[Senate Hearing 112-50]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 112-50

 
     PUBLIC PROPOSALS FOR THE FUTURE OF THE HOUSING FINANCE SYSTEM

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING PUBLIC PROPOSALS FOR THE FUTURE OF AMERICA'S HOUSING FINANCE 
                                 SYSTEM

                               __________

                       MARCH 29 AND MAY 26, 2011

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director
              William D. Duhnke, Republican Staff Director

                       Charles Yi, Chief Counsel
                       Catherine Galicia, Counsel
                 Erin Barry, Professional Staff Member
                 Beth Cooper, Professional Staff Member
                 William Fields, Legislative Assistant

             Andrew J. Olmem, Jr., Republican Chief Counsel
              Michael Piwowar, Republican Chief Economist
            Chad Davis, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk
                     Levon Bagramian, Hearing Clerk
                      Brett Hewitt, Hearing Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                        TUESDAY, MARCH 29, 2011

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2

                               WITNESSES

Michael D. Berman, Chairman, Mortgage Bankers Association........     4
    Prepared statement...........................................    28
Arnold Kling, Ph.D. Member, Mercatus Center Financial Markets 
  Working Group, George Mason University.........................     5
    Prepared statement...........................................    34
Mark Zandi, Chief Economist, Moody's Analytics...................     7
    Prepared statement...........................................    48
Janneke Ratcliffe, Senior Fellow, Center for American Progress 
  Action Fund....................................................     8
    Prepared statement...........................................    51

              Additional Material Supplied for the Record

Arnold Kling web blog submitted by Chairman Johnson..............   122
Statement submitted by the Independent Community Bankers of 
  America........................................................   125

                              ----------                              

                         THURSDAY, MAY 26, 2011

                                                                   Page

Opening statement of Chairman Johnson............................   129

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................   130
    Senator Vitter...............................................   131
    Senator Reed.................................................   132
    Senator Wicker
        Prepared statement.......................................   152

                               WITNESSES

Terri Ludwig, President and Chief Executive Officer, Enterprise 
  Community Partners.............................................   133
    Prepared statement...........................................   152
    Responses to written questions of:
        Chairman Johnson.........................................   190
Ron Phipps, President, National Association of 
  REALTORS'...........................................   135
    Prepared statement...........................................   156
Mark J. Parrell, Executive Vice President and Chief Financial 
  Officer, Equity Residential, on behalf of the National Multi 
  Housing Council and National Apartment Association.............   136
    Prepared statement...........................................   166
Greg Heerde, Managing Director, Aon Benfield and Aon Benfield 
  Securities.....................................................   138
    Prepared statement...........................................   173

                                 (iii)

Martin S. Hughes, President and Chief Executive Officer, Redwood 
  Trust, Inc.....................................................   140
    Prepared statement...........................................   175
    Responses to written questions of:
        Senator Shelby...........................................   190
Barry Rutenberg, First Vice Chairman of the Board, National 
  Association of Home Builders...................................   142
    Prepared statement...........................................   180
    Responses to written questions of:
        Senator Shelby...........................................   194


 PUBLIC PROPOSALS FOR THE FUTURE OF THE HOUSING FINANCE SYSTEM--PART I

                              ----------                              


                        TUESDAY, MARCH 29, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I call this hearing to order.
    As we begin this hearing, I am reminded of the former 
Chairman's farewell speech on the Senate floor. He challenged 
Senators to rise to the expectations of the American people and 
work toward consensus to address the difficult times facing 
families across the Nation.
    While mortgage credit continues to be available, it is 
almost exclusively through Fannie Mae, Freddie Mac, and the 
FHA. Maintaining the housing finance system in this way is not 
sustainable for the long term. Reforming our housing finance 
system will require the kind of hard work and consensus 
building that the Senate is known for. This endeavor can only 
be accomplished through passionate but civil debate.
    To help us frame the debate, we have four witnesses before 
us today with proposals for the future structure of the housing 
finance system. I would like to thank each of you for being 
here today and for taking the time to try and find a path 
forward for the Nation's housing market. I was pleased to see 
that all your plans considered how changes would affect the 
cost and availability of mortgage credit to qualified families.
    These are complex issues with real consequences, and it is 
understandable that reasonable people will disagree about the 
path forward. While disagreement can help further our 
understanding of the potential impact of changes, we are not 
here to simply attack each other's ideas. I hope that in the 
great tradition of this body we can disagree without being 
disagreeable.
    The Committee's first hearing on this topic was a 
constructive discussion about the options for the future, and I 
hope we can continue that discussion today. At that time in the 
Committee agenda that I released in February, I raised several 
points for consideration. These included preserving the 30-year 
fixed-rate mortgage, ensuring that community banks continued to 
have equal access to the secondary market, protecting the 
availability of affordable housing, and safeguarding taxpayer 
dollars. I look forward to hearing from our witnesses about how 
each of their plans address these points.
    Before I conclude my statement, I would like to note that 
the FDIC is considering the proposed QRM definition, as 
required by the Dodd-Frank Act. Like other rulemakings, there 
will be a comment period before the definition is finalized. I 
would encourage extensive and thoughtful public comments about 
the proposed rule to ensure that all sides are heard.
    Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. Thank you for 
putting this hearing together today.
    Today the Committee will again take up the issue of housing 
finance system. At the Committee's last hearing, we heard from 
Treasury Secretary Geithner about the need for reform. 
Secretary Geithner noted that our housing market is now 
entirely dependent on Government support. He warned that 
private capital will not return until we fix the problems in 
our private mortgage market. He also told the Commission that 
Congress should, therefore, pass housing finance reform during 
this Congress.
    I agree with Secretary Geithner that housing finance reform 
is overdue and should be promptly addressed. Chairman Johnson 
has also stated that this is one of his highest priorities. 
However, I also believe that before Congress can consider 
legislation, this Committee needs to do its homework.
    The Committee needs, I believe, to thoroughly examine 
Federal housing policy and identify the problems with our 
current system. Accordingly, I believe this hearing is 
premature at the moment. Before we discuss solutions, I think 
on this Committee we should first clearly identify the problems 
we are trying to solve. Without that examination, a thorough 
examination, I fear that the Committee will again yield to the 
temptation of picking a solution before it has accurately 
described the problem. I think legislation should be driven by 
facts, not by predetermined outcomes.
    I would propose that the Committee establish a formal 
process for considering housing finance reform. This process, I 
believe, should include a series of hearings that are proceeded 
by comprehensive staff work.
    First, the Committee should hold a series of investigative 
hearings to examine Federal housing policy and our housing 
finance system. These hearings would seek to determine what 
aspects of our system have worked well and should be retained, 
as well as which aspects should be reformed or discarded. As 
part of these hearings, I believe that the Banking Committee 
would also examine what caused the failures of Fannie Mae and 
Freddie Mac. We have not done that thoroughly yet.
    The Committee would next gather the proposals for reforming 
our housing finance system from a wide variety of interested 
parties across industry, academia, and the public. I also 
believe the Banking Committee should then commence a second 
series of hearings examining the costs and the benefits of 
these proposals, directly applying the lessons learned from our 
first round of hearings. And once the Banking Committee has 
identified the problems and researched the potential solutions, 
we will then be ready for the final phase, which would be 
legislating.
    I understand that this process would be time-consuming and 
require a great deal of effort, but that is what this Committee 
should be about. I do not believe that the Committee has much 
choice. It is the only way to produce legislation on a subject 
as complex and important as housing finance. This process would 
help educate us on the issues so that we can make informed 
decisions here in the Committee and in Congress.
    It would also ensure that any legislation passed is 
effective and has the fewest unintended consequences. In 
addition, this process would offer the best chance of forging a 
bipartisan consensus on how we should proceed. Unfortunately, 
the Committee failed to follow this course with the Dodd-Frank 
legislation, and the result was partisan legislation that is 
full of technical problems that has had serious adverse 
unintended consequences. I hope we do not here repeat this 
mistake with housing finance reform.
    Thank you, Mr. Chairman.
    Chairman Johnson. Before I introduce our witnesses, would 
other Members like to make brief opening statements? I will 
also keep the record open for 7 days for statements and 
questions. Senator Reed.
    [No response.]
    Chairman Johnson. Senator Moran.
    Senator Moran. No, Mr. Chairman.
    Chairman Johnson. Senator Merkley.
    [No response.]
    Chairman Johnson. I would like to introduce our first 
witness, Mr. Michael Berman. Mr. Berman is chairman of the 
Mortgage Bankers Association and a founder of CW Financial 
Services. In addition to his capacity as chairman, Mr. Berman 
also leads the MBA Task Force entitled ``The Council on 
Ensuring Mortgage Liquidity: The Future of Fannie Mae and 
Freddie Mac.''
    Our next witness is Dr. Arnold Kling. Dr. Kling is a member 
of the Mercatus Center's Financial Markets Working Group. Prior 
to Mercatus, Dr. Kling had extensive experience at Freddie Mac 
and the Federal Reserve and has authored numerous books 
relating to the mortgage financial crisis.
    Next is Dr. Mark Zandi. Dr. Zandi is chief economist for 
Moody's Analytics, where he directs research and consulting. 
Moody's Analytics is a provider of economic research data and 
analytical tools. Dr. Zandi has frequently testified before 
Congress on various economic topics, including before this very 
Committee, and we welcome you back.
    Our last witness is Janneke Ratcliffe. Ms. Ratcliffe is a 
senior fellow at the Center for American Progress. Her work 
focuses on research and policy within the area of housing 
finance. In addition to her work at CAP, Ms. Ratcliffe is 
associated director at the Center for Community Capital at the 
University of North Carolina.
    We thank all of you for testifying before us today. Mr. 
Berman, proceed.

  STATEMENT OF MICHAEL D. BERMAN, CHAIRMAN, MORTGAGE BANKERS 
                          ASSOCIATION

    Mr. Berman. Thank you, Chairman Johnson and Senator Shelby, 
for the opportunity to testify today. I have been in the real 
estate finance industry for over 25 years, and my company has 
been active in the commercial mortgage-backed securities arena 
as an investor, lender, issuer of securities, servicer, and 
special servicer. We have also been an active Fannie Mae, 
Freddie Mac, and FHA multifamily lender and servicer.
    The current housing crisis has prompted a fundamental 
rethinking of the part played by the Government in the housing 
finance system. Certainty of the Federal role in the housing 
market is necessary to encourage private capital to return.
    Several factors contribute to the current uncertainty and 
the lack of private capital in the housing market. Ongoing 
uncertainty on risk retention rules, GSE reform, and the future 
of the conforming loan limits raise questions about the 
consistency of national housing policy. While the 
Administration's recently released white paper on reforming the 
housing finance system was an important first step, much work 
lies ahead, and we must act in a deliberate, coordinated, and 
comprehensive fashion.
    MBA firmly believes that a carefully crafted Government 
role can serve to maintain the nascent housing market recovery 
and preserve the availability of the affordable 30-year fixed-
rate mortgage. To this end, in 2008 MBA convened the Council on 
Ensuring Mortgage Liquidity, which I chair. This 23-member 
council was made up of industry practitioners from the single-
family, multifamily, and commercial sectors of the real estate 
finance industry. Its mission was to look beyond current market 
conditions to what a properly functioning secondary mortgage 
market would look like.
    In September of 2009, MBA first articulated a plan outlined 
in my written testimony. It is based on three key principles:
    First, secondary mortgage market transactions should be 
funded with private capital. Private capital should take two 
forms: capital that takes on credit risk on the mortgages, and 
capital from bond investors that takes on interest rate risk.
    Second, to promote uninterrupted market liquidity for the 
core mortgage market, the Government should provide an explicit 
but limited credit guarantee on a class of mortgage-backed 
securities backed by core, well-underwritten single-family and 
multifamily mortgage products. This guarantee should not be 
free, but should be financed with risk-based fees to be 
deposited into an FDIC-type insurance fund.
    Third, taxpayers and the system should be protected through 
limits on the mortgage products covered, permissible 
activities, portfolio size and purpose, coupled with strong 
risk-based capital requirements and risk-based payments into a 
Federal insurance fund. This plan has largely been mirrored in 
Option 3 of the Administration's White Paper as well as plans 
proposed by other industry practitioners and trade groups.
    Let me be clear. MBA's plan is not an extension of the 
current status quo. It focuses on core products and enacts five 
significant lines of defense to protect taxpayers. We believe 
that once the transition is complete, the Government footprint 
in the real estate market would be much smaller than today.
    The framework we have proposed is not intended to be the 
entire market. It is meant to focus on a narrowly defined set 
of core mortgage products that are essential to have available 
through all market conditions. Our proposal recognizes the need 
for a wide array of products through a reemergence of the 
private market, including private label securities and covered 
bonds.
    We must also ensure that the transition from the current 
system to a new model is as seamless as possible. As taxpayers, 
we have a $150 billion investment that we need to protect. 
Measures such as focusing the GSEs on a narrow range of 
mortgages and winding down their portfolios can be undertaken 
now. While we continue to rely on the GSEs as we identify a 
clear path forward, we must work to remove uncertainty and 
ensure that the GSEs' resources are of service now and 
throughout the transition.
    The challenge of retaining and recruiting talented 
professional cannot be understated. Without their talent, our 
housing finance system would be further at risk.
    Mr. Chairman, MBA's recommendations combine an 
acknowledgment that only a Government guarantee can attract the 
depth and breadth of capital necessary to support the market 
during times of economic stress, with a reliance on private 
capital, insistence on multiple layers of protections for 
taxpayers, and a focus on ensuring a competitive and efficient 
secondary mortgage market. These proposals were developed by 
industry practitioners and represent a practical approach to 
ensuring liquidity in the mortgage market.
    As you and other policy makers are aware, 16 diverse 
organizations coalesced this week around a similar set of 
principles, calling for a continued, predictable Government 
role in the housing finance system to promote investor 
confidence and to ensure liquidity and stability. We welcome 
your thoughts and comments on our idea.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Mr. Berman.
    Dr. Kling.

   STATEMENT OF ARNOLD KLING, PH.D. MEMBER, MERCATUS CENTER 
    FINANCIAL MARKETS WORKING GROUP, GEORGE MASON UNIVERSITY

    Mr. Kling. Thank you, Chairman Johnson and Ranking Member 
Shelby. I would like my written testimony to appear in the 
record.
    Chairman Johnson. It will be.
    Mr. Kling. Thank you.
    I will have to apologize in advance. I am going to overlook 
the many minor areas of agreement I have with other people at 
the table and focus on fundamental disagreements. And my 
remarks may be rather harsh because this country is suffering 
badly from the consequences of God-awful housing policy, and I 
cannot help but feel exasperated by it.
    What my message boils down to is that when it comes to 
coming up with another institution that supplies a Government 
guarantee in the mortgage market, we should just say no.
    Our friends at American Progress have some critical things 
to say about the private sector, and a lot of them are 
justified. It would be naive to think that the private sector 
always gets everything right. But it would be really naive to 
think that the Government gets things right. Government has 
committed large blunders, and Government has been captured by 
special interests. Right here at this table, we have two 
special interests represented. We have mortgage bankers who 
want a guarantee in the secondary mortgage market in order to 
make sure that we preserve the originate-to-distribute model. 
We have Moody's that wants to have a guarantee in the secondary 
mortgage market in order to ensure that securities are out 
there and they can earn fees from rating those securities. The 
only reason to have special interests here at the table is if 
you could look them in the eye and just say no.
    Our country's economy is in a shambles because of a 
Government-sponsored credit binge in mortgage lending. If a 
household has $5,000 and walks into Las Vegas and says, ``We 
would like $200,000 of poker chips,'' what would you say? If 
they walked into their stockbroker and said, ``We would like 
$200,000 worth of stock,'' what would you say? And if they want 
a $200,000 house, what should you say? You should say no. 
Buying a $200,000 house with $5,000 down is gambling. Even if 
it is done under the auspices of a Government program designed 
by a well-intentioned organization, it is gambling and it is 
wrong.
    Only in Washington, after this shambles caused by a credit 
binge, would we be worried about making sure that there is more 
credit available in the secondary mortgage market. That is like 
if a town had been devastated by a bunch of drunken hooligans, 
I think most people would be saying let us worry about not 
having binge drinking. Instead, if that happened in Washington, 
we would be worrying about how can we keep the bars stocked? 
How can we make sure that everyone has access to alcohol? We 
would not want anyone to miss out. Only in this upside down 
world of Washington.
    I wish that our friends at American Progress and other 
well-intentioned people would focus on projects that would help 
American households become better at saving, not bigger 
borrowers.
    If we do without a Government guarantee, will the secondary 
mortgage market survive? Not necessarily. We might go back to 
lending like when I was growing up where, if you got a mortgage 
loan, the same bank that lent you the money held onto the 
mortgage until you finished making the payments. That would not 
be a disaster for the American people.
    If we do not have a guarantee, will as much foreign capital 
come into the American mortgage market? I sure hope not.
    Will the 30-year fixed rate still be the standard mortgage? 
It will if consumers choose it when it is appropriately priced.
    Again, the markets will not do everything right, but 
without a guarantee, things will not go as badly wrong as they 
did with the Government-sponsored enterprises. Any scheme to 
bring Government back in as a player providing a guarantee is 
the financial equivalent of building a new nuclear power plant 
right on top of a fault line. Based on our experience, we 
should just say no.
    Chairman Johnson. Dr. Kling, I would remind you that we are 
here to have a productive discussion about the future of our 
housing finance system, not to quote your blog to attack other 
witnesses' proposals and just hope my temper stays in check. I 
ask that the full blog post be entered into the record. Please 
be considerate of the Senate rules of civility in the remainder 
of your testimony.
     Mr. Zandi.

   STATEMENT OF MARK ZANDI, PH.D., CHIEF ECONOMIST, MOODY'S 
                           ANALYTICS

    Mr. Zandi. Thank you, Mr. Chairman, Senator Shelby, and the 
rest of the Committee, for the opportunity to speak today. You 
should know I am chief economist of Moody's Analytics, which is 
an independent subsidiary of Moody's Corporation, and I am also 
a director of the MGIC Corporation, which is the Nation's 
largest mortgage lender. My views I am expressing today are 
mine, not Moody's or MGIC's. I am going to make three points in 
my remarks.
    First, the Federal Government should significantly scale 
back its current role in the housing and mortgage markets. As 
has been pointed out, nearly all of the mortgage loans 
originated in the past couple of years have been FHA, Fannie, 
or Freddie loans, Government loans. While changing this quickly 
would be disruptive to the housing market and economy, it is 
not sustainable in the long run.
    This untenable situation is the result of the collapse of 
the private mortgage market during the financial panic. Just to 
give you a number, at the peak of the housing bubble in 2005, 
the private market accounted for roughly two-thirds of all 
originations, and powering the private market was the 
securitization process, which at its core was fundamentally 
flawed. No one in the process was responsible for making sure 
that it was working properly. Mortgage banks and brokers, 
investment banks, credit rating agencies, and Government 
regulators themselves all made mistakes. And right now the 
private market is comatose.
    To allow the private market to revive, the Government 
should phaseout Fannie and Freddie and significantly scale back 
the role of the FHA--again, not quickly but over time in a 
clearly defined way--and there are a number of policy tools to 
do that that I think the Administration has laid out that are 
useful: reducing conforming loan limits, which will begin later 
this year; raising insurance premiums at the FHA, Fannie, and 
Freddie; and requiring Fannie and Freddie to reduce the size of 
their loan portfolios. So point number one, I think it is very 
important for the Government to phaseout its role in the 
mortgage market.
    Point number two, as the Government steps away from its 
current role, I think a so-called hybrid system should replace 
it. You know, there are many different forms of hybrid systems 
that have been proposed. The MBA and other think tanks, we have 
made our own proposal. And in these systems, private capital is 
key. It provides the underpinning for the system. Private 
investors own the loans and insure the loans.
    But there is an important role for Government, and there 
are four key roles:
    One, providing catastrophic insurance, so if things go very 
badly wrong, as they have--in this recent period and also in 
the Great Depression--the Government would provide support.
    Second, standardization. The securitization process can be 
much more efficient if it is standardized, and I think 
Government plays a key role in providing that standardization.
    Third, regulating the system, and that is key to any 
proposal. We need to have very strong, sound regulation to make 
sure that good mortgage loans are being made.
    And if there are subsidies provided to disadvantaged 
households, they must be explicit and on-balance-sheet. I think 
that is very important. But that is a role for Government.
    Just one quick point about catastrophic insurance. You 
know, to me I think it can be done reasonably well. The FDIC 
and FHA are good examples of where Government can get it 
roughly right. I mean, even the FHA, although it has come under 
significant criticism, has weathered the storm pretty well, and 
I think it will come out of this in reasonably good shape.
    My third point--the second point being that I think a 
hybrid system would be the best system. My third point is that 
the hybrid system has a number of advantages over other 
proposals, most notably a fully privatized system. Let me just 
go through three of them.
    First is I think mortgage rates would be measurably lower. 
I think for the typical borrower sort of in the middle of the 
distribution, under a fully privatized system in which 
investors truly believe that Government will not step in to 
save the system, which I think will be difficult to accomplish 
under any circumstance, interest rates will be nearly 100 basis 
points higher, about a percentage point higher.
    Second, I think it will be very difficult to preserve a 30-
year fixed-rate mortgage in a fully privatized system. You can 
do that in a hybrid system. In a fully privatized system, I 
think our system will evolve to be similar to the European 
system in which very few 30-year fixed-rate mortgages are 
offered.
    And, finally, I do think under a hybrid system taxpayers 
will be compensated. The catastrophic insurance would be 
explicitly priced and charged for, unlike in a fully privatized 
system where it would be implicit. And at the end of the day, 
if things go badly wrong, I do think the Government would step 
in and it would cost taxpayers.
    So, in conclusion, I think it is fair to say that mortgage 
rates are going to be higher after all of this, the 
availability of credit lower. But I think we need to be very 
careful how we design the system going forward. A hybrid system 
I think offers the best solution for our mortgage finance 
system.
    Thank you.
    Chairman Johnson. Thank you, Dr. Zandi.
    Ms. Ratcliffe.

   STATEMENT OF JANNEKE RATCLIFFE, SENIOR FELLOW, CENTER FOR 
                 AMERICAN PROGRESS ACTION FUND

    Ms. Ratcliffe. Thank you, Mr. Chairman, Ranking Member 
Shelby, and Members of the Committee. I am Janneke Ratcliffe, a 
senior research fellow at the Center for American Progress 
Action Fund and the executive director for the Center for 
Community Capital, and today I am especially honored to be 
asked to speak to you as a member of the Mortgage Finance 
Working Group. We began gathering in 2008 to chart a path 
forward for the mortgage market. Our ``Plan for a Responsible 
Market for Housing Finance'' is the result. It is included in 
full in my written testimony. I am going to summarize it, 
though I speak only for myself in the views expressed today.
    Our collective experience in the 3 years we have spent 
hashing out these issues has made us well aware of the 
difficult challenge you now face. The immediate task is to 
restore confidence in the housing market. We are also convinced 
that, long term, housing can continue to be core to Americans' 
prosperity and economic security and the foundation of middle-
class opportunity. To meet this mission, housing finance reform 
must meet three key goals:
    First, provide broad access to reasonably priced financing 
for both home ownership and rental housing so that more 
families, including the historically underserved, can have safe 
and sustainable housing options.
    Second, preserve the 30-year fixed-rate mortgage, which 
allows families to fix their housing costs, build assets, and 
plan for their future in an ever more volatile economy.
    And, third, ensure that lenders, large and small, in 
communities large and small, can competitively offer the 
affordable, transparent, safe mortgage loans that the borrowers 
need.
    History has shown us that a housing finance system left to 
private markets will be subject to a level of volatility that 
is just not systemically tolerable, given the importance of 
housing to the American economy and the American family.
    Therefore, our proposal structures an appropriate 
Government role, which is essential for stability and 
consistent with the goals just listed. Our proposal keeps 
beneficial aspects of our current system, including broad and 
constant liquidity and good, safe mortgage products, but 
assigned certain functions performed by Fannie and Freddie to 
the private sector. The Government's role would be limited to a 
catastrophic backstop, one that is explicitly and actuarially 
priced, backed by an FDIC-like reinsurance fund and financed by 
levies on mortgage-backed securities. The backstop work be 
available only on loans meeting safe mortgage parameters, 
subject to stringent operational and securitization standards. 
Further, it would be available only through highly regulated 
single-purpose companies, chartered mortgage institutions, or 
CMIs, who put sufficient capital of their own in the first loss 
position. These capital levels would be higher than those 
previously required of Fannie and Freddie; thus, there would be 
several layers of protection standing ahead of taxpayer 
exposure: borrower equity, CMI capital, in some cases private 
mortgage insurance, and the catastrophic risk insurance fund.
    Our proposal preserves the traditional role of originators 
with measures to ensure that lenders of all sizes in all 
communities can offer the same beneficial mortgage products, 
counteracting the current trend toward extreme market 
concentration, and includes a prohibition against CMIs being 
controlled by originators. This system would serve the vast 
majority of households, those seeking consistent, affordable 
credit and predictable housing costs.
    We also include mechanisms to see that the benefits of this 
system are available in a more fair and equitable way than 
before, and that prevent the dual market where certain classes 
of borrowers and communities are relegated to separate, unequal 
markets. These mechanisms prevent the CMIs from ``creaming the 
market'' and require them to extend the benefits of the system 
to all qualified borrowers. For those families whose housing 
finance needs require more support, we call for the 
establishment of a market access fund to promote products that 
close market gaps, which would complement the Affordable 
Housing Trust Fund and the Capital Magnet Fund; and we also 
outline steps to revitalize the FHA.
    In closing, I would say a note of caution about proposals 
that recommend complete privatization of the housing finance 
system, or privatization with occasional Government 
intervention. Such radical proposals would not achieve 
stability and, in fact, would expose taxpayers to more risk and 
would expose our economy to boom-bust cycles. They would also 
result in some stark consequences for American households. 
Mortgage finance would predominantly be in the form of loans 
with shorter duration and higher costs, and the 30-year fixed-
rate mortgage would not be available under affordable terms for 
most families.
    Rental housing would be less available and would cost more, 
even as there would be greater demand for it, and fewer working 
families would have access to asset-building potential of home 
ownership, and this pillar of the economic mobility that has 
characterized the American economy would be lost.
    Thank you for inviting me to talk about the work my 
colleagues and I have done. I will be happy to answer your 
questions.
    Chairman Johnson. Thank you, Ms. Ratcliffe.
    Dr. Zandi, Ms. Ratcliffe, and Mr. Berman, the insurance 
system you proposed differs from the FDIC Deposit Insurance. If 
losses from banks' insolvencies exhaust the Deposit Insurance 
Fund, the FDIC raises insurance rates on the surviving banks 
and the Government takes no loss. Should the mortgage market 
have a similar clawback mechanism, perhaps including clawbacks 
from banks and other firms that sold mortgages to the 
securitizers in the new system? Dr. Zandi.
    Mr. Zandi. Yes, I think it should have a clawback mechanism 
so that if the reserve fund is depleted, that it can be 
replenished through these types of levies. So I think that 
would be entirely appropriate in the context of a hybrid system 
that I proposed, yes.
    Chairman Johnson. Ms. Ratcliffe.
    Ms. Ratcliffe. I would agree.
    Chairman Johnson. And Mr. Berman.
    Mr. Berman. The system that we have proposed is slightly 
different, Mr. Chairman, in that in our system, the FDIC-type 
insurance fund would only come into play if these mortgage 
credit guarantor entities, or CMIs, actually had gone under and 
all of their assets were depleted. So in that case, there would 
be nothing--there would be nobody to claw back from. We think 
that that alignment is critically important. Again, if private 
capital is going to be in the risk position for the credit on 
these mortgages, we believe that stockholders and bondholders 
who have invested in those entities would be most vigilant if 
their capital was totally at stake first before any FDIC-type 
insurance fund were available.
    Chairman Johnson. Dr. Kling, in your paper, you state that 
the Government should ensure that any housing subsidies should 
be on budget, and you mentioned more robust rental vouchers and 
grants for homebuyers. How would you structure grants to 
homebuyers?
    Mr. Kling. I think that grants to homebuyers might take the 
form--might take a number of forms. You could have some kind of 
matching program for down payments. But I think you have--we 
have an Earned Income Tax Credit. If we could have some kind of 
savings tax credit that would encourage savings, a Saved Income 
Tax Credit, that would be a better way to help low-income 
households get into the housing market so that they would come 
in with equity in the home. The best guarantee in a mortgage is 
a 20 percent down payment, and if we could get households to 
save up to that 20 percent down payment, we will have a stable 
mortgage finance system. And if we do not do that, even with a 
Government guarantee, it will just come to grief.
    Chairman Johnson. Dr. Kling, the vast majority of subprime 
and Alt-A loans were issued securitized and included 
unstructured securities such as CDOs by sophisticated financial 
market participants other than GSEs. These private market 
solutions failed with terrible results outside the private 
mortgage market and Wall Street. Why should we expect that the 
combination of private market mortgage securitization and 
private insurance will produce a different result next time?
    Mr. Kling. I hope that the private securitization market 
does not come back unless it gets--unless it comes back in a 
reformed way. I think it is pretty dead now. I think it 
deserves to be dead. I think that the only thing that caused it 
to arise was a phenomenon called regulatory arbitrage, where 
the Basel Capital Accords gave rewards to banks for holding 
lousy mortgages, packages of securities, and punished banks for 
holding good mortgages as whole loans. If we change the capital 
requirements, we will have more sensible policies.
    And when we talk about pricing this Government guarantee, 
we are going to run into exactly the same issues that the Basel 
Capital Accords ran into. That is, if you have crude risk 
buckets, people are going to arbitrage against that and you are 
going to have the exact same problem, that the private markets 
are going to figure out how to dump all the risk on the 
Government and keep all the profits for themselves, and that is 
the danger of bringing the Government in as a guarantor.
    Chairman Johnson. Ms. Ratcliffe, quickly, with QRM being 
considered today, there is a good deal of focus on the down 
payment that a borrower brings to the table as a way to reduce 
the likelihood of default. In your experience are there other 
factors that can help assess this risk?
    Ms. Ratcliffe. Low down payment loans can be made safely, 
and there are many ways to do this and we have lots of 
evidence, and I would just like to cite some research that we 
have been doing at the Center for Community Capital. We have 
been tracking a portfolio of 50,000 mortgages that were made in 
the decade leading up to the crisis. These loans were made by 
banks around the country. The median income of a borrower in 
this program was $34,000. Fifty-four percent of the borrowers 
had credit scores of 680 and below. And 69 percent, almost 70 
percent of the participants in this program, put down less than 
5 percent on their mortgage. These loans were originated under 
lenders' CRA and Affordable Housing programs.
    To date, fewer than 5 percent of these mortgages have 
entered into foreclosure and the households have managed to 
accumulate a level of equity in their home, at the median, 
$25,000, that they could not have achieved with any other 
mechanism out there.
    What led to this success? It is pretty clear that it is 
well-underwritten access to 30-year prime priced fixed-rate 
mortgages. We have taken borrowers in this portfolio and 
compared them to their counterparts in the subprime market and 
found that the same borrowers given a different set of products 
were three to five times as likely to be in default.
    So, as I said, it is good product, fairly priced, with 
solid underwriting. Reserves are also helpful and probably more 
valuable to a modest income household than having all their 
money invested in their down payment. Escrows--and there are 
other things that have been proven to help, as well, 
prepurchase counseling, down payment assistance. And so we 
believe that there are many ways to assure safe high LTV 
lending, and without that, you shut a lot of people out of home 
ownership.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Recently, Secretary Geithner before this Committee warned 
us of the difficulty in appropriately pricing a guarantee for 
mortgage-backed securities, and he cautioned, and I am quoting, 
``Guarantees are perilous. Governments are not very good at 
doing them, not very good at designing them, not very good at 
pricing them, not very good at limiting the moral hazard risk 
that comes with them.'' Those were the words of our Secretary 
of Treasury. Mr. Berman, Dr. Zandi, Ms. Ratcliffe, do you agree 
with Secretary Geithner?
    Mr. Berman. If I may, Senator, in the first instance, there 
is no question that there is risk in any pricing mechanism.
    Senator Shelby. Sure.
    Mr. Berman. But having said that, I think we have two new 
circumstances that should help us dramatically. The first is 
that we have just come through the greatest crisis since the 
Great Depression, so the data that we have in terms of a 
stressed economy and what the effect of that economy would be 
on various mortgage products gives us a much greater amount of 
information to make better decisions on.
    Second, in what we have described in our mortgage credit 
guarantor entity guarantee, we would have what we have called 
core mortgage products that would, in some respects, attract, 
for instance, the QRM, the Qualified Residential Mortgage, 
kinds of products. And again, we have a substantial amount of 
data and those are more conservative loans than the kinds of 
pricing that have oftentimes failed.
    So for those two reasons, we think we could do a lot better 
this time around.
    Senator Shelby. Dr. Kling, do you agree with Secretary 
Geithner?
    Mr. Kling. I would probably agree even more strongly, 
because I have a background in the analytics of pricing 
mortgage default rates----
    Senator Shelby. Absolutely.
    Mr. Kling. ----and they--first of all, it is a difficult 
problem. Second, it differs greatly by mortgage product. You 
cannot just have a one-price-fits-all guarantee. And finally, 
when you are at the high LTV level, it is just a pure bet on 
house prices. You are just guessing which way house prices will 
go. Any loan you make, no matter how bad, no matter how low a 
down payment, has at least a 50 percent chance of paying off 
because the house price might go up. But that does not mean it 
is not gambling. It is still gambling and the pricing of it is 
extremely difficult.
    Senator Shelby. Dr. Kling, you have cited some of the 
potential risk that you would see to the taxpayer in having the 
Government price the guarantee. That is what you are talking 
about, the risk there, is it not?
    Mr. Kling. It is a catastrophic risk. You will probably 
make money most of the time, like picking up nickels in front 
of a steamroller, and then at some point, that steamroller is 
going to get you.
    Senator Shelby. Dr. Zandi, do you agree with Secretary 
Geithner's comment?
    Mr. Zandi. I do. I think it would be very difficult to 
price risk. It is, for the private sector as well as the 
Government sector. I would say just a few things, three quick 
things.
    Senator Shelby. OK.
    Mr. Zandi. First of all, that in the hybrid system we are 
discussing, it is catastrophic insurance, so most of the risk 
would be--well, all but the very catastrophic events would be 
covered by the capital provided by the private sector.
    Second, it can be done. I think the FDIC and the FHA are 
good examples of that and they are relevant to this discussion.
    And three, the third thing I would say is that in a fully 
privatized system, you are not getting rid of the risk. You 
still have the catastrophic risk, and at the end of the day, 
the Government will step in. I just believe that if we come 
push to shove, that it is going to be very difficult for the 
Government not to step in and save the system, and therefore it 
is better to explicitly price for that service that you are 
providing to give taxpayers some compensation for it.
    Senator Shelby. Ms. Ratcliffe, do you have any comments 
there? Do you agree with Secretary Geithner or disagree?
    Ms. Ratcliffe. I think I would agree with Dr. Zandi, and I 
want to just----
    Senator Shelby. But not with Secretary Geithner?
    Ms. Ratcliffe. No, I think that the Government is going to 
have to set the price on the risk one way or another, whether 
it is through capital reserving requirements--and I wanted to 
add a little bit about the capacity of the system that we 
proposed, the hybrid system, which would put private capital in 
the first loss position and responsible for pricing the risk, 
but also recognize the efficiencies that brings to the system 
by having special purpose entities whose job it is to pool 
risks and manage risks across institutions, across geographies, 
across vintages. That makes for a much more efficient risk 
management system.
    Senator Shelby. Ms. Ratcliffe, in your proposal, you call 
for a guarantee of mortgage-backed securities. That is what you 
are basically saying here, right?
    Ms. Ratcliffe. Similar to what Dr. Zandi talked about, we 
would have the privately capitalized chartered mortgage 
institutions taking the first loss and guaranteeing the 
mortgage-backed securities. Then the next level of defense 
would be an FDIC-like insurance fund that is paid into by the 
private market and the Government backstop would be 
catastrophic only.
    Senator Shelby. But Secretary Geithner basically says that 
any Federal guarantee should be priced according to the risk, 
without any political considerations. Do you disagree with 
that?
    Ms. Ratcliffe. No, I do not disagree with that.
    Senator Shelby. OK. Mr. Berman, the plan put forth by the 
Mortgage Bankers Association argues that social policy goals, 
such as affordable housing initiatives, should be pursued 
through explicit Government programs rather than entities in 
the secondary market. What is the advantage, Mr. Berman, of 
housing policy goals pursued through Government programs 
instead of through private entities, and what types of 
distortions could indirect public or social housing policy 
goals have on the economy?
    Mr. Berman. In the first instance, we would like to 
separate out the possible distortions of subsidies that would 
indirectly or could indirectly affect, for instance, what we 
just talked about, the pricing of risk.
    Senator Shelby. Explain what you mean.
    Mr. Berman. So housing goals, we believe, should be 
separated from the hybrid Government system that we have 
described. We believe that FHA, USDA, Rural Housing, are 
appropriate places where the Government can very specifically 
have programs. We would also suggest that there could be a tax 
or a levy, if you will, on these new mortgage credit guarantor 
entities that could be put into a pool that could be used. But 
again, it would be a very explicit source of payment for 
subsidies and would not cloud the pricing of the risk or 
distort the pricing of the risk.
    Senator Shelby. Dr. Zandi, in your testimony, you stated 
that the mortgage finance system should be, quote, 
``capitalized sufficiently to withstand losses on defaulting 
mortgages that would result if house prices declined by, say, 
25 percent.'' Under this standard, how high would down payment 
requirements need to be for potential borrowers? Ten percent? 
Twenty percent? And if this standard had been in place prior to 
the crisis, how much more capital would Fannie and Freddie have 
been required to hold?
    Mr. Zandi. Well, if Fannie and Freddie were capitalized to 
a 10-percent house price decline scenario-- 10 percent--and----
    Senator Shelby. And that was not good enough.
    Mr. Zandi. It was obviously not good enough, and so I think 
25 percent--just as a starting point for discussion, because 
that is the price declines that we are going to experience in 
the current housing crash.
    Senator Shelby. Mr. Chairman, if I could, Dr. Kling, could 
you take a moment to describe to the Committee how the 
policies--you recently wrote a paper dealing with the financial 
crisis of 2008. In it, you discussed the connection between 
what you described as, quote, ``bad bets by our Nation's 
financial system and a U.S. housing policy such as affordable 
housing goals, the CRA, and the Federal guarantees.'' Could you 
describe how these policies and insufficient capital standards 
have caused the financial crisis?
    Mr. Kling. Well, that is a--I will try to keep my answer 
brief, but that is a----
    Senator Shelby. No, that is very important.
    Mr. Kling. OK. The--first of all, encouraging low down 
payment lending is a mistake. It just creates gambling. It does 
not help neighborhoods. It destabilizes them, because people 
can only buy houses when prices are rising, and then when 
prices stop rising, they default and then the whole 
neighborhood collapses. So we destabilized housing markets by 
encouraging low down payment lending.
    The capital requirements, as I mentioned earlier, encourage 
securitization of really bad mortgages and allowed regulatory 
capital to arbitrage. You talked about Freddie and Fannie 
supposedly having 10 percent capital. A lot of that was not 
real capital. It was tax loss carry-forwards and other soft 
forms of capital. And I am not convinced that the regulator 
really was on top of the caliber of mortgages that were in 
Freddie's and Fannie's portfolios, and I do not think they 
really understood how much capital they really needed. So that 
is, very briefly, some of the things that contributed.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Reed.
    Senator Reed. Mr. Chairman, let me, if I may, I will pass 
to Senator Merkley, if he is ready.
    Chairman Johnson. Senator Merkley.
    Senator Reed. I have just arrived from Armed Services.
    Senator Merkley. Thank you very much, Mr. Chair and Senator 
Reed.
    I wanted to start, Ms. Ratcliffe, with your commentary on 
your study in which you looked at low down payment lending to 
determine whether or not low down payments drove foreclosures. 
And if I understood your testimony correctly, you found that it 
was not low down payments that drove lending, but it was more 
predatory mortgages, I assume, teaser rate mortgages, triple-
option loans, and so forth.
    Ms. Ratcliffe. Yes, sir. In our particular study where we 
compared the folks who had borrowed with low down payment loans 
with sustainable prime priced 30-year fixed-rate mortgages to 
purchase homes versus those in the subprime sector, the primary 
drivers of the difference in default was adjustable rate 
features and broker channel and prepayment penalties. So these 
are some of the features that we identified.
    Meanwhile, I mean, I think we have gotten to the point 
where, somehow, low down payment lending has become conflated 
with the term subprime, and I am not sure that is justified. 
Twenty-seven million Americans between 1990 and 2009 have 
purchased a home with less than 20 percent down. It roughly 
represents a third of the market in normal times, and in the 
most recent year, I understand from some data from the National 
Association of REALTORS' that some 57 percent of 
homes purchased in 2010 put down 10 percent or less on their 
mortgage. So it is an important part of the segment and it does 
not equate with subprime lending.
    Just as an example, if you look at what has caused a 
disproportionate share of losses at the GSEs, it is the Alt-A 
portfolio, which had higher loan balance loans and average down 
payment of closer to, I believe, 27 percent and higher credit 
scores. These were not low down payment borrowers that caused 
this crisis.
    Senator Merkley. So, Mr. Kling, you have noted the risks 
that were created by various mortgages, but you really 
emphasized the size of the down payment. Given the type of 
study that Ms. Ratcliffe is noting, why do you not emphasize 
getting rid of the predatory practices, the teaser rates, the 
steering payments, the liar loans, and so forth rather than the 
low down payment?
    Mr. Kling. I think we should get rid of all--Senator, I 
think we should get rid of all the bad practices in mortgage 
lending that grew up over the last two decades. But there is 
simply no way to make low down payment lending safe in an 
environment--any environment other than a rising house price 
environment. Her study covered the last decade. If you made a 
low down payment loan in 2001, there was enough of a price 
increase after that that you are probably fine, but it only 
works in that environment and it creates this cycle of a boom 
as house prices are rising, and then once they stop rising, 
everybody crashes. You get this epidemic of foreclosures. It 
destabilizes the entire market.
    Senator Merkley. One thing I was struck by is when you were 
talking about mortgages, you kept referring to the notion of 
gambling, and certainly it seems like there is an element of 
risk in every investment, but the term--if you take the 
framework that any investment that has risk is gambling, then 
all investing is gambling. Is that not really just a--why are 
you bringing this to bear and why not say nobody should buy 
stock, because stock can go up and down.
    Mr. Kling. I am not--Senator, I am not saying that nobody 
should buy a house. I am not saying that nobody should buy 
stock. I am saying that we should reduce the degree of 
gambling. So in the stock market, I believe the margin 
requirement is something like 50 percent. We do not require a 
50 percent down payment for buying a home, but I think a 20 
percent down payment is reasonable.
    Senator Merkley. I will just share that in my working class 
neighborhood of three-bedroom ranches, the average price of a 
house is around $200,000, and at 20 percent down, that is 
$40,000. There are very few working families in America that 
would become homeowners at a $40,000-plus closing cost. And yet 
if we look across our economy at the major instruments that 
have brought people into the middle class, one is education. 
One is starting businesses. But the broadest is home ownership, 
and I am just concerned that given the light of the type of 
studies that have seen vast transfers of wealth to working 
Americans through home ownership, I mean, Mr. Kling, you may be 
throwing the baby out with the bathwater here.
    Mr. Zandi, did you want to comment?
    Mr. Zandi. Senator, I just want to make a couple of points. 
One is I think it is important first to recognize that after 
you control for all the things that affect default, down 
payment matters, but it does not matter as much as you might 
think. So if you control for a credit score, if you control for 
debt-to-income ratio, if you control for product type, if you 
control for investor-owned versus owner-occupied, all of these 
things, then you will see that default rates do rise. They do 
rise as the down payment becomes smaller, but the increases are 
quite modest, up almost to a 95 percent LTV.
    The second point I would make is that because of the 
decline in housing values that has occurred over the last 
several years, if you limit lending to 20 percent down, you are 
going to be locking out the vast majority of American middle-
income households because there is no equity left. It has been 
wiped out in this period. So there is a big chunk of the 
American population that will have a very difficult time 
participating in home ownership.
    And the third thing I would say is that you can price for 
risk, so if, in fact, you start--if you provide loans with 
lower down payments, then I think it is reasonable to charge a 
higher interest rate for that because it is riskier.
    Senator Merkley. Thank you. My time has expired, so I will 
apologize because I see more comments desired, but in respect 
to my colleagues, I will defer.
    Chairman Johnson. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    Mr. Berman, the 30-year fixed mortgage has been sort of the 
North Star of American housing for a long time. How do you 
think it will be maintained? Should it be maintained? What is 
your view in terms of that product as a centerpoint of the 
mortgage market?
    Mr. Berman. Senator, the most recent study we have has it 
over 80 percent of mortgage loan applications in February for 
home purchases were for 30-year fixed-rate mortgages. So it has 
clearly become a staple for the American consumer. Importantly, 
we have made a value decision in making that available and 
having the Government role make it affordable, that where homes 
are oftentimes the most significant asset that one would own 
throughout their lifetime, that taking the credit risk on that 
home is one thing, but taking an interest rate risk is quite 
another. And so having the 30-year fixed-rate mortgage as an 
affordable product allows homeowners to virtually eliminate 
that risk in that they can have a fully amortizing mortgage 
product, and then, of course, given the prepayment 
flexibilities that we have, it allows for when rates go down 
that they can again get another 30-year fixed-rate mortgage, 
again reducing their interest rate risk.
    As you know, it is a very unusual instrument in terms of 
what is happening in other countries, and I think that the 
uniqueness in the United States is that we have made that 
decision that we want to protect homeowners from the interest 
rate volatility that would otherwise impact them.
    Senator Reed. Some of the proposals would perhaps make that 
a less available product, is that your analysis of the 
competing proposals?
    Mr. Berman. Yes. In fact, the TBA market, the ``to be 
announced'' market that has really been created by Fannie Mae 
and Freddie Mac has become a vitally important way for 30-year 
fixed-rate mortgages to be priced and then securitized. There 
would be very few participants in the 30-year fixed-rate 
mortgage market if there was no securitization allowed, given 
that it would make it very difficult for any small banks or 
independent mortgage bankers to participate whatsoever.
    And furthermore, the ability of providing the affordability 
in terms of rates for those 30-year mortgages would be severely 
negatively impacted, anywhere from 50 to 150 basis points, if 
people were securitizing 30-year fixed-rate mortgages and did 
not have the TBA market to utilize as a hedging instrument.
    Senator Reed. Dr. Kling, your comments on the 30-year 
mortgage, the proposals?
    Mr. Kling. I believe that American consumers prefer the 30-
year fixed-rate mortgage and I believe the market will provide 
what the consumers want. The----
    Senator Reed. At a price they can pay?
    Mr. Kling. The President's report on housing finance said 
that any rational housing reform is going to lead to a higher 
cost of mortgage credit. You cannot continue to subsidize 
mortgage credit and mortgage credit risk without running into 
trouble. It is not a rational policy.
    You know, 20 years ago, the difference between the interest 
rate in the jumbo loan market, that is the markets that Freddie 
and Fannie were not eligible to guarantee, and the Freddie and 
Fannie market was only 25 basis points, one-quarter of 1 
percent. So I do not think that is a very frightening number.
    A more frightening number would be, you know, Ms. Ratcliffe 
said that of these wonderful well-underwritten low down payment 
loans, 5 percent of them defaulted. Well, we used to assume 
that you would lose 50 percent on each defaulted loan. So a 5-
percent default and you have a 50 percent loss rate, that is a 
two-and-a-half percentage point difference in price. You would 
have to charge 250 basis points more on that loan compared to a 
loan that has much lower default risks.
    So the key is to have loans that have lower default risk. 
That is the key to having low interest rates. The interest rate 
risk is not so much of an issue and the--certainly, the 
Canadian homebuyers have never suffered from having interest 
rate shocks, even though they have a 5-year rollover, and if 
the American people choose to something like a 5-year rollover, 
I do not think it would be a disaster. I do not think that is 
what they choose. I think they will choose a 30-year. I think 
it will be----
    Senator Reed. Well, let me have Ms. Ratcliffe respond, 
because her analysis was questioned.
    Ms. Ratcliffe. Thank you. I had a couple points to make. 
First of all, the additional charge for the higher risk would 
not necessarily fall on the loan every year. It would be spread 
over the life of the loan to begin with.
    I also wanted to make a point about the math that says that 
borrowers in the jumbo markets pay only, you know, 30 to 50 
basis points more for a mortgage than in the Fannie and Freddie 
sector. Our proposal sees that there are certain segments of 
the market which will probably always be able to, at a 
reasonable price, access a fixed-rate mortgage. Even through 
the jumbo market is still much more--tends much more toward 
adjustable-rate mortgages, there are fixed-rate mortgages 
there. And for high-income borrowers, that will probably remain 
an option. It is the rest of the market that we are worried 
about having access to the 30-year fixed-rate market.
    The volatility that has been talked about that we are 
living through right now was not caused by the 30-year fixed-
rate mortgage but more it was a boom-bust cycle driven by 
private capital, which tends to behave very procyclically. So 
in good times, they undercapitalize risk. They rush in. They 
exacerbate bubbles. And then in bad times, they overprice risk 
and they basically freeze up.
    The Government recognized this in 1934 when it decided to 
opt for stability in the mortgage system by introducing the FHA 
and the 30-year fixed-rate mortgage and a number of standards 
to go with it, and it has become a key element in the 
strengthening of the middle class. And what works so well about 
this product is that, of course, the payments stay fixed, so 
over time, as income rises, the family has more disposable 
income for spending or for investing, and with amortization and 
just modest amounts of appreciation over the long run, this 
becomes a great asset-building tool for future financial needs.
    So that product in and of itself inherently reduces risk, 
because over time, debt-to-income improves, and in normal 
environments, LTV should improve. So using that product allows 
us to put more people into homes more sustainably and more 
safely than if we just went to ARMs. They are just simply a 
riskier product. Even if you just look at the----
    Senator Reed. I----
    Ms. Ratcliffe. I am sorry.
    Senator Reed. My time--the Chairman has been very gracious, 
but thank you very much.
    Mr. Berman. Senator, may I just make one clarification?
    Senator Reed. Yes.
    Mr. Berman. I appreciate that. Oftentimes, the jumbo 
mortgage market, 30-year fixed as compared to the conforming 
market, and one of the underlying assumptions that I think we 
have to be very careful about is that in order to price and 
hedge those jumbo loans, even though they are outside of the 
Fannie and Freddie arena, they are utilizing the Fannie and 
Freddie TBA market to hedge those instruments. If that market 
had disappeared, the hedging costs would, in fact, rise and 
that 30 to 50 basis points would be much more dramatic.
    Chairman Johnson. Senator Hagan.
    Senator Reed. Thank you.
    Senator Hagan. Thank you, Mr. Chairman, and thank you for 
your testimony here today, all of you.
    Ms. Ratcliffe, in your testimony you talk about the need 
for standardization of underwriting and documentation rules. 
Why is the standardization so important in the mortgage market? 
Can you go over that, please?
    Ms. Ratcliffe. Well, certainly. One of the things we saw 
with the private label securitization boom was a real 
complexity of products. They became so opaque that it was 
difficult for investors to understand what they were investing 
in. It became really impossible for borrowers to understand 
what they were borrowing. It became difficult to comparison 
shop.
    You know, I have never actually read every document in my 
30-year fixed-rate mortgage because I know what I am getting 
when I sign up for it, and I can look in the Sunday paper or go 
online and make comparisons. But when you have proliferation of 
complex products that no one can understand, it introduces new 
risks into the system. So we think standardization is an 
important aspect of a stable mortgage system.
    Senator Hagan. And would you agree that the qualified 
residential mortgage helps drive the standardization that you 
have spoken about?
    Ms. Ratcliffe. So I think since we are sort of looking at 
new definitions coming out for the qualified residential 
mortgage, it is hard for me--I have not studied them closely, 
and there is a whole lot in flux with the secondary market 
still in flux. So I would sound a note of caution that QRM 
standards that are too restrictive will actually increase 
taxpayer risk and not address the access, make access harder. 
So it could potentially drive, for example, high LTV lending 
all into the FHA sector unnecessarily, which would put them all 
under 100 percent Government guarantee, which I do not think 
you need. And then it would leave sort of the large banks with 
excess capital to be free to serve the rest of the market. 
Again, you might find a lot of adjustable rate mortgages 
combined with higher LTV products there, which would introduce 
additional systemic risk, and then the FHA sector might suffer 
collateral damage from that as well.
    So I just think it is important--I think it is preliminary, 
so I do not know, but I think it is important to think hard 
about the unintended consequences of the QRM.
    Senator Hagan. Thank you.
    Dr. Zandi, on March the 8th, you wrote a special report for 
Moody's Analytics that focused on the risk retention 
requirements in Dodd-Frank and made some recommendation for 
what the qualified residential mortgage should look like. And 
as you know, that is a rule that I coauthored with Senator 
Landrieu and Senator Isakson to ensure that we did not 
inadvertently restrict the availability of capital for well-
underwritten loans.
    In your report you discuss the importance of the rule-
writing process on the qualified residential mortgage. Can you 
tell the Committee why you think it is important--and I know we 
have been discussing this--that regulators get this rule right 
and some of the features that you believe it should include?
    Mr. Zandi. Yes. I think QRM is important because it will 
determine, at least in the immediate future, before we nail 
down the rest of the mortgage finance system, pricing for 
loans. So loans that are QRM, that qualify, will have a lower 
price--a lower interest rate, a higher price, than those that 
are not. And it is not quite--I state that with conviction and 
certainty, but it is not quite clear exactly the numbers 
involved, how big a difference is this going to make, and I do 
not think anyone really knows.
    So, given that, the inability to really even come up with a 
good estimate of what the impact will be, I think it is 
important to keep the QRM box wide, at least initially. And I 
do not know the rules--I have not looked at them carefully yet, 
but what I saw seemed reasonable to me. Keeping Fannie and 
Freddie loans QRM now in this environment I think makes a lot 
of sense. It keeps the box relatively wide.
    I think the one thing that I would encourage is that right 
now, as I understand it, QRM is 20 percent down on non-Fannie/
Freddie/FHA. I think that makes sense if it is not credit 
enhanced. So if you have private mortgage insurance, then I 
think it is reasonable to define a QRM loan with a higher loan-
to-value ratio, a 90-percent LTV. So I think that would be a 
reasonable thing to consider carefully in this rulemaking 
period, and my inclination would be to include that.
    The other aspects of it look quite reasonable to me, very 
consistent with sort of the proposals I made in that paper that 
you referred to.
    Senator Hagan. Well, I definitely think that the 20 percent 
is too high for so many of the people in our Nation to actually 
go out there and buy that home. I think what Ms. Ratcliffe was 
saying, too, earlier in that the numbers-- could you repeat 
those numbers again that you listed?
    Ms. Ratcliffe. Well, I have listed many numbers.
    Senator Hagan. I am sorry. The numbers of people who have 
actually purchased a home.
    Ms. Ratcliffe. Right. Over the last couple of decades, it 
is 27 million homeowners. We would never want to say that those 
were all subprime homeowners. I may have been one of those 
along the way. And as I said, in normal times it is roughly 
about 30 percent of the market. In the last year, it looks like 
it has been almost double that share putting down 10 percent of 
less on their mortgage, on their home purchases.
    Senator Hagan. And also, Dr. Zandi, currently small lenders 
are able to participate in the mortgage market, obviously, by 
selling their loans to Fannie Mae and Freddie Mac without 
having to go through one of the big banks to accumulate enough 
loans to create the securitization pool. What would the 
Administration's proposals do to the ability of small lenders, 
such as community banks, to compete in the mortgage market? And 
what would this do to the concentration of the market?
    Mr. Zandi. Well, this is a very good point, that in any 
mortgage finance reform that you decide to do, you have to be 
cognizant of the impact on the industrial structure of the 
mortgage origination, mortgage market. Already the market has 
gotten much more concentrated as a result of the financial 
collapse and crisis. If you look at the share of origination 
volume and the share of servicing done by the top five, it is 
measurably higher than at any time in history, and you can see 
it in the interest rates that they charge. They do have market 
power. And we are going to see--it is going to be a really good 
test this fall when conforming loan limits come down, and they 
are going to be asked to kind of fill the void. We will see 
what the pricing looks like and how much pricing power they 
actually do have.
    So one of the beauties of our system is that we have a lot 
of small banks, a lot of community banks, and we need to 
preserve that. I think that is a strength of our economy and 
our financial system, and any financial--QRM, risk retention 
rules, anything you do I think needs to be looked at through 
that prism, what impact it will have, because we need to 
preserve that competition to keep those interest rates lower. 
And, frankly, I do think this is a problem. I think interest 
rates--people are paying higher interest rates now and will pay 
higher interest rates going forward because of the 
concentration that has already occurred in the system.
    Senator Hagan. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Thank you all 
for your testimony.
    I just want to establish one or two things because I keep 
hearing this debate that the facts--or assertions that are 
claimed as facts, and I want to make sure that we all talk 
about the same thing. So either to Ms. Ratcliffe or Dr. Zandi, 
I constantly hear that the GSEs led the charge into subprime 
lending, when I look at the FCIC report and other crisis books 
and pretty much see that the private sector rushed madly into 
the subprime lending, and, unfortunately, the GSEs lost their 
way and followed that. Is that a fact?
    Mr. Zandi. My view of this is that the private subprime 
Alt-A market ballooned out in the mid part of the decade, and 
that squeezed Fannie Mae and Freddie Mac out of the market up 
until the very end of the boom. To me, the best statistic, the 
most telling statistic from the Federal Reserve's flow of funds 
is the share of the mortgage market accounted for by Fannie Mae 
and Freddie Mac. If you go back to 2003--I do not have the 
numbers exactly right, but orders of magnitude, it was about 
52, 53 percent of the market, 52 to 53 percent of all 
outstanding mortgage debt was either insured or owned by Fannie 
Mae and Freddie Mac. By 2006, say 3, 3\1/2\ years later, their 
share had fallen to 40 percent. That is a 10-percentage-point 
drop. That is just an incredible shift. And that is not because 
they did not want the business. It is because they got driven 
out of the business.
    Now, unfortunately, by the end of the bubble, late 2006 
into 2007, they wanted back in, and that is when they made 
their very serious errors and started to get into Alt-A 
lending.
    Senator Menendez. And that is what we have to ensure in my 
mind and reform----
    Mr. Zandi. And that is what we are paying for right now.
    Senator Menendez. Absolutely. But it did not lead the way 
here.
    Mr. Zandi. It did not.
    Senator Menendez. Second, I always hear that the Community 
Reinvestment Act is to blame for the crisis because it 
supposedly forced banks to lend to minorities whose loans were 
bad, when, in fact, isn't it true that only 6 percent of the 
subprime loans were made by entities that were even subject to 
the Community Reinvestment Act and 94 percent of the loans were 
made by lenders not subject to the Community Reinvestment Act?
    Ms. Ratcliffe. That is true, and I would add that only 1.3 
percent of mortgages made over the period in question were CRA-
covered loans that were also high-cost loans. So it is hard to 
imagine that 1.3 percent of the loans made could have led us to 
this point.
    Senator Menendez. So I guess this is one of those things 
that if you say a lie enough it ultimately somebody will 
believe it, because the facts clearly do not substantiate that.
    Let me ask you two questions. You know, I listen to a lot 
of the community banks and others, and they say to me they are 
able to participate in the mortgage market by selling loans to 
Fannie and Freddie without having to go through one of the big 
banks to accumulate enough loans to create a securitized pool. 
What would the various reform proposals do to the ability of 
small lenders, such as community banks or mortgage brokers, to 
compete in the mortgage market? What would this do to the 
concentration of the market in the hands of a few players?
    Ms. Ratcliffe. So our proposal lays out as one of our 
primary goals that lenders of all sizes in all communities can 
offer access to the same kinds of products, and that will be--
in order to have that, you need a robust and independent 
secondary market. Our proposal has specific criteria in it for 
ensuring that the entities providing that access to the market, 
the CMIs in the case of our proposal, cannot be controlled by 
lenders and cannot have overconcentration of business going to 
individual lenders. So it has deliberate elements in it to 
ensure that lenders of all sizes--community banks, credit 
unions, nonprofit financial institutions, and the like--can 
still access the system.
    Senator Menendez. Well, a corollary of that--and I would 
invite either one of your or anyone's answer. We continue to 
hear that private capital is on the sidelines awaiting for the 
Government to get out of the way before it enters the secondary 
mortgage market. Can any of you provide us with data indicating 
the amount of capital awaiting to return to the secondary 
mortgage market and indicate a timeline for its reemergence? 
You know, the reason I ask is because there is opportunity for 
that capital in both the commercial real estate and the jumbo 
market space, but it has not entered those markets, and there 
is no Government participation in those fields. So I would like 
to know where all this capital is sitting on the sidelines 
waiting to come in. It seems to be waiting for some, you know, 
heralded moment.
    Mr. Zandi. Well, I think there is no answer to that 
question. We do not know for sure. And that argues for going 
slowly, making one step change at a time. And I think actually 
the policy path that has been laid out is a good one and an 
appropriate one.
    So on October 1st, the conforming loan limits revert back 
to their precrisis levels. This will be a very good test to see 
will the private market step in. Will the big banks with 
balance sheets that have capacity to lend step up and lend and 
at what interest rate?
    Allowing and asking the FHA to raise its insurance premium 
slowly but surely I think makes perfect sense. It helps to 
shore up the FHA system. It also makes it more viable for 
private capital to come in. A good step to take.
    QRM, implementing that over the course of--and other risk 
retention rules over the course of the next year, year and a 
half, makes perfect sense. Let everyone get used to it and get 
the rules defined. So the things that you have done, at least 
the path that seems to be in force, I should say, requiring 
Fannie Mae and Freddie Mac to reduce the size of their loan 
portfolios over time, in an orderly, clearly defined way makes 
perfect sense. Doing all these things is a good test. Each step 
of the way we will just see how much private capital is going 
to come in and at what cost. And I think that is exactly what 
you should do, and, fortunately, it seems like we are going 
down that path.
    Mr. Berman. Senator, I think I would like to underscore the 
caution that we would need to proceed with. While I think we 
all agree that the path forward is to reduce the size of the 
Government footprint and reduce the market share of Fannie and 
Freddie and FHA, each of these levers, whether it is the 
conforming loan limit or G-fees or the QRM standards, will have 
an independent but related impact, and the key is the private 
markets have spoken that they do not have confidence. We will 
not see private markets come back in and make loans and buy 
bonds until there is confidence reestablished. We have seen 
over the last couple of years only two RMBS, mortgage-backed 
securities issuances, and they are at 55 to 65 percent loan-to-
value. There is clearly a lack of confidence.
    I think if we were to move forward, even if the path is the 
right one, but if we move forward at the wrong pace, before 
there is enough investor confidence to come back into the 
market, the swings and the volatility at a time when the 
markets are so fragile and housing markets are so fragile 
could, in fact, endanger the nascent recovery that we have 
begun to see.
    Senator Menendez. Mr. Chairman, I know my time has expired. 
I want to thank you for this hearing. I think our challenge 
here, my personal view, is that our goal is to protect the 
taxpayers but still have the opportunity for a middle-class 
family to get a 30-year mortgage and be able to do so in a 
marketplace that allows them as a responsible borrower to be 
able to achieve that. And I am really concerned about the calls 
by some to just yank out the GSEs totally and what that means 
to this market.
    So thank you very much. Thank you for your answers.
    Chairman Johnson. I understand that Senator Shelby has a 
couple more questions.
    Senator Shelby. Thank you. Thank you, Mr. Chairman.
    Dr. Kling, thank you for your testimony and your candor. In 
order for this Committee, I believe, to reform Fannie Mae and 
Freddie Mac, it must first understand why those institutions 
failed.
    I will say it again. My microphone was not on. In order for 
this Committee to reform Fannie and Freddie, I believe that we 
must understand here why those institutions failed so that we 
do not repeat our past mistakes here in the Banking Committee. 
Dr. Kling, could you describe some of the factors that you 
believe led to the collapse of Fannie Mae and Freddie Mac?
    Mr. Kling. Well, Senator, I can try. Fundamentally, when 
you create a guaranteed enterprise like that, when the 
Government creates a guarantee, the private sector ultimately 
is going to find a way to load the risk onto the Government, 
onto the taxpayers, while it is making profits. So in some 
sense that kind of failure is inevitable.
    Senator Shelby. Explain what you meant there. I agree with 
you, but explain to the public what you meant, to load the 
taxpayer----
    Mr. Kling. Well, if you have a guarantee against 
catastrophic loss, then you earn your highest return by taking 
the most catastrophic loss, and then most of the time you take 
a return, because by definition a catastrophic loss is 
something that happens very rarely, is very unexpected. You 
know, we do not have 25-percent house price declines every 
year. So it is a very rare event, and you load up on the risk 
for the rare event because you earn a return for taking that 
risk, but that risk is borne by the taxpayer. So that is, you 
know, fundamentally what is going on.
    You also have the phenomenon of procyclical regulation. We 
heard talk about the markets being cyclical, but the regulators 
and Congress are very cyclical. Five years ago, if you had had 
mortgage lenders in this room, you would have been berating 
them for turning down good loans. Now you are coming up with 
rules to try to keep them from making bad loans, so the 
regulations are actually going with the cycle. And this kind 
of--so procyclical regulation was certainly a factor with 
Freddie Mac and Fannie Mae because just as the housing bubble 
was heating up, they were ratcheting up their housing goals 
that they felt required that they go after low-quality 
mortgages. So that was a factor. I think there were also 
idiosyncratic factors.
    In 2007, I wrote something for a book that I was drafting 
saying that Freddie Mac and Fannie Mae are not part of the 
subprime crisis; they are going to survive. So I was shocked. 
There must have been some changes in the philosophy and the 
corporate culture there that--you know, because in the 1990s 
no-doc loans, we put a stop to that. Freddie and Fannie got 
together and said, ``We are not going to do that.''
    You know, you are always under pressure----
    Senator Shelby. And what happened? Tell us what happened. 
In the 1990s they were not doing this. Tell us what happened.
    Mr. Kling. They stopped doing the low-doc loans until in 
the late 1990s they came back again. And that is the pressure 
you are going to face with this QRM or whatever, that the 
lenders are always coming back to you and saying, well, what if 
we did this credit enhancement, what if we gave you excess 
collateral, you know, what if we showed you that these loans 
that we have been doing actually have not been defaulting so 
much. They are always pushing the envelope, and the regulators 
are going to feel that, too, and I think they are going to be 
procyclical; that is, over time, as the housing market gets 
better, the regulators will sort of loosen up the definition of 
what is a qualified residential mortgage or whatever, and they 
will just be back in the same boat.
    Mr. Berman. Senator, if I may?
    Senator Shelby. Sure.
    Mr. Berman. One of the areas that we have not really 
focused on this morning is the multifamily sector, and as you 
are, I am sure, well aware, Fannie Mae and Freddie Mac last 
year had--the last 2 years have had between 60 and 80 percent 
of the multifamily market. That is an area where, in fact, they 
were successful and they were disciplined----
    Senator Shelby. What is the default rate on the 
multifamily? Low?
    Mr. Berman. It is under 1 percent. I think Freddie Mac is 
about 25 basis points and Fannie Mae is about six----
    Senator Shelby. That is unusual. That is good.
    Mr. Berman. And they also faced some of the same pressures 
that the single-family brethren faced with pressure from----
    Senator Shelby. What did they do right there as opposed to 
the other? Did they not succumb to pressure, the multifamily, 
and succumb to political pressure in the other? What happened?
    Mr. Berman. In fact, in the multifamily sector, they stayed 
disciplined. The products that they brought out to the public, 
the way those products were underwritten, the loan-to-values, 
the cash-flows, stayed conservative, and so their default rates 
tell a very different story and, in fact, have provided a 
important service when the private sector has vanished from 
that market.
    Senator Shelby. Dr. Kling.
    Mr. Kling. Well, I actually had a different experience in 
multifamily. It was very traumatic. In the late 1980s, Freddie 
Mac did not have a disciplined approach to lending in 
multifamily and had a horrible default experience. They lent 
cash-out refinances to landlords, to slumlords, who would then 
take the cash and then not put anything into the building in 
terms of maintenance. And so the properties went down, and 
people----
    Senator Shelby. Went down.
    Mr. Berman. In 1990, Freddie Mac actually shut down for 3 
years their multifamily program.
    Senator Shelby. So they learned something, didn't they?
    Mr. Berman. Exactly. They learned the lesson and then did 
it right----
    Senator Shelby. Multifamily.
    Mr. Berman. Yes.
    Senator Shelby. Dr. Kling, quickly, would you sum up the 
bad choice, I would call it, or the devil we know versus the 
devil we do not know as we talk about reforming Fannie Mae and 
Freddie Mac? We know a lot about Fannie and Freddie. We know 
they do have some good things. But we know they have made some 
big mistakes, too, as opposed to re-creating a new structure. 
Sum it up for us quickly.
    Mr. Kling. I am terrified of creating a new structure 
because you are going to have inexperienced institutions and 
above all inexperienced regulators. I think we know how to make 
the Freddie and Fannie model work better than it did by having 
the regulators require real capital and by restricting Freddie 
and Fannie to high-quality mortgages. So that would be better 
than coming up with something new. That would be less 
frightening. But I still think----
    Senator Shelby. It would be a lot less risk to the 
taxpayer, too, wouldn't it?
    Mr. Kling. Certainly. Certainly less risk to the taxpayer. 
Just to keep them as they are would be less risky. Still, my 
preferred approach would be to phase them out and let the 
private market develop, and it might not necessarily be a 
secondary mortgage market, a TBA market. It might be banks 
lending the way they used to lend, and, you know, although that 
would be a problem for some of the people in this room, I do 
not think it would be a problem for the American taxpayer or 
the American homeowner.
    Senator Shelby. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thanks again to our witnesses for being 
here today. It is essential that we create a stable, 
sustainable housing market for American families. There are 
several additional proposals and certainly many opinions 
regarding the changes that need to be made. I look forward to 
discussing those further as the Committee continues to consider 
the future of the housing finance system.
    This hearing is adjourned.
    [Whereupon, at 11:30 a.m., the hearing was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]

                PREPARED STATEMENT OF MICHAEL D. BERMAN
                 Chairman, Mortgage Bankers Association
                             March 29, 2011

Introduction
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, thank you for the opportunity to testify on behalf of the 
Mortgage Bankers Association (MBA). \1\ My name is Michael D. Berman, 
CMB, and I am the current Chairman of MBA. I have been in the real 
estate finance industry for over 25 years and am a founder and member 
of the Board of Managers of CW Financial Services. I also serve as 
President and Chief Executive Officer of CW Capital. Headquartered in 
Needham, Massachusetts, CW Capital is one of the top 10 lenders to the 
multifamily real estate industry, with $3 billion in annual production 
and over 150 employees in 12 offices throughout the country. My 
responsibilities include overseeing the strategic planning and 
operations for all of the company's loan programs, including 
multifamily programs with Fannie Mae, Freddie Mac, and the Federal 
Housing Administration (FHA). CW Capital has been active in the 
commercial mortgage-backed securities (CMBS) arena as an investor, 
lender, primary servicer and issuer of securities. Additionally, CW 
Capital is a special servicer of approximately 20 percent of the CMBS 
market.
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     \1\ The Mortgage Bankers Association (MBA) is the national 
association representing the real estate finance industry, an industry 
that employs more than 280,000 people in virtually every community in 
the country. Headquartered in Washington, DC, the association works to 
ensure the continued strength of the Nation's residential and 
commercial real estate markets; to expand home ownership and extend 
access to affordable housing to all Americans. MBA promotes fair and 
ethical lending practices and fosters professional excellence among 
real estate finance employees through a wide range of educational 
programs and a variety of publications. Its membership of over 2,200 
companies includes all elements of real estate finance: mortgage 
companies, mortgage brokers, commercial banks, thrifts, Wall Street 
conduits, life insurance companies and others in the mortgage lending 
field. For additional information, visit MBA's Web site: 
www.mortgagebankers.org.
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    Today's hearing is on the very important issue of housing finance 
reform. Exactly 1 year and 6 days ago I testified on this very topic 
before your colleagues on the House Financial Services Committee. Much 
has changed during those past 12 months.
    On the legislative front, Congress passed the Dodd-Frank Wall 
Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). 
While it is too early to assess the full impact of this legislation, 
the financial services industry already has been directing considerable 
resources toward preparing for the avalanche of new implementing 
regulations on the horizon. Congress and the Administration have voiced 
a desire for private capital to return to the mortgage market. However, 
we must be clear that several pending regulatory actions have the 
potential to increase the cost and decrease the availability of credit 
to many potential borrowers, as these regulatory actions may drive 
private capital away from the market, directly contrary to the stated 
intent.
    On the economic front, data in recent months have been stronger 
than anticipated, with personal consumption expenditures and business 
spending propelling the current pace of economic recovery. The job 
market continues to improve, at a disappointing pace, and housing 
markets remain weak, but we are beginning to turn the corner with 
respect to mortgage performance.
    We also note that the Obama administration recently issued a report 
to Congress on reforming America's housing finance market. The report, 
issued by the Departments of Treasury (Treasury) and Housing and Urban 
Development (HUD), renewed its commitment to affordable rental housing 
and laid out three potential ways to structure Government support in a 
housing finance market. There are positive aspects of each of the 
Administration's three options, and, in fact, we believe that our 
proposal is aligned in part with the Administration's thinking. I will 
briefly touch on other key points about the report later in my 
testimony.
    While much has changed in the past year, much remains the same. For 
example private capital still has not sufficiently returned to the 
mortgage market, leaving the Federal Government to backstop some 90 
percent of all home mortgage loans. Nearly half of the new home loans 
for home purchase are guaranteed by the FHA, the Department of Veterans 
Affairs (VA), or the Department of Agriculture's Rural Housing Services 
(USDA) programs. Almost all other home mortgage loans and most mortgage 
refinancings are financed through Fannie Mae and Freddie Mac, both of 
which are in Government conservatorship. Fannie Mae and Freddie Mac 
also now purchase more than half of all multifamily mortgages, loans to 
owners, and developers of rental residential properties. Because of the 
current difficulty of attracting investors, only a handful of boutique 
private label securitization transactions have taken place during the 
past 3 years, with ultra-low risk loan characteristics such as very low 
loan-to-value ratios. The investment community anticipates only three 
or four more transactions in the year ahead. This situation is as 
undesirable as it is unsustainable.
    MBA continues to identify the key components and optimal structure 
of a safe, stable and liquid housing finance system for the long-term. 
I have the privilege of chairing the ``Council on Ensuring Mortgage 
Liquidity'' that has been charged by MBA to undertake this initiative. 
The council's approach has been to examine the issues so that 
stakeholders can assess options in a measured, thoughtful manner. My 
fellow council members also are industry practitioners who understand 
the capital markets and have perspective on what will and will not 
work. Therefore, the council's recommendations are grounded in 
pragmatism.
    We knew in setting up the council that the policy winds would shift 
with economic circumstances. Therefore, we continue to refine our 
recommendations in the context of current events.
    Before I go into the specifics of MBA's recommendations, I would 
like to explain the basic tenets of housing policy that guided the 
council's work. We believe that housing policy begins with the premise 
that shelter, like food, is a basic human need. As such, a good and 
just society ensures that all of its citizens are able to attain at 
least a minimum standard in terms of their housing, and many families 
are able to do much more, achieving the American Dream of owning a 
home. U.S. housing policy, developed over decades, has consistently 
highlighted these objectives. These include:

    Bringing stability and affordability to the single- and 
        multifamily mortgage finance markets (through Fannie Mae, 
        Freddie Mac, Ginnie Mae, and the Federal Home Loan Bank 
        System);

    Promoting home ownership (through FHA, VA, USDA, the 
        mortgage interest deduction and down payment assistance 
        programs);

    Providing consumer protections to homebuyers and renters 
        (through fair housing, truth in lending and other regulatory 
        efforts);

    Providing subsidies to fill gaps between low-income 
        households' incomes and market rents (through project- and 
        tenant-based Section 8 and other programs); and

    Supporting and promoting the development and preservation 
        of affordable single- and multifamily housing (through HUD and 
        other subsidy and grant programs).

    All of these efforts are vitally important, and all are necessary 
to maintain a housing market that provides safe, decent and affordable 
housing to the American public. In the wake of the recent crisis, 
policy makers may choose to re-order or change the emphasis of these 
priorities to some extent. However everyone would agree they are all 
important. MBA's recommendations are designed to further this policy in 
a safe, sound, and efficient manner.

The MBA Proposal
    MBA's recommendations were first issued in September 2009, in a 
document titled ``Recommendations for the Future Government Role in the 
Core Secondary Mortgage Market.'' (See, www.mortgagebankers.org/
advocacy/issuepapers/ceml.htm.) These recommendations established a 
foundation for the current debate and have been integrated in many of 
the proposals that have since come forward, including the 
Administration's.

Key Principles and Components
    Three principles lie at the heart of MBA's recommendations. First, 
secondary mortgage market transactions should be funded with private 
capital. Second, the importance of housing, whether owner-occupied or 
rental, in the U.S. economic and social fabric warrants a Federal 
Government role in promoting liquidity and stability in the mortgage 
market. This role should be in the form of an explicit credit guarantee 
on a class of MBS, and the guarantee should be paid for through risk-
based fees. Third, taxpayers and the system itself should be protected 
through limits on the mortgage products covered, limitations on the 
types of activities undertaken, strong risk-based capital requirements, 
and actuarially fair payments into a Federal insurance fund.
    The financial crisis proved that some form of Government support is 
required to keep the mortgage market open during times of distress. The 
current dearth of activity outside of the existing Government-supported 
liquidity channels exemplifies the risk averse nature of private 
capital. More importantly, even in good times, investors will remember 
the experiences of the recent crisis. If they doubt their ability to 
sell mortgages during a crisis, they will be less apt to buy them 
outside of a crisis.
    However, the size and scope of the U.S. housing market mean that, 
except in times of extreme duress, the Federal Government's secondary 
market role should be to promote liquidity for investor purchases of 
MBS, not to attempt to provide the capital for or absorb the risks 
itself.
    A guarantee that aims to protect the entire market will be both 
less effective and less efficient than targeted support for the core of 
the market, those products that regulators determine should be 
available to borrowers at all times.
    The centerpiece of MBA's recommendation for Federal support for the 
secondary mortgage market is a new line of MBS. Each security will have 
two components: (a) private, loan-level guarantees from privately 
owned, Government-chartered and regulated mortgage credit-guarantor 
entities (MCGEs) which will in turn be backed by (b) a security-level, 
Federal Government-guarantee (GG) ``wrap.'' The Government guarantee 
will be conceptually similar to that provided by Ginnie Mae by 
guaranteeing timely interest and principal payments to bondholders and 
explicitly carrying the full faith and credit of the U.S. Government.
    Investors in the guaranteed MBS would face no credit risk, but 
would take on the interest-rate risk from the underlying mortgages. In 
supporting their loan-level guarantees, the MCGEs would rely on their 
own capital base as well as risk-retention from originators, issuers 
and other secondary market entities such as mortgage insurers. Only in 
the event of a failure of a MCGE would the Government guarantee come 
into play. Before taxpayers were called upon to support the guarantee, 
a Federal insurance fund, capitalized by risk-based fees charged on the 
supported securities would be next in line. Only in the event that the 
insurance fund ran dry would there be a call on taxpayer resources. The 
fund would be capitalized so that this would be an extremely unlikely 
event, and could likely include provisions to have future MCGEs repay 
the taxpayers over time as well.

Mortgage Credit Guarantor Entities (MCGEs)
    The MCGEs will be privately owned, mono-line institutions focused 
solely on the mortgage credit guarantee and securitization business. 
This business encompasses both single-family and multifamily 
residential mortgages. The loan-level MCGE guarantee would be backed by 
private capital held by the MCGEs which would be overseen by a strong 
regulator.
    The MCGEs will be required to manage their credit risk by using 
risk-based pricing, originator retention of risk (such as reps and 
warrants backed by sufficient capital to support them), private 
mortgage insurance (PMI) and risk transfer mechanisms including other 
risk-sharing arrangements, to ensure that there is a strong capital 
buffer before the GG and insurance fund would come into play. Loans 
would not be included in a GG security unless they were guaranteed by a 
MCGE.
    In most cases the MCGEs will own the loans underlying the GG 
securities they issue, and in the event of foreclosure could own the 
real estate collateral. The MCGEs will have standard corporate powers 
to raise debt and equity. Other than access to the related GG security 
they could issue, none of the corporate debt or equity the MCGEs issue 
would be guaranteed, either explicitly or implicitly, by the Federal 
Government. The MCGEs must be sufficiently capitalized to weather all 
but the most extreme credit events, and should report regularly to the 
satisfaction of the GG, Treasury, and the MCGEs' regulator.
    Because the key mission of the MCGEs will be to guarantee and 
securitize mortgages through the program described, their portfolio 
holdings of mortgage assets would be limited to de minimis levels. 
Their portfolios would only be used to (a) aggregate allowable 
mortgages for securitization, (b) hold REO properties prior to 
disposition, and manage loss mitigation through foreclosure, 
modifications and other activities, (c) incubate mortgages that may 
need seasoning prior to securitization, (d) develop new mortgage 
products through a strictly limited level of research and development 
prior to the development of a full-fledged securitization market, and 
(e) fund highly structured multifamily mortgages that are not conducive 
to securitization.
    The number of MCGEs should be based on the goals of (a) 
competition, (b) strong and effective regulatory oversight, (c) 
efficiency and scale, (d) standardization, (e) security volume and 
liquidity, (f) ensuring no one MCGE becomes ``too big to fail,'' and 
(g) the transition from the current Government sponsored entity (GSE) 
framework. Initially, we would expect the number of MCGEs to be two or 
three. The regulator would have the ability to increase that number, 
through the granting of charters, as the market develops. Intense 
competition along a number of dimensions would benefit borrowers and 
the market as a whole. The market would also benefit from 
standardization of the mortgage-backed security (MBS) structure so that 
investors can easily compare security offerings across MCGEs.
    The existing system extended an implied Federal backing to all the 
activities of Fannie Mae and Freddie Mac, including not only their 
mortgage guarantees, but also their portfolio investments, derivative 
counterparties and corporate bondholders. Some of those activities were 
clearly allocated insufficient capital, underpriced and under-
supervised. In our proposal, the extent of Federal backing would be 
greatly constrained, making explicit what is guaranteed and what is 
not, and establishing mechanisms to properly capitalize, price and 
supervise those activities.
    It is important to reiterate that while the MBS in this model would 
be guaranteed by the Government, the MCGEs as institutions would not 
be. The corporate debt and equity issued by the MCGEs would be purely 
private. As with other firms, investors in MCGE equity and debt would 
accept the potential risk of failure and loss. For this reason, the MBA 
proposal recommends regulators charter enough MCGEs to establish a 
truly competitive secondary market, and to overcome issues associated 
with ``too big to fail.''

Government Guaranteed ``Wrap''
    The Government guaranteed MBS issued by the MCGEs would carry a 
guarantee of timely interest and principal payments, would explicitly 
carry the full faith and credit of the U.S. Government and would be 
supported by a Federal insurance fund, funded by risk-based fees 
charged for the securities at issuance and on an ongoing basis. Due to 
similarities in responsibilities and likely structure, Ginnie Mae could 
potentially take on the responsibilities of the GG.
    The GG would be responsible for standardization of mortgage 
products, indentures and mortgage documentation for the core mortgage 
market. Minimum regulated fees would be established for ongoing 
servicing, surveillance and reporting. This would ensure 
standardization and liquidity throughout the core market. Each MCGE 
would individually issue GG securities under this standardized regime. 
These securities would carry the GG security-level guarantee backed by 
the MCGE loan-level guarantee; accordingly, the MCGEs will have 
approved and insured the underlying collateral.
    The mission of any federally related mortgage securitization and 
guarantee program should be explicitly limited to ensuring liquidity in 
the core mortgage market through the issuance and guarantee of MBS. 
This important mission should not be distorted by additional public or 
social housing policy goals. To the degree additional objectives and 
housing policies are desired, they should be pursued through FHA, VA, 
USDA, Ginnie Mae and direct Federal tax and spending programs, which 
should be adequately funded and supported to meet these important 
objectives. Potentially, a surcharge could be placed on the insurance 
premiums to accumulate an affordable housing fund. This surcharge 
should be tracked separately to ensure that the insurance fund is 
actuarially sound.
    While the full faith and credit of the U.S. Government should mean 
there will not be a need for a liquidity backstop, in times of extreme 
market distress liquidity could be provided to the GG securities market 
through Treasury and/or Federal Reserve purchases of GG mortgage 
securities. As a result, there would be no need for the MCGEs' 
portfolios to take on the role of ``liquidity providers of last 
resort.''

Reform Recommendations of the Administration
    As was mentioned above, the housing finance reforms issued by 
Treasury and HUD included three possible restructuring options. The 
Administration's first option would limit the Government's role almost 
exclusively to the existing targeted assistance initiatives of FHA, VA, 
and USDA. The overwhelming majority of mortgages would be financed by 
lenders and investors and would not benefit from a Government 
guarantee.
    In the second option, targeted assistance through FHA and other 
initiatives would be complemented by a Government backstop designed 
only to promote stability and access to mortgage credit in times of 
market stress. The Government backstop would have a minimal presence in 
the market under normal economic conditions, but would scale up to help 
fund mortgages if private capital became unavailable in times of 
crisis.
    Compared to the first and second options, the third option creates 
a broader role for the Government in ensuring stability in times of 
market stress. Alongside the FHA and targeted assistance initiatives, 
the Government would provide reinsurance for certain securities that 
would be backed by high-quality mortgages. These securities would be 
guaranteed by closely regulated private companies under stringent 
capital standards and strict oversight, and reinsured by the 
Government. The Government would charge the MCGEs a premium to cover 
future claims and would not pay claims until private guarantors are 
wiped out.
    MBA believes there are positive aspects of each of the 
Administration's options. For example, as in option one we place a high 
value on having private capital bear most of the risk. As in option two 
we think the MCGE channel will naturally decline during good times, and 
expand during crises. In terms of form and function, option three 
closely resembles MBA's recommendations.

Other Liquidity Channels
    No formula for restructuring the housing finance system is complete 
unless other private and public liquidity channels are factored into 
the equation. In MBA's recommendation, there would continue to be key 
roles for the fully private market, as well as for FHA, VA, USDA, and 
Ginnie Mae and the Federal Home Loan Banks, particularly as such roles 
evolve in support of public or social housing policy goals and 
objectives. MBA's MCGE framework is not intended to be the entire 
market. It is meant to focus on a narrowly defined set of core mortgage 
products that should be available in all market conditions.
    We also believe it is appropriate to consider additional means of 
funding for mortgage credit as a part of the broader reform process, 
including potentially developing a legislative framework for a covered 
bond market. We will work with Congress to explore opportunities in 
this area.

Loan Characteristics
    One issue that arises frequently during the housing finance reform 
debate is the question of the availability and pricing of long-term, 
fixed-rate financing. For decades, the 30-year, fixed-rate mortgage has 
allowed families to budget their finances and safely build wealth. In 
evaluating the options for a future housing finance system, we should 
consider carefully the implications of such options on the availability 
and pricing of those mortgages.
    Homeowners in the U.S. have come to view the 30-year, fixed-rate, 
self-amortizing, prepayable mortgage as the product standard. Payments 
are predictable and borrowers are protected from fluctuations in 
interest rates. From the borrower's perspective, it is the simplest 
mortgage product available. If rates rise, payments are unchanged. If 
rates decline, borrowers typically have the option to refinance at no 
explicit cost.
    Although thought of as consumer friendly, from the standpoint of an 
investor, the 30-year, fixed-rate, self-amortizing, prepayable mortgage 
is actually a very complex product. Borrowers refinance when rates 
drop, transforming a loan with a nominal 30-year maturity to a short-
term instrument. When rates increase, refinances disappear, extending 
the expected life of the loan. Banks and thrifts that fund themselves 
with deposits are not natural holders of 30-year, fixed-rate, 
prepayable loans, because they would inevitably be borrowing short and 
lending long. With the beginning of the U.S. MBS market in the early 
1970s, it was discovered that investors were willing to bear the 
prepayment risk associated with these loans, so long as they were 
protected from the credit risk. From that point to today, with a few 
exceptions, most investors either did not have the capacity or the 
willingness to take on the credit risk, particularly given the 
uncertainty involved with systemic credit events such as the one we 
just lived through.
    The appeal of the 30-year fixed-rate mortgage in the U.S. is also a 
result of the role the GSEs play in the ``To-Be-Announced'' (TBA) 
market. As the name suggests, the defining feature of a TBA trade is 
that the underlying mortgage loans have not been identified and may not 
even have been originated on the trade date. Instead, participants 
agree only on a defined set of parameters of the securities to be 
delivered. This contrasts sharply with private-label MBS, whose loans 
must be originated before trading. The TBA market also significantly 
lowers the transaction costs associated with originating, servicing, 
and refinancing a mortgage. In addition, the TBA market provides an 
efficient way for lenders to hedge the interest rate risk involved in 
offering borrowers the ability to lock-in a rate for 30 days while 
closing on a mortgage. TBA prices, which are publicly observable, also 
serve as the basis for pricing and hedging a variety of mortgages that 
are not TBA-eligible, such as high-balance (i.e., ``jumbo'') loans not 
eligible to be purchased by the GSEs. TBA trading is thus a key link 
between the primary and secondary mortgage market and constitutes a 
major difference from nonagency or private-label MBS.
    It is also notable that long-term fixed-rate mortgages are unusual 
elsewhere in the world. A key reason for the distinctions in products 
between countries is differences in funding. Deposit funding dominates 
in most countries, while the U.S. is unique in terms of the importance 
of securitization. Over 60 percent of U.S. residential mortgages have 
been securitized. The next closest countries are Canada, Spain, and the 
United Kingdom with 24 to 28 percent securitized. Therefore, in order 
to maintain the availability and affordability of the 30-year, fixed-
rate mortgage, the U.S. needs a vibrant secondary market where 
investors can focus on and manage interest rate and prepayment risks, 
while being shielded from the uncertainties surrounding mortgage credit 
risk.
    MBA's recommendations take care to ensure that capital is available 
to creditworthy borrowers in all communities. We believe formal 
establishment of the core residential mortgage market will set a 
benchmark for consumers, underwriters, investors, and others. For 
consumers, the presence of well-defined core mortgage products will 
provide a standard against which other products can be assessed. The 
core market will also provide considerable stability, ensuring that 
mortgage products of a known type will be available in all market 
conditions. For underwriters, the characteristics of the ``well-
documented, well-understood'' mortgages of the core market will provide 
a known base for modeling and pricing risk. Variations would be 
considered a part of the non- core market and would operate outside of 
any taxpayer backstop. For investors, the core market will establish 
performance and pricing standards for use in GG MBS investing, and 
against which other investment options can be judged.
    It also must be remembered that the mortgage market and the GSEs 
support the financing of both single-family and multifamily properties, 
and that both serve important roles in housing our Nation. MBA's 
recommendations are geared to both parts of the market. The same 
structure, rationales, and tenets apply to the Federal role in the core 
single-family and multifamily secondary mortgage markets. Even though 
the multifamily market had much lower default rates and stronger 
performance than the single-family ownership market during the recent 
downturn, it is also subject to liquidity crises.

Transition
    Both MBA and the Administration's recommendations recognize the 
importance of careful execution during the transition from the current 
to the future state of the housing finance system. The Administration's 
report included actions that can be taken now to reduce the 
Government's role and taxpayer exposure in the market. For example, 
they advocate for gradually increasing guarantee pricing at Fannie Mae 
and Freddie Mac, reducing conforming loan limits, and increasing down 
payment requirements. The Administration also plans to continue winding 
down Fannie Mae and Freddie Mac's investment portfolios.
    While these actions may prove to be effective levers for adjusting 
the mixture of private capital and Government support, it is very 
important that any action take place in a careful and deliberate 
manner. Ignoring the consequences of interim actions and the pace of 
economic recovery could shock a still-fragile housing market, severely 
constrain mortgage credit for American families, and expose taxpayers 
to unnecessary losses on loans the institutions already guarantee. 
During the transition, it is also important that the operations of 
Fannie Mae and Freddie Mac continue to serve the market and the 
American people, including retaining the human capital necessary to 
effectively run both institutions.
    While a gradual transition to the new housing finance may be 
desirable, there are strong reasons to lay out a clearly defined future 
for mortgage finance as soon as possible. The uncertainty over the 
future policy environment is likely deterring the recovery by 
inhibiting the ability of businesses and investors to plan and move 
forward.
    The longer the uncertainty persists, the more difficult it becomes 
to retain and/or recruit personnel with the necessary skill sets to 
execute financing. Both the multifamily and single-family markets are 
vulnerable in this regard.
    Regulators also should proceed with caution as they continue to 
implement the Dodd-Frank Act. One of our concerns is that the magnitude 
and scope of reforms poses challenges from a coordination standpoint. 
The scope of the Dodd-Frank Act's new consumer protections, 
underwriting provisions, risk retention requirements, disclosure, 
liability and operational requirements is profound. Adding secondary 
mortgage market reforms to this equation will require the highest 
degree of care and coordination.
    One aspect of Dodd-Frank in particular that merits attention is the 
risk retention provision, including its exemption for qualified 
residential mortgages (QRM) and framework for commercial real estate 
MBS. The QRM is likely to shape housing finance for the foreseeable 
future and may even serve as a precursor for what the future GSE is 
likely to be eligible to securitize. An overly restrictive QRM 
definition that does not heed the Congressional intent will displace a 
large portion of potential homebuyers, which in turn will slow economic 
growth and hamper job creation.
    MBA believes Congress can play a role in the transition by 
encouraging regulators to formulate a strategic theme to guide their 
actions going forward. For example, before attempting to attract 
private capital back to the housing finance market by increasing Fannie 
Mae and Freddie Mac's guarantee fee, regulators should consider the 
extent to which risk retention rules may drive private capital away 
from the market.
    A narrowly defined Government role of guaranteeing credit risk at 
an actuarially fair price promotes liquidity and limits volatility in 
the secondary mortgage market, which makes it easier for homebuyers to 
obtain mortgages during normal economic times and mitigates the risk 
and consequences of volatility in the housing market and financial 
markets. This assumes that the Government can accurately assess what is 
an actuarially fair price. Mispricing the wrap premium by either over- 
or under-charging for the wrap has costs.
    Pricing risk is difficult for both the private sector and the 
Government. However, it is less difficult now than it was 5 years ago. 
At that time rating agencies and investors looked to ``stress events'' 
for which there were incomplete data and different market practices. 
Having just experienced the worst real estate downturn since the 
Depression, we now have vast amounts of data that can provide the basis 
for more robust and accurate risk pricing models.
    Experience has also shown that Governments intervene to protect 
depositors and prevent housing market collapses. Knowing this, MBA 
believes taxpayers are better served by clearly defining the boundaries 
of such intervention and collecting revenues up front rather than 
paying a lump sum ex post facto.
Conclusion
    It is time to commit to a future housing finance system for the 
United States. The Administration, Congress, and the private sector 
share a responsibility to work together to build a stronger and more 
balanced system of housing finance. MBA looks forward to working 
closely with the Committee on this issue in the weeks and months ahead. 
Thank you again for the opportunity to appear before the Committee 
today. As MBA's deliberations on these topics continue, we would 
welcome the opportunity to come back and update you on our work.
                                 ______
                                 
                   PREPARED STATEMENT OF ARNOLD KLING
 Ph.D. Member, Mercatus Center Financial Markets Working Group, George 
                            Mason University
                             March 29, 2011

    Thank you, Chairman Johnson and Ranking Member Shelby, for inviting 
me to testify at the hearing today on the future of the housing finance 
system.
    My testimony can be summed up in three words: Just Say No.
    The time has come to say no to the mortgage lobby. Send them home 
empty-handed. Let ordinary Americans win one for a change.
    A coalition of real estate agents, Wall Street investment firms, 
mortgage bankers, community activist groups, and others spent the last 
40 years lobbying to protect and expand subsidies for mortgage credit. 
They usually got what they wanted. And what did the American public 
get? We got a housing bubble, a financial crisis, a bailout, a 
recession, and millions of homeowners drowning in debt.
    That shameless coalition is back again, insisting that Government 
must provide a guarantee in the mortgage market. Just say no.
    This country is in a mess today because mortgage borrowing and 
mortgage lending were carried to excess. Given what we have just 
experienced, one would think that proposing a new Government guarantee 
to prop up the mortgage industry would be considered totally 
inappropriate. If a mob of people had gone through the town on a 
drunken rampage, committing reckless acts of vandalism, would the city 
officials be focused on trying to restock the bars?
    There is a way to guarantee reliability of mortgages that does not 
require a Government agency. The solution is for most borrowers to make 
down payments of 20 percent, which was typical before the madness of 
the last two decades. Stop making so many loans where the down payment 
is just 2 percent (or less). At the risk of oversimplifying slightly, I 
would say that a loan with a 20 percent down payment is a good loan, 
and a loan with a 2 percent down payment is a bad loan. With good 
loans, the mortgage market does not need a Government guarantee. With 
bad loans, a guarantee can only come to grief.
    What should we say to someone who wants to buy a $200,000 house but 
has only $5,000 saved up? In most cases, we should say the same thing 
we would say if they wanted $200,000 in poker chips in Las Vegas or 
$200,000 worth of stock. We should just say no.
    If it is in the public interest for more people to own their homes, 
then I would suggest coming up with policies that expand home 
ownership, rather than mortgage indebtedness. We should try to come up 
with programs that encourage people to save for down payments, rather 
than encouraging them to take on too much debt. Instead of trying to 
ensure that everyone has access to the mortgage equivalent of cheap 
alcohol, we should be helping people to drink less.
    Does the Government need to support the rental market? Then provide 
more generous housing vouchers to renters, rather than handing out 
subsidies that encourage indebtedness among landlords. Landlords, too, 
should have significant equity in their properties. Otherwise, at the 
first sign of trouble they will stop maintaining their buildings, 
allowing them to fall into disrepair and adversely impacting their 
tenants.
    These days, it seems as if everyone in Washington has a blueprint 
for restructuring the mortgage industry around some newly created 
institution or Government guarantee program. Just say no.
    This is the time of year when college basketball is on everyone's 
mind. Imagine what would happen if during a game, a team were to go 
through a streak of terrible shot selection, falling way behind and 
leading the coach to call time out. A normal coach would say, ``Settle 
down. Take the shots you know how to make, and stay away from low-
percentage shots.'' If instead he were a Washington policy wonk, he 
would say, ``We need to restructure the whole team. No more two guards, 
two forwards, and a center. From now on we are going to use a bishop, 
three pawns, and a rook. Refer to the diagrams in this memo.''
    The mortgage industry equivalent of bad shot selection is bad 
loans. If the mortgage industry stops making bad loans, then Washington 
does not need to come in with a new playbook and a new set of roles 
that people have to learn to play. With good loans, the mortgage 
finance business will take care of itself.
    The most urgent need for housing finance policy today is to ration 
the use of Government-subsidized mortgage credit, which right now is 
excessive and out of control. I hope that as soon as tomorrow, Congress 
will enact legislation that narrows Government support to the single 
purpose of helping people purchase homes for their own use. Such 
legislation would prohibit Freddie Mac, Fannie Mae, and FHA from 
offering any support for loans to non- owner-occupied home borrowers, 
for cash-out refinances, for nonamortizing loan products, and for any 
other mortgage that fails to fulfill the purpose of helping households 
build up equity in their places of residence.
    These immediate steps should be followed by legislation that 
reduces the maximum loan amount eligible for purchase by, say, 25 
percent each year. Loan limits for the agencies will permit private 
lenders to reenter the market. Once we create a playing field in which 
private lenders have a chance to compete, we can reassess the need for 
further Government intervention. My prediction is that we will find 
that the private sector is fully capable of taking care of the mortgage 
needs of real homebuyers. But in any event, we do not have to make that 
determination until we give the market a chance.
    As we reduce the role of Government agencies, we can monitor the 
behavior of the private sector and adapt our policies accordingly. If 
the private sector goes back to making bad loans, which I doubt will 
happen, we can regulate to stop that. If the private sector leaves gaps 
in accessibility to good housing, we can enact programs to address 
that. Those programs might consist of assistance targeted at specific 
needs, rather than generic subsidies to the mortgage industry.
    I understand why various interest groups want to have a Government 
guarantee for mortgages. Without a guarantee, it is possible that the 
secondary mortgage market will decline in importance or perhaps even 
disappear altogether. We might see the market revert to old-fashioned 
mortgage lending, where the bank keeps your loan until you finish 
paying it off. \1\ I think that homeowners could live with that. I 
understand that it would be hard on the mortgage bankers, the Wall 
Street firms, the rating agencies, and the other special interests that 
count on the Government to prop up the secondary market.
---------------------------------------------------------------------------
     \1\ Arnold Kling, ``Two Approaches to GSE Reform'' (working paper 
no. 11-07, Mercatus Center at George Mason University, March 2011), 
http://mercatus.org/sites/default/files/publication/wp1107-two-
approaches-to-gse-reform_0.pdf.
---------------------------------------------------------------------------
    Just say no.

APPENDIX: CHARGING FOR RISK
    Some proposals for a Government guarantee envision charging a fee 
to private institutions that take advantage of the guarantee. This is 
much easier to do than it sounds.
    If the same fee were charged, regardless of mortgage 
characteristics, it would make the institutions that use the guarantee 
relatively less competitive in the market for low-risk loans and 
relatively more competitive in the market for high-risk loans. Thus, 
charging for the guarantee could very well have the perverse effect of 
encouraging institutions to take more risk.
    In theory, the solution is for the Government to charge a variable 
guarantee fee, one which is higher for loans with riskier 
characteristics. The agency administering the fee would develop ``risk 
buckets'' and charge different fees for loans in different buckets.
    However, even risk buckets can be manipulated in what is known as 
``regulatory arbitrage.'' Many of the fancy new financial vehicles 
created in the decade leading up to the financial crisis were 
introduced in order to get high-risk assets reclassified into low-risk 
buckets. See my paper, Not What They Had in Mind: A History of Policies 
That Produced the Financial Crisis. \2\
---------------------------------------------------------------------------
     \2\ Arnold Kling, ``Not What They Had in Mind: A History of 
Policies That Produced the Financial Crisis of 2008'' (Arlington, VA: 
Mercatus Center at George Mason University, 2009), http://mercatus.org/
sites/default/files/publication/NotWhatTheyHadInMind%281%29.pdf.























                                 ______
                                 
                    PREPARED STATEMENT OF MARK ZANDI
                   Chief Economist, Moody's Analytics
                             March 29, 2011

    No one is comfortable with the Federal Government's current outsize 
role in the housing and mortgage markets. Nearly all of the first 
mortgage loans originated in 2010 were made by the Federal Government 
through the Federal Housing Authority, Fannie Mae, and Freddie Mac 
(see, Chart). Acting on behalf of taxpayers, the FHA is taking on much 
more credit risk than was ever envisaged for this institution, and 
Fannie and Freddie are operating in conservatorship, a kind of 
regulatory purgatory. While changing any of this quickly would disrupt 
the still-fragile housing market and economy, none of it is sustainable 
in the long run.



    This untenable situation is the result of the collapse of the 
private mortgage market during the financial panic. At its peak in 2005 
in the midst of the housing bubble, the private market accounted for 
more than two-thirds of all originations. Powering private mortgage 
lending was securitization--the process of packaging mortgage loans 
into securities sold to global investors. Securitization was not new: 
The FHA, Fannie Mae, and Freddie Mac had been securitizing mortgages 
for more than 25 years. But during the housing bubble, securitization 
surged in both size and scope, incorporating a wider range of 
mortgages, including subprime, Alt-A, and option-ARM loans. 
Securitization also grew more complex and opaque, so that even the most 
sophisticated investors had trouble evaluating the risks.
    Critically, moreover, no participant in private mortgage 
securitizations had the responsibility for ensuring that the process 
worked. Mortgage banks and brokers originated loans but quickly sold 
them to investment banks, which packaged the loans into securities. 
Credit rating agencies assessed them, and in doing so may have 
unknowingly used faulty information provided by the investment banks. 
Investors who purchased the securities took the ratings largely on 
faith. And Government regulators provided little oversight, feeling the 
private market could regulate itself. Yet as the events of the past 3 
years show, it clearly could not. Today, the private mortgage market is 
comatose.

Administration's Proposal
    The Obama administration in its recently released white paper 
appropriately argues that the Government should phase out Fannie Mae 
and Freddie Mac and significantly scale back its role in the mortgage 
market--not quickly, but over time in a clearly defined way to allow 
the private market to revive. \1\ A number of policy tools can help 
achieve this, including reducing conforming loan limits; raising 
insurance premiums and down payments on loans insured by the FHA, 
Fannie Mae, and Freddie Mac; and requiring Fannie and Freddie to shrink 
their loan portfolios.
---------------------------------------------------------------------------
     \1\ The Treasury white paper can be found at http://
www.treasury.gov/initiatives/Documents/
Reforming%20America%27s%20Housing%20Finance%20Market.pdf.
---------------------------------------------------------------------------
    The Administration proposes three potential options for the 
mortgage finance system as the Government steps away:

    Option 1 would limit the FHA to a small part of the 
        mortgage market, fully privatizing the rest of the market with 
        neither explicit nor implicit Government support.

    Option 2 would limit the FHA to a small part of the 
        mortgage market in normal times, leaving the rest to private 
        lenders, but would provide a mechanism, which the 
        Administration did not define, for the Government to 
        significantly expand its role if the private market falters.

    Option 3 would limit the FHA to a small part of the 
        mortgage market in normal times, with private lenders making up 
        the rest of the market, but the private market would be 
        backstopped by explicitly priced catastrophic Government 
        insurance. The Government would step in only after private 
        investors were wiped out.

Hybrid System
    Option 3 is similar to the hybrid private-public mortgage finance 
system Moody's Analytics has proposed, as have others, including the 
Housing Policy Council, the Mortgage Bankers Association, and the 
Center for American Progress. \2\ A hybrid system could take many 
forms, but the most attractive would retain several roles for the 
Federal Government--insuring the system against catastrophe, 
standardizing the securitization process, regulating the system, and 
providing whatever subsidies are deemed appropriate to disadvantaged 
households. Private markets would provide the bulk of the capital 
underpinning the system and originate and own the underlying mortgages 
and securities.
---------------------------------------------------------------------------
     \2\ A detailed description and analysis of the Moody's Analytics 
proposal for a hybrid system is available at http://www.economy.com/
mark-zandi/documents/Mortgage-Finance-Reform-020711.pdf.
    The Moody's proposal is similar to a number of other proposals; the 
most notable include a proposal by the Housing Policy Council of the 
Financial Services Roundtable (a group of 32 leading national mortgage 
finance companies) http://www.fsround.org/housing/gse.htm, the Mortgage 
Bankers Association http://www.mbaa.org/Advocacy/IssuePapers/CEML.htm, 
and the Center for American Progress http://www.americanprogress.org/
issues/2011/01/pdf/responsiblemarketforhousingfinance.pdf.
---------------------------------------------------------------------------
    The Government would provide catastrophic insurance on mortgage 
securities only after major losses, much as the FDIC insures bank 
deposits. The FDIC ended runs by scared depositors on U.S. banks during 
the Great Depression. Catastrophic mortgage securities insurance would 
eliminate runs by scared investors on the global financial system such 
as those in 2008, precipitating the Great Recession.
    Catastrophic insurance would ensure that mortgage credit remains 
ample in the bad times, and--assuming it is properly priced--at no cost 
to taxpayers. It would also reduce the odds of bad lending in good 
times, since the insurance would be offered only to qualifying 
mortgages or to others only at a high price. Since private financial 
institutions would put up the system's capital, there would be 
significant incentive to lend prudently and, given the competition in a 
mostly private system, to innovate as well.
    A hybrid system is superior to the other options for the future 
mortgage finance system, resulting in measurably lower mortgage rates, 
greater credit availability for more homeowners, and preservation of 
the popular 30-year fixed-rate mortgage. It also will compensate 
taxpayers for the risk of backstopping the mortgage finance system--a 
risk that will continue to exist no matter what choices lawmakers make 
for reform.
    In a hybrid system, mortgage rates would be higher than they were 
before the housing crisis, but only because the previous system was 
undercapitalized. If the future system is capitalized sufficiently to 
withstand losses on defaulting mortgages that would result if house 
prices declined by say 25 percent--consistent with the price declines 
experienced in the current housing crash--mortgage rates would be 
approximately 30 basis points higher. Before the financial crisis, the 
mortgage finance system was capitalized to losses associated with a 10 
percent decline in house prices.

Lower Mortgage Rates
    But mortgage rates in the proposed hybrid system would be almost 90 
basis points lower than under a fully privatized system. This is a 
significant difference. The monthly principal and interest paid by a 
typical borrower who has taken out a $200,000 loan for 30 years at a 6 
percent interest rate is $1,199 under the hybrid system. With a 90-
basis point premium in the privatized system, the monthly payment 
increases to $1,317, a difference of $118, or nearly 10 percent. The 
difference in payments under the two systems would likely be even 
greater for borrowers with less than stellar credit or who are seeking 
loans with higher loan-to-value ratios. The greater the risk, the 
greater the rate premium under the privatized system.
    There are three fundamental reasons why mortgage rates will be 
lower in a hybrid system than they would be with full privatization:
    Explicit pricing: Advocates of a privatized market presume that the 
Government could credibly pledge never to intervene during a crisis. If 
private investors actually believed this, they would require larger 
returns on mortgage investments to protect against a catastrophic 
outcome. The cost of private mortgage insurance would therefore be 
higher.
    On the other hand, if investors believe the Government would bail 
out the market in a crisis, they will necessarily underprice the risk, 
leaving taxpayers exposed. History strongly suggests Government would 
not allow the housing market to fail; no matter what lawmakers pledge 
today, investors know political winds change in times of economic 
stress. Taxpayers will be better off if the Government explicitly 
acknowledges this likelihood and collects an insurance premium in 
exchange for its guarantees.
    Standardization: Under the current mortgage system, Fannie Mae and 
Freddie Mac mortgage securities are highly liquid instruments, largely 
because they conform to strict guidelines. Investors in these 
securities pay for this standardization, which helps ensure a robust 
secondary market. Private-label mortgage securities are not 
standardized--a Wells Fargo security trades differently than one from 
Citibank or another issuer. Markets in these individual securities are 
thus much thinner, with wider bid-ask spreads.
    Scale: Mortgage securitization has large fixed costs. Under a 
privatized system, each securitizer would bear the cost of operations, 
Administration, reporting, auditing, etc. A single Government-run 
securitization agency (a feature of most hybrid systems) would achieve 
economies of scale. The provision of insurance, including catastrophic 
risk insurance, also benefits from scale.
    Standardization and scale are more likely with Government 
coordination. Could industry participants come together to set tight 
standards on securities and achieve some economies of scale through 
clearinghouses? Possibly, but that hasn't happened so far. The American 
Securitization Forum, which issues guidelines, has little authority to 
audit or enforce them.

Preserving the Fixed-Rate Mortgage
    Homeowners would also benefit from the preservation of the popular 
30-year fixed-rate mortgage, a type of loan that would quickly fade in 
a fully privatized system. The FHA introduced this type of mortgage 
after the Great Depression to forestall the mass foreclosures that 
occurred during that period. The current foreclosure crisis is a stark 
reminder of this benefit, as the bulk of recent foreclosures are on 
homeowners who had adjustable-rate mortgages.
    Financial institutions have historically found it very difficult to 
manage the interest rate risk in such mortgages: As the cost of funds 
changes, the rate received from homeowners remains fixed. The savings 
and loan industry collapsed largely because of the mismanagement of 
this interest rate risk during the 1980s, and even Fannie and Freddie 
got into trouble using inappropriate interest-rate hedging techniques 
to manage their earnings in the early 2000s. It thus is not surprising 
that 30-year fixed-rate mortgages are very uncommon overseas, where the 
interest rate risk resides with lenders with no support from the 
Government. Indeed, it is likely that a privatized U.S. market would 
come to resemble overseas markets, primarily offering adjustable-rate 
mortgages.

Other Considerations
    Taxpayer bailouts would also be unlikely in a hybrid system, as 
homeowners and private financial institutions would be required to put 
substantial capital in front of the Government's guarantee, and there 
would be a mechanism to recover costs if necessary.
    Given the fragile states of the U.S. housing market and economy, a 
transition from the current nationalized mortgage system to a hybrid 
system would take years and raise many issues, but these would be 
manageable. Given the expertise they have acquired over the past 
several decades, the downsized Fannie and Freddie could become Federal 
catastrophic insurers. The transition would also involve establishing 
institutions and an infrastructure necessary to attract private 
capital.
    One potential weakness of a hybrid system involves moral hazard: If 
private investors believe the Government will bail them out if things 
go badly, they will take inappropriate risks. Moral hazard cannot be 
eliminated in a hybrid model, but it can be significantly mitigated. 
The system we support would require enough private capital to withstand 
massive losses--those associated with a 25 percent decline in house 
prices. The Government's catastrophic insurance would kick in only if 
the losses were even greater, providing significant financial incentive 
for private investors to make sound lending decisions.
    It is also important to recognize that moral hazard exists even in 
a fully privatized system. Investors in such a system are likely to 
assume that in extreme circumstances the Government would still step 
in, congressional pledges to the contrary notwithstanding. Recent 
experience has only reinforced this belief, as the Government stepped 
in during the financial crisis to bail out the system. In the hybrid 
system plan, the Government's backstop is explicit and paid for by 
private investors.
    Assertions that Wall Street banks and their associated financial 
institutions would fare better in a hybrid system than they would with 
full privatization are misplaced. In fact, Wall Street's profits would 
likely be greater in a privatized system, which would be more fractured 
and less liquid, resulting in wider bid-ask spreads and thus bigger 
opportunities to profit from arbitrage. The need for ratings or other 
forms of credit analysis will also be much greater in a privatized 
system that is less standardized and not ultimately backed by the 
Government.
    Mortgage rates will be higher in the future than they were in the 
past and borrowers will face larger hurdles to obtain mortgage loans. 
Given the Nation's fiscal challenges, the Federal Government cannot 
afford to continue large subsidies for home ownership. It is unclear 
that these subsidies were effective in any event, given the current 
foreclosure crisis. Nonetheless, it is critical that the mortgage 
finance system be better designed, or the costs for future prospective 
homeowners will be prohibitive, and the costs to taxpayers in the next 
financial crisis will be overwhelming. And if mortgage finance reform 
is done right, the American dream of home ownership will remain in 
reach for most.
                                 ______
                                 
                PREPARED STATEMENT OF JANNEKE RATCLIFFE
        Senior Fellow, Center for American Progress Action Fund
                             March 29, 2011

    Good morning Chairman Johnson, Ranking Member Shelby, and Members 
of the Committee. I am Janneke Ratcliffe, a Senior Research Fellow at 
the Center for American Progress Action Fund and the executive director 
for the Center for Community Capital at the University of North 
Carolina at Chapel Hill.
    Today I am especially honored to be asked to speak to you as a 
member of the Mortgage Finance Working Group. The members of this 
working group began gathering in 2008 to chart a path forward for the 
mortgage market. Our ``Plan for a Responsible Market for Housing 
Finance'' is the result. I will summarize our proposal, which is 
included in full in my written statement, but I speak only for myself 
in any views expressed here today.
    Our collective experience and the 3 years we spent hashing out 
these issues has made us well aware of the difficult challenge you now 
face. The immediate task is to restore confidence in the housing market 
but we are also convinced that, long term, housing can continue to be 
core to Americans' prosperity and economic security, and the foundation 
of middle-class opportunity. To meet this mission, housing finance 
reform must meet three key goals:

    First, provide broad access to reasonably priced financing 
        for both home ownership and rental housing so that more 
        families, including the historically underserved, can have safe 
        and sustainable housing options to meet their needs.

    Second, preserve the 30-year fixed-rate mortgage, which 
        allows families to fix their housing costs, build assets, and 
        plan for their future in an ever more volatile economy.

    And third, ensure that lenders, large and small, in 
        communities large and small, can competitively offer the 
        affordable, transparent, safe mortgage loans that borrowers 
        need.

    Our proposal achieves these goals by building on lessons from the 
past, both what went wrong and what was done right.
Principles of a New System Based on Lessons Learned From the Past
    History has shown us that a housing finance system left to private 
markets will be subject to a level of volatility that is not 
systemically tolerable, given the importance of housing to the economy 
and to the American family.
    The past decade exposed flaws in our housing finance architecture. 
\1\ The availability of mortgages was wildly cyclical, resulting in 
excessive mortgage credit during the housing boom, followed by a nearly 
complete withdrawal of credit when the bubble burst. The risk of many 
of the mortgages originated during the housing bubble was underpriced. 
At the same time, these mortgages were not sustainable for consumers, 
as low teaser rates and opaque terms masked their high overall cost 
over time.
---------------------------------------------------------------------------
     \1\ Markus K. Brunnermeier, ``Deciphering the Liquidity and Credit 
Crunch 2007-08'', Journal of Economic Perspectives 23(1) (2009):77-100.
---------------------------------------------------------------------------
    The housing bubble was driven by the development of a ``shadow 
banking system'' in which mortgage lending and securitization was 
largely unregulated and certainly undisciplined. In time, this system 
drew in the quasi-governmental entities Fannie Mae and Freddie Mac who 
increased their own overall risk during the ``race to the bottom'' that 
implicated almost all mortgage lenders during the 2000s. In particular, 
as Fannie Mae and Freddie Mac lost market share to private mortgage-
backed securities issuers who were underpricing risk, the two mortgage 
finance giants lowered their own underwriting standards and increased 
their leverage in an attempt to compete. The result: Taxpayers were 
left exposed to major losses.
    The new system must be designed to avoid the same pitfalls in the 
future. Keeping this in mind, we built our proposal on five key 
principles: liquidity, stability, transparency, affordability, and 
consumer protection.

First, There Must Be Broad and Constant Liquidity
    The new system needs to provide investors the confidence to deliver 
a reliable supply of capital to ensure access to mortgage credit for 
both rental and home ownership options, every day and in every 
community, during all kinds of different economic conditions, through 
large and small lenders alike.
    Broad and constant liquidity also requires effective intermediation 
between borrower demands for long-term, inherently illiquid mortgages 
and investor demands for short-term, liquid investments. The capital 
markets have therefore come to play an essential role in mortgage 
finance. But as the past decade so stunningly demonstrated, left to 
their own devices, capital markets provide highly inconsistent mortgage 
liquidity, offering too much credit sometimes and no credit at other 
times with devastating effects on the entire economy.
    To communities, liquidity means that lenders of all sizes can offer 
their customers in all communities beneficial mortgage products. 
Currently, an estimated 70 percent of all mortgage originations flow 
through four lenders--JPMorgan Chase Co., Bank of America Corp., 
Citigroup Inc., and Wells Fargo & Co.--all of which benefit from 
Federal deposit insurance and an perceived and unpaid too-big-to-fail 
guaranty. Without consistent and equitable access to a fairly priced 
secondary market, the country will be in danger of losing the services 
of community banks, credit unions, and other lenders that can meet the 
needs of their communities on a more tailored and targeted basis than 
these larger institutions. These many small but important financial 
institutions need a well-functioning secondary market so they can 
access the capital they need to originate more mortgages.
    To American families, consistent liquidity also means that 
developers will find capital to finance new and rehabilitated 
apartments and other homes so inadequate supply does not put decent 
rental options out of reach. It means that regardless of what community 
they live in, lenders will offer credit at a fair price. It means that 
families will be able to afford a long-term mortgage they can budget 
for without fear that interest rates will drive up their costs. It 
means they can put their hard-earned savings into a home with 
confidence that, whether the economy is up or down, when they need to 
sell, potential buyers will have access to credit from an array of 
competing lenders and the family will be able to sell their home at a 
fair market price.

Second, Any New System Must Foster Financial Stability
    Stability is achieved by reining in excessive risk taking and 
promoting reasonable products and sufficient capital to protect our 
macro economy and household economies from destructive boom-bust 
cycles. A totally private mortgage market is inherently inclined toward 
extreme bubble-bust cycles, which cause significant wealth destruction 
that brings with it devastating repercussions not only for homeowners 
and lenders but also for neighborhood stability, the larger financial 
system, and the broader economy.
    Private mortgage lending is inherently procyclical. Mitigating that 
tendency requires strong, consistently enforced underwriting standards 
and capital requirements that are applied equally across all mortgage 
financing channels for the long cycle of mortgage risk. As we saw in 
the previous decade, capital arbitrage can quickly turn small gaps in 
regulatory coverage into major chasms, causing a ``race to the bottom'' 
that threatens the entire economy.
    Stability for the market requires sources of countercyclical 
liquidity even during economic downturns. For families, stability means 
that they will not experience wild fluctuations in home values, 
allowing them to plan financially for their families, education, 
businesses, or retirement.

Third, Transparency and Standardization Will Support These Other 
        Principles
    Underwriting and documentation standards must be clear and 
consistent across the board so consumers, investors, and regulators can 
accurately assess and price risk and regulators can hold institutions 
accountable for maintaining an appropriate level of capital.
    During the housing bubble, the housing finance system experienced a 
seismic shift toward complex and heterogeneous products that could not 
be understood by consumers at one end of the chain to securities that 
could not be understood by investors at the other. The lack of 
transparency and standardization set the stage for adverse selection 
because the issuers knew more than the investors.
    Because the state of the whole secondary market affects the pricing 
of each packaged pool of mortgages in it, a safe and liquid 
securitization market can only exist if investors have access to 
information about all mortgage-backed securities in the market place. A 
private mortgage-backed securities market will not reemerge unless 
investors are convinced these issues have been resolved. Secondary 
market transparency and standardization lower costs and increase 
availability.
    For borrowers, standardization and transparency means that they can 
make good choices from among well-understood and standard mortgage 
products. The mortgage products they can choose from are not so complex 
that their consequences are hidden.

Fourth, The System Must Ensure Access to Reasonably Priced Financing 
        for Both Home Ownership and Rental Housing
    Liquidity and stability are essential to affordability and, for 
most families, the lower housing costs produced by the modern mortgage 
finance system over the past half century (before the recent crises) 
facilitated wealth building, enabling them to build equity, save, and 
invest. This contributed to the building of a strong middle class and 
has been an important guiding concept in modern U.S. housing finance 
policy--and a key component of the American socioeconomic mobility of 
the 20th century.
    A pillar of this housing system is affordably priced long-term, 
fixed-rate, fully self-amortizing, prepayable mortgages, such as the 
30-year mortgage. The long term of this loan provides borrowers with an 
affordable payment while the fixed-rate, the option to prepay, and 
self-amortization features provide the financial stability and forced 
savings that are critically important to most families, while retaining 
the opportunity for mobility.
    Multifamily rental housing also gains stability from long-term, 
fixed-rate financing. Banks and other lenders, however, are reluctant 
to offer long-term, fixed-rate mortgages to homebuyers or multifamily 
mortgage borrowers unless the lenders have a consistently available 
secondary market outlet. In the absence of Government policies designed 
to explicitly support long-term, fixed-rate mortgages, it is likely 
that this type of mortgage would largely disappear from the U.S. 
housing landscape or become unaffordable to the Nation's middle class, 
which has been so effectively served by 30-year residential mortgages, 
and to the Nation's many renters who rely on multifamily property 
owners' ability to finance and refinance their apartment buildings.
    One of the most important accomplishments of the modern U.S. 
housing finance system is the broad availability of mortgage credit, 
but the benefits of this system have not been equally shared by all 
qualified households. Who is qualified for home ownership? We have 
ample evidence that many households who may not fit the ``20 percent 
down, established credit, 30 percent debt-to-income'' model can become 
successful long-term homeowners, when given access to well-
underwritten, affordable, fixed-rate financing. \2\ For example, at 
UNC, we follow a portfolio of nearly 50,000 mortgages made by banks 
across the country over the decade preceding the crisis; loans made 
under affordable housing and CRA programs. The median borrower earned 
$30,792 a year, more than half of them had credit scores of 680 or 
below, and 69 percent put down less than 5 percent on their home 
purchase. Some of the conversations going on now suggest they were not 
qualified. But as of today, less than 5 percent of these loans have 
experienced foreclosure. Their delinquency rate is a fraction of that 
of subprime mortgages. In fact, the households have on the median, and 
over the period, managed to build more assets than through any other 
available mechanisms. They were able to do so because they had access 
to prime, fixed-rate, long-term amortizing mortgages that they could 
afford to repay. \3\
---------------------------------------------------------------------------
     \2\ David Abromowitz and Janneke Ratcliffe, ``Homeownership Done 
Right: What Experience and Research Teaches Us'', (Washington: Center 
for American Progress, 2010), available at http://
www.americanprogress.org/issues/2010/04/pdf/
homeownership_done_right.pdf.
     \3\ Lei Ding and others, ``Risky Borrowers or Risky Mortgages: 
Disaggregating Effects Using Propensity Score Models'', Working Paper 
(UNC Center for Community Capital, 2010), available at http://
www.ccc.unc.edu/abstracts/091308_Risky.php.
---------------------------------------------------------------------------
    Liquid, stable, and affordable financing must also be more 
available for multifamily and rental housing because it results in more 
affordable and stable rents. The housing opportunity ladder begins with 
access to stable rental housing in reach of good jobs, where households 
can pay their rent and still have money left over to begin saving. It 
is projected that the shortage in affordable rental housing is only 
going to be exacerbated in the wake of the foreclosure crisis. Over the 
next 30 years, we may need to add more than 40 million new housing 
units of all types to meet the demand. We cannot get on track without a 
strong rental housing finance system.
    Access to affordable credit does not mean that people should 
stretch to purchase more house than they can afford. It does mean that 
home ownership's benefits of forced savings and wealth appreciation are 
available to those with sustainable incomes and strong credit history 
without regard to race or geography. It also means that there is enough 
supply of quality rental housing appropriate for individuals and 
families so that rents charged are affordable--meaning housing costs 
are no more than 30 percent of incomes.

Finally, The System Must Support the Long-Term Best Interest of All 
        Borrowers and Consumers and Protect Against Predatory Practices
    The purchase of a home is a far more complicated, highly technical 
transaction than any other consumer purchase and occurs only a few 
times in a consumer's life. Mortgage consumers are at a severe 
information disadvantage compared to lenders. In addition, a mortgage 
typically represents a household's largest liability. A mortgage 
foreclosure therefore has outsized consequences for the borrower. As 
the current crisis so sadly demonstrates, mortgage foreclosures also 
deliver devastating consequences to communities, the financial markets, 
and the broader economy.
    During the housing boom, unregulated and often predatory subprime 
lending not only failed to maintain or promote sustainable home 
ownership opportunities but also established a dual credit market where 
factors other than a borrower's creditworthiness--such as race or 
neighborhood location--determined the type and terms of the mortgages 
available. All too often, families were denied the best credit for 
which they qualified because their communities were flooded with 
unsustainable mortgage credit--in part because secondary market 
pressures created incentives to make and sell these loans instead of 
the safer, lower-cost products.

How the Goals of Our Proposal Support These Principles
    In order to support these fundamental policy principles, our 
proposal for a new housing finance system sets out to achieve four key 
goals:

    Preserve the availability of 30-year fixed-rate mortgages, 
        which allows families to fix their housing costs and better 
        plan for their future in an ever more volatile economy.

    Provide access to reasonably priced financing for both home 
        ownership and rental housing so families can have appropriate 
        housing options to meet their circumstances and needs.

    Ensure that a broad array of large and small lenders (such 
        as community banks, credit unions, and community development 
        financial institutions) have access to secondary market finance 
        so they can continue to provide single and multifamily mortgage 
        loans in every community around the country.

    Address the continuing concerns of underserved borrowers or 
        tenants whose housing needs may require some direct Government 
        support.

The Importance of the 30-Year Fixed-Rate Mortgage
    One important reason why the 30-year fixed-rate mortgage is 
superior to other mortgages is that it provides cost certainty. A U.S. 
household with a 30-year fixed-rate mortgage always knows what its 
mortgage payments will be. Because shorter-duration products are 
basically designed to be refinanced every 2 to 7 years, homeowners with 
these types of loans face significant risks that interest rates may 
rise, making their home payments unaffordable after that initial 2 to 7 
year period expires.
    This is true even when interest rates are stable or declining. 
Adjustable-rate and short-term mortgages expose borrowers not only to 
ordinary interest-rate risk but also to the risks that they may not be 
able to refinance when they need to, due to adverse changes in market 
conditions.
    The 30-year fixed-rate mortgage insulates borrowers against these 
risks since their payment streams are fixed. If we transitioned to an 
economy where the 30-year fixed-rate mortgage was no longer the 
dominant mortgage product, Americans would face the risk of losing 
their home every time they refinanced, due to rising interest rates or 
an unavailability of refinancing options, even if they otherwise could 
have been able to make their payments.
    The ``Plan for a Responsible Market'' ensures that the 30-year 
fixed-rate mortgage remains a widely available, efficiently priced 
choice for all qualified homeowners.

An Appropriate Government Role
    History and experience shows that a Government role is necessary 
for a smoothly functioning mortgage market.
    Prior to the introduction of the major housing and finance reforms 
of the 1930s (which established the Federal Housing Administration, the 
Federal Home Loan Bank System, the Federal Deposit Insurance 
Corporation, and Fannie Mae, among others), the United States had a 
mortgage system that closely resembled the purely private system 
conservatives are arguing for today. From our contemporary perspective, 
this system was a total failure, demonstrating the perils of calls to 
``reform'' the mortgage system back into a purely private endeavor.
    Residential mortgages prior to the 1930s had many of the same 
features as the unregulated mortgage loans of the 2000s, with products 
similar to the subprime mortgages and so-called Alt-A mortgages--then 
as in the 2000s they were short term (typically 5-10 years), they were 
interest only, they carried a variable rate of interest, and they 
featured ``bullet'' payments of principal at term (unless borrowers 
could refinance these loans when they came due, they would have to pay 
off the outstanding loan balance).
    Moreover, mortgages in this earlier era had high down-payment 
requirements, typically more than 50 percent, and were offered at rates 
much higher than the ones we take for granted today. They were 
effectively confined to a very narrow band of Americans, with a much 
higher percentage of home purchases being cash only. As a result, home 
ownership was far less attainable than it is today, with a home 
ownership rate of 43.6 percent in 1940.
    Some have asserted that the significant development of the 
financial sector since the 1930s means that a purely private mortgage 
system could effectively serve the mortgage needs of Americans today. 
They point to the nascent recovery in the so-called jumbo mortgage 
markets, an area that lacks any Government support because these 
mortgages are for the high end of the housing market, as evidence 
supporting the idea that the purely private markets can capably serve 
the mortgage markets.
    This argument is fundamentally flawed for a number of reasons. 
First, it ignores the enormous size of the U.S. mortgage market, which 
currently has some $11 trillion in residential mortgage debt 
outstanding. The fact that the purely private markets may be able to 
meet the mortgage needs of a narrow, wealthy slice of homebuyers does 
not mean that they will be able to meet the mortgage needs of all 
Americans.
    Second, and relatedly, this argument ignores the limited investor 
appetite for long-term debt investments--the type of investments that 
fund home mortgages--in the absence of a Government backstop. While 
investor demand for long-term sovereign debt is enormous, totaling many 
trillions of dollars for U.S. Treasuries alone, the demand for 
privately issued long-term mortgage obligations that don't carry a 
Government backstop is small in comparison. \4\
---------------------------------------------------------------------------
     \4\ Bryan J. Noeth and Rajdeep Sengupta, ``Flight to Safety and 
U.S. Treasury Securities'', The Regional Economist 18(3) (2010):18-19, 
available at http://www.stlouisfed.org/publications/re/articles/
?id=1984.
---------------------------------------------------------------------------
    Without a Government backing, there is unlikely to be sufficient 
investment capital to fund the $11 trillion in U.S. residential debt 
outstanding, let alone to fund longer-term mortgages, such as the 15-
year to 30-year fixed-rate mortgages that dominate the U.S. mortgage 
market. Almost certainly, the removal of the Government's role in the 
mortgage markets would result in sharp reductions in the availability 
of mortgage credit and an immediate transition to short-duration 
mortgages, such as the 2-year and 3-year adjustable-rate mortgages that 
dominated the purely private subprime and Alt-A markets during the 
2000s.
    Finally, this position ignores the highly cyclical nature of 
private mortgage lending. One of the major weaknesses of exclusively 
private mortgage lending is the unavailability of mortgage credit 
during housing market or economic downturns as lenders become highly 
risk averse. This in turn can quickly lead to a ``vicious circle'' 
where a lack of available mortgage credit exacerbates the housing 
downturn, accelerating price declines and causing more mortgage 
defaults, which then leads to an even greater risk aversion on the part 
of lenders to provide credit. \5\
---------------------------------------------------------------------------
     \5\ Joint Economic Committee Majority Staff, ``From Wall Street to 
Main Street: Understanding How the Credit Crisis Affects You'' (2008).
---------------------------------------------------------------------------
    The inability of a purely private mortgage finance system to meet 
the housing needs of a modern economy is also evident from the 
experience of developed economies around the world. While the exact 
particulars vary from country to country, every advanced economy in the 
world relies on significant levels of Government support, either 
explicit or implicit, in their mortgage markets.
    Proposals that recommend complete privatization of the housing 
finance system (or privatization with occasional Government 
intervention) would not achieve stability and they, in fact, would 
expose families and taxpayers to even more risk. These radical 
privatization proposals would present as extreme a change in the 
housing finance system as we have witnessed since the 1930s and would 
leave the U.S. economy vulnerable to the kind of boom-bust cycle that 
unfettered private market forces caused then and again in the last 
decade. They also would result in some stark consequences for American 
families.
    The predominant form of finance would be in the form of loans with 
shorter durations and higher costs, putting more households at greater 
financial risk. The 30-year fixed-rate mortgage would not be available 
under terms affordable to most families. Rental housing would be less 
available and more costly, even as there would be greater demand for 
it. Finally, fewer working families would have access to the asset-
building potential of home ownership, and this pillar of the economic 
mobility that has characterized the American economy until recently 
would be lost--and with it part of the American Dream.
    History has shown us that a purely private market will not work. 
Similarly, we know that the current overreliance on Federal Government 
intervention is unsustainable. Private capital must be encouraged to 
bear as much of the load as possible in our housing finance system 
going forward, but that is different from saying the market must be 
``privatized.''
    The proposal does induce private capital back into the system and 
structures an appropriate Government role to ensure that the broader 
housing policy goals are satisfied.
Features of the ``Plan for a Responsible Market for Housing Finance''
    Let me now describe the key features of the ``Plan for a 
Responsible Market.'' The reforms and enhanced consumer protections 
enacted in the Dodd-Frank Act were an essential first step as is proper 
implementation of that law. The proposal of the Mortgage Finance 
Working Group creates a system that preserves the traditional roles of 
originators and private mortgage insurers, but assigning functions 
previously provided by the Government-sponsored enterprises, or GSEs, 
Fannie Mae and Freddie Mac, to three different actors--issuers; 
chartered mortgage institutions, or CMIs; and a catastrophic risk 
insurance fund, or CRIF.
    Issuers will originate or purchase and pool loans; issue mortgage-
backed securities, or MBSs; and may purchase credit insurance on MBSs 
that meets certain standards from CMIs.
    CMIs also will be fully private institutions not owned or 
controlled by originators. They will be chartered and regulated by a 
Federal agency and their function would be to assure investors of 
timely payment of principal and interest only on MBSs that are eligible 
for the Government guarantee.
    The CRIF would be an on-budget fund (similar to the FDIC's Deposit 
Insurance Fund) that is run by the Government, and funded by premiums 
on CMI-guaranteed MBSs. In the event of the CMI's financial failure, 
the explicit guarantee provided by the CRIF would protect only the 
interests of holders of only qualified CMI securities.
    The Government would price and issue the catastrophic guarantee, 
collect the premium, and administer the fund. The fund would establish 
the product structure and underwriting standards for mortgages that can 
be put into guaranteed securities and the securitization standards for 
MBSs guaranteed by the CMIs. The Government would also establish 
reserving and capital requirements for CMIs, and these would be at 
higher levels than those held by Fannie and Freddie.
    It is important to note that under our plan, there would be several 
layers of protection standing ahead of any taxpayer exposure. Borrower 
equity, the CMI's capital, and in some cases private mortgage insurance 
all would stand ahead of the CRIF. All of these private sources of 
funds would need to be exhausted before the CRIF would have any 
exposure to loss.
    We believe this system will serve the needs of the vast majority of 
households that are looking for the consistent availability of 
affordable credit and predictable housing costs that can be achieved 
through a limited Government market backstop.
    This system will serve the vast majority of households seeking 
consistent, affordable credit and predictable housing costs that can be 
achieved through a limited Government backstop. We also include new 
mechanisms to see that the benefits of this system are made available 
in a fairer and more equitable way than ever before and to prevent the 
problem of a dual market where certain classes of borrowers and 
communities are relegated to separate, unequal markets. These 
mechanisms prohibit the CMIs from ``creaming the market'' and require 
them to extend the benefits of the system to all qualified borrowers, 
including those historically underserved. Further, to effectively serve 
those underserved borrowers or tenants whose housing needs require 
greater Government support, our plan proposes two parallel strategies: 
(1) establishing a new ``market access fund'' to provide responsible 
credit support and research and development funds to promising new 
products that close market gaps, and which would complement the 
Affordable Housing Trust Fund and Capital Magnet Fund established by 
the Housing and Economic Recovery Act of 2008; and (2) revitalizing the 
Federal Housing Administration, or FHA.

Ensure Nondiscriminatory Access to Credit
    CMIs in the new housing finance system would be responsible for 
providing an equitable outlet for all primary market loans meeting the 
standards for the guarantee, rather than serving only a limited segment 
of the business, such as higher-income portions of that market.
    This obligation would have four parts:

    CMIs would be expected to roughly mirror the primary market 
        in terms of the amount and the geography of single-family low- 
        and moderate-income loans (other than those with direct 
        Government insurance) that are securitized and are eligible for 
        the CMI guarantee. They would not be allowed to ``cream'' the 
        market by securitizing limited classes of loans. This assumes 
        that the primary market will be appropriately incentivized 
        through the Community Reinvestment Act, which requires banks 
        and thrifts to serve all communities in which they are 
        chartered, including low- and moderate-income communities, 
        consistent with safe and sound operations.

    CMIs that guarantee multifamily loans would be expected to 
        demonstrate that at least 50 percent of the units supported by 
        securitized multifamily loans during the preceding year were 
        offered at rents affordable to families at 80 percent of the 
        relevant area median income, measured at the time of the 
        securitization.

    CMIs would be required to provide loan-level data on 
        securitizations to the Government (which will be required to 
        make these data public) that are no less robust than those of 
        the Public Use Database currently produced by the Federal 
        Housing Finance Administration.

    All CMIs would participate in a yearly planning, reporting, 
        and evaluation process covering their plans for and performance 
        against both the single-family and multifamily performance 
        standards and Government-identified areas of special concern, 
        such as rural housing, small rental properties, and shortages 
        created by special market conditions such as natural disasters.

    Like all other secondary market participants, CMIs would be 
required to abide by nondiscrimination and consumer protection laws. 
Substantial underperformance by a CMI could lead to fines and possible 
loss of its CMI license.

Market Access Fund
    Some groups of borrowers and certain types of housing have not been 
well served by the system of the past. Rules against discriminatory 
lending and anticreaming provisions, such as those we have proposed for 
CMIs, will help, but are likely to be insufficient to fill all the 
gaps.
    These gaps are especially important to fill in the aftermath of the 
housing crisis, where many communities saw equity stripped by subprime 
lending. Moreover, the larger economic downturn has hit underserved 
communities most heavily. These places most in need of capital to 
rebuild will be the last to get it from a private market left to its 
own devices.
    Certainly, direct subsidies are critical where deep Government 
support is needed, such as for low-income rental housing. In addition 
to existing programs like Section 8, the low-income housing tax credit, 
and HOME, a fully funded National Housing Trust Fund will help meet 
these needs. But beyond cash grants to support affordable housing, we 
need the entire housing finance system to provide access to credit for 
affordable rental housing and home ownership. Mortgage insurance 
provided by FHA and other similar programs brings private capital into 
underserved communities, but under these programs, a taxpayer insurance 
fund takes on almost all of the credit risk. Lenders who make FHA loans 
get fee and servicing income but they have very little capital at risk. 
Thus, FHA insurance ensures loans are available to markets and 
borrowers that private capital will not serve. \6\
---------------------------------------------------------------------------
     \6\ FHA's history of service to low-income and minority 
communities has not, however, been without controversy, as in some 
communities and in some time periods, racial covenants, block busting, 
fraud, and other abuses by realtors, lenders, and other program 
participants that FHA failed to prevent have led to neighborhood 
deterioration. See, Sean Zielenbach, ``The Art of Revitalization: 
Improving Conditions in Distressed Inner-City Neighborhoods'' (New 
York: Garland Publishing, 2000).
---------------------------------------------------------------------------
    CMIs are unlikely to make loans that they perceive as too risky or 
that might provide below-market rates of return. But this sector cannot 
be allowed to see itself as having no responsibility to serve low- and 
moderate-income communities, communities of color, and communities hard 
hit by the foreclosure crisis and other adverse conditions, claiming 
that the risks are inconsistent with their fiduciary duty to 
shareholders. The result could be a two-tiered system of housing 
finance, with FHA as the primary vehicle serving low- and moderate-
income communities and communities of color and taxpayers absorbing all 
the risk, and private capital serving only the middle and upper parts 
of the market.
    The market access fund offers a way to help CMIs and other private 
actors meet their obligations to serve the entire market.
    Loan products that can successfully and sustainably meet 
underserved housing needs can eventually access the capital markets--if 
they can first gain a record of loan performance and market experience. 
Past examples include home improvement loans and guaranteed rural 
housing loans, as well as loans made less risky by quality housing 
counseling.
    A market access fund would provide a full-faith-and-credit 
Government credit subsidy to cover part of these risks to enable 
entities including CMIs and nonprofit and Government (such as State 
housing finance agency) market participants to develop and establish a 
market for these innovative products. Examples of new products might 
include lease purchase loans, energy-efficient or location-efficient 
loans, shared equity loans, and loans on small multifamily properties. 
\7\ The fund could also make available research and development funds 
(grants and loans) to encourage initial development of such products.
---------------------------------------------------------------------------
     \7\ For example, one idea that has been proposed for the market 
access fund has been to capitalize an equity pool that would purchase 
participations in local and State ``shared equity'' home ownership 
funds, providing scale to this affordability product that has been 
greatly successful in smaller settings but which lacks access to the 
secondary capital markets and is thus otherwise limited in the funds it 
has access to. The two major barriers to scale for this product have 
been a large degree of heterogeneity in local products and a lack of 
standard performance data. The leveraging of market access fund capital 
would clearly address these hurdles and allow shared equity to achieve 
a larger scale, potentially accessing the secondary markets in time.
---------------------------------------------------------------------------
    The market access fund would provide ``wholesale'' Government 
product support on a risk-sharing basis, in contrast to the retail, 100 
percent insurance offered by the Federal Housing Administration. The 
fund would be required to meet specific performance goals relating, for 
example, to financing for housing in rural areas or places with high 
foreclosure rates, unsubsidized affordable rental housing, and 
manufactured housing. And the fund's credit subsidy would only be 
available for products on a shared-risk basis, meaning that other 
capital would need to be at risk as well, providing both market 
discipline and an opportunity for these actors to learn how to serve 
underserved markets well. This in turn would pave the way for private 
capital to ``mainstream'' the products, increasing sustainable home 
ownership and affordable rental housing, and eventually reducing or 
eliminating the need for public support.
    The market access fund would be funded by an assessment on all MBS 
issues. A portion of the assessment would go to the National Housing 
Trust Fund (for direct subsidy) and to the Capital Magnet Fund (for 
credit programs by Community Development Finance Institutions), as 
established under the terms of the Housing and Economic Recovery Act of 
2008. It is important that the assessment be levied on both those 
issues guaranteed by CMIs and those without CMI guarantees to ensure 
that the responsibility to support better service to underserved 
markets primarily through private finance is supported by the jumbo 
market as well as the middle market.
    By sharing the risk of loss, the market access fund makes it easier 
for private capital to serve underserved communities. Without this 
mechanism, there is a significant risk that the taxpayer will continue 
to stand behind too large a segment of the housing market through FHA/
VA and a two-tier housing finance system will develop.
    The market access fund will help CMIs and other private actors meet 
their obligations to serve the entire market while simultaneously 
providing the market discipline of private risk capital for new 
products that serve underserved communities. And it will do so while 
limiting the Government's role and exposure to risk.

Revitalized and Improved FHA
    The role of the Federal Housing Administration as an essential 
countercyclical backstop has been demonstrated by its performance 
during the recent housing and financial crises. While it insured only 
3.3 percent of single-family mortgages originated in 2006, by 2009, 
after private capital fled the housing market, its market share 
increased to 21.1 percent. Over the past year, FHA provided access to 
credit for about 40 percent of purchase mortgages. \8\ In 2009, FHA 
insured 60 percent of all mortgages to African-American and Hispanic 
homebuyers, and mortgages for more than 882,000 first-time homebuyers. 
\9\ Earlier in the economic and financial crises, these percentages 
were even higher.
---------------------------------------------------------------------------
     \8\  Office of Policy Development and Research, U.S. Housing 
Market Conditions (Department of Housing and Urban Development, 2010), 
available at http://www.huduser.org/portal/periodicals/ushmc/fall10/
hist_data.pdf.
     \9\  Annual Report to Congress Regarding the Financial Status of 
the FHA Mutual Mortgage Insurance Fund Fiscal Year 2010 (Department of 
Housing and Urban Development, 2010), available at http://www.hud.gov/
offices/hsg/rmra/oe/rpts/actr/2010actr_subltr.pdf.
---------------------------------------------------------------------------
    FHA reported in November 2010 in its annual report to Congress 
that, under conservative assumptions of future growth of home prices, 
and without any new policy actions, FHA's capital ratio is expected to 
approach the congressionally mandated threshold of 2 percent of all 
insurance-in-force in 2014 and exceed the statutory requirement in 
2015. In other words, if correct, FHA will have weathered the worst 
housing crisis since its creation in the aftermath of the Great 
Depression and will have done so without costing taxpayers a dime. 
FHA's market share was small during the worst of the crisis and, while 
it is sustaining significant losses from loans insured prior to 2009, 
better-performing loans are now helping to stabilize its financial 
position.
    FHA, however, lacks the systems, market expertise, and nimbleness 
one would hope to see in an institution with more than $1 trillion of 
insurance-in-force. \10\ Its product terms and many practices are 
prescribed by statute with such specificity that it makes prudent 
management of an insurance fund extremely difficult.
---------------------------------------------------------------------------
     \10\ Ibid.
---------------------------------------------------------------------------
    In 1994, the Joint Center for Housing Studies at Harvard teamed up 
with FHA Commissioner Nic Retsinas to conduct a series of public 
hearings and study the future of FHA. Their report and recommendations 
concluded that Congress should reinvent FHA as a Government 
corporation, under the direction of the secretary of the department of 
housing and urban development, with strict and independent oversight of 
its performance in serving underserved markets and maintaining 
financial soundness, but greater flexibility in product design to meet 
those ends. \11\
---------------------------------------------------------------------------
     \11\ Department of Housing and Urban Development and Harvard 
University's Joint Center for Housing Studies, ``Creating a New Federal 
Housing Corporation'', (1995), available at http://
babel.hathitrust.org/cgi/
pt?view=image;size=100;id=mdp.39015034895089;page=root;seq=3.
---------------------------------------------------------------------------
    The Harvard proposal would have created a new Federal Housing 
Corporation with far greater flexibility in procurement and personnel 
policies in order to jumpstart the transformation to a more business-
like agency with a public purpose. The proposal was adopted by 
President Clinton in a HUD Reinvention Blueprint released in March 
1995. \12\ Similar recommendations were endorsed by the Millennial 
Housing Commission in their report submitted to Congress in May 2002. 
\13\ Each time, market, political, and inertial forces resulted in no 
action.
---------------------------------------------------------------------------
     \12\ HUD Reinvention: From Blueprint to Action (Department of 
Housing and Urban Development, 1995).
     \13\ The Millennial Housing Commission, ``Meeting Our Nation's 
Housing Challenges: Report of the Bipartisan Millennial Housing 
Commission Appointed by the Congress of the United States'' (2002), 
available at http://govinfo.library.unt.edu/mhc/MHCReport.pdf.
---------------------------------------------------------------------------
    The thrust of these recommendations is on the mark. Most 
significantly, under these proposals, FHA could design loan products to 
help meet the needs of underserved markets. The FHA would need to 
charge premiums designed so the insurance funds would be actuarially 
sound. These products would be subject to independent credit subsidy 
estimates approved by the Office of Management and Budget and 
additional private market-like measures of risk. And the overall 
portfolio of insurance would be required to maintain adequate capital 
reserves to continue to protect taxpayers from insurance losses, as FHA 
has done since the Great Depression.
    Other reforms would let FHA pay salaries at levels paid by the 
banking regulatory agencies, as comparable financial market expertise 
must be attracted to better protect taxpayers from the risks inherent 
in insurance. And procurement and budget flexibility would make it 
easier for FHA to use insurance fund resources to develop new systems 
and procure them more easily to better assess and manage risk in the 
insurance fund.
    It is time to revisit these ideas. It is now evident that FHA is 
indispensable for economic stability and housing market equity. In 
light of its continued importance, we should ensure that FHA has the 
tools it needs to best meet underserved housing needs and provide 
countercyclical liquidity while doing what works to protect taxpayers 
optimally from any risk.

Conclusion
    From the 1930s to the 2000s, the United States enjoyed a vibrant, 
stable, housing market that evolved to provide mortgage money at all 
times, in all parts of the country, for sustainable home ownership and 
rental housing. The system was not perfect but it contains valuable 
lessons for us as we look to rebuild. By applying those lessons to meet 
the goals outlined in this testimony, you have the opportunity to build 
a system that rebalances housing choices and works better for more 
households and more communities than the system that has been in place 
for the last 70 years.
    Thank you for inviting me to talk about the work my colleagues and 
I have done and I would be happy to answer any questions.



























































































































              Additional Material Supplied for the Record
          ARNOLD KLING WEB BLOG SUBMITTED BY CHAIRMAN JOHNSON







  STATEMENT SUBMITTED BY THE INDEPENDENT COMMUNITY BANKERS OF AMERICA
    On behalf of its nearly 5,000 member banks, ICBA is pleased to 
submit this statement for the record for this hearing on ``Public 
Proposals for the Future of the Housing Finance System.''
    Community bank mortgage lenders have a great deal at stake in the 
future of housing finance in this country. Community banks serve the 
mortgage credit needs of rural areas, small towns, and suburbs across 
the Nation, and the secondary markets are a significant source of 
capital in support of this lending. Our members need a financially 
strong, impartial secondary market that provides equitable access and 
pricing to all lenders regardless of size or volume. We're grateful to 
Chairman Johnson for convening this hearing.
    With regard to the Administration's recent report to Congress, 
``Reforming America's Housing Finance Market,'' we were encouraged to 
see the Administration recognize that smaller lenders and community 
banks serve their communities more effectively than larger lenders. 
Access to credit for these communities, along with the related 
imperatives of preserving a competitive market for credit and 
minimizing consolidation, are all criteria the Administration uses in 
evaluating proposals for remaking the Government's role in the 
secondary mortgage market. In this respect, we support the analysis 
provided by the Administration.
    The Administration's report considers three broad approaches to 
secondary market reform:

    Nearly complete privatization of the housing finance 
        system, with Government assistance for targeted groups of 
        borrowers;

    A privatized system with a Government guarantee that 
        becomes effective only during times of crisis, supplemented by 
        Government assistance for targeted groups of borrowers; and

    A privatized system with catastrophic Government 
        reinsurance buffered by private capital, in addition to 
        Government assistance for targeted groups of borrowers.

    Even the third catastrophic reinsurance option would entail a more 
circumscribed role for the Government in the housing market, 
emphasizing private capital as the primary source of mortgage credit 
and the first to bear losses. The Administration report has effectively 
shifted the debate; the spectrum of viable options ranges from narrow 
Government involvement to virtually full privatization. Government's 
historical role in housing is off the table. The Administration's 
report also indicated that it will reduce the conforming loan limits, 
raise guarantee fees to allow private-sector securitizers to be more 
competitive and raise down payment requirements, among other steps to 
shrink the Government's role in housing that don't require 
congressional approval. Wherever we end up, it will look significantly 
different than the precrisis Fannie and Freddie. ICBA welcomes this new 
reality as an appropriate response to the moral hazard and taxpayer 
liability of the old system. Our members are prepared to adapt and 
thrive in an environment of limited Government involvement.
    A housing finance system with a smaller Government footprint, 
properly designed, can preserve the vital role of community banks. The 
worst outcome, for community banks and consumers, would be a system 
dominated by a few large, too-big-to-fail banks (TBTF), with community 
banks forced to the sidelines.
    Such an outcome would simply replicate the moral hazard that 
prevailed under Fannie Mae and Freddie Mac. To allow a small number of 
large banks to dominate the secondary mortgage market would create a 
new variety of moral hazard, just as pernicious as the old variety. 
These dominant lenders, driven by quarterly earnings and dividends to 
unacceptable risk taking, would become too-big-to-fail because the 
market would know full well that the Government would bail them out (as 
it did in 2008) rather than let the housing market collapse. These 
lenders would in effect become privatized ``Fannies'' and ``Freddies,'' 
with all the benefits and the risks that come with TBTF status. 
Privatization is not enough to cancel out moral hazard, which lies in 
the concentration of risk, and especially risk in the housing market 
because it occupies such a central place in our economy. These same 
TBTF banks are also the largest mortgage servicers and are responsible 
for much of the foreclosure mess, including the mishandling of 
America's military families. Any solution that fuels this consolidation 
is only setting up the financial system for an even bigger collapse 
than the one we've just been through.
    To address these concerns, ICBA has set forth its own proposal for 
reform that would replace Fannie Mae and Freddie Mac with lender-owned 
cooperatives. We believe that this proposal would protect taxpayers 
from another bailout, ensure equal access and pricing for lenders of 
all sizes, deter further consolidation, ensure liquidity during periods 
of market stress, preserve the significant benefits of the ``to-be-
announced'' (TBA) market, and minimize disruption in the market by 
providing for the direct transfer of Fannie Mae's and Freddie Mac's 
infrastructure to the new co-ops.

ICBA Proposal for Secondary Mortgage Market Reform\1\
Cooperative governance would ensure broad access and deter excessive 
        risk taking
    Fannie and Freddie would be restructured as cooperative entities 
owned by mortgage originators who purchase stock commensurate with 
their loan sales to the co-ops. This is similar to the capitalization 
of the Federal Home Loan Banks (FHLBs) and provides a capitalization 
source that can be adjusted based on market conditions and risk profile 
and performance of the co-ops' book of business. Members would have an 
incentive to transfer only soundly underwritten loans to the co-ops 
because any losses would adversely affect their capital investment.
---------------------------------------------------------------------------
     \1\ ICBA's cooperative model is similar to a proposal favorably 
analyzed by the New York Federal Reserve and the Government 
Accountability Office. It is also similar to a proposal put forth by 
the National Association of REALTORS'.
---------------------------------------------------------------------------
    The co-ops would be governed on a one-company-one-vote basis. Big 
banks would not be allowed to dominate the new co-ops. Further, 
directors would be appointed to represent various sizes and classes of 
members, while a minority number of seats would be reserved for outside 
independent directors with financial expertise.
    The advantage of this form of governance is that all co-op members 
would enjoy open and equal access and benefits in terms pricing, 
regardless of their origination volume. This would prevent industry 
consolidation and preserve access to credit for the millions of small 
town and rural borrowers served by community banks. The housing market 
is best served by a large and geographically dispersed number of 
lenders. The co-ops would be required to provide liquidity to all home 
mortgage markets on a continuing and equitable basis. Guarantee fees 
and reinsurance fees would be set by the co-op boards and would be the 
same for all members. However, mortgage originators with substandard 
loan performance would be subject to additional surcharges and 
restricted access until their loan performance improved.

A limited scope of conservatively underwritten products would be 
        eligible for sale to the co-ops
    The co-ops would guarantee a limited range of conservatively 
underwritten products: 15- and 30-year fully amortizing mortgage loans 
that meet the definition of ``qualified residential mortgage'' (QRM) 
and adjustable rate mortgage loans that meet the QRM definition, would 
be exempt from risk retention requirements. Loans that fall outside of 
the QRM definition would require risk retention by the originator and 
additional risk to the co-ops would be priced accordingly. These 
provisions would shield the co-ops from excessive risk.
    The co-ops would only be engaged in the secondary market and would 
be barred from operating in the primary market. They would not unfairly 
compete with mortgage originators.
A privately capitalized guarantee fund would insulate taxpayers
    Mortgage-backed securities issued by the co-ops would be guaranteed 
by a fund capitalized by co-op members as well as 3rd party guarantors. 
Resources would be set aside in good times to prepare for challenging 
times. The Government would provide catastrophic loss protection, for 
which the co-ops would pay a premium. This guarantee, fully and 
explicitly priced into the guarantee fee and loan level price, would 
not only provide credit assurances to investors, sustaining robust 
liquidity even during periods of market stress, but--a point less often 
noted--it would enable the co-op securities to be exempt from SEC 
registration and trade in the ``to-be-announced'' (TBA) forward market. 
\2\ Without the TBA market, which allows lenders to sell loans forward 
before they are even originated and to hedge their interest rate risk 
during the rate ``lock'' period, the 30-year fixed rate loan as we know 
it and on which our housing market is based will become a rarity. 
Though the co-ops would be ultimately backstopped by the Government, 
private capital from members and private reinsurers would absorb all 
but catastrophic losses; Government reinsurance funds and ultimately 
the taxpayer would be well insulated.
---------------------------------------------------------------------------
     \2\ In a TBA trade, participants agree to exchange a given volume 
of mortgage backed securities at a specified date and at an agreed-upon 
price. This allows lenders to sell mortgages forward before they are 
even originated. Because it facilitates hedging of interest rate risk, 
the TBA market also allows lenders to offer borrowers an interest rate 
``lock'' for as long as 90 days. TBA trades are based on an assumption 
of homogeneity among the securities that will actually be included in 
the MBS. This assumption is facilitated by standardization in the 
underwriting of mortgages and by a Government guarantee, implied or 
explicit.
---------------------------------------------------------------------------
Easy Transition From Fannie Mae and Freddie Mac
    The infrastructure of Fannie and Freddie--including their 
personnel, systems, automated underwriting engines--would transfer to 
the new co-ops. This is an essential feature of the proposal as it 
would minimize disruption in the market and reduce the cost of the 
transition to the new system.
    The outstanding debt and securitizations of Fannie and Freddie 
would maintain the current guarantee.

Strong Supervision
    The Federal Housing Finance Agency (FHFA) would regulate and 
supervise the co-ops. FHFA would be responsible for setting and 
monitoring capital levels based on market conditions, portfolio 
performance and overall safety and soundness. FHFA would approve all 
new mortgage products purchased by the co-ops.

Closing
    Private entities will succeed Fannie Mae and Freddie Mac; that much 
is all but settled. Still to be determined is what form those entities 
will take--instruments of Wall Street or those in which community banks 
and large banks are equally represented and communities and customers 
of all varieties are served.
    ICBA looks forward to working with this Committee, the 
Administration, and our industry partners to enact our proposal or 
another proposal that meets our criteria and is in the best interest of 
the communities we serve.
    Thank you.


 PUBLIC PROPOSALS FOR THE FUTURE OF THE HOUSING FINANCE SYSTEM--PART II

                              ----------                              


                         THURSDAY, MAY 26, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:26 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I call this hearing to 
order. We will excuse ourselves for an executive session when 
we get a quorum.
    In the meantime, I would like to thank our witnesses for 
coming before the Committee to discuss their ideas for the 
future of America's housing finance system. As promised in the 
Committee agenda I released earlier this year, housing finance 
reform is one of my top priorities. The Committee has held 
three housing hearings in addition to the Subcommittee hearings 
held by Senator Reed and Senator Menendez. I anticipate at 
least one hearing on housing finance reform each work period 
for the rest of the year.
    Our housing market continues its fragile recovery. In our 
efforts to reform the housing finance system we must take care 
not to disrupt that recovery. Witnesses testified in a previous 
hearing that without Fannie Mae, Freddie Mac and FHA providing 
liquidity, many families that could afford a home would not be 
able to get a mortgage in the current economic environment.
    However, the Government's current dominant role in the 
market is unsustainable long term. This Committee must explore 
ways to bring private capital back to the market while also 
ensuring that credit remains available. As I have said before, 
there are other questions we must answer when considering the 
future of the housing finance system:
    How will we preserve the availability of affordable, 30-
year, fixed-rate, prepayable mortgages?
    Should all lenders have equal access to the secondary 
market?
    Will a new structure provide equal access for all qualified 
borrowers and market segments--including rural areas--to the 
mainstream housing finance system?
    Will a new system maintain stable, liquid, and efficient 
mortgage markets for single-family and multifamily housing?
    How will a new structure protect taxpayer dollars?
    We must find workable solutions that preserve the option of 
responsible home ownership for future buyers and provide 
adequate financing for multifamily construction for those who 
prefer to rent rather than to own a home. I look forward to 
hearing the suggestions of our witnesses.
    With that, I will turn to Ranking Member Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. Thank you for 
calling this hearing. I think it is very important.
    Today, as the Chairman has said, the Committee will 
continue its examination of proposals for reforming our 
Nation's housing finance system. I do not believe there is any 
dispute that our housing finance system is broken. Since 2006, 
housing starts have fallen by 67 percent, while existing home 
sales have fallen by nearly 13 percent in just the last year 
alone.
    Likewise, home prices continue to decline in most markets. 
The latest median price of an existing home is more than 17 
percent lower than just 2008. Our once dynamic and innovative 
housing market is now stagnant and damaged, crippled by 
regulatory uncertainty. Unfortunately, when market participants 
should be focusing on reviving our housing markets, Washington 
has forced them to vote countless hours and millions of dollars 
to navigating the scores of new regulations imposed by the 
Dodd-Frank legislation.
    Accordingly, it should be no surprise to anyone that our 
housing market has not rebounded since the passage of the Dodd-
Frank Act. By some measures, it is even worse because our 
private markets have been almost completely replaced by 
Government programs.
    Last year, the Federal Government accounted for 96 percent 
of all mortgage-backed securities issued. Yes, 96 percent. In 
effect, Fannie and Freddie and FHA now occupy what used to be 
the private secondary mortgage market. And as a result, nearly 
all of the risk in our housing market is being transferred from 
private capital to the American taxpayer. I believe this is a 
wholly unacceptable situation.
    Today we will hear from two very different points of view, 
I believe, on how to address this situation. One side will 
argue that our mortgage market needs the Federal Government to 
continue guaranteeing mortgages in one form or another. This 
means that the American taxpayer will continue to guarantee 
mortgage-backed securities while collecting a guarantee fee. It 
is not surprising that certain segments of the housing market 
advocate such a model.
    Most businesses, not just housing, like Government 
subsidies if they can get them, and the housing market and the 
housing industry is no different. However, the Federal 
Government does not have a good track record on pricing risk 
and, thus, subsidies are not without cost. Indeed, Secretary of 
the Treasury Geithner warned this Committee in March, when he 
stated, and I quote, ``Guarantees are perilous. Governments are 
not very good at doing them, not very good at designing them, 
not very good at pricing them, and not very good at limiting 
the moral hazard risk that comes with them.'' These are the 
words of our Secretary of the Treasury.
    Given the combination of these difficulties, I believe we 
cannot assume a Government guarantee of mortgages can be 
achieved without risk to the taxpayer. And while a Government 
guarantee may be a good deal for the housing industry, it could 
be a very bad deal for the taxpayer.
    The other side of the argument raises concerns with the 
Federal Government's domination of the mortgage finance market. 
We have heard from many witnesses over the years that the 
Government must remain engaged in the market because of 
concerns with private sector capacity. We must ask, however, 
whether the reduced role of the private sector is a result of 
market conditions or conditions created by Government policies.
    Surely we should answer this critical question before we 
draw any conclusions about the wisdom of continued Government 
involvement in the mortgage market.
    Mr. Chairman, I agree that many factors must be considered 
as we proceed with reform. I maintain, however, that protecting 
the American taxpayer must continue to be our number one 
priority.
    Thank you.
    Chairman Johnson. Before I introduce our witnesses, would 
other Members like to make very brief opening statements? 
Senator Reed.
    [No response.]
    Chairman Johnson. Senator Vitter.

               STATEMENT OF SENATOR DAVID VITTER

    Senator Vitter. Thank you, Mr. Chairman. I just want to 
echo many of Senator Shelby's comments. As many folks, 
including me, said many times last year, Dodd-Frank did not 
address one of the largest root causes of our recent crisis, 
and that is, Government housing policy, certainly including 
major problems at Fannie Mae and Freddie Mac.
    This has come to light more and more with each passing 
week. Several months ago, JPMorgan issued a report that 
reexamined, based on new statistics and new information, the 
significance of this cause, and they basically said in very 
clear terms, we want to update our opinion and say that 
Government housing policy was a primary cause of the policy in 
light of reclassification of loans and new information that is 
now available.
    Research from Ed Pinto at the American Enterprise 
Institute, a former chief credit officer at Fannie Mae, showed 
that there were 27 million subprime and other risky mortgages 
in the system when the housing bubble began to deflate in 2007. 
That was an aggregate value of over $4.5 trillion, 50 percent 
of all the mortgages in the United States.
    Peter Wallison I think had it correct when he said that, 
``Although there were many contributing factors, the housing 
bubble of 1997-2007 would not have reached its dizzying heights 
or lasted as long, nor would the financial crisis of 2008 have 
ensued, but for the role played by the housing policies of the 
U.S. Government over the course of two Administrations.''
    So I am glad that this Committee is finally focusing on 
what was the largest--not the single but the largest--cause of 
the size and length of the bubble and the resulting crisis. And 
I encourage us to listen to this testimony, take in more 
information, and most importantly, act so that this Government 
policy does not continue and does not cause these enormous 
problems again in the future.
    Thank you, Mr. Chairman.
    Senator Wicker. Mr. Chairman?
    Chairman Johnson. Yes.
    Senator Wicker. I have a prepared an opening statement. 
Because of the hour I ask that it be included in the record at 
this time.
    Chairman Johnson. It will be received.
    I will remind my colleagues that we will keep the record 
open for 7 days for additional statements and questions.
    I would like to welcome and introduce the witnesses that 
will testify here today.
    Our first witness is Ms. Terri Ludwig, who is president and 
CEO of Enterprise Community Partners, Incorporated. Enterprise 
is a national nonprofit provider of capital that specializes in 
the creation of affordable homes and rebuilding communities. 
Ms. Ludwig has been with Enterprise since 2009 and began her 
tenure as CEO in January of this year.
    Our second witness is Mr. Ron Phipps, president of the 
National Association of REALTORS'. The NAR is 
America's largest trade association, representing 1.1 million 
members involved in all aspects of the residential and 
commercial real estate industries. Mr. Phipps appeared before 
this Committee earlier this year, and we welcome him back.
    Senator Reed, do you have any comments?

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman. I want to 
welcome Ron personally. Ron has been a great business and 
community leader in Rhode Island for 31 years. We were 
delighted when he was elected president of the National 
Association of REALTORS'. He has great insights. He 
has testified before the Committee previously, and I look 
forward to his testimony this afternoon, so thank you, Ron, for 
joining us.
    Thank you, Mr. Chairman, for allowing me to speak. Thank 
you.
    Chairman Johnson. Our next witness, Mr. Mark Parrell, is 
executive vice president and CFO of Equity Residential. Equity 
Residential focuses on the acquisition, development, and 
management of high-quality apartment properties within the U.S. 
Before serving as the company's executive vice president, Mr. 
Parrell served as senior vice president and treasurer, a role 
which put him in charge of capital markets, mortgage servicing, 
and tax and treasury functions for the company.
    We welcome Mr. Greg Heerde to the Committee, who served as 
the managing director of Aon Benfield, a company that is the 
industry leader in placing treaty and facultative reinsurance. 
In his role at Aon Benfield, Mr. Heerde is responsible for 
assisting in the development of global strategy and advising 
the company in new insurance company formations, capital 
raising, and M&A transactions.
    Next we have Mr. Martin Hughes, who is the president and 
CEO of Redwood Trust. Redwood Trust is a real estate investment 
trust which manages finances and invests in real estate assets. 
Mr. Hughes has served in his current role at the company since 
2009, before which he served as co- chief operating officer and 
CFO.
    Our final witness on the panel is Mr. Barry Rutenberg. Mr. 
Rutenberg is the first vice chairman of the board for the 
National Association of Home Builders. The NAHB has more than 
160,000 members assisting their association to provide and 
expand safe, decent, and affordable housing opportunities for 
all consumers. Mr. Rutenberg has been active in the NAHB 
leadership structure at the local, State, and national levels 
throughout his career, serving on the board of directors since 
1980.
    Ms. Ludwig, please proceed.

   STATEMENT OF TERRI LUDWIG, PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, ENTERPRISE COMMUNITY PARTNERS

    Ms. Ludwig. Chairman Johnson, Ranking Member Shelby, and 
distinguished Members of the Committee, thank you for inviting 
me to testify today, and thank you for holding these hearings 
on the challenging yet critical issue of how to reform our 
housing finance system.
    My name is Terri Ludwig, and I serve as the president and 
CEO of Enterprise Community Partners. Enterprise is a national 
nonprofit organization that works across the country to provide 
affordable housing and strengthen communities.
    Prior to joining Enterprise, I worked in the private sector 
for 20 years in investment banking. I partnered with groups 
like Enterprise, using capital markets to efficiently invest in 
affordable housing and community development. This experience 
has taught me that public-private partnerships are critical to 
bringing capital to working families and vulnerable 
populations.
    I came to work for Enterprise because it is an organization 
that believes having a safe and affordable place to call home 
is an essential platform to help people achieve stability and a 
better life.
    Enterprise works in places ranging from small rural towns 
to large urban centers and from Native American tribes to 
suburban job centers. During the past 30 years, Enterprise has 
invested more than $11 billion in communities. With our 
partners we have built and preserved nearly 300,000 homes, 
catalyzed economic development, and strengthened entire 
neighborhoods.
    Enterprise has provided financing and development expertise 
to create affordable home ownership opportunities, but our 
primary focus is on providing quality, affordable rental 
housing.
    I want to talk briefly why affordable rental housing is so 
important. The number one thing to take away from my testimony 
today is that any new housing finance system must focus on 
stability, liquidity, and affordability for this housing stock.
    As the financial crisis has shown, America needs a full 
range of housing options. Multifamily rental housing is 
increasingly important for people at all income levels. But for 
low- and moderate-income families, the need for affordable 
rental housing is acute.
    Housing costs consume two-thirds of the lowest-income 
families' household budgets, leaving only about $500 a month to 
cover basic needs, like food, health care, transportation, and 
clothing. And there is not a single county in the United States 
where a minimum wage worker can afford a one-bedroom apartment 
at local fair market rent. We believe that the public and 
private sectors play important roles in meeting these needs.
    To be clear, we do not support the status quo, but any new 
system should consider the 11 million apartments that Fannie 
Mae and Freddie Mac have helped to finance and their historic 
role as a major investor in the low-income housing tax credit 
program, which has financed 90 percent of all affordable rental 
housing. Each year, this generates 140,000 jobs and $1.5 
billion in State and local taxes.
    Since the financial crisis, the GSEs have been one of the 
only sources of financing for affordable housing, purchasing 84 
percent of all multifamily loans in 2009. Let me emphasize that 
this portfolio has performed extremely well, with less than a 
1-percent foreclosure rate between 2005 and 2009. Compared to 
the single-family portfolio, the performance is quite dramatic.
    You will hear a lot about numbers and percentages today, 
but what really matters is helping real families with real 
needs.
    Jordan's Gate is a development in rural Opelika, Alabama. 
It is home to 48 working families earning up to 60 percent of 
the area median income, which is only about $13,200 a year. 
There is a child care center on-site providing a safe place for 
children while their parents are at work. Fannie Mae and 
Freddie Mac have invested in low-income housing tax credits and 
provided debt financing to make Jordan's Gate possible. Without 
support from the Government-supported secondary market, 
Jordan's Gate and much of the other housing that we have helped 
to create would likely not exist.
    We ask that six principles should guide your deliberations 
as you consider changes to the housing finance system.
    Number one, the Government must continue to play a role in 
providing liquidity and stability for affordable housing in all 
communities, including hard-to-serve markets, such as rural, 
and economically distressed areas.
    Number two, the Government's role should be focused and 
targeted at affordable and workforce housing, including both 
rental and home ownership. We must also maintain the flow of 
capital to upgrade and finance an aging multifamily rental 
housing stock.
    Three, mortgage financing should remain available for 
creditworthy borrowers in all communities.
    Four, secondary markets that enjoy Government support and 
guarantees should have an affirmative obligation to finance 
affordable housing, including in rural and underserved areas. 
Assessments on mortgage-backed securities may be needed to fund 
affordable housing and community development activities.
    Five, the low-income housing tax credit is an important 
source of equity investment in affordable multifamily housing. 
No changes to the housing finance system should negatively 
impact important improvement programs like this credit.
    Six, credit channels for multifamily housing must remain 
open while we transition to a new system.
    In closing, I would like to thank you for the opportunity 
to testify today. Enterprise very much looks forward to working 
with you as you consider housing finance reform, and I welcome 
any questions.
    Chairman Johnson. Thank you, Ms. Ludwig.
    Mr. Phipps, please proceed.

  STATEMENT OF RON PHIPPS, PRESIDENT, NATIONAL ASSOCIATION OF 
                      REALTORS'

    Mr. Phipps. Good morning, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee. Thank you for inviting me 
to testify this morning.
    My name is Ron Phipps. I am the 2011 president of the 
National Association of REALTORS'. I am proud to be 
an active part of a four-generation, family owned residential 
real estate business in Rhode Island. I am testifying today on 
behalf of the 1 million REALTORS', the 75 million 
Americans who own homes, and the 310 million Americans who 
require shelter.
    REALTORS' agree that the existing system failed 
and reforms are needed. We appreciate that the Committee is 
heeding Treasury Secretary Timothy Geithner's and the Ranking 
Member Shelby's warnings and cautions that a Federal housing 
policies must adequately be assessed and proper homework must 
be done before action is taken.
    As you consider the future of the Federal housing policies, 
we ask you to keep in mind the immense value that sustainable 
home ownership provides to this country and to American 
citizens.
    Right now, the mortgage markets are not working as they 
should and change is required. However, REALTORS' 
believe that the GSEs' housing mission, and the benefits that 
are derived from it, played a vital role in the success of this 
Nation's housing system and continue to play that role today.
    Had there been no secondary market when market entities, 
like Fannie Mae and Freddie Mac, when the private market 
capitals reached their financial crisis, the American housing 
market would have come to a complete halt, throwing our Nation 
into an even deeper recession than we did see. We need only 
look at the current state of affairs in the commercial and 
jumbo market to see how bad it would be.
    For this reason alone, REALTORS' believe that 
pure privatization of the secondary mortgage market is 
unacceptable; rather, NAR supports the creation of secondary 
mortgage market entities that include some level of explicit 
Government participation but protect the taxpayer and ensure 
that all creditworthy consumers have reasonable access to 
affordable mortgage capital. Moreover, these entities should 
provide a wide range of safe, reliable mortgage products such 
as 30-year or 15-year fixed-rate loans, traditional ARMs, and 
other products that have stood the test of time.
    Let me be clear. REALTORS' agree that the 
reforms of our housing system, including GSEs, are required to 
prevent a recurrence of the housing market meltdown. However, 
we caution that significantly limiting the Government's role in 
housing finance will foster mortgage products that are more in 
line with business goals than in the best interests of the 
Nation's housing policy or the consumer. This action coupled 
with other unnecessary implementing rules that further curtail 
access to mortgage credit--for example, raising down payments 
have stark ramifications for the overall economy.
    This leads me to the second significant concern that 
realtors have today, and that is, the definition of a qualified 
residential mortgage. QRMs, or risk retention requirements of 
the Dodd-Frank requirement, are expected to have basically 
lower rates and fees than other non-QRM products. 
REALTORS' believe that Federal regulators should 
honor the intentions of Senators Isakson, Hagan, and Landrieu 
by crafting a qualified residential mortgage exemption that 
includes a wide variety of traditionally safe, well-
underwritten products such as 30-, 15-, and 10-year fixed-rate 
loans as well as 7-1 and 5-1 ARMs, and also loans with variable 
down payments or flexible down payments that require mortgage 
insurance. A very narrow QRM policy that does not heed their 
intention will displace a large number of potential homeowners.
    As noted in a recent American Banker article, 69.5 percent 
of all loans originated in 2009 would not qualify under the new 
proposed QRM standards.
    Moreover, an analysis of QRM by CoreLogic indicates that 
boosting down payments in 5-percent increments has only a 
negligible impact on the default rates, but significantly 
reduces the potential pool of borrowers. Further, a narrowly 
drawn QRM ignores the compelling data that demonstrates that 
sound underwriting, such as documentation of income, and use of 
traditional mortgages have a larger impact on reducing default 
rates and higher down payments. Saving for a down payment has 
always been a major obstacle. The Center for Responsible 
Lending indicates it will take 8 years for the average family 
earning $50,000 to come up with a 10-percent for a $150,000 
mortgage. It will take them 13 years to come up with 20 
percent.
    Every decision that we make today regarding the housing 
finance system will have a significant impact on the ability of 
future generations to purchase homes. Moreover, these decisions 
will have a profound impact on our Nation's economy.
    I thank you for the opportunity to present our thoughts. As 
always, the National Association of REALTORS' stands 
ready, willing, and able to work with you and our partners to 
make a future brighter for Americans. REALTORS' 
believe that housing is not a partisan issue, nor is it simply 
in the common interest. We really believe that it is in our 
national interest.
    Thank you.
    Chairman Johnson. Thank you, Mr. Phipps.
    Mr. Parrell, please proceed.

  STATEMENT OF MARK J. PARRELL, EXECUTIVE VICE PRESIDENT AND 
 CHIEF FINANCIAL OFFICER, EQUITY RESIDENTIAL, ON BEHALF OF THE 
     NATIONAL MULTI HOUSING COUNCIL AND NATIONAL APARTMENT 
                          ASSOCIATION

    Mr. Parrell. Thank you. Chairman Johnson, Ranking Member 
Shelby, and distinguished Members of the Committee, my name is 
Mark Parrell. I am the Executive Vice President and Chief 
Financial Officer of Equity Residential. My company is the 
largest publicly traded owner of apartments in the United 
States and we are also a large borrower from the GSEs, Fannie 
Mae and Freddie Mac. I am testifying today on behalf of the 
National Multi Housing Council, NMHC, and its joint legislative 
partner, the National Apartment Association, NAA.
    I appreciate the opportunity to present the industry's 
perspective on the role of Fannie Mae and Freddie Mac in the 
multifamily market and the benefits they produce from that 
presence. I will also explain why the private market alone 
cannot meet the industry's current and future capital needs.
    First, a little background on our industry. Rental demand 
is surging because of changing demographics and new economic 
realities. More than four million members of the echo boom 
generation will turn 18 each year for the next decade, creating 
tremendous demand for housing. While there may be an oversupply 
of single-family housing, the Nation could actually see a 
shortage of multifamily housing as early as 2012.
    Apartments are more than shelter. I would point out they 
are also a big economic powerhouse. We produce about $120 
billion as an industry in rental revenues annually and we 
employ about 550,000 in managing apartments. Apartments also 
produce important societal benefits. They are environmentally 
sustainable, resource and energy efficient, and help create a 
mobile workforce that can relocate for job opportunities, and 
that is something I think is especially important in this 
recovery.
    I highlight these things to help you understand why it is 
so important that Congress consider the unique needs of the 
apartment industry as you pursue reform options. Solutions that 
work for single family will not necessarily work for 
multifamily. Our sector warrants its own specialized analysis. 
To that end, let me share with you what works and what does not 
work in the current GSE system.
    While the problems in the single-family sector are widely 
acknowledged, when it comes to the GSE's multifamily programs, 
much works. Let me be clear. I am not here to defend the GSEs 
or to suggest that they continue in their current form. I 
simply want to highlight the multifamily elements that are 
working and working at no taxpayer expense. In fact, many of 
the single-family housing reform proposals look a lot like the 
existing multifamily system, private capital taking a 
significant first loss position and the Government's 
involvement ebbing and flowing with changes in the availability 
of private capital.
    The existing GSE multifamily housing finance system has 
attracted enormous amounts of private capital, helped finance 
millions of units of market-rate workforce housing, and all of 
this without direct Federal appropriations. It has filled a 
critical gap when private capital disappeared and ensured 
liquidity was available to refinance maturing mortgages.
    In stark contract to the GSE single-family business, the 
multifamily programs were not part of the meltdown and are not 
broken. Overall loan performance remains strong, with 
delinquency and default rates at less than 1 percent. They have 
outperformed CMBS, commercial banks, and even FHA. In addition, 
since entering conservatorship, the multifamily portfolio has 
produced approximately $2 billion in profit for the Federal 
Government.
    The most recent crisis underscores the need for a capital 
source that will be available in all markets at all times, not 
just in New York City, but also in Sioux Falls, South Dakota, 
and Birmingham, Alabama. The GSE's share of the multifamily 
market has varied considerably over time, increasing at times 
of market dislocation and scaling back during healthier 
economic times.
    A federally backed secondary market is also critical to 
refinancing the estimated $300 to $400 billion of multifamily 
mortgages that will mature by 2015. Unlike residential 
mortgages, which are typically for 30-year terms, most 
multifamily mortgages are for periods of seven to 10 years and 
do not fully amortize.
    Without the GSEs' multifamily programs in the latest 
crisis, there would have been widespread foreclosures of 
otherwise performing apartment properties because owners would 
not have been able to refinance maturing mortgages. Property 
upkeep would have suffered and fewer units would have been 
built.
    Finally, I would like to share a little known fact about 
the units financed by Fannie Mae and Freddie Mac over the last 
15 years. Fully 90 percent of these units, more than 10 million 
in total, were affordable to families at or below the median 
income for their community without requiring Federal 
appropriations and at no taxpayer risk. In other words, 
workforce housing for teachers, nurses, and first responders.
    In conclusion, the liquidity provided by the Government-
supported secondary multifamily mortgage market lowers the cost 
of capital to borrowers, which encourages the construction of 
more multifamily housing. This increased supply forces owners 
to provide this market-rate housing at a rent level that makes 
it more affordable to the Nation's workforce. Without it, 
higher interest rates and debt service costs would mean fewer 
multifamily units and higher rents.
    I once again ask Congress, as it looks at reforming the 
housing finance system, that it do nothing that would 
jeopardize the construction, financing, and availability of 
multifamily housing.
    I thank you for this opportunity to present the views of 
NMHC and the National Apartment Association.
    Chairman Johnson. Thank you, Mr. Parrell.
    Mr. Heerde, please proceed.

 STATEMENT OF GREG HEERDE, MANAGING DIRECTOR, AON BENFIELD AND 
                    AON BENFIELD SECURITIES

    Mr. Heerde. Good morning, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee. I am Greg Heerde, 
Managing Director of Aon Benfield and Aon Benfield Securities, 
and I am here today to discuss the role of private capital in 
supporting lenders' credit risk through the provision of 
mortgage insurance.
    Aon Benfield is the world's largest reinsurance 
intermediary, and Aon Benfield Securities is an investment 
banking firm providing advisory services to insurance and 
reinsurance companies, including capital raises, risk transfer 
securitization, and mergers and acquisitions.
    Private mortgage insurance provides protection to lenders, 
investors, and most importantly, taxpayers by standing in the 
first loss position in the event that a borrower stops making 
payments. Private mortgage insurance also expands home 
ownership by allowing qualified borrowers with less than the 20 
percent prescribed down payment to purchase a home. Private 
mortgage insurance is also an alternative to the Federal 
Housing Administration mortgage insurance program.
    Mortgage insurers underwrite the underlying quality of the 
prospective borrowers' creditworthiness and the supporting 
collateral, and thereby ensuring higher quality mortgages are 
issued. This protects not only the lenders and investors, but 
the prospective borrowers by ensuring that the home is 
affordable at the time of purchase.
    Private mortgage insurers also have clear incentives to 
mitigate losses once loans become in default. As foreclosure 
results in the highest likelihood of lost payment under the 
insurance policy, mortgage insurers' goals are to work with 
borrowers to avoid foreclosure and keep them in their homes.
    U.S. private mortgage insurers have already paid 
approximately $25 billion in losses during the current housing 
downturn without Government or taxpayer support. The largest 
beneficiary of these payments has been and will be Fannie Mae 
and Freddie Mac, thereby reducing a material amount of exposure 
to the taxpayer.
    Reinsurance is another form of capital available to the 
insurance industry. Reinsurers' capacity stands ready to be 
deployed more broadly going forward to support the U.S. 
mortgage insurers. Aon Benfield estimates that global 
reinsurance capital totaled $470 billion at December 31, 2010, 
representing a 17 percent increase over 2009 and the largest 
amount of capital in the history of the industry.
    Private reinsurers also play an important role in 
supporting mortgage insurance in a number of other countries, 
including Australia, Canada, and the United Kingdom. These 
countries have mortgage finance systems that are each unique 
with varying Government roles, but it is important to note that 
private reinsurance plays some part in all of these.
    Since the beginning of the financial crisis, new capital 
has come into the sector in the form of a new start-up mortgage 
insurer and as significant contributions to existing carriers. 
To date, approximately $8 billion of new capital has been 
raised.
    In addition to the capital that was raised, Aon Benfield 
Securities represented a qualified management team in 2009 
seeking to form a new mortgage insurance company. This plan was 
ultimately shelved as the capital providers witnessed the 
substantial growth of the Federal Housing Administration, 
coupled with the uncertainty surrounding the future of Fannie 
and Freddie, which was viewed as weakening the demand for the 
mortgage insurance product and, therefore, the need for new 
companies.
    There were other efforts during the same period to 
introduce new mortgage insurance companies in various forms, 
some of which received indications that they would not receive 
approval from Fannie and Freddie to write business, resulting 
in these efforts being shelved, as well.
    If a decision is made to reduce the role of Fannie over 
time, and that decision results in increased demand for private 
mortgage insurance at commercially responsible terms, we are 
confident that sufficient private capital would be available to 
support that increased demand. Reinsurers are also eager to 
underwrite new risks, and reinsurance capacity is clearly 
available to support the mortgage insurers by providing 
capacity that will allow them to insure more loans as the 
housing market rebounds and demands for mortgage insurance 
grow.
    As consideration is given to the reduced Government role in 
supporting mortgages, another area that will require private 
capital is in covering earthquake exposure. GSEs currently 
require underlying mortgages to be insured against most perils, 
including fire, hurricane, and flood, as applicable. No such 
requirement exists for the earthquake peril, representing a 
multi-billion-dollar subsidy currently provided by the 
taxpayers. Private capital retaining the underlying mortgage 
risk is likely to require all underlying insurable risk to be 
covered. We are pleased to report that there is ample insurance 
and reinsurance capacity to absorb this risk.
    In closing, as this Committee considers proposals impacting 
the future of the housing finance system, we are encouraged to 
report that private capital providers have upheld their 
commitments made through the mortgage insurance channel and 
additional private capital is available to inject fresh capital 
as needed. Thank you.
    Chairman Johnson. Thank you, Mr. Heerde.
    Mr. Hughes, please proceed.

 STATEMENT OF MARTIN S. HUGHES, PRESIDENT AND CHIEF EXECUTIVE 
                  OFFICER, REDWOOD TRUST, INC.

    Mr. Hughes. Good morning, Chairman Johnson, Ranking Member 
Shelby, Members of the Committee. I am Marty Hughes, CEO of 
Redwood Trust. I sincerely appreciate the opportunity to 
testify here today. My testimony is narrowly focused on what is 
it going to take to bring back private financing for 
residential mortgages.
    By way of background, Redwood is not a bank, is not an 
originator, and is not a servicer. We have a long history of 
sponsoring and investing in prime jumbo mortgage-backed 
securitizations. As part of our business model, we have always 
held risk retention. We hold the bottom tranches. In regulatory 
parlance, we have held a horizontal slice.
    We have completed the only two private transactions backed 
by new issue residential mortgages since the freeze began. We 
hope to complete two more transactions by year end. Our two 
transactions were quickly and well oversubscribed. It did not 
happen by accident.
    We work with AAA investors, insurance companies, banks, 
lenders, to meet their needs. Their needs are pretty 
straightforward. Enhanced transparency--they want skin in the 
game, safe and simple structures, and strong and enforceable 
representations and warranties. We believe, based on the 
success of these transactions, but beyond that, in 
conversations with fixed-income investors who are awash with 
liquidity looking for safe, attractive investments, we believe 
that they will come back into the private prime jumbo space. 
The speed at which they come back is the biggest question.
    In my opinion, the biggest impediment to the speed coming 
back is the outsized role of the Government in supporting 90 
percent of the U.S. mortgages. It is crowding out the private 
sector. There is no sense of urgency, especially by traditional 
bank securitizers. They can sell 90 percent of their 
originations to an attractive Government bid and then easily 
retain the remaining 10 percent. There is just no financial 
urgency to get anything moving.
    We would note, postcrisis, the ABS markets for credit 
cards, auto loans, and now commercial loans are up and working 
and functioning, while the private residential markets barely 
have a pulse. If we look at how they recovered, it is success 
breeds success. Issuance velocity leads to more issuance 
velocity. There are just too few prime loans available to 
securitize to gain any velocity.
    Government subsidies need to be scaled back to allow the 
private markets to flourish and to reduce the burden on 
taxpayers. We are ready to securitize any prime loan of any 
size once the playing field has been leveled.
    We strongly advocate moving ahead with the Administration's 
plan to safely and on a measured basis and begin to test the 
private market's ability to step into the breach. It is going 
to take a period of time, we believe 5 years, but we believe if 
loan limits are reduced, if guarantee fees are moved up to 
market rates, it will allow the private sector time to gain 
standardized practice procedures and, most importantly, 
confidence.
    There are other impediments. We need to get through 
regulatory reform and know the rules of the road. Servicers 
have some fence mending to do. They need to rebuild confidence. 
We need uniform standards for servicers that clearly set out 
their responsibilities, the procedures they are supposed to 
follow, and how to resolve conflicts of interest. 
Securitization sponsors are going to have to follow best 
practices as demanded by AAA investors. They are going to have 
to develop, adopt, and they are going to have to embrace it. 
That is the only way you are going to end up getting the trust 
back. We would say the recent Redwood Trust transactions 
provide a pretty good road map.
    One kind of gaping hole that is still out there is the 
unresolved threat from second mortgages. It is a significant 
factor that led to the housing and mortgage crisis. The first 
and most important level of skin in the game is at the borrower 
level. If the borrower can immediately withdraw their skin in 
the game through a second mortgage, it greatly increases the 
risk of default on the first mortgage. Left unchecked, we 
believe this would be a very disappointing result for 
investors.
    In terms of mortgage rates, we do believe as the Government 
recedes, mortgage rates will go up. We believe they will go up 
modestly, in our opinion, perhaps 50 basis points. In our deal, 
the fixed-rate loans were 50 basis points above the conforming 
rate, but really, it is not just looking at that deal. It is 
also talking to investors. Again, they are awash. There is $2.5 
trillion in fixed-income funds searching for yield. To the 
extent that they have confidence that private-label residential 
mortgages are there and they can buy them and they can earn a 
premium over agency securities, we believe there would be a 
very active market. Done correctly, a wind-down of the 
Government's role can be replaced by a smarter, less risky 
private-label market.
    Thank you for allowing me to testify.
    Chairman Johnson. Thank you, Mr. Hughes.
    Mr. Rutenberg, please proceed.

STATEMENT OF BARRY RUTENBERG, FIRST VICE CHAIRMAN OF THE BOARD, 
             NATIONAL ASSOCIATION OF HOME BUILDERS

    Mr. Rutenberg. Chairman Johnson, Ranking Member Shelby, and 
Members of the Committee, thank you for the opportunity to 
testify today. My name is Barry Rutenberg and I am NAHB's 2011 
First Vice Chairman of the Board and a builder from 
Gainesville, Florida. NAHB represents 160,000 corporate members 
representing for sale and rental housing as well as remodeling.
    NAHB strongly supports efforts to modernize the Nation's 
housing finance system, including reforms to the Government 
Sponsored Enterprises Fannie Mae and Freddie Mac. NAHB believes 
strongly that a Federal backstop is needed to ensure the 
continued availability of affordable mortgage credit, 
specifically 30-year fixed-rate mortgages and affordable 
financing for multifamily housing.
    The housing finance system is under a cloud of uncertainty. 
For over a year now, NAHB has been actively involved with 
Congress in discussions on changes to the financing framework 
for homebuyers and producers of housing. Since then, Congress 
has passed the Dodd-Frank Act. Regulators are now busy 
implementing this massive law that has the potential to reduce 
the availability and increase the cost of housing credit. In 
addition, Congress and the regulators are piling on layers of 
regulations in an attempt to plug gaps in the system of 
mortgage regulation and prevent a recurrence of the recent 
mortgage finance problems.
    Caught up in the wave of uncertainty, criticism has been 
directed toward the Federal Government's role in housing 
finance markets through the FHA and the housing GSEs. 
Currently, these sources of housing finance account for nearly 
all mortgage credit flowing to homebuyers and rental 
properties, yet this is exactly the role that these systems 
were designed to fill during times of economic uncertainty. And 
even with the current heavy dose of Federal backing, fewer 
mortgage products are available and loans are being 
underwritten on much more stringent terms.
    This is not an arrangement that can continue indefinitely 
and there is no clear picture of the future shape of the 
conforming conventional mortgage market. One thing is clear. 
Certainty must be returned to the housing market.
    The housing landscape has been little changed during this 
period, as the housing market remains extremely weak. In fact, 
while economic growth has been weak by historic standards for 
an economic recovery, housing performance has been even weaker. 
Unlike the last two economic recoveries, when at this point in 
the recovery, housing had already grown 25 and 45 percent to 
lead the country out of recession, housing is still down 18 
percent since this recession ended in June 2009.
    Adding to the current housing crisis, decisions about 
comprehensive structural reforms to the U.S. housing finance 
system are stuck in a quagmire, despite the Administration's 
recent report outlining options for reforming the housing 
finance market.
    There is a way forward. Recently, NAHB has joined a 
coalition with 15 other organizations that developed principles 
for restoring stability to the Nation's housing finance system. 
These principles highlighted the need for a continuing and 
predictable Government role in housing finance, to promote 
investor confidence, and ensure liquidity and stability for 
home ownership and rental housing. NAHB believes that it is 
critical that any reforms be well conceived, orderly, and 
phased in over time.
    In contrast, proposals offered by some would effectively 
wind down the operations of Fannie Mae and Freddie Mac without 
offering a clear vision for the future of the housing system. 
We need a thoughtfully designed path for a transition to the 
new framework that will not disrupt the housing market even 
further and push the Nation back into a deep recession.
    America's home builders urge policy makers and the 
Administration and Congress to move forward comprehensive GSE 
reform legislation that seeks an appropriate Federal role to 
maintain a healthy mortgage marketplace for single and 
multifamily housing. Housing can be a key engine in job growth 
that this country needs, but it cannot fill that vital role if 
reform legislation moves forward that does not include a 
predictable Government role in the secondary mortgage market to 
preserve financial stability in the market and maintain a 
stable housing sector.
    Thank you for the opportunity to testify today. I look 
forward to your questions.
    Chairman Johnson. Thank you, Mr. Rutenberg.
    Mr. Phipps and Mr. Rutenberg, one of the ways that the 
Administration and others have suggested to reduce Government 
involvement in the housing finance market is by increasing the 
down payments required by Fannie Mae and Freddie Mac. How would 
this impact future borrowers and current homeowners? Mr. 
Phipps.
    Mr. Phipps. Senator, part of the frustration that we as 
REALTORS' have is that when you look at the 
modeling, down payment does not necessarily prevent or preclude 
default. If you look at programs like VA in particular, in 
which you can have 100 percent financing, it has one of the 
lowest rates of default across the board. What we know is that 
if you use rigorous underwriting standards and have traditional 
predictable mortgage instruments, meaning--30 years is a great 
instrument because the consumer knows what they are getting 
into. By definition, you will have better outcome.
    Our concern is when we look at the analysis of increasing 
from the down payment at 3.5 or 5 percent or 10 percent to a 20 
percent threshold, you are going to preclude many, many 
borrowers from being able to finance to be able to obtain 
mortgages. As I said in my opening statement, that is a huge 
problem.
    The other footnote is that when we talk about the amount of 
money down, we ignore the fact that the consumer typically has 
to come up with more than the 3.5 or 5 or 10 percent down. They 
have something called closing costs, which can be 3 to 5 
percent more, plus prepaids. Those are insurance, taxes, et 
cetera. So there is more money in the dynamic.
    But suffice it to say that if we really make it 
particularly difficult, we retard the recovery of the housing 
market and we make it harder for people to get in that first 
rung of home ownership. So we really disagree with it.
    Chairman Johnson. Mr. Rutenberg.
    Mr. Rutenberg. Thank you, Mr. Chairman. Not only is it the 
first rung to move up, the first-time buyer, but it is also the 
move up, because if the first-time buyer cannot sell his house 
after several years, then they cannot move up. So there is a 
chain that interacts all the way up and down.
    The qualified residential mortgages that have been 
envisioned from the Dodd-Frank bill, we have been told by some 
of the Senators that the current version is not exactly what 
they had expected it to be. It has a great possibility of 
unsettling it. I have seen estimates that 50 to 65, 70 percent 
of the mortgages that were approved last year could not be 
approved under the new rules, and I keep hearing that the newer 
mortgages are performing much better as far as any 
delinquencies and being paid on time.
    There are different provisions in them. Not only is there 
the 20 percent, which may take 10 to 15 years to accumulate, 
but you now have a 20 percent PITI provision, 36 percent for 
total debt. You cannot have had any kind of miss on your credit 
for 60 days late in the previous 2 years. It has an unsettling, 
and I believe that one of the reasons that housing is not 
selling better now is a lack of confidence and uncertainty. As 
we can work together to make it more certain, then the market 
will return. It will help stabilize our housing market and our 
housing values.
    Chairman Johnson. Ms. Ludwig and Mr. Parrell, the Committee 
has talked about the need for a capital source that will be 
available to all markets at all times. Can you elaborate about 
what you think would happen to availability and price of rental 
housing in America, such as New York City, compared to 
Aberdeen, South Dakota, if there were not a Government backstop 
or guarantee for multifamily financing? Ms. Ludwig.
    Ms. Ludwig. Certainly. Thank you. That is a really 
important question for the work that Enterprise does directly, 
and we feel that it is critically important to ensure that all 
communities have access to credit, and in our work, one of the 
important places we work is in rural communities. We think that 
in this case, if we move to a wholly private system, that 
certain underserved markets may not be effectively served. And 
when we think about those markets, we think about places like 
rural America. We also think about certain segments of our 
population.
    But the liquidity and the stability provided by the GSEs 
have ensured that all these communities, rural, suburban, 
urban, have all had access to credit. So, for example, we 
provided about, at Enterprise, almost a billion dollars worth 
of capital to rural communities. Much of that was in 
partnership with GSEs in some form, whether it was through the 
debt financing or through the Low-Income Tax Credit, and so we 
think it is vitally important, particularly in communities that 
do not have as active capital markets, that we make sure that 
there is some sort of Government backstop.
    Chairman Johnson. Mr. Parrell.
    Mr. Parrell. I would just follow up on the prior speaker's 
comments. From personal experience, I can tell you that the 
private markets are ready and willing to take credit risks, 
specifically the life insurance companies and a few other 
sources, as it relates to certain popular coastal markets like 
Washington, DC, Boston, New York, Southern California, Seattle, 
and Northern California.
    We just recently tried to refinance a 15-year-old property 
in Scottsdale, Arizona, a very nice asset, pretty low leverage, 
about 60 percent of the value, and had absolutely no takers 
from the life insurance companies after soliciting bids from 40 
of them. One of the GSEs will finance that asset for us. When 
we did the same thing in the San Francisco Bay area with about 
20, 25-year-old properties, we had no difficulty whatsoever 
obtaining excellent life insurance company interest.
    So the private market is there, but it is very selective. 
And not only would it ignore, in my view, or mostly ignore 
Aberdeen, South Dakota, it would ignore a great deal of other 
places, like Fresno, California. And they are interested right 
now in a very specific subset of markets, and they have been 
interested in a subset, that specific subset, for quite a 
while.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you.
    I was interested in what Ms. Ludwig said in her testimony 
about multifamily, and the default rate was basically 1 percent 
as opposed now to 11.5 percent in single-family homes. Is that 
because of more skin in the game, more down payment, better 
underwriting standards and so forth? Because that is a big 
difference there. What are we all interested in? I think we are 
interested in providing opportunities for home ownership. It 
will not be for everybody. We pushed all that probably too much 
and pushed people into homes that they could not afford with 
nothing down. I think that day is gone.
    But I do believe--and I think Mr. Phipps has a different 
opinion--that there is a connection, a correlation between 
putting something down, putting skin in the game on anything, 
and the likelihood of default, because the more risk if it goes 
to the taxpayers or if it is in the private market, which we 
are trying to produce, they are going to look at risk because 
they are managing risk, you know, as they--what is the 
likelihood of default. Isn't that what we are really getting 
at? And if we are ever going to create another private market 
like we had. I thought for a long time, before it was all abuse 
and misused, that securitization was good for America, and 
Fannie Mae and Freddie Mac were not the only people involved in 
that, as you well know. But it was abused and misused, and we 
are where we are today, which is a bad situation. We understand 
the plight of housing. We have got just too many houses, you 
know. There has to be an equilibrium between supply and demand, 
and it is tough on everybody around it.
    But what is wrong with some skin in the game, Mr. Phipps? 
What is wrong with a down payment? This is anecdotal, but I 
remember many years ago when my wife and I were very young, and 
we were going to build a house. We wanted as much down payment 
as we could rake and scrape to keep the payment low because we 
had no intent of walking from it. You know, the underwriting 
standards were tough. It was a conventional loan and so forth. 
But what is wrong with skin in the game?
    Mr. Phipps. Senator, the----
    Senator Shelby. Because we are thinking about the taxpayers 
right now. Since Fannie Mae and Freddie Mac are basically the 
only people in this game right now, the secondary market.
    Mr. Phipps. The short answer is there is skin in the game 
when you have 3.5 to 5 percent down. That is skin in the game, 
and, frankly, the house itself, the asset, is skin in the game. 
When most American families in our opinion get housing, they 
want to have sustainable home ownership. The lessons--if you 
look at the performance of the mortgages and the underwriting 
that has happened in the last 2 years, we have analyzed the 
risk, and the fact that the default rate now is negligible 
versus what we had go on in the 3- to 5-year period of 
ridiculous underwriting or nonunderwriting or blind 
underwriting, we have corrected for that.
    We look to have confidence in the market, and the consumer 
is looking right now and watching what we are doing here and 
watching the things with great anxiety that housing values are 
not stabilized in their market area. The sources of money are 
very limited and very difficult. They want to have confidence 
that we figured it out and we have identified a measured risk 
for the future.
    Senator Shelby. How do we bring back an appetite in the 
private market for mortgage-backed securities? I think that is 
what we all need because, my God, you would have greater 
opportunities. But how do we do that?
    Mr. Phipps. We are for that--I think from our perspective 
what we do is we create the principles by which we engage; we 
acknowledge the need for an explicit Government guarantee, and 
we create other entities that are successors that will not make 
the mistakes that Fannie and Freddie made. I think that is 
really what we are looking----
    Senator Shelby. So you are not advocating here that you 
want a Government guarantee for everything in the real estate 
industry bills, are you?
    Mr. Phipps. No. What we are looking for is the backstop, 
Senator.
    Senator Shelby. OK.
    Mr. Phipps. The ultimate protection. But we are looking for 
private markets and private capital to step back into the 
market.
    Senator Shelby. But it has not come yet, has it?
    Mr. Phipps. It just has not come, and in the interim, the 
housing market lives on this river of capital, we need that 
capital for transactions to happen, for houses to be built, for 
there to be a future of housing and also a future for American 
home ownership.
    Senator Shelby. But isn't it basically true, whether we 
like or not, that we have got in a lot of areas a glut of real 
estate. Let us be honest about it. And we are going to have to 
absorb that. The market always absorbs the excess. Maybe it is 
very painful to all of us--to me, to you, and to a lot of 
participants. But isn't it going to have to be absorbed?
    Mr. Phipps. It will have to be absorbed----
    Senator Shelby. To get an equilibrium?
    Mr. Phipps. We want to get back to equilibrium, and, 
frankly, as we move along and resolve issues like QRM, et 
cetera, so that the consumer knows what the rules of the road 
are, then I think they will step in and absorb that excess 
inventory.
    Senator Shelby. Mr. Hughes, what is your opinion or what is 
your judgment on the impact on interest rates if the conforming 
loan limits were gradually reduced? Gradually reduced.
    Mr. Hughes. So if we look for the next scheduled reduction, 
which is 725 to 625--729 to 625, it represents 2 percent of the 
market today. The difference in the loan rates for the jumbo 
conforming rate is 4.75; the jumbo rate you can get at a bank 
today with similar underwriting is 5 percent. So there has been 
a lot said that mortgage rates are going to skyrocket. The 
payment that a mortgage person would make today on a $720,000 
mortgage at today's rate would be $3,765. If we rolled back the 
limits to 625 and that has to seek financing from a bank, the 
payment would go up by $109.
    Senator Shelby. It would also depend on what you put in the 
down payment, wouldn't it?
    Mr. Hughes. Correct.
    Senator Shelby. I mean, you know, if you are getting a big 
loan, say $700,000 or $650,000, that is a pretty good size loan 
for the average American, whether it is in Alabama, South 
Dakota, or Montana, or maybe not in certain areas of California 
or New York or Miami, you name it. But should that be our 
housing policy up here to worry about the people at the upper 
end that can access the market, can put their own money in 
without a Government guarantee?
    Mr. Hughes. I think that market should be supported by the 
private sector. It is $720,000--you are talking about a 
$900,000 house. I do not believe that is a house that should be 
subsidized by taxpayers.
    Senator Shelby. Thank you.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you all for your testimony.
    I wanted to keep dwelling on this issue of the potential 
impact of a qualified residential mortgage line at 10 or 20 
percent. I must say that in my work in affordable housing, 
developing affordable housing, and my former work with Habitat 
for Humanity working with low-income families striving to 
become homeowners, what I often saw was that folks who were 
renting and paying at that time, 20 years ago, $500 to $700 a 
month in rent could buy a house for $500 to $600, and that was 
before they got any tax benefits, and they took enormous, 
enormous pride in the fact that they finally had the stability 
and a piece of the American dream, that they had ownership, 
that they could decide what color to paint the house, they 
could decide what rhododendrons and azaleas they were going to 
plant in the yard. And the attitude of the children changed 
with the notion of the parents saying, ``No, you cannot do that 
because we have to fix it. There is no landlord to call to fix 
it.''
    This is my deep concern, that we are going to throw the 
baby out with the bath water, and that essentially what has 
happened is we had predatory mortgage practices with ``liar 
loans'' and prepayment penalties that locked people into 
predatory loans and steering payments that encouraged 
originators to put people into predatory loans. And we fixed 
all that, and now that we fixed it, we are looking and 
analyzing the data--and I really appreciate the analysis, Mr. 
Phipps, that you all have gone through to compare mortgages 
that met certain standards. And as I understand it, when you 
looked at that situation and said, OK, let us see what happens 
with different down payments when we have fair mortgages, where 
there is documented income, where it is either a fixed rate or 
a 7-year ARM, when there is no negative amortization, no-
interest loans, no balloon payments, 41 percent debt to income, 
private mortgage insurance if it is over 80 percent loan to 
value, and you found a very small impact on the amount of the 
down payment on the default rate.
    Am I capturing that correctly?
    Mr. Phipps. Exactly right.
    Senator Merkley. So I was doing a little back-of-the-
envelope number here, and I think you found in the vicinity of 
a 0.02-percent increase in the default rate.
    Mr. Phipps. Correct.
    Senator Merkley. So the basic setup is this. Let us say we 
have a million people buying homes, and by increasing the down 
payment from 5 to 10 percent, we proceed to have 10 percent 
fewer families--or I think the range you had was 7 to 15, but I 
am taking kind of the center point. So 100,000 fewer families 
gained access to home ownership because you are going to have 
2,000 more defaults. Basic math.
    So I was trying to capture the profit on those 100,000 
successful homeowners versus those 2,000 defaults, and I will 
be happy to share the numbers later, but let me just say it is 
more profitable for the banking industry to have those 100,000 
owners and it has very little impact on the interest rate, and 
we will have families that will be successful in all kinds of 
ways because of their ability to be homeowners. So I appreciate 
your analysis.
    Mr. Phipps. Correct. And the piece that I would add, too, 
is that home ownership is in the national best interest because 
the average family that owns a home, all 75 million of them, 
even after the market corrections, have a family net worth of 
about $180,000. The average family with obvious demographic 
difference that rents a house has a family net worth of $4,600. 
So we want self-reliance. Home ownership should be something 
that is a priority in our national agenda.
    Senator Merkley. Well, absolutely, and many of the families 
I was working with in the early 1990s were buying homes. At 
that point the market price in the community for your basic 
home was around $60,000. Those homes are $250,000 to $300,000 
today. Those families are in a completely different position. 
They have come close to now paying off their loans, and while 
they will still have taxes, it is cheaper than renting the rest 
of their life.
    And I think about the basic plan in America. We have very 
few employment settings anymore that have a defined benefit 
pension; that is, after you retire you will get X amount per 
month. So families are relying on buying a home, having that 
equity, and getting Social Security, and as two fundamental 
principles, and we cannot allow the mistakes we made with 
mortgages over the last 10 years to drive us down the road.
    And I would really like to note that we have got to tackle 
this issue of foreclosures at the same time because not only 
are the families being affected when a family is unable to stay 
in the home, but the market--how can the market recover if 
there are empty houses being sold at fire-sale prices? Of 
course, Oregon makes a lot of lumber. Who is going to buy 
lumber if you are not building houses? We have a huge nursery 
industry, but people buy plants when they buy homes.
    So there has been an enormous focus on Wall Street and 
fixing institutions. We have got to work to make sure that the 
mechanics of mortgages work for homeowners.
    I have gone over my time. I had lots of questions, but I 
will yield back to my colleagues. Thank you.
    Chairman Johnson. Mr. Heerde, your testimony states that 
the private insurance market and reinsurance market could fill 
the role of a Government guarantee. If there were no Government 
backstop and the private mortgage insurance provided the 
backstop, what would the insurance cost?
    Mr. Heerde. Well, the insurance market would set the rate 
based on the underlying risk of the mortgages. So when you look 
at the factors, and listening to the testimonies of the other 
witnesses as well, there are a number of factors, including 
down payment, past credit history, earnings to--debt-to-
earnings ratios and so on. Those rates would be set based on 
the predictable default pattern of the underlying borrower.
    Chairman Johnson. Reinsurance stepped in after Hurricane 
Katrina to assist insurance companies. Given that the housing 
market is a multi-trillion-dollar market, would reinsurance be 
able to cover that amount in the event of another financial 
crisis like the one we just experienced? Mr. Heerde.
    Mr. Heerde. We believe that reinsurance could play a role. 
The likely outcome of a wind-down or decline in Fannie Mae and 
Freddie Mac and more loans being held on the balance sheets of 
the financial institutions, the underlying product would likely 
change significantly in that the banks would probably not 
ultimately require loan level mortgage insurance but, rather, 
maintain an acceptable level of risks on their own balance 
sheet and buy portfolio coverage. That would change the dynamic 
of the coverage. But because of the role the insurers and then, 
therefore, reinsurers would ultimately need to play, it would 
raise up their retention and it would probably provide more 
coverage at a higher level than the current system of 
individual loan level protection.
    Chairman Johnson. Mr. Hughes, before the crisis, did 
Redwood securitize subprime loans? And what was the reason 
behind that decision?
    Mr. Hughes. Prior to the crisis, Redwood did not securitize 
any subprime loans. We have been in the prime jumbo space since 
that period of time.
    Chairman Johnson. Would your investors be interested in 
deals that were backed by loans that did not have extremely low 
LTVs?
    Mr. Hughes. I think the investors would buy the loans today 
that are getting sold to Fannie Mae and Freddie Mac. Those 
loans, the loan-to-values for those, you know, everybody thinks 
are here and that there is 5 percent down. The loan-to-value on 
a jumbo securities offer by Fannie Mae today is 68 percent. So, 
yes, I think the prime market, in order to come back and 
private investors to come back, there is going to have to be a 
down payment. I do not think that 20 percent is what the 
private markets are going to require, but that is where Fannie 
and Freddie are today. It is a different market than where the 
FHA is.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. I would like to address this to, I guess, 
all of you, but I was thinking about the home builders and the 
real estate people probably know this better than I. I am 
interested in this.
    A lot of people, we have seen--I have known a lot of them 
anecdotally--they will buy more than one home. They will be 
owing money on all of them. They will have a home that they 
live in. Some of them buy a home at the beach in the South. 
Some buy a home in the mountains. I have known some that own 
the heck on all of them. But, you know, they are living a 
pretty good life, I guess.
    Does the down payment apply in the mortgage--this 700, does 
that apply to if I want to buy a second home, so to speak? Mr. 
Rutenberg.
    Mr. Rutenberg. Senator Shelby, it has been my experience--
--
    Senator Shelby. I am just interested in what the policy is.
    Mr. Rutenberg. It has been my experience that there are 
different down payments for secondary homes than there are for 
primary homes. There are different down payments for jumbo 
loans than there are conforming loans.
    Senator Shelby. OK. And what are those down payments? It is 
not 3 percent for your second home, too, is it, or 3.5?
    Mr. Rutenberg. Right.
    Senator Shelby. I hope not.
    Mr. Rutenberg. I do not know the policy. I can tell you 
that my customers who are buying jumbo are normally putting 
down 30 percent. My customers who are buying----
    Senator Shelby. And what is the default rate in say, the 
jumbo loan area?
    Mr. Rutenberg. I will defer to someone else who has that 
data.
    Senator Shelby. OK. Mr. Hughes.
    Mr. Hughes. At least on the two transactions we have 
recently done, there are currently no losses, no delinquencies 
at all.
    Senator Shelby. Mr. Phipps, tell me what--if I wanted--let 
us say I owned a--I did not own but I was buying a home, and I 
bought one and I put 5 percent down.
    Mr. Phipps. For your primary residence?
    Senator Shelby. Yes, primary residence. And then, say, 3 
years later I found me a place at the beach or the mountains, 
somewhere else, what would I have to pay down to buy that 
house?
    Mr. Phipps. My experience is that for a second home or a 
third home, you are typically looking at between 25 and 35 to 
40 percent. The criteria is much more rigorous for nonprimary 
residence just by definition. I do not know what the default 
rate is, but I know it is more rigorous. In my market area, if 
you do not have 20 percent or 25 percent for the second home, 
you are going to be looking to the current owner to provide 
some assistance.
    Senator Shelby. OK. Thank you.
    Chairman Johnson. The Committee did not reach a quorum at 
this hearing and, therefore, we did not vote on the nomination 
of Mr. Timothy Massad as was planned. We will attempt to hold 
this vote off the floor, off the Senate floor, before we leave 
for recess. The Committee clerk will send a message to alert 
Senators and staff regarding this vote.
    Thanks again to all our witnesses for being here with us 
today. Reforming our housing finance system cannot take place 
without a thoughtful and intelligent dialog encompassing many 
different views and proposals. Your testimony today further 
helps the Committee as we continue to analyze the complex 
issues regarding the future of housing finance.
    I look forward to the ongoing discussions with my 
colleagues here today as we continue to work toward creating a 
stable and sustainable housing market for American families.
    This hearing is adjourned.
    [Whereupon, at 11:41 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
             PREPARED STATEMENT OF SENATOR ROGER F. WICKER
    I am glad we are having this hearing today to examine the state of 
U.S. housing finance. Housing remains an essential component of our 
economy, and I am convinced our Nation will not recover entirely from 
its economic struggles until the housing sector recovers. As we go 
forward, we must learn from the economic crisis of 2008 and promote 
policies that do not put taxpayers at risk.
    As we learn from the 2008 crisis, I believe we must significantly 
reduce the role of Government in housing. Indeed, the Government has a 
poor track record in its involvement in housing finance. To date, the 
failure of Fannie Mae and Freddie Mac has cost U.S. taxpayers over $150 
billion. The companies, which are in Government conservatorship and 
owned by the Government, could need additional taxpayer dollars to 
remain solvent. Laudable attempts by the Government to ``solve 
problems,'' often create entirely new problems themselves. For example, 
I believe that intentions of promoting ``affordable housing'' 
eventually led us down the path of pushing homeowners into subprime 
mortgages. This worked temporarily. However, once the interest rate on 
these mortgages reset, these homeowners could no longer afford their 
mortgage payments. In this case, excessive Government involvement 
encouraged borrowers to over-borrow and lenders to over-lend and played 
an important role in Fannie Mae and Freddie Mac's failures.
    This short-sighted and risky approach resulted in increased 
foreclosures across the Nation. In response to concerns about this 
trend, I supported legislation when I was a member of the House of 
Representatives in 2005 and 2007 to increase oversight of these 
dangerous markets. Both bills passed the House but were never 
considered by the Senate.
    As we examine the housing finance, the question before us is this: 
What is the role of the private market and what, if any, is the role of 
Government? As this Committee considers housing reform, I hope we 
consider the need to limit Government involvement and promote the 
private sector.
                                 ______
                                 
                   PREPARED STATEMENT OF TERRI LUDWIG
  President and Chief Executive Officer, Enterprise Community Partners
                              May 26, 2011

    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, thank you for the opportunity to testify this morning. I am 
Terri Ludwig, president and chief executive officer of Enterprise 
Community Partners (Enterprise). Enterprise is a national nonprofit 
organization that creates opportunities for low- and moderate-income 
people through fit, affordable housing and diverse, thriving 
communities. For nearly 30 years, Enterprise has provided financing and 
expertise to organizations around the country to build and preserve 
affordable housing and to revitalize and strengthen communities. 
Enterprise has invested more than $11 billion to create more than 
280,000 affordable homes and strengthen hundreds of communities across 
the country.
    Enterprise is a long-time provider of permanent debt financing, 
specializing in affordable multifamily rental housing. We have 
originated $560 million in loans on more than 17,000 affordable 
apartments and houses. We work with the Federal Housing Administration 
(FHA), Fannie Mae and Freddie Mac, and private lenders and partners. We 
are an FHA Multifamily Accelerated Processing (MAP) lender and Ginnie 
Mae issuer, a Special Fannie Mae Delegated Underwriting and Servicing 
(DUS) lender, a Freddie Mac Targeted Affordable Housing lender, and a 
U.S. Department of Agriculture Section 538 lender. In all of these 
programs, Enterprise underwrites and services loans on rental housing 
and either sells the loans to one of these entities or finances it with 
mortgage backed securities. This provides additional capital allowing 
us to undertake additional lending and development activities.
    We greatly appreciate the leadership and initiative of Chairman 
Johnson, Ranking Member Shelby, and other Committee Members in 
convening these hearings and pressing for a thorough and comprehensive 
review of the housing market. Reforming the housing finance system in 
the wake of the recent financial crisis is of critical importance. The 
issues at hand are complex and have significant implications for the 
housing sector, the financial markets, and the broader economy.
    For 20 years, I worked in the private sector in investment banking, 
partnering with groups like Enterprise and using capital markets to 
efficiently invest in affordable housing and community development. 
This experience taught me that public-private partnerships are 
absolutely critical to bringing capital profitably to working families 
in low-income communities. In countless communities across the 
country--rural, urban and suburban--the combination of public and 
private financing is effectively producing quality affordable housing.
    Enterprise strengthens communities by bringing public and private 
capital together to meet local needs. We work in communities that range 
from small rural towns to large cities, from Native American tribal 
communities to suburban job centers. We know that housing is more than 
just a physical building--it is the place where people build their 
lives, create networks, and send their children to school. Secure 
housing is best provided in communities with a diverse mix of 
affordable and market rate housing options; access to jobs and support; 
and strong commitments to the environment and civic participation. We 
work on holistic housing solutions so that people can live close to 
work or public transportation, in healthy and safe housing and in safe 
and vibrant communities.
    We know that housing needs are not homogeneous. People in rural 
communities have different needs then those in urban centers. Some 
families need secure rental housing while others can benefit from 
sustainable home ownership. At Enterprise, we focus on local and 
community needs. We have helped to create communities with both stable 
home ownership opportunities for families and affordable and safe 
rental housing.
    As the financial crisis has shown, America needs a spectrum of 
housing options. During the past 10 years, many borrowers had 
unsustainable home loans. The consequences have been disastrous. 
Millions of homeowners are underwater on their mortgages. Irresponsible 
lending coupled with high unemployment has led to unprecedented 
foreclosure rates and vacant homes creating neighborhood blight. This 
crisis is undermining decades of progress that Enterprise and our 
national and local partners have made in revitalizing neighborhoods and 
bringing economic development, jobs and community safety improvements 
to underserved and low-income communities.
    As the pendulum swings back to a more balanced housing policy and 
more homeowners look to the rental market, either out of choice or 
necessity, it is critical that Congress and the Administration ensure 
that affordable housing is available--this means ensuring that there is 
a stable source of capital and liquidity for affordable home ownership 
and rental housing.
    In considering the next stage of housing finance and the 
Government's role in it, we must maintain adequate capital flow, 
liquidity, and stability for the multifamily mortgage market, both 
subsidized and unsubsidized. Any shift away from the current GSE 
structure must be done carefully and must ensure that viable affordable 
housing options--both home ownership and rental--exist in all 
communities. We must do no harm and take time to truly understand the 
consequences of housing finance reform on all borrowers and communities 
and all market segments. We urge Congress to consider how any new 
structure will impact the availability of credit to affordable housing 
and to ensure access to capital for all communities. This does not mean 
that we support the status quo. However, the GSEs have played a 
critical role in ensuring the availability of capital for affordable 
housing--through their loan purchases and securitizations as well as 
their investments in the Low Income Housing Tax Credit.

The Nation's Serious Affordable Housing Needs
    The need for affordable rental housing is acute. The Government 
cannot walk away from all Government support of this market segment. We 
must think carefully before proceeding with a quick wind down of the 
GSEs without a successor financing system in place.
    To begin, consider that in the United States today, there are 38.6 
million units of rental housing, \1\ and 32.6 million of those units 
are unsubsidized. Sixty percent of the unsubsidized rentals are in 
properties with four units or fewer. \2\ Forty percent of households--
12.3 million in all--are in unsubsidized buildings with more than five 
units. By contrast, the United States has 6 million units of subsidized 
rental housing. \3\ One-third of these subsidized units are in 
properties with less than four units, and 4.5 million of the subsidized 
rental stock is in buildings with more than five units. More than 16 
million units, or 47 percent, of rental housing are in buildings with 5 
or more units, with more than 40 million people living in this housing. 
\4\
---------------------------------------------------------------------------
     \1\ Joint Center for Housing Studies of Harvard University. 
America's Rental Housing (2011).
     \2\ Mortgage Finance Working Group, Center for American Progress; 
JCHS Rental Housing (2008).
     \3\ Census Bureau. 2009 American Housing Survey; JCHS (2008).
     \4\ MFWG CAP paper, p.9.
---------------------------------------------------------------------------
    Eighty-three million people--a full one-third of the U.S. 
population--are renters. Only 25 percent of those eligible to receive 
housing subsidies actually receive any form of assistance. Thirty-eight 
percent of renters are cost-burdened, meaning they spend more than 50 
percent of their monthly income on rent. And this number continues to 
grow: according to HUD, this population increased by 1.2 million, or 20 
percent, between 2007 and 2009 alone. In general, renters have lower 
incomes than homeowners. The annual median income of a rental household 
is $28,400, while the median income for homeowners is $60,000. Half of 
all renters earn less than $25,000 a year, and a quarter live below the 
poverty line. There is no county in the United States in which a 
minimum wage worker can afford a one-bedroom apartment at the fair 
market rent.
    The current stock cannot meet the demand for affordable housing, 
and the need continues to grow. According to the National Multi Housing 
Council, there will be an additional 6 million renter households 
between 2008 and 2015. Construction of and investment in multifamily 
properties has been severely curtailed amid the housing market crash. 
Multifamily housing starts in 2009 were just over 100,000, well below 
the annual average of 300,000 between 1995 and 2004. According to the 
Joint Center for Housing Studies at Harvard University, in 2009 there 
were 10.4 million extremely low-income renter households and only 3.6 
million units affordable to those renters. Existing rental housing is 
older, and much is in need of rehabilitation and repair or outright 
replacement. There has been a steady loss of affordable units.
Financing Affordable Housing in the U.S.
    This data demonstrates the tremendous need and demand for 
affordable housing in this country. Both the public and private sectors 
have critical roles to play in the affordable rental market. Without 
support from the GSEs, much of the supportive, affordable, and 
workforce housing built in the past decade would not exist. The GSEs 
have been a constant and reliable source for the much-needed liquidity 
for the multifamily housing sector. They have been a long-term, 
reliable source of financing, especially for complex real estate 
developments in hard-to-serve areas, including rural and Native 
American communities.
    Since 1996, the GSEs have provided more than $535 billion in 
multifamily mortgage debt to finance more than 11 million apartments. 
During the past 2 years, the GSEs have provided $94 billion in mortgage 
debt for affordable housing at a time when many other capital sources 
have left the market. \5\ According to the Center for American 
Progress, the GSEs purchased more than 84 percent of all multifamily 
loans originated in 2009 alone.
---------------------------------------------------------------------------
     \5\ Robert Dewitt, NHMC and NAA. House Financial Services 
Committee Hearing on the Future of Housing Finance. March 23, 2010.
---------------------------------------------------------------------------
    According to the Joint Center for Housing Studies' recent report `` 
. . . The only net additions to outstanding multifamily debt since 2008 
have come from Fannie Mae, Freddie Mac, and the FHA . . . while the 
volume for all other financing sources combined dropped by $40 
billion.'' We understand that private sector capital must be brought 
back into the rental housing market.
    As the single-family market has struggled in recent years and even 
under Government conservatorship, the GSEs' multifamily portfolios have 
performed well and are profitable. Between 2005 and 2009, Fannie Mae 
and Freddie Mac's share of delinquent or foreclosed single family loans 
rose from approximately 3 percent to 11.5 percent. During the same 
period, the GSEs' share of delinquent or foreclosed multifamily loans 
remained at less than 1 percent. \6\
---------------------------------------------------------------------------
     \6\ Michael Bodaken, National Housing Trust. House Financial 
Services Committee Hearing on the Future of Housing Finance. September 
29, 2010.
---------------------------------------------------------------------------
    Fannie Mae and Freddie Mac have played a critical role in the Low 
Income Housing Tax Credit market. During the past decade, the LIHTC 
program has produced 90 percent of all affordable multifamily housing 
in the United States. \7\ Annually, this program generates 140,000 jobs 
and $1.5 billion in State and local taxes and other revenues. Before 
the financial crisis, the GSEs provided 40 percent of LIHTC 
investments, producing countless rental homes. But the financial crisis 
has meant the withdrawal of Fannie Mae and Freddie Mac, along with 
other financial institutions, from the LIHTC market. The shock of this 
caused investments in LIHTC to drop by 50 percent in 2008 from the $9 
billion invested in 2007. \8\ This has meant serious challenges for the 
affordable housing industry as we seek to preserve and build housing 
affordable to working families and vulnerable populations, including 
homeless Americans, seniors, and those with disabilities. While the 
private market has moved in somewhat, the market remains volatile and 
there is a serious and real need for a stable entity to weather the 
storms of the market.
---------------------------------------------------------------------------
     \7\ National Council of State Housing Agencies.
     \8\ Buzz Roberts, ``Strengthening the Low Income Housing Tax 
Credit Investment Market''. Cascade: Federal Reserve Bank of 
Philadelphia. Fall 2009.
---------------------------------------------------------------------------
    I would like to take a moment to explain what these numbers mean 
for some of your constituents. Jordan's Gate, located in rural Opelika, 
Alabama, provides 48 affordable rental homes for families earning up to 
60 percent of the area median income--a little more than $13,000 a 
year. It was made possible in part by permanent debt originated by 
Enterprise and purchased by Fannie Mae, as well as Low Income Housing 
Tax Credit equity that was purchased in part by Freddie Mac through an 
Enterprise multi-investor fund. Residents have access to playgrounds 
and computer centers. Importantly, residents also have access to a day 
care center, providing a safe place for children while their parents 
are at work. Were it not for the support from the Government-sponsored 
secondary market, this development and many others would not exist.

Principles for Housing Finance Reform: Liquidity, Stability, and 
        Affordability
    Any new housing finance system must provide liquidity, stability, 
and affordability. Access to capital for underserved communities--
whether small rural towns, tribal communities, or low-income urban 
neighborhoods--must be preserved. In general, we believe that the 
Government should have a role, albeit more limited, in the housing 
system.
    CDFIs, small community banks, credit unions, regional banks, large 
national banks, State Housing Finance Agencies, the Federal Home Loan 
Bank System, and national intermediaries are all needed in a robust 
housing finance system. Any new housing finance system should ensure 
choices and access to capital for all communities and for all lenders. 
A return to the redlining of the 1970s is not acceptable--no one should 
have to pay more for a mortgage because they live in a certain place.
    Our guiding principles are as follows:

    The Government must play a role in housing finance to 
        ensure liquidity, stability, and affordability.

    The Government's role should be focused and targeted on 
        affordable housing, including both rental and home ownership 
        housing.

    Mortgage financing should be available to creditworthy 
        borrowers in all communities. Rural areas and economically 
        distressed areas should have access to capital for affordable 
        sustainable home ownership and rental housing through both the 
        primary and secondary markets.

    Secondary market entities that enjoy Federal support should 
        carry an affirmative obligation to finance affordable and 
        sustainable homes and to reach underserved people, markets and 
        needs, including low- and moderate-income people; low-income 
        communities and rural areas; and our most vulnerable 
        populations.

    Responsible, sustainable mortgage products are critical to 
        ensuring that all Americans have access to affordable home 
        ownership.

    FHA provides an important mechanism for Government 
        involvement in the housing market, particularly as a 
        countercyclical resource available to take on risk that the 
        private sector cannot or will not. However, to ensure a robust 
        secondary mortgage market and appropriate risk-sharing, other 
        ways to provide mortgage securitization are necessary. Further, 
        changes are needed in structure, personnel rules, and risk-
        sharing programs to make FHA an optimally effective provider of 
        capital for affordable housing.

    A small assessment on mortgage-backed securities should be 
        used to fund affordable housing, through mechanisms such as the 
        National Housing Trust Fund and the Capital Magnet Fund, and 
        through risk sharing and credit enhancements to leverage 
        participation in meeting specific needs through secondary 
        market investments.

    Any new housing finance system must ensure a purposeful 
        presence in the market for multifamily housing. We cannot rely 
        on the private sector alone to provide financing or to continue 
        to invest in the Low Income Housing Tax Credit (LIHTC) and 
        other proven, efficient public-private programs.

    Credit channels for multifamily housing must remain open 
        during the transition period between the current and any future 
        system.

Conclusion
    Any movement from the current GSE structure must be done carefully 
and over time to avoid a further weakening of the housing market. The 
GSEs are imperfect partners, but served an important role in providing 
access to credit that would otherwise not be available. We are working 
to develop more specific recommendations for the future of the housing 
finance system.
    However, we are clear on the three main principles that should 
serve as the basis for any new system: (1) maintaining liquidity for 
the multifamily mortgage market; (2) doing no harm to the aspects of 
the housing finance system that are working; and (3) protecting 
affordability and the underserved. Our principles outline the most 
important considerations from Enterprise's perspective as a national 
intermediary that has invested in affordable housing and community 
development for nearly 30 years. Above all, we support a housing 
finance system that provides liquidity, stability, and affordability. 
We look forward to working with you as you further consider changes to 
our housing finance system. I appreciate the opportunity to testify and 
look forward to your questions.
                                 ______
                                 
                    PREPARED STATEMENT OF RON PHIPPS
        President, National Association of Realtors'
                              May 26, 2011

Introduction
    On behalf of the 1.1 million members of the National Association of 
REALTORS' (NAR), thank you for holding this hearing on the 
need to reform our Nation's secondary mortgage market infrastructure.
    My name is Ron Phipps, and I am the 2011 President of the National 
Association of REALTORS'. I am proud to be part of a four-
generation, family owned residential real estate business in Rhode 
Island. As I have mentioned to you during prior testimony, my passion 
is making the dream of home ownership available to American families. I 
am proud to testify today on behalf of the more than 1.1 million 
REALTORS' who share that passion, and the 75 million 
Americans who own homes and the 310 million Americans who require 
shelter.
    REALTORS' agree that the existing housing finance system 
failed and that reforms to our secondary mortgage market are needed. We 
applaud the Committee's caution as you take up this very important and 
complex issue. You are truly heeding the words of Treasury Secretary 
Timothy Geithner and the Committee's Ranking Member, Senator Richard 
Shelby when they said earlier this year that `` . . . Federal housing 
policies must be adequately assessed, and proper homework must be done 
before action is taken.''

Housing Mission and the Secondary Mortgage Market
    REALTORS' are fervent in their belief in ``free 
markets,'' and the need for private capital to reduce the Federal 
Government's financial support of the housing sector if the housing 
finance system is to right itself. However, REALTORS' are 
also practical and understand that in extreme economic conditions, 
private capital will retreat from the market, requiring the 
participation of entities that will participate in the marketplace 
regardless of economic conditions. The Government-sponsored enterprises 
(GSEs) were created to support this specific mission within the 
secondary mortgage market, and any replacements must meet this 
criterion as well. Future secondary mortgage market entities must be 
created with this mission as their basis in order to ensure that 
citizens will always have access to affordable mortgage capital.
    REALTORS' agree that taxpayers should be protected, 
open-ended bailouts should end, private capital must return to the 
housing finance market, and that the size of the Government 
participation in the housing sector should decrease if the market is to 
function properly. Where we disagree with some is ``how'' these 
aspirations should be accomplished. When reviewing current legislation 
that effectively constrains, or shuts-down, Fannie Mae and Freddie Mac 
and relies only on private capital to operate the secondary mortgage 
market (e.g., S. 693, the ``GSE Bailout Elimination and Taxpayer 
Protection Act''), one need only examine the miniscule activity in the 
jumbo and manufactured housing mortgage markets in order to understand 
the implications of just having private capital form the foundation of 
the housing market. In both instances, mortgage capital became nearly 
nonexistent, which prohibited qualified borrowers from access to the 
funds required to purchase a home.
    Congress chartered Fannie Mae and Freddie Mac to expand home 
ownership and provide a solid foundation for our Nation's housing 
financial system. Unlike private secondary market investors, Fannie Mae 
and Freddie Mac remain in housing markets during downturns, using their 
Federal ties to facilitate mortgage finance and support home ownership 
opportunity for all creditworthy borrowers.
    REALTORS' believe that the GSEs' housing mission, and 
the benefits that are derived from it, played a vital role in the 
success of our Nation's housing system, and continue to play that role 
today. Without Fannie Mae and Freddie staying true to their mission of 
providing affordable mortgage capital during the current market 
disruption, there would have been a more serious disruption to the 
market.
    Since being placed in conservatorship, NAR has closely monitored 
the impact of the current market turmoil on both Fannie Mae and Freddie 
Mac. As previously mentioned, REALTORS' are extremely aware 
that the role of the GSEs is crucial to housing consumers' ability to 
obtain fair and affordable mortgages, which stimulate real estate 
transactions, and thus the overall U.S. economy.
    As the market turmoil reached its peak in late 2008, it became 
apparent that the role of the GSEs, even in conservatorship, was of 
utmost importance to the viability of the housing market as private 
mortgage capital effectively fled the marketplace.



    As you can see from the above chart, if no Government-backed entity 
existed as private mortgage capital fled to the side lines, the housing 
market would have come to a complete halt and thrown our Nation into a 
deeper recession, or even a depression.
    REALTORS' believe that reform of the U.S. housing 
finance system must be a methodical, measured, and comprehensive effort 
based on practical market experience, and not just theory.
    Earlier this year, NAR signed onto an industry letter that espouses 
the fundamental principles that we all believe are required to ensure a 
viable secondary mortgage market going forward (see, Appendix). NAR 
believes that the industry letter's basic principles, in concert with 
our own, form a good foundation on which the secondary mortgage market 
can be reformed. NAR's principles are as follows:

Key GSE Reform Points Based on NAR's Principles
    An efficient and adequately regulated secondary market is 
        essential to providing affordable mortgages to consumers. The 
        secondary market, where mortgages are securitized and/or 
        combined into bonds, is an important and reliable source of 
        capital for lenders and therefore for consumers.

    Without a secondary market, mortgage interest rates would be 
        unnecessarily higher and unaffordable for many Americans. In 
        addition, an inadequate secondary market would impede both 
        recovery in housing and the overall economic recovery.

    We cannot have a restoration of the old GSEs with private 
        profits and taxpayer loss system. The current GSEs should be 
        replaced with Government chartered, nonshareholder owned 
        entities that are subject to sufficient regulations on product, 
        revenue generation and usage, and retained portfolio practices 
        in a way that ensures they can accomplish their mission and 
        protect the taxpayer.

    Government-chartered entities have a separate legal 
        identity from the Federal Government but serve a public purpose 
        (e.g., the Export-Import Bank). Unlike a Federal agency, the 
        entities will have considerable political independence and be 
        self-sustaining given the appropriate structure.

    The mission would be to ensure a strong, efficient 
        financing environment for home ownership and rental housing, 
        including access to mortgage financing for segments of the 
        population that have the demonstrated ability to sustain home 
        ownership. Middle class consumers need a steady flow of 
        mortgage funding that only Government backing can provide.

    The Government must clearly, and explicitly, guarantee the 
        issuances of the entities. Taxpayer risk would be mitigated 
        through the use of mortgage insurance on loan products with a 
        loan-to-value ratio of 80 percent or higher and guarantee or 
        other fees paid to the Government. This is essential to ensure 
        borrowers have access to affordable mortgage credit. Without 
        Government backing, consumers will pay much higher mortgage 
        rates and mortgages may at times not be readily available at 
        all (as happened in jumbo and commercial real estate loans)

    The entities should guarantee or insure a wide range of 
        safe, reliable mortgages products such as 30- and 15-year 
        fixed-rate loans, traditional ARMs, and other products that 
        have stood the test of time and for which American homeowners 
        have demonstrated a strong ``ability to repay.''

    For additional safety, sound and sensible underwriting 
        standards must be established for loans purchased and 
        securitized in MBSs, loans purchased for portfolio, and MBS 
        purchases.

    The entities should price loan products or guarantees based 
        on risk. The organization must set standards for the MBS they 
        guarantee that establish transparency and verifiability for 
        loans within the MBSs.

    Political independence of the entities is mandatory for 
        successful operation (e.g., the CEOs will have fixed terms so 
        they cannot be fired without cause, they should not be allowed 
        to lobby, and the authorities should be self-funded--no ongoing 
        appropriations).

    In order to increase the use of covered bonds, particularly 
        in the commercial real estate arena, the entities should pilot 
        their use in multifamily housing lending and explore their use 
        as an additional way to provide more mortgage capital for 
        residential housing. The entities should be allowed to pave the 
        way for innovative or alternative finance mechanisms that meet 
        safety criteria.

    There must be strong oversight of the entities (for 
        example, by the Federal Housing Finance Agency--FHFA or a 
        successor agency), that includes the providing of timely 
        reports to allow for continual evaluation of the entities' 
        performance.

Private Capital Participation, But Not a Fully Private Secondary 
        Mortgage Market
    REALTORS' believe that full privatization is not an 
effective option for a secondary market because private firms' business 
strategies will focus on optimizing their revenue/profit generation. 
This model would foster mortgage products that are more aligned with 
the business' goals (e.g., based upon significant financial risk-
taking) than in the best interest of the Nation's housing policy or the 
consumer. This situation, we believe, would lead to the rescinding of 
long-term, fixed-rate mortgage products (e.g., 30-year fixed-rate 
mortgage products), and an increase in the costs of mortgages to 
consumers, or both.
    According to research by economist Dr. Susan Woodward, there is no 
evidence that a long-term fixed-rate residential mortgage loan would 
ever arise spontaneously without Government urging. Dr. Woodward points 
out that a few developed countries have encouraged the use of 
amortizing long-term loans, but in all instances (save for Denmark), 
the loans have adjustable rates and recast every 5 years. She goes on 
to indicate that the United States is unique in supporting a 
residential mortgage that is long-term, amortizing, fixed-rate and 
prepayable, and that Americans have come to view this product as one of 
their civil rights. Dr. Woodward points out that in early 2000, when 
Former Federal Reserve Chairman, Alan Greenspan, hinted at its 
abandonment, the public outcry was such that he eagerly abandoned that 
position.
    Second, the size of the U.S. residential mortgage market is also a 
consideration. Currently, the U.S. residential mortgage market stands 
at $10.6 trillion, with the GSEs owning or guaranteeing $5 to $6 
trillion of mortgage debt outstanding and providing capital that 
supports roughly 70 percent of new mortgage originations. 
REALTORS' believe that it is extremely unlikely that enough 
purely private capital--without Government backing--could be attracted 
to replace existing mortgage funding, assume the GSEs market share, or 
make mortgage lending available in all types of markets.
    Finally, our members fear that in times of economic upheaval, a 
fully private secondary mortgage market will largely cease to exist as 
has occurred in the jumbo mortgage, the commercial mortgage, and the 
manufactured housing mortgage markets. When the economy turns down, 
private capital understandably flees the marketplace. Should that 
happen in the residential mortgage market space, the results for the 
entire economy--because of the plethora of peripheral industries that 
support and benefit from the residential housing market--would be 
catastrophic.

Reasonable Qualified Residential Mortgage Definition
    Another issue that will dramatically impact the future of housing 
finance and the secondary mortgage market is the definition of what 
constitutes a qualified residential mortgage (QRM). NAR believes that 
Federal regulators should honor the intentions of the concept's 
authors, Senators Isakson, Hagan, and Landrieu, by crafting a qualified 
residential mortgage (QRM) exemption from the risk retention 
requirements of the Dodd-Frank Act that includes a wide variety of 
traditionally safe, well underwritten products such as 30-, 15-, and 
10-year fixed-rate loans, 7-1 and 5-1 ARMs, and loans with flexible 
down payments that require mortgage insurance. A QRM policy that does 
not heed their intention will displace a large portion of potential 
homebuyers, which in turn will slow economic growth and hamper job 
creation.
    Strong evidence shows that responsible lending standards and 
ensuring a borrower's ability to repay have the greatest impact on 
reducing lender risk. A balance must be struck between reducing 
investor risk and providing affordable mortgage credit. Better 
underwriting and credit quality standards will greatly reduce risk. 
Adding unnecessarily high minimum down payment requirements, overly 
stringent debt-to-income ratios, and onerous payment performance 
criteria, will only exclude hundreds of thousands of homebuyers, 
despite their creditworthiness and proven ability to afford the monthly 
payment, because of the dramatic increase in the wealth required to 
purchase a home.
    According to a white paper compiled by a cross-section of housing 
and consumer lending groups titled, ``Proposed Qualified Residential 
Mortgage Definition Harms Creditworthy Borrowers While Frustrating 
Housing Recovery of Housing'' (2011): \1\
---------------------------------------------------------------------------
     \1\ Qualified Residential Mortgage Coalition, ``Proposed Qualified 
Residential Mortgage Definition Harms Creditworthy Borrowers While 
Frustrating Housing Recovery'', May 2011.

        The impact of the proposed rule on existing homeowners is also 
        harmful. Based on data that the coalition received from 
        CoreLogic Inc., nearly 25 million current homeowners would be 
        denied access to a lower rate QRM to refinance their home 
        because they do not currently have 25 percent equity in their 
        homes (Table 2). Many of these borrowers have paid their 
        mortgages on time for years, only to see their equity eroded by 
        a housing crash and the severe recession. Even with a 10 
        percent minimum equity standard, more than 16 million existing 
        homeowners--many undoubtedly with solid credit records--will be 
        unable to obtain a QRM. In short, the proposed rule moves 
        creditworthy, responsible homeowners into the higher cost non-
        QRM market.

        
        
        As now narrowly drawn, QRM ignores compelling data that 
        demonstrate that sound underwriting and product features, like 
        documentation of income and type of mortgage have a larger 
        impact on reducing default rates than high down payments.

        A further analysis of data from CoreLogic Inc. on loans 
        originated between 2002 and 2008 shows that boosting down 
        payments in 5 percent increments has only a negligible impact 
        on default rates, but it significantly reduces the pool of 
        borrowers that would be eligible for the QRM standard. Table 2 
        shows the default performance of a sample QRM based on the 
        following attributes of loans: Fully documented income and 
        assets; fixed-rate or 7 year or greater ARMs; no negative 
        amortization; no interest only loans; no balloon payments; 41 
        percent total debt-to-income ratio; mortgage insurance on loans 
        with 80 percent or greater loan-to-value ratios; and maturities 
        no greater than 30 years. These QRM criteria were applied to 
        more than 20 million loans originated between 2002 and 2008, 
        and default performance is measured by origination year through 
        the end of 2010.

        As shown in Tables 2 and 3, moving from a 5 percent to a 10 
        percent down payment requirement on loans that already meet the 
        defined QRM standard reduces the default experience by an 
        average of only two- or three-tenths of 1 percent for each 
        cohort year. However, the increase in the minimum down payment 
        from 5 percent to 10 percent would eliminate from 7 to 15 
        percent of borrowers from qualifying for a lower rate QRM loan. 
        Increasing the minimum down payment even further to 20 percent, 
        as proposed in the QRM rule, would amplify this disparity, 
        knocking 17 to 28 percent of borrowers out of QRM eligibility, 
        with only small improvement in default performance of about 
        eight-tenths of one percent on average. This lopsided result 
        compromises the intent of the QRM provision in Dodd-Frank, 
        which is to assure clear alignment of interests between 
        consumers, creditors and investors without imposing 
        unreasonable barriers to financing of sustainable mortgages.

        
        
        Importantly, this analysis takes into account the impact on the 
        performance of the entire cohort of defined QRMs that would 
        result from moving from a 5 percent minimum down payment on 
        QRMs in that cohort, to a 10 percent and a 20 percent minimum 
        down payment. As such, it shows the broad market impact of a 
        QRM with a 5 percent down payment requirement compared to a QRM 
        with a 10 percent or 20 percent down payment requirement, 
        rather than simply comparing default risk on 5 percent down 
        loans to 20 percent down loans. Clearly, moving to higher down 
        payments has a minor impact on default rates market-wide, but a 
        major adverse impact on access by creditworthy borrowers to the 
        lower rates and safe product features of the QRM.

        
        
        NAR is concerned that a narrowly defined QRM will also require 
        severe tightening of FHA eligibility requirements and even 
        higher FHA premiums to prevent huge increases in its already 
        robust share of the market, adding additional roadblocks to 
        sustainable home ownership.

        Lastly, saving the necessary down payment has always been the 
        principal obstacle to buyers seeking to purchase their first 
        home. Proposals requiring high down payments will only drive 
        more borrowers to FHA, increase costs for borrowers by raising 
        interest rates and fees, and effectively price many eligible 
        borrowers out of the housing market.

        
        
Mortgage Loan Limits
    NAR strongly supports making permanent the GSE and FHA mortgage 
loan limits that are currently in effect. The GSEs and FHA have played 
a critical role in providing mortgage liquidity as private financing 
has dried up. The current loan limits are set to expire in just a few 
months, on September 30, 2011. In early 2010, when the limits 
temporarily expired, many communities saw dramatic declines in mortgage 
liquidity. More than 612 counties in 40 States and the District of 
Columbia saw their limits fall. The average decline in the loan limits 
was more than $51,000.
    In today's real estate market, lowering the loan limits and 
changing the formula on which they are calculated further restricts 
liquidity and makes mortgages more expensive for households nationwide. 
FHA and GSE mortgages together continue to constitute the vast majority 
of home financing availability today, which makes it particularly 
critical that the current limits be extended. Without the additional 
liquidity created by maintaining these loan limits at current levels, 
families will have to pay more to purchase homes, face the possibility 
that they will not be able to obtain financing at any price or find it 
more difficult or impossible to refinance problematic loans into safer, 
more affordable mortgages.

GSE Dividend Payments
    Since August 2010, NAR has requested that the punitive dividend 
payments placed on the GSEs be reduced from 10 percent to 5 percent, in 
line with other Federal financial support recipients. Such a move is 
necessary in order to relieve the unnecessary drag that this assessment 
imposes on the housing industry's recovery. We believe that reducing 
the current punitive dividend will enhance the GSEs' ability to 
eliminate losses, which will be further enhanced as the housing markets 
continue to stabilize and recover. This will give the GSEs the 
flexibility to adjust their underwriting standards to take into account 
reasonable lending risks, which will benefit the consumer and the 
entire economy, without further risk of additional cost to the 
consumer.
    More importantly, it makes no apparent sense for the Treasury 
Department to transfer amounts to the GSEs so they, in turn, will have 
enough money to make the dividend payment back to the Treasury. If the 
GSEs were not required to pay the 10 percent dividend, which 
significantly increases each of their quarterly losses, it would reduce 
the amount of capital Treasury is called upon to provide them. It would 
make more sense to charge the GSEs an amount equal to the Treasury 
borrowing cost, or borrowing cost to the GSEs based on the current 
Federal assurance that they will maintain a positive net worth. Both of 
these amounts are far less than 10 percent.

Conclusion
    The National Association of REALTORS' supports a 
secondary mortgage market model that includes some level of Government 
participation, but protects the taxpayer while ensuring that all 
creditworthy consumers have reasonable access to mortgage capital so 
that they too may attain the American Dream--home ownership. We believe 
that the key points that we mentioned will help Congress and our 
industry partners design a secondary mortgage model that will be in all 
of our Nation's best interest today, and in the future.
    I thank you for this opportunity to present our thoughts on 
reforming our housing finance system, and as always, the National 
Association of REALTORS' is at the call of Congress, and our 
industry partners, to help continue the housing and national economic 
recovery.

APPENDIX



                                 ______
                                 
                 PREPARED STATEMENT OF MARK J. PARRELL
     Executive Vice President and Chief Financial Officer, Equity 
   Residential, on behalf of the National Multi Housing Council and 
                     National Apartment Association
                              May 26, 2011

    Chairman Johnson, Ranking Member Shelby, and distinguished Members 
of the Committee, my name is Mark Parrell, Executive Vice President and 
Chief Financial Officer of Equity Residential. Equity Residential (EQR) 
is an S&P 500 company focused on the acquisition, development, and 
management of apartment properties in top U.S. growth markets. Equity 
Residential owns or has investments in more than 450 properties with 
117,286 units in 17 States and the District of Columbia. I am 
testifying today on behalf of the National Multi Housing Council (NMHC) 
and its joint legislative partner, the National Apartment Association 
(NAA).
    NMHC and NAA represent the Nation's leading firms participating in 
the multifamily rental housing industry. Our combined memberships are 
engaged in all aspects of the apartment industry, including ownership, 
development, management, and finance. NMHC represents the principal 
officers of the apartment industry's largest and most prominent firms. 
NAA is the largest national federation of State and local apartment 
associations, with 170 State and local affiliates comprised of more 
than 50,000 multifamily housing companies representing more than 5.9 
million apartment homes.
    I appreciate the opportunity to be here today to present the 
industry's perspective on the role of the Government Sponsored 
Enterprises (GSE), specifically Fannie Mae and Freddie Mac, and how the 
multifamily market works and is different than the single-family 
market. I will also discuss the benefits derived from the GSEs' 
presence in the multifamily market and why we believe there will be a 
continued need for Federal involvement even after they are phased out.
    Before I do that, however, allow me to describe some key aspects of 
the apartment market and how the changing demographics will demand a 
continued flow of capital into this sector if we are to meet the future 
housing needs.
    Currently, one-third of Americans rent their housing, and nearly 14 
percent--17 million households--call an apartment their home. Americans 
are changing their housing preferences. Married couples with children 
represent less than 22 percent of households, and that number is 
falling. By 2030, nearly three-quarters of our households will be 
childless. Echo boomers are starting to enter the housing market, 
primarily as renters, and baby boomers are beginning to downsize, and 
many are choosing the convenience of renting. Rental housing offers 
them a maintenance free lifestyle with amenities, social opportunities 
and often walkable neighborhoods. In this decade, renters could make up 
more than half of all new households--more than 7 million new renter 
households. Because of these changes, University of Utah Professor 
Arthur C. Nelson predicts that half of all new homes built between 2005 
and 2030 should be rental units.
    Apartments are not just shelter. They are also an economic 
powerhouse. The aggregate value of this apartment stock is $2.2 
trillion. Rental revenues from apartments total almost $120 billion 
annually, and management and operation of apartments are responsible 
for approximately 550,000 jobs. Moreover, the construction of apartment 
communities in the last 5 years has added an average of 210,000 new 
apartment homes per year, providing jobs to over 270,000 workers.
    Finally, apartments also produce societal benefits; not only are 
they environmentally sustainable, resource- and energy-efficient, they 
also help create a mobile workforce that can relocate to pursue job 
opportunities.
    I highlight these important changes in housing choice, supply and 
demand as well as the economic and social contributions apartments make 
to society to encourage Congress to consider the unique needs of the 
apartment industry as you pursue reform options.
    The bursting of the housing bubble exposed serious flaws in our 
Nation's housing finance system. However, fixing the single-family 
housing finance system should not come at the expense of the much 
smaller and less understood, but vital, multifamily sector. The GSEs' 
multifamily programs did not contribute to the housing meltdown, and 
without adequate attention to this segment of the housing market we 
risk becoming collateral damage. We believe a fully functioning 
secondary market, backstopped by the Federal Government is absolutely 
critical to the multifamily sector and our industry's ability to 
continue to meet the Nation's demand for market-rate, workforce and 
affordable housing.
    I have been invited here today to talk about what works in the 
current GSE system of mortgage finance. Regardless of what you hear and 
read relative to the perceived evils of the GSEs and their contribution 
to the housing meltdown, when it comes to financing multifamily 
housing, quite a lot works. Let me be clear, I am not here to defend 
the GSEs or to suggest that they be continued in their current form. 
However, I would like to highlight for the Committee those elements of 
the system that worked well for multifamily lending and, most 
importantly, at no cost to the taxpayer. It is our hope that these 
elements of success can be incorporated into whatever you design to 
replace Fannie Mae and Freddie Mac.

Multifamily Performance: A Success Story
    It is hard to imagine a success story coming out of the worst 
housing crash in recent history, but the performance of the GSEs' 
multifamily portfolio stands in stark contrast to that of the single-
family business. In short, the multifamily programs were not part of 
the meltdown and are not broken.
    Overall loan performance remains strong with delinquency and 
default rates at less than 1 percent, a tenth of the size of the 
delinquency/default rates plaguing single-family. They have 
outperformed CMBS, commercial banks and even FHA. In addition, since 
the Federal Government placed the GSEs in conservatorship, the 
multifamily portfolio has managed to net approximately $2 billion in 
profit for the Federal Government.
    Not only are the GSEs' multifamily programs operating in a fiscally 
sound manner, they are doing so while offering a full range of mortgage 
products to meet the unique needs of the multifamily borrower and serve 
the broad array of property types. This includes including conventional 
market rental housing, workforce rental housing and targeted affordable 
(e.g., Project-based Section 8, properties subsidized by State and 
local Government and Low-Income Housing Tax Credit (LIHTC)) properties.
    The GSEs' multifamily programs adhere to a business model that 
includes prudent underwriting standards, sound credit policy, effective 
third-party assessment procedures, risk-sharing and retention 
strategies, effective loan portfolio management, and standardized 
mortgage documentation and execution. In short, the GSEs' multifamily 
models hit the mark. They have attracted enormous amounts of private 
capital; helped finance millions of units of market-rate workforce 
housing without direct Federal appropriations; sustained liquidity in 
all economic climates; and ensured safety and soundness of their loans 
and securities. As a result of the liquidity provided by the GSEs, the 
United States has the best and most stable rental housing sector in the 
world.

Federal Credit Guarantee: Meeting the Needs When Private Capital 
        Disappears
    This most recent crisis underscores the need for a capital source 
that will be available in all economic climates. In the last 2 years, 
the GSEs have provided $94 billion in mortgage debt to the apartment 
industry when virtually every other source of capital left the market. 
They served a similar role during the 1997-1998 Russian financial 
crisis and in the post-9/11 recession of 2001.
    Their share of the multifamily mortgage market has varied 
considerably over time, increasing at times of market dislocation when 
other sources of capital are scarce and scaling back during times when 
private credit is widely available. For example, when private capital 
left the housing finance market in 2008, the apartment industry relied 
almost exclusively on Fannie Mae, Freddie Mac, and FHA/Ginnie Mae for 
its capital sources.
    If not for the GSEs' multifamily programs, I would most likely be 
telling a different story today. It would be one of higher default and 
delinquency rates because owners would be unable to secure capital to 
refinance maturing, but otherwise performing, mortgages. The 
consequences for renters nationwide would have been severe. Multifamily 
may only represent 10 percent on average of the GSEs' mortgage debt, 
but the GSEs currently provide nearly 90 percent of multifamily 
mortgage capital.
    Historically, the apartment industry enjoys access to mortgage 
capital from a variety of credit sources, each with its own focus, 
strengths, and limitations. In addition to the GSEs, these sources 
include commercial banks, life insurance companies, CMBS, and pension 
funds. Prior to the financial crisis, these combined capital sources 
provided the apartment sector with $100-$150 billion annually, reaching 
as high as $225 billion to develop, refinance, purchase, renovate, and 
preserve apartment properties.
    We are encouraged by the thawing in the private capital markets and 
support a return to a marketplace dominated by private capital. But 
even in healthy economic times, the private market has not been able or 
willing to meet the full capital needs of rental housing. The following 
highlights some of the capital sources, limitations, and level of 
participation in the multifamily market:

    Banks are limited by capital requirements and have never 
        been a source of long-term financing. They currently hold 31.2 
        percent of outstanding multifamily mortgage debt. Between 1990 
        and 2010, they provided 24 percent ($136.49 billion) of the 
        total net increase in mortgage debt but have provided limited 
        amounts of capital to the industry since the financial crisis.

    Life insurance companies target very specific product, 
        i.e., newer, luxury high-end properties. They tend to enter and 
        leave the multifamily market based on their investment needs 
        and economic conditions. They currently hold just 5.6 percent 
        of outstanding multifamily mortgage debt. Between 1990 and 
        2010, they accounted for just 3 percent ($18.3 billion) of the 
        net increase in multifamily mortgage debt.

    FHA has exceeded its capacity to meet the sector's capital 
        demands and their capital targets construction lending. FHA/
        Ginnie Mae currently hold 14 percent of outstanding multifamily 
        mortgage debt. From 1990 to 2010, they accounted for 10.7 
        percent ($59.6 billion) of the total net increase in mortgage 
        debt.

    The private-label CMBS market is unlikely to return to the 
        volume and market share it reached a few years ago. It peaked 
        at 16.5 percent of the market ($17.6 billion a year) in the 
        housing bubble years of 2005-2007. The CMBS market now holds 
        12.2 percent of the outstanding multifamily mortgage debt.

    While covered bonds might provide some additional liquidity 
        to apartment borrowers, they are unlikely to provide the 
        capacity, flexibility, and pricing superiority necessary to 
        adequately replace traditional sources of multifamily mortgage 
        credit, including the GSEs.

        
        
Federal Credit Guarantee Creates Workforce Housing Without Federal 
        Appropriations
    It is important to note that nearly ALL of the multifamily funding 
provided by the existing GSEs helped create workforce housing (not just 
the capital they provided to properties designated ``affordable''). 
Fully 90 percent of the apartment units financed by Fannie Mae and 
Freddie Mac over the past 15 years--more than 10 million units--were 
affordable to families at or below the median income for their 
community. This includes an overwhelming number of market-rate 
apartments that were produced with no Federal appropriations, and with 
virtually no risk to the taxpayer.
    The ability to serve renters at or below area median income is 
dependent on the liquidity provided by the Government-supported 
secondary multifamily mortgage market. It lowers the cost of capital to 
borrowers who provide workforce market-rate housing. Without this 
support, interest rates and debt service costs would rise, rents would 
increase to cover these costs, and fewer renters would be able to enjoy 
the pricing at area median income levels.
    Not only does the presence of a Government-supported secondary 
multifamily mortgage market lower the cost of capital, it also works to 
leverage private capital to support affordable housing. We are 
convinced that removing the Government guarantee of multifamily 
mortgages or mortgage-backed securities will put the supply of 
affordable housing at risk. Other capital sources will simply not fill 
the gap, and with a severe supply shortage already existing in many 
markets and steadily forecasted to worsen, vacancy rates will most 
certainly decrease and rents will rise. This most recent crisis 
underscores the need for a capital source that will be available in all 
markets, whether it is New York City, Sioux Falls, South Dakota, or 
Birmingham, Alabama, and at all times.

Multifamily Loan Maturity Risk Depends on Active and Functioning 
        Securitization and a Secondary Market
    A federally backed secondary market is critical not only for the 
long-term health of the industry but also to help refinance the 
estimated $300-$400 billion in multifamily mortgages that will mature 
by 2015. Unlike residential mortgages, which are typically for 30-year 
terms, most multifamily mortgages are for a period of 7 to 10 years. 
This ongoing need to refinance apartment mortgages makes it imperative 
for the industry to have access to reliable and affordable capital at 
all times, in all markets and in all market conditions.
    When credit markets have been impaired for reasons that have 
nothing to do with multifamily property operating performance, the 
federally backed secondary market has ensured the continued flow of 
capital to apartments. As I mentioned earlier, without this source of 
liquidity during the most recent and prior financial crises, performing 
properties could have been pushed into foreclosure or bankruptcy when 
their loans matured. The disruption in the housing system in such a 
scenario would be potentially devastating to millions of renters and 
the economy as a whole.

Growing Importance of Rental Housing, Experts Forecast Supply Shortage
    As noted previously, the U.S. is on the cusp of a fundamental 
change in our housing dynamics. Changing demographics and new economic 
realities are driving more people away from the typical suburban house 
and causing a surge in rental demand. Tomorrow's households want 
something different. They want more choice. They are more interested in 
urban living and less interested in owning. They want smaller spaces 
and more amenities. And increasingly, they want to rent, not own. 
Unfortunately, our housing policy has yet to adjust to these new 
realities.
    Our society is changing in meaningful ways that are translating 
into new housing preferences. Beyond just changing demographics, there 
is also a much-needed change in consumer psychology underway that 
favors more long-term renters in the future. The housing crisis taught 
Americans that housing is shelter, not the ``sure thing'' investment 
once believed. That awareness is freeing people up to choose the 
housing that best suits their lifestyle. For millions, that is an 
apartment.
    While there may be an oversupply of single-family housing, the 
Nation could actually see a shortage of multifamily housing as early as 
2012. The shortage is particularly acute in the area of workforce and 
affordable housing. The Harvard Joint Center for Housing Studies 
estimates a nationwide affordable housing shortfall of three million 
units. (Addendum II of my testimony provides further information on the 
inherent affordability of apartments.)
    This context is particularly important in understanding why it is 
vital that as Congress looks to reform housing finance, it do nothing 
that would jeopardize the construction, financing, and availability of 
multifamily housing. Without a functioning securitzation process and a 
backstop of Government credit support for multifamily mortgages or 
mortgage-backed securities to ensure a steady and sufficient source of 
capital going forward, the apartment industry will not be able to meet 
the Nation's housing needs and Americans will pay more for workforce 
housing.
    I am attaching the NMHC/NAA ``Key Principles for Housing Finance 
Reform'' as Addendum I of my testimony.

National Housing Policy
    In closing, I would like to take a moment to address our national 
housing policy more broadly. I feel it underscores the importance of 
explicitly considering the multifamily component in a restructured 
secondary mortgage market.
    For decades, the Federal Government has pursued a ``home ownership 
at any cost'' housing policy, ignoring the growing disconnect between 
the country's housing needs and its housing policy. We have seen the 
devastating effects of such a policy. If there is a silver lining in 
this situation, it is the opportunity we now have to learn from our 
mistakes and rethink our housing policy. Housing our diverse Nation 
means having a vibrant rental market along with a functioning ownership 
market. It's time we adopt a balanced housing policy that doesn't 
measure success by the level of home ownership.
    I thank you for the opportunity to present the views of NMHC and 
NAA.

         ADDENDUM I: KEY PRINCIPLES FOR HOUSING FINANCE REFORM

    The apartment industry urges you to consider the following key 
points for inclusion in any reform measure:

1. Do No Harm: Preserve Multifamily Lending Programs
    The multifamily sector produces the vast majority of this Nation's 
affordable, workforce housing. Therefore, there is an appropriate 
public mission for the Government to provide an effective financing 
system to ensure the Nation's housing needs are met. In addition, the 
multifamily sector, and more specifically the GSEs' multifamily 
programs, did not contribute to the housing meltdown. Therefore, as 
policy makers ``fix'' the problems in the single-family sector, they 
should not do so at the detriment of the multifamily industry.

2. Protect the Taxpayer: Look to Proven Multifamily Models
    The taxpayer is footing the bill for the breakdown of the single-
family housing sector, and that should never happen again. The GSEs' 
multifamily programs can serve as a model for a reformed housing 
finance system. They have performed extraordinarily well and have less 
than a 1-percent delinquency rate. Historically, they have been well 
capitalized, have covered all their losses through the loss reserves 
they collected and have earned a profit. Even during conservatorship, 
the GSEs' multifamily programs have earned net revenues of $2 billion. 
\1\ Their success is the result of strong business models that use 
retained risk and stringent underwriting criteria.
---------------------------------------------------------------------------
     \1\ Source: GSE SEC filings. This does not include write downs of 
Low-Income Housing Tax Credit holdings that the firms have been 
prohibited from selling and liquidating.
---------------------------------------------------------------------------
    To protect the taxpayer going forward, these models should be 
carefully studied for a broader application within the larger housing 
finance system. Specifically, the Government must ensure strong 
regulatory oversight. It should consider implementing some level of 
retained risk by mortgage originators and servicers and adequate 
capital standards to fund loan-loss reserves. These steps would 
preserve the strong mortgage loan performance and track record seen in 
the multifamily sector and protect the taxpayer.

3. Federal Government Involvement Necessary and Should Be Appropriately 
        Priced
    Even after we transition to a new housing finance system, there 
will be an ongoing need for an explicit Federal Government guarantee on 
multifamily mortgage securities and portfolio-held loans. Over the past 
40 years, there have been numerous occasions when the private sector 
has been unable or unwilling to finance multifamily loans. There is a 
legitimate concern that the private sector cannot be counted on, from 
both reliability and capacity standpoints, to consistently finance the 
majority of multifamily borrowers' needs. Hence, it is hard to envision 
a reformed housing finance system without some form of Federal credit 
enhancement. However, that credit should be priced at an appropriate 
level that reflects the mortgage risk and the value of the Government's 
credit enhancement, and in such a way that it complements, but does not 
unfairly compete with, private debt capital.

4. Liquidity Support Should Be Broad and Available at All Times, Not 
        Just ``Stop-Gap'' or Emergency
    Any Federal credit facility should be available to the entire 
apartment sector and not be restricted to specific housing types or 
specific renter populations. Narrowing any future credit source would 
remove a tremendously important source of capital to a large portion of 
our industry, namely market-rate developers who actually provide a 
large volume of unsubsidized workforce housing. Such a facility should 
also be available at all times to ensure constancy in the U.S. housing 
market throughout all business cycles. It would be impossible to turn 
on and off a Government-backed facility without seriously jeopardizing 
capital flows.

5. Mission Should Focus on Liquidity, Not Mandates
    The public mission of a federally supported secondary market should 
be clearly defined and focused primarily on using a Government 
guarantee to provide liquidity and not specific affordable housing 
mandates. Such mandates create conflicts within the secondary market 
and are partially responsible for the housing crisis because of the 
distortions the mandates introduced into the GSEs' business practices. 
Instead of mandates, the new housing finance system should provide 
incentives to support the production and preservation of affordable 
multifamily housing. Absent incentives, the Government should redirect 
the affordability mission to HUD/FHA and the Low-Income Housing Tax 
Credit program.

6. Retain Portfolio Lending While Expanding Securitization
    Securitization must be used to attract private capital for 
multifamily mortgage capital. However, unlike single-family loans, 
multifamily loans are not easily ``commoditized.'' Without the ability 
to hold some loans in portfolio, multifamily lending activities will be 
significantly curtailed. In addition, securitizing multifamily loans is 
not always the best way to manage credit risk. Portfolio capacity is 
also required to aggregate mortgages for a structured securities sale.

7. Create Certainty and Retain Existing Resources/Capacity During the 
        Transition
    To avoid market disruption, it is important that policy makers 
clearly define the role of the Government in a reformed system and the 
timeline for transition. Without that certainty, private capital 
providers (e.g., warehouse lenders and institutional investors) are 
likely to limit their exposure to the market, which could cause a 
serious capital shortfall to rental housing. In addition, during the 
transition years, we believe it is critical to retain many of the 
resources and capacity of the existing GSEs. The two firms have 
extensive personnel and technology expertise as well as established 
third-party relationships with lenders, mortgage servicers, appraisers, 
engineers, and other service providers that are critical to a well-
functioning secondary market.
    We appreciate the opportunity to present the views of the apartment 
industry and look forward to working with you to build a world-class 
housing finance system that meets the Nation's changing housing needs 
while also protecting the taxpayers.

         ADDENDUM II: THE INHERENT AFFORDABILITY OF APARTMENTS

    Many areas of the country are suffering from a severe shortage of 
workforce and affordable housing. In February 2011, the U.S. Department 
of Housing and Urban Development (HUD) found that ``worst case housing 
needs'' grew by nearly 1.2 million households, or more than 20 percent, 
from 2007 to 2009 and by 42 percent since 2001. ``Worst case housing 
needs'' are defined as low-income households who paid more than half 
their monthly income for rent, lived in severely substandard housing, 
or both. The increase in the extent of worst case housing needs 
represents the largest 2-year jump since HUD began reporting this 
segment of the rental market in 1985.
    A separate study by the Harvard University Joint Center for Housing 
Studies found that falling incomes and the Great Recession have pushed 
both the number and share of renters facing severe cost burdens (those 
spending more than 50 percent of income on rent and utilities) to all-
time highs and that nearly half of all renters face at least moderate 
housing cost burdens.
    The growing incidence of renter payment burdens reflects a growing 
shortage of affordable and workforce housing and underscores the 
importance of ensuring a continued capital flow to the rental housing 
industry because apartments are inherently affordable.
    An NMHC/NAA-commissioned study by MPF Research examined 5.6 million 
apartment units (without direct Federal subsidy) and found that 94 
percent of the units surveyed were affordable to households earning 100 
percent of area median income (AMI). Fully 85 percent were affordable 
to households earning 80 percent of AMI, and 60 percent were affordable 
to those earning 60 percent of AMI.







                                 ______
                                 
                   PREPARED STATEMENT OF GREG HEERDE
      Managing Director, Aon Benfield and Aon Benfield Securities
                              May 26, 2011

    Good morning Chairman Johnson, Ranking Member Shelby, and Members 
of the Committee. I am Greg Heerde, Managing Director of Aon Benfield 
and Aon Benfield Securities, and I am here today to discuss the role of 
private capital supporting lender's credit risk through mortgage 
insurance. Aon Benfield is the world's largest reinsurance 
intermediary, and Aon Benfield Securities, Inc., is an investment 
banking firm providing advisory services to insurance and reinsurance 
companies including capital raising, risk transfer securitization, and 
mergers and acquisitions. Combined, we have a high level of visibility 
into all forms of capital available to support the mortgage insurance 
industry. The goal of this testimony is to communicate:

  1.  The significant role that private mortgage insurance currently 
        plays in supporting residential housing transactions and the 
        stabilization of the housing market postcrisis;

  2.  The role for private reinsurance to support the mortgage 
        insurance market;

  3.  The availability of additional private capital in various forms 
        to support the future of the housing market as needed.

1. Role of Private Mortgage Insurance
    Private mortgage insurance provides protection to lenders, 
investors, and most importantly, taxpayers by standing in the ``first 
loss position'' in the event that a borrower stops making mortgage 
payments. When a borrower defaults, private mortgage insurance pays the 
lender or investor 20-25 percent of the loan amount, mitigating a 
significant (and in many cases all) portion of the loss on the loan. 
Private mortgage insurance also expands home ownership by allowing 
qualified borrowers with less than the 20 percent prescribed down 
payment to purchase a home. Private mortgage insurance is an 
alternative to the Federal Housing Administration (FHA) mortgage 
insurance. Key differences from the FHA coverage include private 
mortgage insurance is generally lower cost, as it covers the top 
portion of the loan whereas FHA insurance covers 100 percent of the 
loan, and private mortgage insurance is available on a wider variety of 
loans with no maximum loan amount.
    Mortgage insurers underwrite the underlying quality of the 
prospective borrower's creditworthiness and the supporting collateral 
thereby ensuring higher quality mortgages are issued. This protects not 
only the lenders and investors but the prospective borrowers by 
ensuring that the home is affordable at the time of purchase. Private 
mortgage insurers also have clear incentives to mitigate losses once 
loans are in default. As foreclosure results in the highest likelihood 
of loss payment under the insurance policy, mortgage insurers' goals 
are to work with borrowers to avoid foreclosure and keep them in their 
homes.
    The mortgage insurance industry in the U.S. is over 50 years old 
and has paid claims in a variety of adverse economic cycles. For 
example, more than $6 billion of mortgage insurance claims were paid in 
the 1980s, when the U.S. experienced double-digit interest rates and 
inflation. Similarly, in the early 1990s, mortgage insurers paid more 
than $8 billion of losses primarily in California and the Northeast. 
\1\
---------------------------------------------------------------------------
     \1\ Source is Mortgage Insurance Companies of America reports.
---------------------------------------------------------------------------
    U.S. private mortgage insurers have already paid approximately $25 
billion in losses during the current housing downturn, without 
Government or taxpayer support, and the annual loss payments continue 
to climb. The largest beneficiary of these payments has and will be 
Fannie Mae and Freddie Mac, thereby reducing a material amount of the 
exposure to the taxpayer. U.S. mortgage insurers are currently meeting 
their insurance obligations and most continue to write new mortgage 
insurance business, supporting the stabilization of the housing sector. 
In short, U.S. mortgage insurance is acting exactly as intended and 
continuing to pay significant losses without Government support in the 
wake of the most severe housing downturn in U.S. history.

2. Role of Reinsurance
    Reinsurance is another form of capital available to the insurance 
industry. Reinsurance is the transfer of insurance risk by an insurance 
company to a third party referred to as a reinsurer. Transferring 
insurance risk reduces the total amount of volatility the insurer is 
exposed to, and therefore the amount of capital required to absorb that 
volatility. Reinsurers, for example, have paid some losses associated 
with the current housing crisis.
    Despite these losses, reinsurance capacity stands ready to be 
deployed more broadly going forward to support U.S. mortgage insurers. 
Aon Benfield estimates that Global Reinsurer Capital totaled $470 
billion at December 31, 2010, representing a 17 percent increase over 
2009 and the largest amount of capital in the history of the 
reinsurance industry. The total represents a full recovery following 
losses from natural catastrophes such as Hurricanes Katrina, Rita, and 
Wilma in 2005 and earthquakes in Chile and New Zealand in 2010. 
Reinsurers in 2011 to date have experienced additional losses from 
earthquakes in Japan and the second New Zealand event, along with 
severe weather in the United States. The Aon Benfield Aggregate, which 
is a subset of Global Reinsurer Capital (representing approximately 53 
percent of the total), currently has reported loss estimates from first 
quarter events totaling $12.4 billion, with some companies still to 
comment on the extent of their exposures. However, Aon Benfield 
believes the losses to date fall within expected annual income and 
therefore will represent an earnings loss event rather than a capital 
loss event for the reinsurance industry.
    Private reinsurers also play an important role supporting mortgage 
insurance in a number of other countries including Australia, Canada, 
and the United Kingdom. These countries have mortgage financing systems 
that are each unique, with varying Government roles, but it is 
important to note that private reinsurance plays some part in all of 
them.

3. Availability of New Capital To Support the Housing Sector
    The insurance industry by its nature protects against various 
sources of volatility. Through adequate risk pricing and risk 
selection, the industry is able to achieve a level of diversification 
required to produce acceptable returns to capital providers. Following 
each major insured loss from man-made and natural catastrophes, 
reinsurers have brought material new and lasting capacity to the 
market. For example, after hurricane Katrina, over $30 billion of new 
capital was raised to form new insurers and reinsurers. This capital 
meant that insurers were able to continue renewing policies that they 
would have otherwise not been able to renew.
    Since the beginning of the financial crisis, new capital has come 
into the sector in the form of a new start-up mortgage insurer and as 
significant contributions to support existing carriers. To date, 
approximately $8 billion of new capital has been raised, \2\ which by 
industry standards could enable the sector to support $200 billion of 
insurance exposure. In addition to the capital that was raised, Aon 
Benfield Securities represented a qualified management team in 2009 
through early 2010 seeking to form a new mortgage insurance company. 
This plan was ultimately shelved as the capital providers witnessed the 
substantial growth of the FHA during the period coupled with the 
uncertainty around the future of Fannie and Freddie, which was viewed 
as weakening the demand for mortgage insurance and therefore the need 
for new companies. Ultimately, the capital providers concluded that the 
existing mortgage insurers and the introduction of the one new company 
formed were sufficient to satisfy current and short term future demand. 
There were other efforts during the same time period to introduce new 
mortgage insurance companies in various forms, some of which received 
indications that they would not receive approval from Fannie and 
Freddie to write business resulting in those efforts being shelved as 
well. As such, a transparent path to achieving approval from Fannie and 
Freddie would further encourage private capital investment.
---------------------------------------------------------------------------
     \2\ Source is Mortgage Insurance Companies of America reports.
---------------------------------------------------------------------------
    If, as a result of the review of various proposals for the future 
of the housing finance system, a decision is made to reduce the role of 
Fannie and Freddie over time, and that decision results in an increased 
demand for private mortgage insurance at commercially responsible 
terms, we are confident that sufficient private capital would be 
available to support that increased demand. Should the demand be 
sufficient to warrant the introduction of new mortgage insurance 
companies, and the necessary approval of qualified new mortgage 
insurers be attainable, we are equally confident that capital would 
form such new entrants. In addition, such a change in dynamics would 
likely result in more innovation in the underlying mortgage insurance 
product, which may ultimately result in a more competitive product as a 
benefit to both lenders and borrowers.
    As indicated above, reinsurers are enjoying record levels of 
capital while total reinsurance premiums over the past few years have 
declined. Given the greater capital base chasing fewer premium dollars, 
reinsurers are eager to underwrite new risks. The lack of such new 
exposures has resulted in reinsurers returning capital to shareholders 
in the form of dividends and share buybacks (the companies comprising 
the Aon Benfield Aggregate returned $17.6 billion, or approximately 73 
percent of their 2010 net income to shareholders). Reinsurance capacity 
is clearly available to support mortgage insurers by providing capacity 
that will allow them to insure more loans as the housing market 
rebounds and demands for mortgage insurance grow as well as to limit 
mortgage insurers exposure to severe losses and help ensure the ability 
of the mortgage insurance market to effectively meet a range of 
potential future loss scenarios. Mortgage insurance is generally not 
highly correlated to most other significant reinsurance exposures and 
therefore represents an attractive source of diversification for the 
industry.

Concluding Remarks
    As this Committee considers proposals impacting the future of the 
housing finance system, we are encouraged to report that private 
capital providers have upheld their commitments made through the 
mortgage insurance channel, and additional private capital is available 
to inject fresh capital as needed. Further, reinsurers stand ready to 
assist in mitigating a portion of the mortgage insurance risk as long 
as prudent underwriting standards and reasonable pricing characterize 
the marketplace.
                                 ______
                                 
                 PREPARED STATEMENT OF MARTIN S. HUGHES
       President and Chief Executive Officer, Redwood Trust, Inc.
                              May 26, 2011

Introduction
    Good morning Chairman Johnson, Ranking Member Shelby, and Members 
of the Committee. My name is Marty Hughes, and I am the CEO of Redwood 
Trust, Inc., a publicly traded company listed on the New York Stock 
Exchange. I appreciate the opportunity to testify regarding the Future 
of the Housing Finance System and look forward to responding to your 
questions.

Overview
    My testimony is focused on restoring a fully functioning private-
sector residential mortgage finance market. Currently, about 90 percent 
of all new mortgage originations rely on Government support. \1\ Given 
the fact that there is $9.6 trillion of outstanding first mortgage 
debt, \2\ this level of public subsidization is simply not sustainable. 
That being said, reducing the current level of governmental support, 
whether immediately or gradually over time, will have severe 
consequences for the housing market if the private sector is not 
prepared to step in with investment capital to replace a diminished 
level of Government backing.
---------------------------------------------------------------------------
     \1\ 2011 Mortgage Market Statistical Annual, Volume I , p. 19.
     \2\ Federal Reserve Flow of Funds of the United States, Fourth 
Quarter, Tables L.217 and L.218.
---------------------------------------------------------------------------
    The consequences of failing to attract sufficient private-sector 
capital to this market include a contraction in the availability of 
credit to homebuyers, an increase in mortgage rates, and continued 
decreases in home prices. Furthermore, these consequences in the 
housing market may have broader negative effects on the overall 
economy.
    The main sources of private-sector capital that previously financed 
residential mortgages include banks, mutual funds, pension funds, and 
insurance companies. For the nonbanks, the transmission mechanism for 
providing this financing was through their investments in triple-A 
rated residential mortgage-backed securities (RMBS). My testimony will 
recommend how to bring these ``triple-A investors'' back to this 
securitization market, thereby enabling the Government to reduce its 
role in the mortgage market without negative consequences.
    I realize that this and other hearings may devote considerable 
attention to ideas for new Government guarantees of mortgages in a 
post-GSE world. My testimony today is not focused on discussing these 
different alternatives. That debate may continue for years. My focus is 
on steps the Government can take today to spur a full return of the 
private mortgage securitization market. A broad return of the private 
market may also help the Committee to realize that it has more policy 
options on the Government's future role, or nonrole, than would appear 
in today's Government dominated market.

Background on Redwood
    Redwood commenced operations in 1994 as an investor in residential 
mortgage credit risk. We are not a direct lender or mortgage servicer. 
Our primary focus has been on the prime jumbo mortgage market, or that 
portion of the mortgage market where the loan balances exceed the 
limits imposed by Fannie Mae and Freddie Mac (the ``GSEs'') for 
participation in their programs. Similar to the GSEs, Redwood also 
provides credit enhancement, but our focus is on the prime jumbo 
mortgage market. We provide credit enhancement by investing in the 
subordinate securities of private-label residential mortgage 
securitizations, which enables the senior securities to obtain triple-A 
ratings. From 1997 through 2007, Redwood securitized over $35 billion 
of mortgage loans through 52 securitizations.

Recent Securitization Activity
    In April 2010, Redwood was the first company, and is so far the 
only company, to sponsor a securitization of newly originated 
residential mortgage loans without any Government support since the 
market froze in 2008. The size of that first transaction was $238 
million. In March 2011, we completed a second securitization of $295 
million, and we hope to complete two more securitizations this year.
    Completing these transactions required that we address the concerns 
and interests of triple-A investors who, in the wake of the financial 
crisis, had lost confidence that their rights and interests would be 
respected and, consequently, that their investments would be safe and 
secure. We worked hard to regain their trust by putting together 
transactions that included even more comprehensive disclosure, better 
structure, and a new enforcement mechanism for representation and 
warranty breaches. In addition, Redwood retained meaningful exposure to 
the transaction's future performance--i.e., through risk retention or 
``skin-in-the-game''--and, in doing so, aligned our interests with 
those of investors. Investors responded with significant demand to 
acquire the triple-A rated securities, as evidenced by the fact that 
the first offering of those securities was oversubscribed by a factor 
of six to one. The second securitization was also quickly and fully 
subscribed.
    To be clear, Redwood Trust has a financial interest in the return 
of private sector securitization for residential mortgages. We hoped 
that our decision to securitize loans in 2010 would demonstrate to 
policy makers that private capital would support well-structured 
securitizations that also have a proper alignment of interests between 
the sponsor and the triple-A investors. We are proud of our history of 
sponsoring residential mortgage securitizations and our more recent 
role in helping to restart the private securitization market, and are 
pleased to have the opportunity to share our insights and observations 
with the Committee.

The Private Mortgage Securitization Outlook for 2011
    The outlook for nongovernment or private-label residential mortgage 
securitization volume backed by newly originated mortgage loans (new 
securitizations) in 2011 remains very weak by historical standards. 
Year-to-date through April 30, 2011, only one new securitization 
totaling $295 million has been completed, and that was our deal. We 
hope to complete two more securitizations in 2011 and securitize 
between $800 million and $1.0 billion for the year, and to build upon 
that volume in 2012. There are no good industry estimates for new 
private securitization volume in 2011, as the market is still thawing 
from its deep freeze. While we would welcome other securitizations in 
2011 to provide additional third-party validation of the viability of 
securitization, the yearly volume will almost certainly be a small 
fraction of the $180 billion average annual issuance completed from 
2002 through 2007, when the market began to shut down. \3\
---------------------------------------------------------------------------
     \3\ 2011 Mortgage Market Statistical Annual, Volume II, p. 31.
---------------------------------------------------------------------------
Major Hurdles to Private Mortgage Securitization Activity
    Before I outline the major impediments to reviving private 
residential mortgage securitization, I would like to comment on the 
often cited lack of investor demand or interest as the primary reason 
for the dearth of private MBS issuance. We strongly disagree. Today, 
there is a vast amount of global investment capital from bank balance 
sheets, insurance companies, and mutual funds to non-U.S. financial 
institutions, hedge funds, and even real estate investment trusts 
searching for ways to generate safe, attractive risk-adjusted returns.
    Based in part on the success of our two recent mortgage 
securitizations and ongoing discussions with triple-A investors, we 
have confidence that the private market will invest in safe, well-
structured, prime securitizations that are backed by ``good'' mortgage 
loans. We consider ``good'' loans as loans on properties where the 
borrowers have real down payments, capacity to repay, and good credit. 
Well-structured securitizations will be those that meet the new demands 
of triple-A investors around disclosure transparency, alignment of 
interests, loan quality, structural investor protections and standards 
for servicer functions and responsibilities. To the extent these 
criteria are met, we believe that over time, traditional triple-A 
investors in private residential securitizations will regain their 
confidence and return ``en masse.''
    Some market participants have been very vocal about the potential 
negative impact on mortgage rates as a result of the proposed new 
regulations and/or the phase out of the GSEs. Recent news articles have 
speculated that mortgage rates will rise dramatically, by as much as 
300 basis points. We do not agree. Worldwide competition for returns is 
too great to allow such a rise in mortgage rates, assuming their safety 
conditions are met.
    We do believe residential mortgage rates could rise modestly--by 
perhaps 50 basis points--as the Government withdraws from the market. 
We note the average spread between the conforming and jumbo market from 
2000 through 2007 prior to the financial crisis was 31 basis points. 
\4\ The Government support effectively subsidizes borrowing rates and 
it is reasonable to expect these rates to rise somewhat as the subsidy 
is withdrawn. We nevertheless expect borrowing rates to remain 
attractive. On May 24, 2011, for loans with comparable prime quality 
underwriting, 3D-year, fixed-rate conforming mortgage rates were 4.625 
percent, conforming jumbo rates were 4.75 percent, and private jumbo 
rates were 5.00 percent. We note the spread between conforming and 
nongovernment guaranteed or private jumbo mortgages was only 0.375 
percent.
---------------------------------------------------------------------------
     \4\ Data from Banxquote. The average spread from 2000 through 
April 2011 is 0.46 percent, which includes 2008 and 2009 when the 
average spread increased to 1.25 percent during the financial crisis.
---------------------------------------------------------------------------
    For context, in our most recent deal, the average mortgage interest 
rate for 30-year fixed-rate loans backing the securitization was 0.46 
percent above the Government-guaranteed rate. As the number and 
diversity of loans available for private label securitization 
increases, thereby lowering risk, it is possible that residential 
mortgage rates could rise by less than 50 basis points relative to 
Government rates.

1. Crowding Out of Private Sector
    As a result of the financial crisis, through the GSEs and the 
Federal Housing Administration (FHA), the Government has taken the 
credit risk on about 90 percent of the mortgages originated in the U.S. 
without passing on the full cost of the risk assumed. Government 
subsidies must be scaled back to permit a private market to flourish. 
We note that postcrisis, the private asset-backed securities markets 
for auto loans, credit cards loans, and now commercial real estate 
loans are up and functioning, while the private-label RMBS market 
barely has a pulse. The difference is the pervasive below-market 
Government financing in the residential mortgage sector that is 
crowding out traditional private market players.
    Critics will argue that Redwood's transactions were backed by 
unusually high quality jumbo mortgage loans and are therefore not 
representative of the market. We disagree on this point as the loans 
backing our two securitizations had similar loan-to-value and credit 
scores as the loans guaranteed by Fannie Mae since the beginning of 
2010. \5\ In fact, that argument proves the point that the Government 
is crowding out private label securitizations, by maintaining an 
abnormally high conforming loan limit and by subsidizing the guarantee 
fees that the GSEs charge issuers. No private sector securitizer can 
compete with that--we can only securitize the small volume of prime 
quality loans beyond the Government's reach. We are ready to purchase 
and securitize prime mortgage loans of any loan amount, and can do so 
at an affordable rate once the Government creates a level playing 
field.
---------------------------------------------------------------------------
     \5\ The weighted average original loan-to-value and FICO scores 
for the loans guaranteed by Fannie Mae in 2010 and the first quarter of 
2011 were 69 percent and 763, respectively, per the company's First 
Quarter Credit Supplement. The weighted average original loan-to-value 
and FICO scores for Redwood's securitizations (SEMT 2010-H1 and SEMT 
2011-1) were 59 percent and 771. The average loan size for Fannie Mae 
was $212,793 and for Redwood was $957,945.
---------------------------------------------------------------------------
2. No Financial Urgency To Challenge the Status Quo
    We note that keeping the status quo effectively prevents the 
creation of any sense of urgency to restore private securitization, 
especially by traditional bank securitization sponsors. These major 
banks benefit by selling 90 percent of their mortgage originations into 
a very attractive Government bid, and they have ample balance sheet 
capacity to easily portfolio the remaining jumbo loans and earn an 
attractive spread between their low cost of funds and the rate on the 
loans. There is simply no financial incentive at this juncture for 
banks to sell loans through a nonagency securitization.
    During the onset of the financial crisis, it was essential for the 
Government to increase its support of the mortgage market. Today, that 
crisis level of support and the ongoing burden on taxpayers to support 
90 percent of a $10 trillion market is simply untenable. We strongly 
advocate that the time has come to more broadly demonstrate the private 
market's ability to replace Government-dependent mortgage financing, 
and do so on a safe and measured basis to prevent negative consequences 
to the housing market.
    The first step would be to allow the scheduled reduction in the 
conforming loan limit in high cost areas from $729,750 to $625,500 to 
occur as scheduled in September 2011. This reduction would represent 
only about 2 percent of total industry originations, a conservative 
first step. \6\ The potential lenders for the mortgages over $625,500 
are the same lenders, mainly banks, who are currently providing loans 
over $729,750. With $1.5 trillion of excess liquidity in the banking 
system, \7\ there is certainly ample liquidity in the banking system to 
enable banks to step into the breach, while financing through private 
residential mortgage securitization regains its footing.
---------------------------------------------------------------------------
     \6\ According to the National Mortgage News citing the Federal 
Housing Finance Administration's Mortgage Market Note. Fannie Mae and 
Freddie Mac originated just over $30 billion of conforming jumbo loans 
in 2010, compared to $1.57 trillion of total industry originations.
     \7\ Federal Reserve H.3 report dated May 19, 2011.
---------------------------------------------------------------------------
    Additionally, the Administration should follow through on its plan 
to increase guarantee fees to market levels over time to eventually 
level the playing field between the private market and the GSEs. A 
gradual Government withdrawal from the mortgage market over a 5-year 
period will enable time for a safe, attractive, robust private label 
market to develop.
    As the housing market begins to recover, we support further 
measured reductions on a periodic basis in the conforming loan limit as 
a means to increase the share of the mortgage market available to the 
private sector. We note that with housing prices now down in excess of 
30 percent from their peak in mid-2006, \8\ it would seem logical to 
consider reducing the conforming loan limit by a similar amount over 
time.
---------------------------------------------------------------------------
     \8\ S&P/Case-Shiller Home Price Index press release dated April 
26, 2011.
---------------------------------------------------------------------------
3. Regulatory
    In the wake of the Dodd-Frank Act, there are many new regulatory 
requirements and market standards out for comment, but they are not yet 
finalized. The resulting uncertainty keeps many market participants out 
of the market. Once the rules of the road are known, market 
participants can begin to adjust their policies, practices, and 
operations.

            A. Dodd-Frank Act Implementation Overview

    We recognize joint regulators had a very difficult task in 
establishing, writing, and implementing the new rules as required by 
the Dodd-Frank Act. Before noting some specific concerns, we would like 
to offer some high level observations on the joint regulators' notice 
of proposed rulemaking on risk retention (NPR).
    The NPR as written has some technical definitional and mechanical 
issues that need to be fixed. In particular, how the premium capture 
account works. This issue has been the source of much debate market 
participants. We are hopeful that appropriate corrections will be made 
after all comment letters are received and reviewed.
    We also note that regulators took a well intentioned approach to 
crafting a new set of risk retention rules to cover the entire mortgage 
securitization market--i.e., both the prime and subprime markets. In 
theory, this comprehensive approach should be a more expedient method 
for restarting securitization. However, there are complex differences 
between the prime and subprime markets and their unique securitization 
structures that make it very difficult to apply a one-size-fits-all set 
of new rules.
    The details are too complex for this testimony, but to over-
simplify, the proposed rules are effectively subprime centric. While 
the rules do a good job of addressing and deterring abuses relating to 
subprime securitization structures, they are overly and unnecessarily 
harsh when applied to prime securitization structures. This is 
meaningful since prime loans are approximately 90 percent of the 
overall market. If the proposed rules are adopted as written, prime 
borrowers whose loans are financed through private securitization will 
face unnecessarily higher mortgage rates.
    In Redwood's comment letter to the NPR, we intend to propose a more 
tailored approach that would keep intact the necessary safety 
protections, but eliminate the unnecessary structural inefficiencies 
that would lead to higher prime mortgage rates.
    We believe that focusing first on restoring the prime segment of 
the market in a safe yet efficient manner would bring the greatest 
benefit to the largest number of stakeholders (borrowers, lenders, 
investors, and taxpayers) and would become more effective and 
productive than attempting to craft one all-encompassing regulatory 
solution that is likely to be challenging given the complexities of the 
nonprime segment of the market.

            B. Form of Risk Retention

    We are strong advocates of requiring securitization sponsors to 
retain risk in order to properly align their interests with those of 
investors. We support the intent of the joint regulators' NPR on this 
issue. In fact, it has always been Redwood's operating model to retain 
the first-loss risk in our securitizations.
    The NPR proposes four forms of risk retention: (1) a horizontal 
slice consisting of the most subordinate class or classes; (2) a 
vertical slice with pro rata exposure to each class; (3) a combination 
of horizontal and vertical slices; and (4) a randomly selected sample 
of loans.
    Redwood believes the most effective form of risk retention is the 
horizontal slice and that other forms are much less effective. The 
horizontal slice requires the sponsor to retain all of the first-loss 
securities and places the sponsor's entire investment at risk. Only 
that approach will provide the required incentive for a sponsor to 
ensure that the senior securities are backed by safe and sound loans, 
which will benefit borrowers as well as investors.
    The other forms of risk retention result in substantially less of 
the sponsor's investment in the first risk position, which reduces the 
incentive to sponsor quality securitizations. Over time, we believe 
investors will vote on the best form of risk retention and reward 
sponsors that retain horizontal ``skin-in-the-game.''

            C. Qualified Residential Mortgages

    We support the intention of the proposed definition of a qualified 
residential mortgage (QRM), but we believe it is a bit too restrictive. 
We support the concept of ``common sense'' underwriting, similar to the 
standards used by the GSEs for so many years prior to the period 
leading up to the credit bubble. These standards resulted in low credit 
losses for many years.

            D. Servicer Functions and Responsibilities

    We believe that the well-publicized mortgage servicing issues are 
an impediment to broadly restarting private residential mortgage 
securitization. Beyond the issue of lost documents and foreclosure 
practices, servicers have been on the front lines throughout the recent 
crisis. Focusing more narrowly on their role in the securitization 
structure, they have sometimes been placed in the position of having to 
interpret vague contractual language, ambiguous requirements, and 
conflicting direction. In their role, they are required to operate in 
the best interest of the securitization and not in the interest of any 
particular bond holder. In practice, without any clear guidance or 
requirements, they invariably anger one party or another when there are 
disagreements over what is and is not allowed--with the result of 
discouraging some triple-A investors from further investment in RMBS. 
We propose that uniform standards governing servicer responsibilities 
and conflicts of interest be established and that a credit risk manager 
be established to monitor servicer performance and actions. We have 
discussed this servicing issue in greater detail and have proposed 
recommendations in our ``Guide to Restoring Private-Sector Residential 
Mortgage Securitization'', which is available on our Web site.

4. Second Mortgages
    If we really want to restore a safe securitization market, we also 
need to address second mortgages. One of the significant factors that 
contributed to the mortgage and housing crisis was the easy 
availability of home equity loans. Plain and simple, the more equity 
that a borrower has in his or her home, the more likely that borrower 
will continue to make mortgage payments. Home equity loans often result 
in the borrower having little or no equity in their homes.
    Although the proposed QRM standard will encourage lenders to 
originate loans to borrowers who have a minimum 20 percent down 
payment, there is no prohibition against the borrower immediately 
obtaining a second mortgage to borrow back the full amount of that down 
payment. The addition of a second mortgage that substantially erodes 
the borrower's equity and/or substantially increases a borrower's 
monthly debt payments increases the likelihood of default on the first 
mortgage. Many of the current regulatory reform efforts are centered on 
creating an alignment of interests between sponsors and investors 
through risk retention or ``skin-in-the-game.'' However, the first and 
most important line of defense is at the borrower level. If the 
borrower can take his or her own ``skin'' out of the game through a 
second mortgage, what have we really accomplished? The answer is very 
little. We believe any failure to address borrower skin-in-the-game 
will be very discouraging not only to private-label RMBS investors, but 
all mortgage investors.
    To prevent the layering of additional leverage and risk, it is 
common in other forms of secured lending (including commercial and 
corporate lending) to require either the consent of the first mortgage 
holder to any additional leverage or to limit the new borrowing based 
on a prescribed formula approved by the first mortgage holder. We 
recommend extending this concept to residential mortgages.
    Specifically, we recommend enactment of a Federal law that would 
prohibit any second mortgage on a residential property, unless the 
first mortgage holder gives its consent. Alternatively, a second 
mortgage could be subject to a formula whereby the new combined loan-
to-value (based on a new appraisal) does not exceed 80 percent.
Conclusion
    Looking ahead to the long-term future of housing finance, I see a 
number of positives emerging: safer mortgages that borrowers can 
afford, the return of loan loss rates to historically low norms for 
newly originated prime loans, and private capital willing to fund 
residential mortgages at affordable rates for borrowers through 
responsible, safe securitization. The first step is to give the private 
sector a chance by following through on the Administration's plan to 
reduce the conforming loan limits and increase the GSE's guarantee fees 
to market rates at a safe and measured pace.
    Thank you for the opportunity to testify before the Committee 
today. I would be happy to answer your questions.
                                 ______
                                 
                 PREPARED STATEMENT OF BARRY RUTENBERG
First Vice Chairman of the Board, National Association of Home Builders
                              May 26, 2011

Introduction
    Chairman Johnson, Ranking Member Shelby, and Members of the Senate 
Banking Committee, I am pleased to appear before you today on behalf of 
the National Association of Home Builders (NAHB) to share our views on 
the long-term future of the housing finance system. We appreciate the 
invitation to appear before the Committee on this important issue.
    My name is Barry Rutenberg and I am NAHB's First Vice Chairman of 
the Board and a home builder from Gainesville, Florida. NAHB represents 
over 160,000 member firms involved in building single family and 
multifamily housing (including participants in the Low Income Housing 
Tax Credit program), remodeling, and other aspects of residential and 
light commercial construction. Each year, NAHB's builder members 
construct about 80 percent of all new housing in America.
    Credit is the life's blood of the housing sector. A reliable and 
adequate flow of affordable funds is necessary in order to achieve the 
Nation's housing and economic goals. Establishing a finance system that 
provides liquidity for the housing sector in all markets throughout the 
economic cycle is a prerequisite to achieving housing policy 
objectives. In fact, achieving affordability in credit for single and 
multifamily housing reduces the resources required to address the 
Nation's housing needs. A stable, effective, and efficient housing 
finance system is critical to the housing industry's important 
contribution to the Nation's economic performance and to the 
achievement of America's social goals.
    The housing finance system currently is under a cloud of 
uncertainty. The Federal Government, through the Federal Housing 
Administration (FHA) and Fannie Mae/Freddie Mac, is currently 
accounting for nearly all mortgage credit flowing to homebuyers and 
rental properties. Even with the current heavy dose of Federal support, 
fewer mortgage products are available and these loans are being 
underwritten on much more stringent terms. In addition, Congress and 
the regulators are piling on layers of regulations in an attempt to 
plug gaps in the system of mortgage regulation and to prevent a 
recurrence of the mortgage finance debacle that is still playing out.
    This is not an arrangement that can continue indefinitely and there 
is no clear picture of the future shape of the conforming conventional 
mortgage market. One thing that is clear is that the status quo cannot 
be maintained. Policy discussions are underway on what should become of 
Fannie Mae and Freddie Mac following the current, still-indefinite 
conservatorship period, and what, if anything, should change in the 
structure and operation of the Federal Home Loan Banks (FHLBanks). A 
key consideration is how to get from the current structure to a future 
arrangement without undermining ongoing financial stabilization efforts 
and disrupting the operation of the housing finance system.
    NAHB has been actively involved in discussions on changes to the 
financing framework for homebuyers and producers of rental housing. In 
the past year, NAHB has developed a detailed plan outlining our 
thoughts on the future of the housing finance system and shared this 
extensively with Congress. In the meantime however, Congress has passed 
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(Dodd-Frank Act). Regulators are now busy implementing this massive law 
that has the potential to reduce the availability and increase the cost 
of housing credit. The housing landscape has seen little change during 
this period as the housing market remains extremely weak and decisions 
about the future of the housing finance system are stuck in a quagmire, 
despite the Administration's recent report outlining options for 
Reforming America's Housing Finance Market.
    NAHB strongly supports efforts to modernize the Nation's housing 
finance system, including reforms to the Government-sponsored 
enterprises Fannie Mae and Freddie Mac. We cannot go back to the system 
that existed before the Great Recession, but it is critical that any 
reforms be well-conceived, orderly, and phased in over time. Short-term 
proposals to reduce the support Fannie Mae and Freddie Mac provide for 
the housing finance system represent a piecemeal approach to reform 
that would disrupt the housing market and could push the Nation back 
into a deep recession. These proposals, along with similar plans 
announced by the Obama administration in February, show that many 
policy makers have clearly forgotten housing's importance to the 
economy.
    America's home builders urge policy makers in the Administration 
and Congress to consider the potential consequences of their proposals. 
Do not move forward with policies that would further destabilize a 
housing market that is already struggling. Housing can be the engine of 
job growth this country needs, but it cannot fill that vital role if 
Congress and the Administration make damaging, ill-advised changes to 
the housing finance system at such a critical time.
    NAHB's testimony today will expand on these thoughts within the 
context of current housing market conditions and other recent 
developments affecting the housing finance system.

Housing Market Conditions
    The housing market has not experienced the same tentative growth 
path that the rest of the economy is experiencing. Overall economic 
growth has been weak by historic standards for an economic recovery, 
but housing's performance has been even weaker. Unlike the last two 
economic recoveries, when housing grew 25 and 45 percent at this point 
after the end of the recession, housing is still down 18 percent since 
the end of the recession in June 2009.
    The early months of 2011 have not provided any positive news for 
housing. New home sales have been stuck at record lows since the 
expiration of the homebuyers' tax credit in April 2010.
    Housing construction has reflected the poor sales performances as 
total building permits in 2011 have been the lowest on records going 
back to 1960. Single family housing starts have been among the lowest 
ever recorded.
    House prices continue to fall in many locations as foreclosed and 
distressed sales continue to absorb what little demand there is. Oddly, 
low mortgage rates and very affordable house prices should be a 
stimulus to home buying, but the consumer remains uncertain about 
future Government moves against housing. Mortgages are affordable, but 
credit standards and down payment requirements are keeping many 
potential homebuyers out of the market.

Proposals To Reform the Housing Finance System
    In February, the Obama administration released its report on 
Reforming America's Housing Finance Market (Report). As required by the 
Dodd-Frank Act, the Report provides recommendations for ending Fannie 
Mae and Freddie Mac's conservatorship and the proper role of the 
Federal Government in the Nation's housing finance system. The report 
lays out a path toward transition that will significantly reduce the 
Government's role in housing finance by winding down Fannie Mae and 
Freddie Mac and, over time, restoring the private sector's role in 
mortgage finance. The Administration stresses that the transition 
should be a careful and deliberative process that will take several 
years to implement.
    During the transition, the Administration proposes a number of 
steps to reduce Government support including lower loan limits, 
increased down payment requirements and higher fees for conforming and 
FHA-insured mortgages. As Fannie and Freddie's role in the housing 
market is reduced, FHA's presence would be scaled back to its precrisis 
role as a targeted provider of credit access for low--and moderate 
income and first-time homebuyers. Program changes at FHA would ensure 
that the private market--not FHA--would pick up new market share as the 
Fannie/Freddie role is reduced. Reforms at the FHLBanks would include 
restricting member banks to only one FHLBank, capping the level of 
advances for any institution and reducing the FHLBanks' investment 
portfolios.
    The Administration proposes three options for the long-term 
framework of the housing finance system, but does not endorse a 
specific option:

    Option 1 would establish a privatized system of housing 
        finance with Government support limited to assistance by FHA, 
        USDA, and VA for a narrowly targeted group of borrowers.

    Option 2 is a similar to Option 1, but would provide a 
        Federal Government guarantee for private mortgages that would 
        be triggered only during time of economic stress.

    Option 3 would permit the Government to provide 
        catastrophic Federal reinsurance for the securities backed by a 
        targeted range of mortgages that are already guaranteed by 
        private insurers.

    NAHB believes that changes to the housing finance system should be 
comprehensive, coordinated, and undertaken in a careful and deliberate 
manner that does not unnecessarily disrupt the struggling housing 
recovery. While we support housing finance reform, and look forward to 
working with this Committee and Congress on broad reform efforts, we 
have serious concerns on several of the legislative proposals put 
forward so far in the 112th Congress.
    On March 31, 2011, legislation was introduced by Senators John 
McCain (R-AZ) and Orrin Hatch (R-UT), S. 693, the GSE Bailout 
Elimination and Taxpayer Protection, that would effectively wind down 
the operations of Fannie Mae and Freddie Mac without offering a clear 
vision for the future housing system and a thoughtfully designed path 
for a nondisruptive transition to a new framework. NAHB opposes S. 693, 
as well as identical legislation introduced in the House earlier this 
year, H.R. 1182, introduced by Representatives Jeb Hensarling (R-TX) 
and Spencer Bachus (R-AL). Similarly, NAHB is opposed to the growing 
list of legislative proposals introduced by members of the House 
Financial Services Committee that are aimed at reducing the activities 
of Fannie Mae and Freddie Mac absent comprehensive reform that would 
continue to provide a Federal backstop ensuring a reliable and adequate 
flow of affordable housing credit in all economic and financial 
conditions.
    While NAHB agrees that private capital must be the dominant source 
of mortgage credit, the future housing finance system cannot be left 
entirely to the private sector. The historical track record clearly 
shows that the private sector is not capable of providing a consistent 
and adequate supply of housing credit without a Government backstop. 
NAHB therefore believes that it is premature to begin dismantling the 
current housing finance system, as represented in both these 
legislative approaches, until there is a clear vision for the future of 
the housing finance system.
    NAHB is nevertheless pleased to see new legislative efforts being 
introduced and developed in the House of Representatives that would 
take a very different tack from the proposals mentioned previously. 
Recently bipartisan legislation, H.R. 1859, was introduced by 
Representatives John Campbell (R-CA) and Gary Peters (D-MI), which 
would replace Fannie Mae and Freddie Mac with five private companies 
that would issue mortgage-backed securities and have Government 
backing. This approach differs greatly from the previously mentioned 
proposals that would move towards full privatization of the GSEs and 
slowly diminish Federal support for the current housing finance system. 
Similarly, NAHB is aware of legislation currently under development by 
Representative Gary Miller (R-CA) that would likewise include a 
predictable Government role in the secondary mortgage market to 
preserve financial stability in the market and maintain a stable 
housing sector.
    NAHB views the introduction of H.R. 1859, as well as the direction 
of Rep. Miller's legislative proposal, as a very positive development 
as the debate on the future of the housing finance system moves forward 
in the 112th Congress. In addition to NAHB's own detailed proposal on 
how a future housing finance system can be structured (outlined later 
in this statement), NAHB looks forward to working with all members of 
the House and Senate to move forward comprehensive GSE reform 
legislation seek an appropriate Federal role to maintain a healthy 
mortgage marketplace.

NAHB Position on Housing Finance Reform
Key Principles
    NAHB has had a strong and longstanding interest in the maintenance 
of an efficient secondary mortgage market and the role of the GSEs in 
facilitating the flow of capital to housing. NAHB, along with a number 
of other housing and financial trade associations, including some that 
are on this panel, have developed Principles for Restoring Stability to 
the Nation's Housing Finance System, which were released on March 28. 
We believe the following principles should help guide efforts to 
restore and repair the Nation's housing finance system:

    A stable housing sector is essential for a robust economic 
        recovery and long-term prosperity. Housing, whether through 
        home ownership or rental, promotes social and economic benefits 
        that warrant it being a national policy priority.

    Private capital must be the dominant source of mortgage 
        credit, and it must also bear the primary risk in any future 
        housing finance system.

    Some continuing and predictable Government role is 
        necessary to promote investor confidence and ensure liquidity 
        and stability for home ownership and rental housing.

    Changes to the mortgage finance system must be done 
        carefully and over a reasonable transition period to ensure 
        that a reliable mortgage finance system is in place to function 
        effectively in the years ahead.

    We agree with the Administration that private investment capital is 
critical for a robust and healthy mortgage marketplace, and the current 
Government-dominated mortgage system is neither sustainable nor 
desirable. As critical as it is to attract private money to the 
mortgage markets, an appropriate level of Government support is 
essential to preserving financial stability. To facilitate long-term 
fixed-rate mortgages, affordable financing for low- and moderate-income 
borrowers, and financing affordable rental housing--particularly during 
times of crisis and illiquidity--it is important to establish a clearly 
defined role for the Federal Government in developing effective 
insurance and guarantee mechanisms. While the goal should be to move 
toward a largely private secondary market, the private and public 
sectors should work as partners in creating a variety of financing 
options to ensure that safe, stable, and affordable financing is 
available to all creditworthy borrowers.

NAHB Proposal for New Secondary Market System
    NAHB believes that it is crucial for the Federal Government to 
continue to provide a backstop for the housing finance system to ensure 
a reliable and adequate flow of affordable housing credit. The need for 
such support is underscored by the current state of the system, where 
Fannie Mae, Freddie Mac, the FHLBanks, FHA and Ginnie Mae are the only 
conduits for residential mortgage credit. NAHB feels the Federal 
backstop must be a permanent fixture in order to ensure a consistent 
supply of mortgage liquidity as well as to allow rapid and effective 
responses to market dislocations and crises.
    A workable system must be established to perform the basic roles 
served by Fannie Mae and Freddie Mac. These GSEs should not be 
converted to Government agencies, nor should their functions be 
completely turned over to the private market. Last year NAHB presented 
this Committee a proposal recommending major changes in the structure 
and operations of the secondary mortgage market. The operation of the 
new secondary market for conforming conventional mortgages is 
illustrated in the diagram attached to this statement.
    NAHB's proposal is similar to the Administration's third option for 
the long term structure of the housing finance system. Key features of 
NAHB's proposal are summarized below.

    Private entities, called conforming mortgage conduits, 
        would purchase and securitize mortgages but would receive no 
        direct or implicit Federal Government support.

    The Federal Government would guarantee the timely payment 
        of principal and interest of the mortgage-backed securities 
        issued by the conforming mortgage conduits.

    Conforming mortgage conduits would have significant capital 
        requirements (minimum and risk-based requirements) and also 
        would be required to contribute to a fund to cover losses on 
        the mortgages they pool and sell.

    Therefore, the Federal Government would incur only 
        catastrophic risk beyond the risk covered by securitizers' 
        capital and fund.

    Primary mission of conforming mortgage conduits would be to 
        provide mortgage market liquidity through securitization 
        activities.

    These conduits would be permitted to maintain limited 
        portfolios to facilitate transactions as well as to hold loans 
        that do not have a secondary market outlet.

    Conforming mortgage conduit activities should be directed 
        at a broad range of housing market needs to enable Americans at 
        all income levels to achieve decent, safe, and affordable 
        housing. (No specifics on affordable housing requirements.)

    Conforming mortgage conduits would deal in mortgages with 
        well-understood and reasonable risk characteristics (including 
        standard 30-year fixed-rate loans, ARMs, and multifamily 
        mortgages).

Impact on the Federal Home Loan Bank System
    Discussion of housing finance system reform has focused almost 
exclusively on the future of Fannie Mae and Freddie Mac. While this is 
understandable given the magnitude of problems facing those companies, 
their open-ended line of support from the U.S. Treasury, and their 
ongoing operation under conservatorship, attention must also be 
accorded to the FHLBank System.
    NAHB also views the FHLBank System as an essential component of the 
U.S. housing finance framework that has served as a key source of 
liquidity for institutions providing loans to homebuyers and home 
builders as well as credit for community and economic development. The 
FHLBanks are significantly different from Fannie Mae and Freddie Mac in 
structure and operations and these differences should be acknowledged 
and respected during the consideration of the future structure of the 
housing finance system.
    NAHB urges policy makers to undertake any changes to the housing 
finance system in a manner that will not diminish the favorable cost of 
funds for the FHLBanks or impair the role of the FHLBanks in supplying 
liquidity to institutions providing mortgage and housing production 
credit, support for community and economic development, and resources 
to address affordable housing needs. The FHLBanks should continue their 
current activities to serve as an ongoing key liquidity source for 
institutions providing housing credit.

Transition Considerations
    The housing sector is struggling to regain its footing and begin 
contributing to a recovery in economic output and jobs. The current 
environment is rife with instability and uncertainty. Many markets 
throughout the country, however, have returned to a position where 
consumers are shopping for new homes and housing production can begin 
to move back to more normal levels.
    It is critical that the housing finance system facilitate this 
emerging recovery rather than stifle it. Under these circumstances, 
finding a means of moving to a new secondary market framework may be as 
great, or greater, a challenge as developing the new conforming 
conventional secondary market structure. NAHB urges Congress to 
carefully consider and address the short-term, unintended consequences 
that could occur during the transition to a new housing finance system.
    Any changes should be undertaken with extreme care and with 
sufficient time to ensure that U.S. homebuyers and renters are not 
placed in harm's way and that the mortgage funding and delivery system 
operates efficiently and effectively as the old system is abandoned and 
a new system is put in place. Every effort should be made to reassure 
borrowers and markets that credit will continue to flow to creditworthy 
borrowers and that mortgage investors will not experience adverse 
consequences as a result of changes in process.

Impact on 30-Year Fixed-Rate Mortgage
    NAHB believes that any new housing finance system must support the 
continued availability of the 30-year, fixed-rate mortgage (FRM). Borne 
out of the Great Depression, the 30-year FRM has played a pivotal role 
in helping to increase the national home ownership rate so that today 
two out of three Americans own a home of their own.
    It has become an industry standard for several reasons:

    Affordability. These loans are geared toward affordability; 
        30-year terms lock in low monthly payments, allowing households 
        with average incomes to comfortably budget for their home loan.

    Inflation protection. Knowing their monthly housing costs 
        will remain the same year in and year out regardless of whether 
        interest rates rise provides households with a sense of 
        financial security and also acts as a hedge against inflation.

    Long-term planning. Many young buyers know that as their 
        incomes rise, their housing costs will stay constant and become 
        less of a burden, enabling them to prepare for other long-term 
        obligations, such as college tuitions and retirement savings.

    Tax advantages. In most instances, all of the interest and 
        property taxes borrowers pay in a given year can be fully 
        deducted from their gross income to reduce taxable income. 
        These deductions can result in thousands of dollars of tax 
        savings, especially in the early years of a 30-year mortgage 
        when interest makes up most of the payment.

    The key to the sustainability of the 30-year FRM is a 
securitization outlet because originators (banks and thrifts) do not 
have the capacity to hold such long-term assets which are funded with 
short-term deposits. Fannie Mae and Freddie Mac provided the securities 
vehicle along with an implicit Government guarantee for investors. It 
is not clear whether a private housing finance system would be capable 
of supporting this type of product without some Government backing. At 
a minimum, the cost of 30-year FRMs would increase under a private 
system.
    The Administration's Report analyzes the impact of its three 
options on the cost and availability of the 30-year FRM to assess the 
impact of each option on the housing finance market. Option 1 would 
likely eliminate the 30-year FRM for non-FHA mortgages. Under Option 2, 
the 30-year FRM could be preserved, but would be very expensive. The 
30-year FRM would be most likely to survive under Option 3, but it 
would be more expensive than at present.
    As the private market transitions to assume a greater role, a 
strong Federal backstop is necessary to maintain a stable and adequate 
supply of credit for homebuyers and ensure that the 30-year FRM remains 
readily available to first-time homebuyers and working American 
families. Otherwise private financial institutions will turn the 30-
year mortgage into a luxury product, with high interest rates, fees, 
and down payments that would price millions of middle-class households 
out of the market.

Multifamily Financing
    The focus of the discussion on the future of housing finance reform 
largely has been on single-family home ownership. Less attention has 
been paid to the multifamily rental housing segment of the housing 
finance system, even though almost one-third of Americans live in 
rental housing, and demand for rental housing in the future is expected 
to increase.
    In particular, NAHB estimates that the aging of the ``echo boom'' 
generation will result in demand for between 300,000 and 400,000 
multifamily housing units on average per year over the next 10 years. 
The timing of this demand will depend on the pace of economic recovery, 
but the housing needs of these households will not be postponed 
indefinitely. The current average pace of multifamily housing starts of 
less than 120,000 annually is insufficient to meet this demand. 
Production of multifamily housing will undoubtedly increase above the 
current extraordinary low levels. It is important that the financing 
mechanisms to support that production are available.
    In spite of the crisis affecting single-family housing, the 
multifamily sector has performed well. Multifamily loans held or 
guaranteed by Fannie Mae and Freddie Mac have very low default rates, 
and both businesses are profitable. In addition, the multifamily 
business of the GSEs finances a wide range of multifamily rental 
properties, which provide housing for very-low to middle income 
households. The FHA multifamily mortgage insurance programs also fill a 
need in the multifamily rental market, although its loan volume 
capacity is limited.
    Private market sources of capital for multifamily financing are not 
available for all segments of the multifamily market. Life insurance 
companies tend to focus on large projects in the strongest markets and 
typically serve the highest income households. Once they meet their own 
portfolio investment targets, life insurance companies retract their 
lending. Banks do not provide long-term financing and are subject to 
significant restrictions in terms of capital requirements. While the 
commercial mortgage backed securities (CMBS) market was significant at 
one time, it has not recovered from the financial crisis and is not 
expected to resume its past levels of volume.
    These facts point to the need to maintain a viable, liquid, and 
efficient secondary market for multifamily rental financing where the 
Federal Government continues to play a role. In addition, the secondary 
market must be structured to ensure that the appropriate range of 
products is available to provide the capital needed to develop new and 
preserve existing rental housing, as well as to refinance and acquire 
properties. An adequate flow of capital will ensure that demand for 
rental housing is met and that affordable options are available for a 
range of households.
    As we suggest for the single family market, on the multifamily 
side, the Federal Government should provide an explicit guarantee of 
the timely payment of principal and interest on securities backed by 
conforming conventional mortgages, in the same manner that Ginnie Mae 
now provides guarantees for investors in securities representing 
interests in Government-backed mortgages. Again, the Federal Government 
should only be called on to support the conforming conventional 
mortgage market under catastrophic situations when the capital and 
self-funded insurance resources of private secondary market entities 
are exhausted.
    However, multifamily loans do not lend themselves to 
standardization as easily as single-family loans, which points to the 
need to retain the ability to hold some volume of multifamily loans in 
portfolio.

NAHB Concerns With the Administration's Proposal for Multifamily 
        Financing
    The Administration's report emphasizes that Americans must have 
access to a range of affordable housing options, whether they own or 
rent. The report notes that renters face significant affordability 
challenges and says that the housing finance system must promote 
liquidity and capital to support affordable rental options that 
alleviate high rent burdens on low-income households.
    The report states that, in the near term, the Administration will 
begin to strengthen and expand FHA's capacity to support both lending 
to the multifamily market and for affordable properties that are 
underserved by the private market. Options include risk-sharing with 
private lenders and development of programs dedicated to hard-to-reach 
segments, such as small rental properties. However, NAHB believes that 
the current structure, staffing levels and resources available to the 
FHA may not be sufficient to take on such additional responsibilities, 
nor does FHA have the institutional flexibility to respond to the range 
of market needs quickly and efficiently. If the role of FHA is to 
change, much more discussion is needed in this regard.
    Of particular importance, the report states that the Administration 
is committed to finding more effective ways to provide financing for 
small rental properties, underserved markets and rural areas. NAHB is 
pleased that this proposal is included in the report, as financing for 
such properties continues to be a challenge.
    However, NAHB is concerned that less thought has been given to a 
future financing system that will meet the needs of moderate- and 
middle-income renters. The Administration acknowledges that Fannie Mae 
and Freddie Mac have developed expertise in providing financing to the 
middle of the rental market, where housing is generally affordable to 
moderate income families. But the Administration does not suggest any 
alternatives to this model, nor does it set forth a viable transition 
plan as Fannie Mae and Freddie Mac are wound down. NAHB believes that 
it is critical to find ways to maintain funding to this segment of the 
market, and more thought needs to be devoted to solving this aspect of 
the housing finance system.
    Also of concern to NAHB is the continued heavy reliance on 
nonprofit partnerships to address the needs of low- and moderate-income 
renters. Unfortunately, there has been a long-standing bias favoring 
nonprofits for expertise on these issues. This has been true in this 
and other Administrations. NAHB believes the criteria in selecting 
program participants should be based on their competence and capacity 
for producing housing in the most cost-effective way. For-profit 
businesses are successful, and the Government should look to partner 
with for-profit businesses when appropriate.

Recent Regulatory Developments--QRM
    Of great concern to NAHB at present are the credit risk retention 
rules required by Section 941 of the Dodd-Frank Act, which were 
unveiled on March 29, 2011, by the six agencies charged with 
implementing that section of the law. NAHB believes the proposed rules 
contain an unduly narrow definition of the important term ``Qualified 
Residential Mortgage'' (QRM), featuring a minimum down payment of 20 
percent, which would seriously disrupt the housing market by making 
mortgages unavailable or unnecessarily expensive for many creditworthy 
borrowers. By stipulating such a large down payment for a loan to be 
considered a QRM, the Administration and Federal agencies are 
preempting congressional efforts to reform the housing finance system 
by imposing a narrow and rigid gateway to the secondary mortgage 
market.
    This extreme proposal could not have been put forward at a less 
opportune time. The housing market is still weak, with a significant 
overhang of unsold homes, and an equally large shadow inventory of 
distressed loans. A move to a larger down payment standard at this 
juncture would cause renewed stress and uncertainty for borrowers who 
are seeking or are on the threshold of seeking affordable, sustainable 
home ownership. We believe a more balanced QRM exemption is imperative 
in light of the enormous potential impact it would have on the cost and 
availability of mortgage credit at this precarious point in the housing 
cycle.
    Risk retention is intended to align the interests of borrowers, 
lenders and investors in the long-term performance of loans. This 
``skin in the game'' requirement, however, is not a cost-free policy 
option. Borrowers who can't afford to put 20 percent down on a home and 
who are unable to obtain FHA financing will be expected to pay a 
premium of two percentage points for a loan in the private market to 
offset the increased risk to lenders, according to NAHB economists. 
This would disqualify about 5 million potential homebuyers, resulting 
in 250,000 fewer home sales and 50,000 fewer new homes being built per 
year. Such a drastic cutback would have a disproportionate impact on 
minorities and low-income families who are struggling to achieve the 
dream of home ownership.
    The exclusion of FHA and VA and, at least temporarily, Fannie Mae 
and Freddie Mac from the risk retention requirement provides some 
short-term cushion to the impact of the proposal but that relief would 
be short-lived and is eroded by the tighter underwriting and higher 
costs already imposed by those agencies. Further exacerbating the 
situation, the Obama administration has announced its intention to 
shrink FHA's share of the marketplace, lower FHA and conventional 
conforming loan limits, and further increase fees on FHA, Fannie Mae, 
and Freddie Mac home loans. These changes, combined with the effects of 
an overly restrictive QRM, would make it even more difficult for buyers 
to access affordable housing credit.
    It appears to NAHB that the agencies did not give sufficient weight 
to statutorily required considerations in formulating their QRM 
proposal, which directed that the definition be based on objective, 
empirical data rather than subjective presumptions. The statute also 
requires a multifactor approach to establishing the parameters of the 
QRM in order to promote sound underwriting practices without 
arbitrarily restricting the availability of credit. The agencies have 
admitted that they deliberately selected an extremely conservative 
approach to create a very limited QRM basket.
    Creating an inordinately narrow QRM exemption would cause 
significant disturbances in the fragile housing market. Today's credit 
standards are tougher than they have been in decades. As a result, 
credit availability is extremely tight even for very well qualified 
borrowers. NAHB strongly urged the banking regulators to consider the 
negative ramifications of setting further limits on the availability of 
credit through a comparatively narrower QRM exemption. Under the 
proposed standard, millions of creditworthy borrowers would be deemed, 
by regulatory action, to be higher-risk borrowers. As a result, they 
would be eligible only for mortgages with higher interest rates and 
fees and without the protections required by the statutory QRM 
framework that limit risky loan features.
    An overly restrictive QRM definition also would drive numerous 
current lenders from the residential mortgage market, including 
thousands of community banks, and enable only a few of the largest 
lenders to originate and securitize home loans. This sharp dilution of 
mortgage market competition would have a further adverse impact on 
mortgage credit cost and availability.
    A QRM definition that is too narrow would prohibit many potential 
first-time homebuyers from buying a home especially if the definition 
includes an excessively high minimum down payment requirement. Repeat 
buyers and refinancers also would be adversely impacted if the QRM 
includes exceedingly high equity requirements. In other words, the 
important goal of clearing historically high foreclosure inventory--a 
necessary condition for a stabilized housing market--will be 
undermined.
    The purpose of the QRM is to create a robust underwriting framework 
that provides strong incentives for responsible lending and borrowing. 
Loans meeting these standards will assure investors that the loans 
backing the securities meet strong standards proven to reduce default 
experience. The exemption also will keep rates and fees lower on QRMs, 
which will provide incentives for borrowers to document their income 
and choose lower risk products. In turn, the market will evolve to 
establish the appropriate mixture of QRM to non-QRM borrowing.
    The majority of industry participants (lenders, home builders, 
realtors, mortgage insurers) and the sponsors of the QRM language in 
Dodd-Frank support a broad QRM definition that would encompass the bulk 
of residential mortgages that meet the lower risk standards of full 
documentation, reasonable debt-to-income ratios and restrictions on 
risky loan features. In addition, most believe that loans with lower 
down payments that have risk mitigating features, most notably mortgage 
insurance, should be included in the QRM exemption.
    NAHB recommends the broadest criteria possible should be utilized 
in defining a QRM exemption that will ensure safe and sound operation 
of the mortgage market while accommodating a wide range of viable 
mortgage borrowers.
    Given the substantial impact that the QRM rule will have on the 
availability and costs of mortgage credit for years to come, a thorough 
response to the Proposed Rule will require significant data 
development, analysis, and validation that cannot reasonably be 
completed by the June 10, 2011 comment deadline. For this reason and 
others, NAHB joined with 14 other organizations representing consumers 
and the real estate and financial services industries to request an 
extension of the comment deadline. Specifically, we asked that the 
comment deadline on the QRM proposal be synchronized with that of the 
rulemaking on the Ability to Repay and Qualified Mortgage provisions 
under Dodd-Frank so that comments are due no earlier than July 22, 
2011. NAHB respectfully requests the Committee's support for this 
request and urges the Committee to encourage the regulatory agencies 
that drafted the QRM rule to grant the extension of the comment 
deadline.
Conclusion
    Thank you for the opportunity to participate in this important and 
timely hearing. NAHB looks forward to working with all stakeholders to 
develop an effective as well as safe and sound means to provide a 
reliable flow of housing credit under all economic and financial market 
conditions.



       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON
                       FROM TERRI LUDWIG

Q.1. In your testimony, you call for continued Federal support 
of the secondary mortgage market to help provide affordable 
housing and lower cost mortgage financing in all markets.
    Can you unequivocally state that your plan has accounted 
for all of the risks that led to a taxpayer bailout of Fannie 
Mae and Freddie Mac? In other words, can you tell us with any 
certainty that if your plan was adopted that taxpayers would 
not once again have to bail out the mortgage industry?

A.1. In my testimony before the Senate Committee on Banking, 
Housing, and Urban Affairs, I urge Congress not to fully 
withdraw from the housing market and to look at ways to 
continue support for affordable rental housing options. 
Enterprise Community Partners has not endorsed a specific plan 
for reform of the housing finance system; however, given the 
large role that the Government-sponsored enterprises have 
played in multifamily affordable housing, we believe that there 
needs to be some Federal role in this market.
    We agree with you that any system established to provide 
guarantees must better protect taxpayers and the Federal 
Government. Unlike the single-family sector, the multifamily 
portfolio of the GSEs has performed incredibly well, with low 
default rates and continued profitability. This is not to say 
that the Government's involvement should remain as is, but that 
guarantees in the multifamily sector have worked well, and 
should be continued at some level. We understand that risks and 
benefits need to be considered and weighed, and results should 
be transparent. Any guarantees should be paid for, and the fees 
should be risk based, so that taxpayers are protected. We look 
forward to working with you to ensure that any new system 
protects taxpayers while helping to support affordable housing.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                     FROM MARTIN S. HUGHES

Q.1. In your testimony you discuss how the Federal Government 
is crowding out the private sector from the secondary mortgage 
market by aggressively expanding the market share of the GSE's 
and FHA. You point out that ``postcrisis, the private asset-
backed securities markets for auto loans, credit cards loans, 
and now commercial real estate loans are up and functioning, 
while the private-label RMBS market barely has a pulse.''
    In other words, the markets with the least Government 
involvement have been the fastest to recover and return to 
normal.
    What lessons do you think this Committee should learn from 
this situation as we embark on housing finance reform?

A.1. The old saying goes, ``Necessity is the mother of 
invention.'' If you really need to figure something out--figure 
it out. Without a Government-backed financing alternative, 
participants in the nonresidential ABS markets were motivated 
to restart private financing through securitization.
    When you look at how these ABS markets recovered, you see 
that success has bred further success and issuance velocity has 
led to further velocity. These ABS markets restarted slowly 
allowing industry practices to evolve and investor trust and 
confidence to gain momentum. For example, the first postcrisis 
CMBS transaction for $716 million was completed in June of 
2010. Industry estimates for 2011 CMBS issuance volume are 
approximately $50 billion. \1\ In addition, AAA credit spreads 
have tightened. It's been a win for borrowers and investors.
---------------------------------------------------------------------------
     \1\ Source: Wells Fargo Securities, ``Changing Dynamics in 
Commercial Real Estate Investments'', May 19, 2011.
---------------------------------------------------------------------------
    We are the first to acknowledge that the RMBS market faces 
comparatively far more complex regulatory and investor issues. 
Having acknowledged that, it is also the case that there is 
little financial urgency on the part of RMBS market 
participants to prioritize solving the issues and developing 
best practices to woo back AAA investors. Major banks now 
benefit from selling 90-plus percent of their originations into 
an attractive, Government-subsidized bid and can easily 
portfolio the remainder. There are too few loans outside the 
Government's reach to allow the private RMBS market to develop. 
Until the Government levels the playing field, by decreasing 
the size of mortgages eligible to be purchased by Fannie Mae 
and Freddie Mac and increasing their guarantee fees, the 
current status quo is at risk of becoming institutionalized. 
That would mean practices which were originally intended to be 
temporary will become the new normal, the high burden on 
taxpayers will persist, and the private sector's ability to 
finance home mortgage borrowing through securitization will 
further atrophy.

Q.2. In your testimony you address the perception that there is 
not adequate investor demand in the private MBS market. This 
critique is often cited by those arguing for the continuation 
of a Government guarantee.
    Based on your experience, is there an investor appetite for 
private mortgage-backed securities?
    What are the most important policy changes that would 
further encourage investors to return to the private MBS 
market?

A.2. We would agree that there are many angry residential AAA 
investors and some have sworn they will never again buy a 
private-label RMBS. Against that backdrop, today, there is over 
$2.5 trillion in fixed income funds. Investors are awash with 
investment capital in search of safe, attractive, risk-adjusted 
yields. We believe there would be significant investor demand 
to invest in private RMBS (and earn a premium over agency 
securities) provided their rights are protected and their 
demands for safety, alignment of interests, and transparency 
are met.
    There is already a robust dialogue and debate going on 
regarding implementing the Dodd-Frank Act provisions that 
require a definition of a qualified residential mortgage loan 
(QRM) and the implementation of risk retention rules. We 
believe that if a common sense definition of a QRM is 
established and if meaningful risk retention rules are 
implemented, it will go a long way towards incenting strong 
mortgage loan underwriting.
    However, it will take more than the Federal regulators 
getting these two concepts right to attract investors back to 
this market. We believe several additional changes to law and 
regulation are needed in order for investors to return to this 
market en masse. A high level summary of these key additional 
policy changes is outlined below. Discussion of other suggested 
changes is set forth in our recently published Guide to 
Restoring Private-Sector Residential Mortgage Securitization.

Proposed Changes to SEC Regulations Governing RMBS Issuance

Expand disclosure requirements to include:

    Increased transparency and investor access to data 
        as contemplated by the SEC's proposed amendments to 
        Regulation AB

    Disclosure of variances from specified industry 
        standard loan-level representations and warranties

    Clear disclosure regarding:

      The servicer's role, responsibilities, and 
        compensation

      Any servicer conflicts of interest

      The process for identifying potential breaches of 
        loan level representations and warranties and the 
        dispute resolution process for resolving any alleged 
        breaches

    Disclosure of the resolution of borrower defaults, 
        including the servicer's analysis of the relative 
        merits of foreclosure, short sale, and loan 
        modification

Condition the use of Form S-3 registration statements on:

    Transaction documentation that:

      Incorporates specified industry-standard terms 
        and securitization structures that are straightforward 
        and already familiar to securitization investors

      Utilizes standardized robust loan-level 
        representations and warranties that the various Federal 
        regulatory agencies have approved (with the Fannie Mae/
        Freddie Mac standard representations and warranties to 
        be considered by the regulatory agencies as a model)

      Includes binding arbitration, nonbinding 
        predispute mediation, or a similar nonjudicial process, 
        as a dispute resolution process for any disputed claim 
        of a breach of loan-level representations and 
        warranties

    A credit risk manager being appointed to monitor 
        the servicer's compliance with transaction 
        documentation and periodically report to securitization 
        investors

Proposed Federal Legislation

Enact Federal legislation to:

    Standardize servicing standards and duties to 
        investors

    Resolve any uncertainty relating to documentation 
        of mortgage assignments and the use of MERS, which 
        legislation would respect State law governing liens on 
        real estate and subject MERS to Federal regulation

    Give first mortgage holders the ability to 
        contractually limit the ability of borrowers to reduce 
        the equity they have in their home through a second 
        lien loan or home equity line-of-credit without the 
        consent of the holder of the first mortgage lien

    In addition to the proposals I've listed above, there is 
another step the Government can take to help bring investors 
back to this securitization market: establish and adhere to 
public criteria that govern emergency interventions into the 
mortgage market and at whose expense such interventions will be 
made. Investors are skittish about this market not only because 
of the well-documented shortcomings of many of the participants 
in this market during the housing boom, but also because of a 
concern that future Government intervention into this market 
will unfairly be at their expense. For example, in the recent 
past, the Government created incentives for servicers to modify 
mortgage loans. Investors rely on servicers to fairly evaluate 
the relative merits of modifications vs. foreclosures and 
object to interventions of this kind by the Government.

Q.3. Many of the plans discussed here today incentivize 
borrowing through Federal guarantees and other subsidies. Some 
experts have argued that if the Federal Government is to 
subsidize home ownership, it should be done through direct, on-
budget subsidies reducing the price of the home to the buyer, 
not by making the borrowing of additional money more 
attractive. The former approach would seem to have the added 
benefit of making the resulting mortgages more liquid in the 
secondary market, as lower LTVs would be more attractive to 
investors.
    Mr. Heerde and Mr. Hughes, how would policies that 
encourage lower LTV loans affect the markets in which you work?

A.3. Investors have an appetite for high quality loans. The 
size of a borrower's down payment is a key determinant in the 
quality of a mortgage loan over its life. The higher the down 
payment (i.e., the lower the loan-to-value ratio), the more 
likely any losses to investors will be low or nonexistent. 
Borrowers with more equity in their homes are better credit 
risks, all things equal.
    Demand for securitizations backed by higher quality loans 
will be stronger than demand for securitizations backed by 
loans that are not quite as high quality. If there is stronger 
demand, investors in AAA-rated RMBS backed by higher quality 
loans are likely to be willing to accept slightly lower yields 
on their AAA-rated securities. Competitive market forces should 
translate these lower investment yields into lower mortgage 
rates for good borrowers.
    Once the RMBS markets begin functioning again, investors 
will supply capital to a variety of types of borrowers over 
time. Borrowers who represent lower risk will get lower 
mortgage rates. We think securitization will provide capital to 
a range of borrowers. However, as part of this securitization 
market coming back to life and investors rebuilding their 
confidence in it, we expect high down payments will help 
facilitate investment in newly issued private label mortgage-
backed securities.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                      FROM BARRY RUTENBERG

Q.1. Secretary Geithner warned this Committee of the difficulty 
in having the Government guaranteeing mortgage-backed 
securities. He cautioned:

         . . . guarantees are perilous. Governments are not 
        very good at doing them, not very good at designing 
        them, not very good at pricing them, not very good at 
        limiting the moral hazard risk that comes with them.

    Do you agree with Secretary Geithner?
    If not, on what basis do you believe that the Government 
can accurately price risk?

A.1. NAHB observes that neither the private nor the Government 
sector did a very good job pricing risk in the run up to the 
housing crisis. Both sectors should use the lessons learned 
from the current crisis to develop better pricing mechanisms. 
There is no reason why the Government sector could not develop 
a pricing mechanism that is at least as accurate as the private 
sector.

Q.2. Many of the plans discussed here today incentivize 
borrowing through Federal guarantees and other subsidies. Some 
experts have argued that if the Federal Government is to 
subsidize home ownership, it should be done through direct, on-
budget subsidies reducing the price of the home to the buyer, 
not by making the borrowing of additional money more 
attractive. The former approach would seem to have the added 
benefit of making the resulting mortgages more liquid in the 
secondary market, as lower LTVs would be more attractive to 
investors.
    Mr. Rutenberg, do you feel it is preferable to subsidize 
debt over equity?

A.2. NAHB believes that it is crucial for the Federal 
Government to continue to provide a backstop for the housing 
finance system to ensure a reliable and adequate flow of 
affordable housing credit. NAHB feels the Federal backstop must 
be a permanent fixture in order to ensure a consistent supply 
of mortgage liquidity as well as to allow rapid and effective 
responses to market dislocations and crises. The Federal 
Government should provide an explicit guarantee of the timely 
payment of principal and interest on securities backed by 
conforming conventional mortgages, in the same manner that 
Ginnie Mae now provides guarantees for investors in securities 
representing interests in Government-backed mortgages. However, 
the Federal Government should only be called on to support the 
conforming conventional mortgage market under catastrophic 
situations when the capital and self-funded insurance resources 
of private secondary market entities are exhausted.
