Mr. 
Fleming said his analysis pretty clearly shows that there are 
many instances in which it would be far better; the loss would 
be far less if there was a principal modification, a principal 
reduction, rather than a foreclosure.
    I have introduced legislation that is modeled on the former 
Mac procedures that provides standards and requires principal 
modification when a mortgage is in trouble.
    Mr. Katopis or Mr. Fleming, have you looked at those 
standards? My understanding from the people I have talked to in 
Farm Credit is that they work fine. It is not a problem. It 
doesn't create moral hazards. People don't strategically--
farmers don't strategically default. They only get modified if 
they truly are in trouble. Should there be some standard in the 
statute, or should it be given to the discretion of the FHFA? 
Mr. Katopis?
    Mr. Katopis. Let me just start by saying that investors 
believe in a couple of things, including the truth and math. So 
to the degree that a writedown, a haircut, is a 30 percent loss 
versus a 60 percent loss, we favor principal reduction in our 
work with the AGs. We have talked about principal reduction. I 
think it needs to be done correctly. We have to do it on a 
case-by-case basis. You have to look at the borrower's entire 
debt scenario.
    So while we have not reviewed your legislation, I will go 
back to our members and look at it. It is part of a solution, 
from what you are describing, but it has to be done correctly 
and mindful of many facts: the right discount rate; the MPV 
modeling has to be transparent. There are a lot of issues that 
go into that kind of analysis.
    Mr. Fleming. I would just add, we have models and tools 
that do that math at the loan level, looking at the borrower's 
whole credit history, assessing their willingness, assessing 
their capacity, and using the net present-value testing 
framework where the user can change the dial so that it is very 
transparent to do all of that, to make those decisions, to come 
up with the conclusion that a foreclosure 2 years from now is 
going to cost me ``X'' in losses but a short sale is going to 
cost me ``Y,'' and a principal modification or a principal 
reduction of this amount today will cost me ``Z.'' And ``Z'' is 
the lowest number, so therefore we should do it.
    Mr. Miller of North Carolina. Thank you.
    Mr. Schweikert. Mrs. Maloney?
    Mrs. Maloney. Thank you so much, Mr. Chairman.
    I would like to ask Mr. Salomone to follow up on what Mr. 
Lynch's question was with the contractors not being paid, the 
carpenters. In New York, you are required to have a performance 
bond that would cover this. I know it wasn't your company, but 
do you know if the company had a performance bond?
    Mr. Stevens. Yes, the Pulte situation I am well aware of 
with Mr. Lynch, and we have tried to facilitate conversations. 
The woman, by the way, was not scheduled to testify today at 
all. But nevertheless, the issue is something that we are aware 
of.
    Mrs. Maloney. But did they have a performance bond? That 
would cover it, wouldn't it?
    Mr. Stevens. Our member only runs a mortgage subsidiary. 
She is not on the board and did not work for the builder 
directly. This is a Pulte home builder issue in Massachusetts, 
as I understand it, and we are trying to facilitate as many 
conversations as we can between Congressman Lynch's office and 
the Pulte Company.
    Mrs. Maloney. Thanks. Listen, I want to go back to the 
whole risk retention deal and ask anyone on the panel who would 
like to comment on what would happen if it was totally 
repealed, if they repeal Section 941 without providing an 
alternative other than enhanced underwriting standards. It it 
would be just a narrow slice of the mortgage market.
    What do you see as the consequences of eliminating risk 
retention across-the-board, and how would the consequences 
vary, or would they vary with asset types? Anyone?
    Mr. Poole. Let me jump in here very quickly. I am always in 
favor of reducing and getting rid of regulation, so I would 
support that.
    Mrs. Maloney. I would like to ask Mr. Salomone, do you 
support repealing 941?
    Mr. Salomone. We don't really have a position. But if it 
does remain, we would be in favor of--
    Mr. Schweikert. Could I beg of you to do me a favor? You 
might have to either turn the microphone on or pull it closer.
    Mr. Salomone. I apologize. Like I said, we don't really 
have a position on that, but if it did remain, we would be in 
support of Senator Isakson's efforts around a Qualified 
Residential Mortgage exemption.
    Mrs. Maloney. Mr. Stevens?
    Mr. Stevens. This is a difficult subject. We believe 
actually what was approved in Dodd-Frank in Section 941 by 
Congress as it relates to protecting against--not requiring 
risk retention for certain loan features had merit. We think 
that the regulators went above and beyond what the legislation 
called for, and that is where the issues concern us directly 
about the availability of mortgage finance capital, 
particularly for first-time homebuyers and people who have less 
wealth in this country, and forcing them to an only solution 
being FHA or a government-sponsored program.
    So we have not called for the elimination of 941. In fact, 
we helped work on the language in supporting from a technical 
standpoint many, many months ago.
    Mrs. Maloney. Dodd-Frank precluded from QRM loans risky 
characteristics such as balloon payments, negative 
amortization, and the like. And the Act leaves it to the 
discretion of the FHFA Director to decide. So how important are 
these loan features such as balloon payments, negative 
amortization, whether and how soon after origination the 
interest rate adjustments and prepayment penalties are in 
determining the default risk of loans? Are they important? Mr. 
Fleming?
    Mr. Fleming. Yes. The features have had a variety of 
different names associated with them, but the features of those 
loan terms certainly add risk. And I think one of the biggest 
realizations for those who do the modeling of credit risk in 
the mortgage space today is that the layering of those risks 
actually was one of the reasons for the surprises of the 
delinquency rates; that each one alone may not be particularly 
risky, but the combinations of them together became 
significantly risky.
    There is a place and a time for many of these features in 
certain situations. For example, Alt A loans were a classic 
loan given to high-net-worth borrowers when they were first 
designed and originated, and it played a valuable role in the 
mortgage industry as a product. How they eventually became used 
is very different.
    Mrs. Maloney. Thank you. I would also like to ask about the 
exemption that is provided for certain mortgage-backed 
securities from the SEC registration and oversight; but it does 
not, the draft bill, replicate the SEC's investor protections. 
What are your comments on that? Are there any ways that they 
provide equivalent protections for investor protections? That 
is a serious thing to me, that they are repealing that 
requirement and yet not replacing it in any way. Is that not a 
concern, or is that a concern of the panelists?
    Mr. Fleming. I would yield to other panelists here today on 
those comments.
    Mr. Calabria. While I think parts of Title I try to include 
provisions to replicate much of securities law, this is one 
reason why I do think that ultimately these provisions should 
be at the SEC. But again I emphasize, I think having it at the 
FHFA for a number of years is a reasonable interim step to 
getting it to the SEC at some point.
    Mrs. Maloney. Okay, my time has expired. Thank you.
    Chairman Garrett. Thank you. And since I am back, I thank 
the panel.
    So I understand one of the issues has been the risk 
retention aspect, and I guess there is maybe unanimity, just as 
we are trying to get some degree of unanimity with regard to 
the legislation as well, as far as standardization and the 
underwriting and also on securitization.
    On this issue, it sounds to me from the testimony that 
maybe we have some sort of agreement on this as well. And that 
is to say that the risk retention piece that we currently have 
in current law of Dodd-Frank may not be the best way to provide 
for that assurance, and instead what we do here is by having 
specific and enforceable reps and warrants that you can 
replicate, if you will, that through this legislation. I think 
this may have been done, but since I wasn't here and I am the 
chairman, I can do it again.
    I am going to run down the panel and just get your two 
cents on that piece.
    Mr. Katopis. The two-cent answer is yes. The best skin in 
the game is reps and warranties, and I can elaborate.
    Mr. Calabria. First of all, I would emphasize there was 
risk retention beforehand, so before this rule was ever put in 
place. The 5 percent is arbitrary. I think leaving it to the 
marketplace to determine the appropriate risk retention on a 
product-by-product basis is a far better way to go.
    Mr. Fleming. I would just add that monitoring, 
surveillance, dynamically updating the performance of the 
pools, basically bring market forces that can address some of 
the components of what risk retention is after.
    Mr. Stevens. We understand the desire to have safe and 
sound mortgage underwriting. That is the thing we have to 
correct for. Our concern about the current way the risk-
retention rules are provided, both with the qualified mortgage 
that the concept of rebuttable presumption will actually 
eliminate access to mortgage finance in the private sector for 
those that we are trying to protect through this process, and 
in the Qualified Residential Mortgage, we think that rule goes 
too far in eliminating capital even further.
    There is absolutely value in reps and warrants and 
repurchase risk, which institutions hold today, which is 
significant from a cost standpoint to institutions. There is a 
way to ultimately get to a safe and sound system without 
overregulating to a point where we eliminate access to capital 
for the consumers we are trying to protect.
    Mr. Salomone. As I mentioned before, if it is repealed we 
are okay with it, but we really have no position on it. But if 
it does remain in Dodd-Frank, then we will continue to support 
Senator Isakson's efforts around the Qualified Residential 
Mortgage exemption.
    Mr. Poole. We need to distinguish between two different 
aspects of stabilizing the financial system. One is designing 
the instruments, and I have already said where I come out on 
that.
    The second is the constraints on the institutions, and let 
them design the instruments that they think work best in their 
business environment and their own customer base. We need 
stiffer capital requirements and so forth on the institutions. 
If we can stabilize the institutions, if we can do away with 
``too-big-to-fail,'' we will solve most of the problems we have 
been talking about.
    Chairman Garrett. Thank you. Mr. Katopis, did you want to 
chime in for a second?
    Mr. Katopis. Again, investors can price risk, but they 
can't price the unknown. So it is not just the reps and 
warranties, it is also having that information accurate at the 
issuance level through the life of the security, through the 
wind-down, and have it enforceable. I think it is an important 
tool, because it doesn't just help investors, but also our Main 
Street projects, whether it is CalPERS, the Carpenters Union. 
If people see there are defects in the mortgage pools and want 
to make sure there are returns for retirees, first responders, 
union people, then they have an extra tool to get back that 
skin in the game.
    Chairman Garrett. Thanks. And the gentlelady from New York 
said that this bill would do away with the investor protection 
elements, equity protection elements with regards to the SEC. I 
would suggest that is not the case, that this bill would 
replicate them in the legislation. I see somebody nodding their 
head.
    Mr. Calabria. I would agree. I think you have added within 
Title I most of the provisions that would replicate the 
security protections.
    Chairman Garrett. So, right now you have them over at the 
SEC. This would put them in the same protections here.
    Mr. Stevens. I was going to say your bill clearly outlines 
standards for servicing and reporting, standards for 
modifications, standards for documentation. A lot of that is 
replicated.
    Chairman Garrett. Great. The last question is for you, Mr. 
Stevens. Can you expound on your comments in your testimony 
about the need to ensure a safe harbor with regard to the QM, 
and if the rebuttal presumption option is selected, could that 
basically have a chilling effect on the whole mortgage market?
    Mr. Stevens. Yes. I think the greatest challenge we have 
here with this particular rule on the qualified mortgage now is 
that without having a clear bright line that gives safe harbor 
to the industry, to the financial services industry to provide 
mortgage finance, we are going to see credit actually retreat 
even further from the private sector, leaving even more 
dependency on government programs such as FHA to fill that gap. 
There has to be a bright line in the QM rule for safe harbor. 
Rebuttable presumption will not be enough to get private 
capital back into those markets.
    Chairman Garrett. That is a very important point. I thank 
the entire panel.
    Mr. Green is recognized for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank the witnesses 
for appearing.
    Mr. Poole, you have made your position quite clear. You 
oppose any sort of government backstop; is this true? If you 
will kindly say yes, it would be appreciated.
    Mr. Poole. I do not favor a backstop in the form of Fannie 
Mae, Freddie Mac, and other such agencies.
    Mr. Green. Excuse me, I am sorry, I misunderstood you. What 
type are you inclined to support?
    Mr. Poole. I believe that it is the responsibility of the 
Federal Reserve to maintain financial stability and liquid 
markets, and that should be a generalized responsibility, not 
market by market by market.
    Mr. Green. I see. Mr. Stevens, it is my belief that you 
differ with Mr. Poole. Is that a fair statement?
    Mr. Stevens. That is correct.
    Mr. Green. Can you kindly explain why you differ with him 
in terms of the role of the government, please?
    Mr. Stevens. The most simple way I can describe this is 
private capital is opportunistic. They will come into markets 
when they are strong, and they will exit markets when there is 
weakness. Our economy goes through cycles, and the role of the 
government backstop, outside of this enormous disruption that 
we just had over in the 2000 timeframe, has been to make sure 
that there is a continuous availability of mortgage capital in 
the United States for housing.
    So to have that backstop there has been extremely important 
to the housing system of this country. Clearly not at the size 
it is today; it has to shrink dramatically, and we need to work 
on those provisions and bring private capital back in. But to 
eliminate it in its entirety we believe would be unnecessarily 
and actually extraordinarily disruptive to access to housing.
    Mr. Green. What type of impact--and I will come to you in 
just a moment, sir--would it have on the product that would be 
made available if we do not have a role for the government?
    Mr. Stevens. This is a debate that goes on. I spent the 
first 20 years of my career working for a depository that held 
loans, did not sell them into the GSEs. We offered 30-year 
fixed-rate mortgages. We didn't lock the rate for the consumer 
until typically a day before closing, so they couldn't lock 
their interest rate in advance before buying a home. We 
obviously charged more for that product and required larger 
downpayments and prepayment penalties on those loans back in 
the day. The availability to have a fully prepayable 30-year 
fixed loan, while people may debate its merit over the last 
several decades when rates went from roughly 20 percent in 1980 
to 4 percent today, may not have been as valuable as the period 
going forward when rates are going to 4 percent and rise over 
the next many years as the economy recovers. I think that is 
where the program may be actually more needed in this society.
    So the question is, can you safely offer a 30-year fixed-
rate, or a long-term interest-rate-lock mortgage for consumers 
without some sort of organized finance system behind it? And I 
believe that is actually at the crux of much of the debate 
today.
    Mr. Green. Mr. Poole, out of fairness to you, I would like 
to give you an opportunity to respond, and then I will go to 
the others. But I would like to be fair to you.
    Mr. Poole. I think the issue is very simple here. Yes, it 
is not a viable product in the market to offer a 30-year 
mortgage with no prepayment penalties, because it is very 
symmetric against the lender. So if you charge the appropriate 
fees and if the consumer is willing to pay those fees, the 
interest rate, then that product will exist in the market.
    Mr. Green. I think you want to weigh in, Mr. Salomone?
    Mr. Salomone. Yes, it is kind of fun sitting between these 
two. Specifically, I would say that the impact on consumers is 
going to be higher rates, larger downpayments, and less 
financing choices. And I would agree with Mr. Stevens in the 
comments he made as well.
    Mr. Green. Hold on just a second, Mr. Poole. I am sorry. 
There was one other person who tried to get my attention. It 
seems that I have created a little bit of a concern here. Yes, 
sir, if you would?
    Mr. Calabria. I appreciate your commitment. I want to parse 
out something that Mr. Stevens was talking about, which is the 
picture he painted was the markets come in, fine, everything is 
great. And then boom, we get some bad shocks, something bad 
happens, and the market falls apart, and you need a backstop 
there.
    And I think what Dr. Poole is getting at: To what extent 
does the backstop help inflate the bubble to begin with? So if 
you have these backstops in place, particularly if they are 
there all the time, you run the risk of the bubble itself is 
higher, which means the bust itself is worse. So if you go to a 
system, as Dr. Poole suggested, where the Fed comes in, the Fed 
only comes in worst-case scenario, and they are not feeding the 
bubble. I think the very hard question to answer is, how do you 
structure a backstop that doesn't add to the craziness and 
frenzy of the bubble in the first place?
    Mr. Green. Mr. Stevens?
    Mr. Stevens. The only thing I would say in the few seconds 
you can actually speak in this context, is that the bubble that 
was created from the 2001-2007 period was in many ways 
contributed to by the private markets initially, with subprime 
mortgages, stated income loans, option ARMs, etc.
    The GSEs ultimately obviously participated in that, and 
that is because in the pursuit of shareholder value and the 
lack of oversight in terms of what they were able to do, had 
they been constrained to doing owner-occupied primary 
residence, 30-year fixed-rate loans--which was always in their 
tradition--there would have been much less fuel provided to the 
private capital markets to put these products in the market in 
the first place.
    Mr. Green. I have to yield back the time I no longer have, 
but thank you very much, Mr. Chairman.
    Chairman Garrett. The gentleman yields back after a great 
discussion. The gentleman from California is recognized for 5 
minutes.
    Mr. Sherman. Yes, I think we have focused effectively on 
the history here. Real estate values were bid up to 
unsustainable rates by a new wave of effective demand. That is 
to say, not only could people who could afford to buy houses, 
buying houses; but people financed with subprime loans who were 
invited to overstate their income or not state their income at 
all, were invited to also bid on those homes. The prices went 
up and then the credit rating agencies said, since the prices 
are going up, nobody could possibly lose any money making these 
loans, because if somebody can't afford their mortgage, they 
will simply sell the property at a profit. Therefore, we are 
going to give Triple A to Alt A. And, here we are.
    What we can't really allow in this economy is a sudden 
additional decline in the value of homes that will happen if 
some big piece of effective demand is removed.
    I would like to ask Mr. Salomone if--I would assume that if 
the buyers are told they can't get 30-year fixed-rate 
mortgages, there will be a big chunk of demand that goes away.
    Mr. Salomone. I am glad you got to the point of buyers, 
because we have been talking about a lot of things, but not the 
individual buyer out there. I have had the opportunity to sit 
across the table for 33 years from buyers and sellers. I think 
one of the things that is really important, and Ranking Member 
Waters talked about it earlier when she was discussing the 
whole concept of reduction in principal, is the confidence that 
our American people have in the housing market today or the 
lack thereof.
    People today--I sit across from everyday people, and they 
want stability, they want security, and they want something 
that they know is going to be a constant, i.e., their mortgage 
payment. That 30-year fixed-rate mortgage is so important in 
this country right now, and I can't emphasize that enough. If 
that goes away, you are just--you think we have a problem now. 
If that 30-year fixed-rate mortgage goes away, we are going to 
be in a lot worse shape.
    And if I may, Ranking Member Waters, one of the things that 
we obviously as REALTORS care about is keeping homeowners in 
their homes. I think that one of the things that we haven't 
talked about today enough, or at all, is the confidence of the 
American people in the housing industry today.
    One of the questions that individuals have is, someone 
loses a job, and they have a payment on a property that is now 
underwater, and you talked about principal reduction. It is so 
frustrating for that homeowner to call his or her bank, get no 
good conversation going and say, hey, if we can just reduce by 
this little bit--and it doesn't happen. And then, they find out 
that their house is sold in foreclosure for a third of what it 
would have been.
    Now, I don't need to be a rocket scientist--and you can 
talk about all the data all day long--but those numbers just 
don't make sense. So I think you are going down the right path, 
Ranking Member Waters.
    Mr. Sherman. My next question is for Mr. Stevens. If I 
understand you correctly, you think there are a lot of 
favorable provisions in the bill that we are discussing here, 
the current draft. Are there any concerns that you have, or 
what potential improvements would you suggest?
    Mr. Stevens. I actually believe that the chairman's bill is 
very thoughtful, and it is something that is interesting from 
an industry perspective, because it could theoretically create 
a pathway for private capital to engage in the market. If we 
are going to talk about getting private capital back in, we 
believe strongly that before we talk about moving the support 
much more from Freddie Mac, Fannie Mae, FHA, etc., we need to 
find a pathway to get private capital to reengage. And to that 
degree, we applaud the nature of this bill.
    There are questions about the role of the FHFA; about some 
of the servicing standard provisions that we would love to give 
more thoughtful response to; about how the oversight isn't 
involved from a regulatory standpoint. And I could parse 
through each of those. It would take too much time for this 
particular meeting, but I would be glad to give a follow-up 
with a more thorough review.
    Mr. Sherman. I will end with the comment that a lot of us 
are concerned about the Federal deficit. Some are concerned 
about the role that government plays. But I would like to point 
out that if we see a decline, a further decline in real estate 
values that hits the economy hard, and which drives up the 
deficit, it will obviously reduce tax collections. But then, we 
should remember that, like it or not, we own Fannie and 
Freddie. We are the insurers of many trillions of dollars of 
mortgages, and a decline in real estate values could cost the 
Federal Government many hundreds of billions of dollars. With 
that I yield back.
    Chairman Garrett. The gentleman yields back. And that 
brings us to the conclusion of today's hearing. Again, as I 
said in the very beginning, I really do appreciate everyone who 
came out to the hearing today.
    The Chair notes that some Members may have additional 
questions for the panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    Inasmuch as a number of you said you had additional 
insights into the weak sort of aspects to this legislation as 
we go forward, I would suggest if you haven't already--and I 
know a lot of you have--that you talk to our staff members, zip 
any of your ideas over to us, and we will be glad to take a 
look at them. And with that, this hearing is adjourned.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]


                            A P P E N D I X



                            December 7, 2011


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