[Senate Hearing 112-318]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 112-318

 
         NEW IDEAS TO ADDRESS THE GLUT OF FORECLOSED PROPERTIES

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
           HOUSING, TRANSPORTATION, AND COMMUNITY DEVELOPMENT

                                 of the

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

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

 EXPLORING NEW IDEAS TO ADDRESS THE GLUT OF FORECLOSED PROPERTIES AND 
               MOVING THE NATION'S HOUSING MARKET FORWARD

                               __________

                           SEPTEMBER 20, 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

                       Dawn Ratliff, Chief Clerk

                      Anu Kasarabada, Deputy Clerk

                     Riker Vermilye, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

   Subcommittee on Housing, Transportation, and Community Development

                 ROBERT MENENDEZ, New Jersey, Chairman

         JIM DeMINT, South Carolina, Ranking Republican Member

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              PATRICK J. TOOMEY, Pennsylvania
SHERROD BROWN, Ohio                  MARK KIRK, Illinois
JON TESTER, Montana                  JERRY MORAN, Kansas
HERB KOHL, Wisconsin                 ROGER F. WICKER, Mississippi
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Michael Passante, Staff Director

              Jeffrey R. Murray, Republican Staff Director

                                  (ii)
?



                            C O N T E N T S

                              ----------                              

                      TUESDAY, SEPTEMBER 20, 2011

                                                                   Page

Opening statement of Chairman Menendez...........................     1

Opening statements, comments, or prepared statements of:
    Senator Reed.................................................     2
    Senator Merkley..............................................     2

                               WITNESSES

Allan H. ``Dutch'' Dechert, President, New Jersey Association of 
  Realtors.......................................................     3
    Prepared statement...........................................    31
    Responses to written questions of:
        Senator Corker...........................................    61
        Senator Wicker...........................................    62
Robert Nielsen, Chairman of the Board, National Association of 
  Homebuilders...................................................     5
    Prepared statement...........................................    35
Chris Krehmeyer, President and CEO, Beyond Housing...............     7
    Prepared statement...........................................    38
    Responses to written questions of:
        Senator Corker...........................................    63
        Senator Wicker...........................................    64
Laurie Goodman, Senior Managing Director, Amherst Securities.....     8
    Prepared statement...........................................    42
    Responses to written questions of:
        Senator Corker...........................................    65
        Senator Wicker...........................................    66
Stan Humphries, Ph.D., Chief Economist, Zillow...................    10
    Prepared statement...........................................    58
    Responses to written questions of:
        Senator Corker...........................................    66
        Senator Wicker...........................................    67

              Additional Material Supplied for the Record

Washington Post article: Steven Pearlstein: How about Refi.gov?, 
  submitted by Senator Reed......................................    68

                                 (iii)


         NEW IDEAS TO ADDRESS THE GLUT OF FORECLOSED PROPERTIES

                              ----------                              


                      TUESDAY, SEPTEMBER 20, 2011

                                       U.S. Senate,
      Subcommittee on Housing, Transportation, and 
                             Community Development,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee convened at 10:02 a.m. in room 538, 
Dirksen Senate Office Building, Hon. Robert Menendez, Chairman 
of the Subcommittee, presiding.

         OPENING STATEMENT OF CHAIRMAN ROBERT MENENDEZ

    Senator Menendez. This hearing of the Subcommittee on 
Housing, Transportation, and Community Development is called to 
order. Thank you all for being here today.
    This hearing, the second in a series to explore the best 
ideas for moving our Nation's housing market forward, will 
focus on new ideas to address the glut of foreclosed 
properties.
    Last, we looked at refinancing options and heard from 
Senators Boxer and Isakson about how we can break down some of 
the costs of barriers to refinancing and also heard from 
experts on the bill I will be introducing to encourage 
principal write-downs by allowing both the lender and the 
borrower to share in the upside of an appreciation of home 
value.
    In my view, we need to do even more to fix the housing 
market, get the broader economy moving again, and create jobs, 
as the housing market often anchors the broader economy. Too 
many families, including those who have never missed a mortgage 
payment in their lives, are suffering from a housing hangover 
caused by years of risky behavior in our over-indulgence of the 
market.
    Today, our witnesses will explore the question posed in the 
Obama administration's request for information about how the 
Government should dispose of the millions of foreclosed 
properties that it has or will have on its books within the 
next few years. These properties are at the GSEs and the FHA, 
which are half of the foreclosed properties in the country.
    Currently, the Government sells these properties one by 
one, but I would question whether that is always the best 
policy right now for all areas of the country. Although that 
policy might make sense in areas where home sales are strong, 
in areas where home sales are weak, converting those properties 
to rentals or even looking at other options might make more 
sense. Continuing to sell foreclosed properties into an already 
depressed market in some areas leads to further drops in home 
prices, which hurts other homeowners in the neighborhood. And 
then there is a need for rental housing right now because many 
people who lost their homes or who cannot get financing to buy 
a home now need to rent, and as a result, we have seen rents go 
up, as well.
    One idea that has been widely suggested is selling 
foreclosed properties in bulk to nonprofits or to investors 
with a requirement that they be converted into single-family 
rentals for a certain period of time. There are different views 
of that and we look forward to the views of the panel on those 
suggestions. And the witnesses will also explore whether and 
under what conditions the Government should help finance such 
sales for conversion into rentals.
    We must do all we can to stop the slide in home prices and 
stabilize neighborhoods by turning millions of vacant 
foreclosed homes into occupied homes, and that is the focus of 
the Committee's work.
    With that, I am happy to recognize any other Members who 
wish to make an opening statement. Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Mr. Chairman, I simply want to commend you 
for not just this hearing, but the series of hearings you have 
undertaken addressing critical issues in the housing market, 
and I share the same presumption that you have articulated, 
which is until we get the housing market stabilized and moving 
forward, the broader economy will not begin to move forward in 
a sustained and appropriate way. Many of the ideas that we will 
explore today, I think, are important aspects of getting that 
market moving.
    But I thank you for your leadership and I thank you 
particularly for accommodating this hearing so we can have a 
broader participation. Thank you, Mr. Chairman.
    Senator Menendez. Senator Merkley.

               STATEMENT OF SENATOR JEFF MERKLEY

    Senator Merkley. I echo the compliment on holding these 
hearings. The cloud of foreclosures, the five to eight million 
additional foreclosures is a huge problem for our economy and 
holding these hearings to try to wrestle with how we can be 
more aggressive in addressing them, both for the millions of 
families' success and for our economic success, is so 
important. Thank you.
    Senator Menendez. Thank you.
    Well, let me introduce our panel. We have a great panel 
here to help us go through some of these options.
    Allan Dechert is the President of the New Jersey 
Association of Realtors. He has been a Realtor since 1981, owns 
Ferguson Dechert Real Estate in beautiful Avalon, New Jersey. 
Those of you who have not visited should visit Avalon, New 
Jersey, I assure you. He has served the Realtors in many 
capacities over the years and the Subcommittee and I are 
certainly pleased to welcome his Garden State experience here 
today.
    Bob Nielsen is the current Chairman of the National 
Association of Homebuilders. He currently works in Reno, 
Nevada, brings over 25 years of industry experience with him. 
He has also been very active in the affordable housing sphere, 
contributing to the creation of the Nevada Low-Income Housing 
Trust Fund, and we look forward to your testimony and thank you 
for being here.
    Chris Krehmeyer is the President and CEO of Beyond Housing, 
a NeighborWorks Organization in St. Louis, Missouri. He has 
served in that capacity since 1993 and has led the organization 
through fivefold growth, adding a nonprofit property management 
company with Beyond Housing, currently controlling assets worth 
nearly $50 million, and we appreciate your perspective here 
today.
    Laurie Goodman is a Senior Managing Director at Amherst 
Securities responsible for research and business development. 
Before joining the firm in 2008, she was the head of Fixed 
Income Research at UBS, also worked at CitiGroup, Goldman 
Sachs, Merrill Lynch, and the Federal Reserve Bank of New York. 
She has appeared before the Subcommittee before and we are 
looking forward to her expertise once again. Thank you.
    Dr. Stan Humphries is a Chief Economist at Zillow, a home 
and real estate marketplace that helps homeowners, buyers, 
renters, and professionals share information about homes, real 
estate, and mortgages. He oversees the production of housing 
market metrics and economic research and he has contributed to 
housing market price algorithms for Zillow. The Subcommittee 
looks forward to his testimony and thanks you for being here.
    So I would ask you all to synthesize your statement in 
about 5 minutes or so. We will include your entire written 
statement in the record, and then we will have an opportunity 
for our Members and you to have a conversation and some 
questions.
    So, Mr. Dechert, we will start with you.

STATEMENT OF ALLAN H. ``DUTCH'' DECHERT, PRESIDENT, NEW JERSEY 
                    ASSOCIATION OF REALTORS

    Mr. Dechert. Thank you. Chairman Menendez, Ranking Member 
DeMint, and Members of the Committee, thank you for holding 
this timely hearing on new ideas to address the Nation's 
continuing mortgage problem.
    My name is Allan Dechert and I am the 2011 President of the 
New Jersey Association of Realtors, and I am proud today to 
testify on behalf of the more than 1.1 million members of the 
National Association of Realtors.
    The U.S. housing sector is in a precarious state. According 
to many economists, the market appears to have reached bottom 
and sales volumes and prices are beginning to stabilize. 
However, the uncertainty and lack of consumer confidence that 
has plagued the sector could be reintroduced and impact the 
absorption rate of bank-owned real estate, which will place 
downward pressure on prices and jump-start the cycle that has 
debilitated the housing sector to date.
    Realtors appreciate the Administration's attempts over the 
last two-and-a-half years to keep families in their homes and 
its recognition that home ownership matters. Those several 
Federal programs were put in place to keep families in their 
homes, nearly all have fallen short of their goals.
    Realtors believe that another attempt must be made to fix 
the housing sector if a broad recovery of the overall economy 
is to occur. In particular, focus should be placed on the large 
inventory of real estate owned, REO properties, that continues 
to grow. Realtors recommend that any foreclosure solution must 
focus on providing mortgage financing to qualified home buyers 
and investors to prevent increases to the existing REO 
inventory. Expand pre-foreclosure efforts, including loan 
modifications and short sales, since foreclosures typically 
cost more than loan modifications and short sales. And continue 
the timely and orderly disposition of REO inventory assets, 
relying on the expertise of local contractors, real estate 
brokerage firms, and professional property management 
companies.
    NAR supports strong underwriting standards. However, 
potential home buyers and investors have been discouraged by 
high fees, unduly tight underwriting standards, and the lack of 
availability of private mortgage capital. Realtors respectfully 
request that regulators and lenders reassess their policies in 
order to increase lending.
    In particular, Realtors believe that the Government should 
temporarily modify some policies governing FHA and the GSEs to 
encourage investors to step in and absorb some of the REO 
properties. Two examples of policies to be modified are, one, 
FHA's Section 203(k) lending program, which HUD should expand 
to include investors, and remove the limitations on the number 
of outstanding loans held by an investor.
    Since early 2008, NAR has urged the lending industry to 
take every feasible action to keep families in their homes with 
a loan modification, or, where it is not possible to avoid 
foreclosure, a short sale. Realtors recommend that the 
Government reassess current policies to make sure that as many 
loan modifications and short sales are approved as possible. 
This will reduce adding to the ever-increasing glut of REOs. 
Moreover, repurposing a portion of housing funds designated 
under TARP to increase borrower participation in loan 
modification and short sale programs will improve them and 
reduce the number of mortgages ending in foreclosure. Also, 
streamlining the short sale process would result in a properly 
functioning loss mitigation mechanism that prevents additional 
foreclosures.
    Last, in August, the Administration requested advice from 
market participants on the pooling and disposition of GSE and 
FHA REO properties inventories, I should say. Though bulk sales 
may quickly alleviate the critical mass of REO inventory held 
by the agencies, bulk sales will likely result in larger losses 
than is necessary. Realtors strongly believe that every effort 
should be made to incentivize individual versus bulk sales 
because individual sales maximize recovery of the assets and 
minimize the impact on housing values.
    An option that combines REO disposition with affordable 
rental is a lease-to-own program. NAR recommends that any 
lease-to-own solution should first focus on keeping families in 
their homes, after which the following principles should be 
considered. Lease-to-own ventures should be privately 
administered by local investors or local nonprofits that 
understand the specialized needs and challenges of markets. Use 
local real estate agents to market the property to ensure 
visibility. Have clearly defined expectations. Have guidelines 
in contracts that are specific regarding maintenance, purchaser 
responsibility, purchase price, and percent of payment 
allocated toward the down payment. Include condominiums, and 
minimize detrimental effects on neighborhoods by implementing 
strict guidelines on the rehabilitation and continued 
maintenance of properties.
    Finally, NAR recommends the creation of an advisory board 
made up of public and private industry participants. Advisory 
board members should include Government staff, asset managers, 
real estate sales professionals, property managers, and others 
with extensive real estate industry experience. The charge of 
this board will be to ensure the efficient disposition of 
Government-owned REO properties in order to minimize taxpayer 
losses and negative effects on local real estate markets.
    In conclusion, every decision that we make today regarding 
our housing finance system will have a significant impact on 
the ability of future generations to purchase a home and our 
Nation's overall economy.
    I thank you for this opportunity to present our thoughts. 
As always, the National Association of Realtors stands ready to 
work with you and our partners to make the future brighter for 
all Americans. Thank you.
    Senator Menendez. Thank you very much.
    Mr. Nielsen.

 STATEMENT OF ROBERT NIELSEN, CHAIRMAN OF THE BOARD, NATIONAL 
                  ASSOCIATION OF HOMEBUILDERS

    Mr. Nielsen. Chairman Menendez and Ranking Member DeMint 
and Members of the Subcommittee, I am pleased to appear before 
you today on behalf of the National Association of Homebuilders 
to share our views on how to address the glut of foreclosed 
homes that are currently on the market. My name is Bob Nielsen. 
I am the 2011 NAHB Chairman of the Board and a homebuilder from 
Reno, Nevada.
    Home mortgage foreclosures continue to have a significant 
negative impact on the housing market and contribute to the lag 
in the Nation's economic recovery. While the majority of 
foreclosures have been concentrated in a handful of States, no 
State has avoided the negative effects on prices created by the 
foreclosures.
    Home prices have fallen by a record amount across the 
country, making consumers hesitant to undertake home purchases 
and making it more difficult for homeowners to sell their 
current home in favor of a new residence. Many times, 
foreclosed or distressed property sales are used as comparable 
sales in appraisals, which further depresses home values and 
puts new construction at a disadvantage. The downward spiral in 
values is also adversely affecting outstanding residential 
construction loans, as lenders demand equity pay-ins to offset 
declines in collateral value and making it more difficult for 
builders to obtain adequate funding to start new projects.
    Ultimately, stopping this trend in foreclosures will have 
benefits beyond the housing industry. Stabilizing home values 
will improve the balance sheets of financial institutions and 
will reassure homeowners that their biggest asset will retain 
its value.
    NAHB recently submitted comments in response to a joint 
request for information, soliciting ideas for strategies on 
disposing of the substantial inventory of real estate owned 
properties held by Fannie Mae, Freddie Mac, and FHA. We support 
the agencies' goal of reducing the REO portfolio in a cost-
effective manner, reducing average loan losses to the 
enterprises and FHA, addressing property repairs and 
rehabilitation needs, responding to the economic and real 
estate conditions in specific geographies, and stabilizing 
neighborhoods and local home values.
    While my written statement covers NAHB's specific 
recommendations in great detail, we believe that it is 
extremely important for the enterprises and FHA to take a 
balanced approach in disposing of their large inventories of 
REO properties to avoid further disruptions to pricing and 
markets and to limit losses to the enterprises and FHA.
    In particular, the enterprises and FHA should avoid bulk 
sales to large investors that have no stake in the 
neighborhoods in which these properties are located. Local and 
small businesses should be the driving force behind the 
disposition of REO inventory, which will result in the creation 
of jobs and the stabilization of neighborhoods. Federal 
Government programs such as FHA Section 203(k) and the 
Neighborhood Stabilization Program should be modified to allow 
for-profit investor participants to provide the capacity and 
the innovation needed to tackle this problem.
    Fannie Mae and Freddie Mac programs are also currently 
biased against investors, as they have very tight limits on the 
number of homes one individual can finance. These limits must 
be increased to enable the private sector to partner in an 
effective REO disposition effort.
    Additionally, NAHB suggests that several new programs could 
be pursued that could contribute to the reduction of the REO 
inventory, specifically, the creation of an investment fund 
that would be open to individual investors and a new lease-to-
own program geared to all income levels.
    It is also essential to return to more balanced credit 
requirements for home purchasers. Current GSE credit 
requirements and further discretionary overlays by private 
lenders are frustrating many creditworthy borrowers who 
otherwise would make an REO property their home.
    And finally, with the current GSE and FHA loan limits set 
to expire on September 30, I would like to thank the Chairman 
for his leadership and efforts to extend the higher limits 
beyond the current deadline. As the Chairman fully understands, 
allowing the limits to expire would exclude many homes and home 
buyers from critical Government loan programs, particularly in 
areas of the country where there is substantial foreclosure 
inventory.
    Thank you again for the opportunity to testify today. I 
look forward to your questions.
    Senator Menendez. Thank you very much, Mr. Nielsen.
    Mr. Krehmeyer.

STATEMENT OF CHRIS KREHMEYER, PRESIDENT AND CEO, BEYOND HOUSING

    Mr. Krehmeyer. Chairman Menendez, Ranking Member DeMint, 
and all Committee Members, it is truly my honor to be here to 
talk about this very serious problem of foreclosures happening 
all across the country. In addition to my role as being 
President and CEO of Beyond Housing, I am also on the board of 
the National NeighborWorks Association and a founding member of 
Practitioners Leveraging Assets for Community Enhancement, 
PLACE, trying to unify the voice of our community development 
field.
    Day in and day out, in neighborhoods and communities back 
in St. Louis, we see this problem day in and day out. My 
organization touches foreclosures from just about every vantage 
point, from providing home ownership advisement services on the 
front side to create sustainable, successful long-term 
homeowners, to providing foreclosure counseling services to 
keep families in their home, to buying and rehabbing foreclosed 
properties, and just created a Community Land Trust as another 
tool to try to get after the problem.
    First and foremost, I think the best way to deal with the 
problem is keep families in their homes, so I am grateful that 
the Chairman is proposing principal reductions in a more 
significant way, because certainly my foreclosure accounting 
staff has begged us, can we please get more principal 
reductions to keep families in their homes.
    In addition to that, can we convert some of this portfolio 
to rental properties. My organization owns 340 scattered site 
single-family homes and we rent them to low-income families and 
have done so for 30 years. It is possible. It is feasible. It 
is a challenge. It is not easy. It is a long-term asset 
accumulation plan. It is not a short-term windfall to put your 
investment dollars in and try to take them back out. It is 
about investing in that, not only in that home, but in that 
community and providing affordable rental opportunities, and 
certainly, as has been said, there is a great need for 
affordable housing all across this country. Folks are 
suffering, and we need to see if we can provide more of those 
opportunities. We have proven it can be done. It takes 
significant debt reduction relative to the price points. It 
takes sound property management and ensures that, again, you 
have to create that asset that will serve that community well 
long-term.
    Can we create other possibilities, and we think there are 
opportunities to do some bulk purchases with the GSEs. I have 
talked to a number of my peers across the country and we think 
there is a great opportunity to do so, particularly if we 
design a vehicle that says, can we build on the existing work 
and really move the needle on getting homes back in productive 
use.
    A partnership model that we proposed leverages many 
institutions, created by the community development industry in 
response to the crisis. This includes the National Community 
Stabilization Trust, which was created by NeighborWorks America 
and many other enterprises. The NCST provides a function to 
aggregate REO inventory among servicers and creates a platform 
for offering this inventory to not-for-profits across the 
country and simplifying the execution process to transfer these 
assets.
    That particular model can take a number of forms in terms 
of what it can look like, but here are some of the key 
elements. GSEs and FHA identify and reserve homes that are 
located in either Neighborhood Stabilization markets or similar 
target geographies being worked by not-for-profits. These 
assets can be made available through a first look clearinghouse 
of loans to qualified not-for-profits. These assets then are 
available for acquisition for a short period of time to see if 
they can be disposed. If not, they will be put back on the 
marketplace.
    Qualified not-for-profits working in the target markets 
would purchase the assets at a prudent, transparent discount 
price that considers the balance between the cost of 
acquisition, rehabilitation, and management and feasible rents 
to families in these markets. In consideration for these 
discounted prices, the not-for-profits would execute an 
agreement to share any gain on sales that would occur with the 
GSEs or with FHA. Not-for-profits would take title to the 
property, would rehab the housing stock to an appropriate 
level, considering the appraised value, and that will improve 
the longevity and operating costs of the home by including 
energy efficiency and green improvements within that budget.
    To facilitate this rehabilitation, the GSEs and FHA will 
offer the not-for-profits an opportunity to take out a mortgage 
as the mortgagor from the GSEs that covers rehabilitation costs 
of the homes. The mortgage would be assumable by a future buyer 
of the property. The not-for-profit improves the property and 
makes them available to a low-income family or moderate-income 
family. The not-for-profit manages the assets of the rental 
property and uses the income to cover the mortgage note 
payment. And at a point of time when the values have 
stabilized, the not-for-profit makes the property available for 
sale to families in the community, and once that sale is made 
available, the not-for-profit again shares that asset 
appreciation with the GSEs or the FHA.
    Gentlemen, you guys know this is a big problem, day in and 
day out. My organization sees the struggles of what is 
happening in the community. We need big, bold solutions. 
Everything we have tried to date on our foreclosure problem, 
regrettably, has not met with our expectations. I hope we can 
continue to talk about this topic, and again, come up with some 
big, bold and aggressive solutions that are harming families in 
our country.
    Thank you very much.
    Senator Menendez. Thank you.
    Ms. Goodman.

STATEMENT OF LAURIE GOODMAN, SENIOR MANAGING DIRECTOR, AMHERST 
                           SECURITIES

    Ms. Goodman. Mr. Chairman and Members of the Subcommittee, 
thank you for your invitation to testify today. My name is 
Laurie Goodman and I am a Senior Managing Director at Amherst 
Securities, a leading broker dealer specializing in the trading 
of residential mortgage-backed securities. I am in charge of 
the strategy and business development efforts for the firm. We 
perform extensive data-intensive research as part of our 
efforts to keep ourselves and our customers informed of 
critical trends in the residential mortgage-backed securities 
market.
    One of the trends we have documented is the very 
significant supply demand imbalance in the housing market. 
Distressed loans are moving very slowly through the delinquency 
foreclosure pipeline. These loans weigh heavily on the 
residential real estate market and are often referred to as 
shadow inventory. In addition, many of the borrowers that are 
not delinquent on their loans have a tainted credit history 
and/or are seriously underwater, suggesting many more defaults 
to come. Thus, there are many distressed homes that will need 
to change hands over the next five to 6 years.
    At the same time, mortgages are becoming increasingly 
difficult to obtain. Overall credit availability is tightening, 
and the pool of qualified mortgage applicants is shrinking 
dramatically. A large number of borrowers who are delinquent on 
their current mortgage and do not have the financial profile to 
purchase another home are likely to be converted to renters.
    Despite this cloud surrounding the mortgage market, we see 
housing as very affordable by most traditional measures. Given 
this backdrop, we believe that long-term investors in one- to 
four-family residential real estate are the key to a housing 
recovery. They are the only potential buyers of many of the 
distressed homes that are likely to hit the market over the 
next five to 6 years. Investors need to be part of the solution 
to the housing crisis.
    At the same time, this represents a good business 
opportunity for interested investors whose goal would be to 
rent the distressed homes as the rental market strengthens. 
Given the large decline in home prices, rental yields are high 
enough now to attract a limited amount of private capital. With 
modest governmental action, not assistance, more private 
capital can be attracted to this market, helping to stabilize 
home prices, neighborhoods, and communities, and more 
importantly, ensure that the housing needs of the distressed 
homeowners and their families are met. In fact, my firm, 
Amherst Securities, along with several of our partners, has 
successfully launched such a program.
    We would argue that successful governmental action must 
have four objectives. First, it must be scalable enough to have 
an impact. Second, it must hold homes off the market for 
several years to give the market a chance to stabilize. Third, 
it must place the risks and responsibilities of owning the real 
estate with financially strong and operationally sound 
managers. Finally, it needs to maximize the economics for the 
GSEs and the taxpayers.
    We believe these objectives could best be accomplished by 
allowing for a program in which, one, opportunities were 
provided for bulk purchases of REO properties as well as non-
performing loans, and two, financing was more available to 
investors.
    The difficulty of buying up sizable blocks of distressed 
properties inhibits large-scale investors from participating in 
the market. In order to build out a rental organization, which 
include rental agents and property managers, it is necessary to 
obtain a critical mass of properties in a given area. Thus, we 
would strongly urge the FHFA, working with Fannie and Freddie, 
to bundle together at least 200 properties in a given MSA and 
conduct an auction on an all or none basis. We believe this 
would maximize the economics for the GSEs. Bulk sales are the 
most efficient distribution vehicle and homes that are vacant 
or occupied by homeowners not paying their mortgage or 
maintaining their property lose value very, very quickly. In 
addition, we would suggest imposing the requirement that at 
least 80 percent of the properties be held for a three-year 
period.
    One very important point. A program that includes 
nonperforming loans as we as REO properties would be more 
effective than an REO program alone. Bidding a portfolio of 
nonperforming loans and REOs would allow for the bundling of a 
larger group of properties in a given geographic area. In 
addition, since the borrower is often a suitable tenant for a 
property, it saves the transactions and emotional costs of a 
move and may allow the loan to command a higher price as it is 
being sold with a ready-made renter.
    This is not just a theoretical idea to my firm, Amherst 
Securities. We believe in it and put our own capital to work, 
purchasing the first block of homes auctioned by Fannie Mae 
with a tenant in the home.
    Conservative financing of 60 to 75 percent of the purchase 
price would serve to stimulate investor demand and further 
cushion home price declines. An example will make this clearer. 
Assume the net distress rental yield was 7 percent. Assume 
further that an investor was able to obtain financing on 60 
percent of the purchase price at a 4.5 percent rate. The return 
to investors would rise to ten-and-three-quarter percent. We 
expect conservative investor financing to encourage more 
investor participation and higher bids from participating 
investors.
    Again, thank you for the opportunity to appear before the 
Subcommittee. We look forward to working with you on practical 
solutions that will help ease the housing crisis and promote 
housing market stability.
    Senator Menendez. Thank you.
    Dr. Humphries.

  STATEMENT OF STAN HUMPHRIES, Ph.D., CHIEF ECONOMIST, ZILLOW

    Mr. Humphries. Thank you, Chairman Menendez, Ranking Member 
DeMint, and Members of the Subcommittee for the invitation to 
speak today. My name is Stan Humphries. I am Chief Economist at 
Zillow, the leading real estate information marketplace, where 
I closely follow and report on the state of the housing market.
    I would like to preface my statements this morning by 
noting the perspective from which Zillow approaches analysis of 
the housing market. We launched our Web site in 2006 with the 
goal of creating more transparency of real estate information 
for consumers. As a media-supported business, we have 
relatively little vested interest in the outcome of this 
particular debate other than the hope that whatever is decided 
will best address the needs of consumers, buyers, sellers, and 
homeowners who have no intention of selling any time soon.
    Today, I would like to make three points about the housing 
market and about how to address foreclosures. The first is, let 
us not underestimate the ability of the market to fix itself. 
Second, let us focus on fundamental drivers of the housing 
market itself, not on symptoms of the housing recession. And 
third, the first objective of any policy response should be do 
no harm.
    Regarding my first point about the ability of the market to 
fix itself, yes, there are a large number of foreclosures in 
the open marketplace right now. The latest estimates put that 
number at about 4.1 million foreclosures or seriously 
distressed homes in the marketplace. That cheap, abundant 
inventory is going to put downward pressure on prices over the 
near term, and over the long term, it is going to put a firm 
lid on price appreciation that we should expect over the next 
few years.
    But that dismal side that we spend so much time talking 
about in the housing market is just one side of the housing 
market. It is the purchase side. If you look at the other side 
of the coin, the rental side, that side of the housing market 
is actually doing quite well. We expect effective rental rates 
to rise four to 5 percent this year alone, and the rental 
supply right now is back down to pre-recession levels. So there 
is a lot of demand in the rental side of the housing market and 
investors smell a distinct opportunity here. They are--in terms 
of arbitraging from the distressed purchase side over into the 
rental side where there is strong demand.
    How do we know this is happening? One-third of all home 
sales nationally right now are going to all-cash buyers, the 
bulk of whom are investors. True, this process is not always 
pretty and does take time, but it is a natural market process 
that is and will slowly heal the market. Unfortunately, 
economic recovery cannot always happen overnight.
    A second point. Many policies addressing foreclosures are 
simply addressing symptoms, not fundamental drivers of a 
healthy housing market. I believe the fundamental drivers of 
the housing economy in the next 2 years can be summed up in two 
factors, negative equity and unemployment.
    Negative equity is very important to the housing market for 
two reasons. One is on the supply side, it is the key 
contributor to foreclosures, which increase supply and, 
therefore, put downward pressure on prices. Negative equity is 
also a problem on the demand side because it suppresses demand 
because it traps people in their homes and prevents them from 
going out and buying new homes. And unfortunately, negative 
equity is a fairly difficult problem to address through policy 
means for a variety of reasons which I can go into in questions 
if it is relevant.
    This pains me that this is the fact because the aggregate 
numbers that I cited about foreclosures and seriously 
delinquent mortgages mask the tremendous suffering for millions 
of homeowners. So I wish that there was more of a silver bullet 
for negative equity, but unfortunately, as you drill down into 
a lot of responses for how to eliminate negative equity, they 
become quite problematic, typically because of issues involving 
moral hazard. We, therefore, expect negative equity to be a 
problem that will slowly recede over the coming years once 
normal home value appreciation returns to the marketplace.
    Unemployment is a second big factor in the housing market 
and it is also very critical, of course, to housing for a 
variety of reasons, and fortunately, it is one that is more 
easily addressable through policy means. Unemployment and job 
growth is very important to the housing market for a few 
reasons. I will just list two, consumer confidence and 
household formation. The more confident consumers are about 
their jobs and about the overall economy, the more likely they 
are to get off the fence and buy homes.
    Household formation is also important. We were just 
reminded last week when the Census Bureau reported that 22 
million households in the United States are doubled up. If you 
want to know where a lot of the housing demand has gone during 
the housing recession, that represents a lot of it. These are 
adult children living with their parents in the basement and 
multiple families living under the same roof. If we want to get 
those families moved out and into new housing units and, 
therefore, increase housing demand, we have got to grow jobs. 
So make no mistake that a plan for unemployment is a plan for 
housing, as well.
    My third and final point is that the objective of 
Government policies should be to do no harm. For example, one 
of the ideas that we have been exploring, or, rather, that we 
in America have been exploring over the past few months more 
seriously is the idea of the Government getting more involved 
in some fashion in the rental market as a solution for 
disposing of its stockpile of REO and foreclosed homes.
    I believe that we should tread cautiously in examining 
proposals like this because, as I already noted, the private 
sector is already stepping in fairly briskly to do exactly 
this, to arbitrage from the purchase side over to the rental 
side where there is strong demand. Allowing the GSEs or FHA to 
get into the rental market more directly could have a definite 
chilling effect on private investment in this area, and as I 
noted, the rental area is an area that is actually performing 
fairly well and is actually indirectly helping the purchase 
side, as well, through contributing to demand on the purchase 
side. I believe we would be naive if we think that we can only 
address the supply side through these proposals without also 
affecting the demand side of that proposal.
    So, in summary, forces in the housing market are already at 
play that will ultimately lead to long-term stabilization. 
Again, it is not always pretty and it may take longer than we 
would desire, but the likely long-term consequences of policy 
intervention should be well understood before the Government 
steps in to help the market along.
    Thank you again for the opportunity to address you today 
and I look forward to answering any questions you might have.
    Senator Menendez. Well, thank you all very much for your 
testimony. There are a few cross-current here and I want to 
explore them.
    The question of the whole issue I heard in your statements, 
the question of investors being able to purchase groups of 
properties and there is a countervailing view here. How do--in 
this step-by-step process that we have right now--how do we 
move that whole universe of that housing market if we continue 
on the individual-by-individual sale at the end of the day? Mr. 
Nielsen or Mr. Dechert.
    Mr. Nielsen. Well, I do not think that is what we are 
advocating. In fact, what we are advocating is that the 
financing vehicles that keep folks from going to larger numbers 
of homes being sold be allowed to go forward. In other words, 
Fannie Mae and FHA both have limits on the way they finance 
some of those things. Our guys would be out there buying much 
greater numbers of homes if they could use those financing 
mechanisms to purchase them.
    So I think I would agree with Ms. Goodman. A lot of what 
Laurie said, however, we would probably ratchet it down to 50 
units as a salable bulk and then maybe up to 200, as she 
suggested. So I think there is a lot of commonality in what we 
are all saying here, but I think what we are concerned about is 
the financing mechanisms need to be loosened up so that our 
guys can participate.
    Senator Menendez. Mm-hmm. And what would you want to see in 
that respect, the number of individual properties that could 
be----
    Mr. Nielsen. Well, like I said, I think as far down as 
maybe 50, you know, allow Freddie and Fannie and FHA to finance 
50 units as opposed to the limits that they have today.
    Senator Menendez. Ms. Goodman, how does that sound to you?
    Ms. Goodman. Obviously, the more units, the better. I think 
bulk execution actually will give the GSEs much better pricing 
in the end. I mean, from a large investor's point of view, we 
cannot afford to buy three properties in Cincinnati, four in 
Atlanta, six in Cleveland. It is virtually impossible to 
maintain. You need the incentive to build out the 
infrastructure for bulk. So certainly 200 would be preferred. 
Could we live with 50? Yes. Would more be better? Yes.
    One-by-one does nothing for anyone. First, it does not 
encourage us to build out the infrastructure. Second, not all 
properties are going to trade one-by-one, so the absolutely all 
in execution is going to be worse. Third, if you trade them 
one-by-one, you cannot impose the conditions on selling to keep 
homes off the market for a period of time, which I think is 
very, very important, which you can do if you sell in bulk. 
Fourthly, bulk can be executed far more efficiently. Property 
deteriorates very, very quickly if it is not maintained, and 
this alone argues for very quick disposition. And finally, 
quick execution is very important from a macro perspective 
because it will serve to stabilize the housing market more 
quickly and, hence, the economy, as well.
    Senator Menendez. In this respect, there is a concern that 
when you have institutional investors buy in bulk, and the 
larger the bulk, there is this lack of connection locally and 
the ability to execute with management of those properties once 
owned. What type of processes would you advocate putting in 
place in order to screen and monitor bulk investments, if any?
    Ms. Goodman. I think you have got to make sure the investor 
is strong and can afford to maintain the properties. But, 
basically, it is in their financial interest to maintain the 
properties. They have just paid for these properties. If 
investors do not maintain them, they are unable to rent them 
out. The vacancy rate would be really high. And current pricing 
is not such a bargain that it is a slam-dunk.
    That is, investors really have to maintain the properties 
or they cannot really meet their financial targets. Investors 
have to maintain the properties in order to get the rent that 
is making their numbers work. And they are looking at sort of 
8-percent type returns. They are not looking at 12-percent type 
returns after the costs of maintaining and the costs of renting 
the property out.
    Senator Menendez. Mr. Krehmeyer, you do this in a different 
context. What is some of your experience in terms of what is 
necessary?
    Mr. Krehmeyer. Certainly, I would agree with the other 
panelists that one at a time is not going to work. The problem 
is too big. Whether it is 50 or 200, I think the smaller is 
better for us in the not-for-profit world to secure what 
limited capital we can for challenges like this.
    I would suggest that partnering with local communities, 
with folks on the ground who know communities, who know 
neighborhoods, pushing political jurisdictions at the local 
level, hold folks accountable, whether they are local 
neighborhood folks or out-of-town investors. Hold everybody to 
high standards and how are you going to maintain that property, 
how are you going to take care of it, and if you do not, there 
should be some penalties associated with that. Failure to do so 
just means this downward spiral in communities and 
neighborhoods will continue.
    Again, if we do not take an aggressive approach and force 
people to say, let us align the incentives of, whether it is an 
out-of-town investor, a local organization, that local 
political jurisdiction, align the incentives and the goals of 
what are we trying to accomplish and stop working in silos, 
because we have tried that and it just has not worked.
    You know, my organization would be happy to work with an 
outside investor to come work in our communities, buy some 
properties, work with us, because we are rehabbing other homes. 
We know the folks in the community. We are doing after-school 
programs. We are doing all that other community-building work. 
We would love to have somebody else's capital and somebody else 
take a little risk with us in the community.
    Senator Menendez. Let me take one last moment. Mr. Nielsen, 
you mentioned in your comments, although we are talking about 
foreclosure here, one of the goals here in these hearings is to 
make sure we get this housing market moving again. The 
expiration of the higher loan limits take place September 30. 
Senator Isakson and I and others have this effort to try to 
extend that, particularly the 125 percent of area median home 
price standard for 2 years for FHA, VA, and GSE. What effect do 
you think happens if the loan limits are not extended and if 
they expire at the end of this month?
    Mr. Nielsen. Well, there are specific markets that are 
going to be dramatically affected, basically, those on the 
coasts where folks just cannot buy a home if you do not have 
those loan limits where they are today. Any reduction in the 
loan limits is going to dampen that market, and with a housing 
market that is in critical need of everything that they can get 
to purchase homes today, to do that is just piling on, and it 
seems to me that--and thank you for your leadership on that--if 
we could keep those numbers where they are today, that is going 
to be the very best situation for folks that are trying to buy 
homes and trying to sell homes today.
    Senator Menendez. Mr. Dechert, is that the Realtors' view?
    Mr. Dechert. Yes, Senator, that is our view, and again, we 
appreciate your sponsoring this legislation. I mean, when you 
look at our State, even, within New Jersey, Hudson County, your 
home county, this would be a $104,250 drop in loan limits there 
if this change would go through. Down my way, Cumberland 
County, which is not a high-cost area, but there is a drop 
there from $405,000 to $271,050 in loan limits, which is 
$133,950. That is going to have an impact on the market. As Mr. 
Nielsen said, we do not need more piling on. We need to 
incentivize the market, not de-incentivize it. That is very 
important to us, yes.
    Senator Menendez. Thank you.
    Senator Reed.
    Senator Reed. Well, thank you, Mr. Chairman.
    Let me make two initial points. The Chairman held last week 
a hearing on some innovative approaches, not to REO but to the 
other aspects of the mortgage market, and I commend you for 
that. Steve Pearlstein wrote a thoughtful opinion piece in the 
Washington Post, which I would like to put as part of this 
record, too.
    Senator Menendez. Without objection.
    Senator Reed. He is one of the most, I think, thoughtful 
commentators on the economy operating in the media. That had to 
do with refinancing and how we break through the issue of 
refinancing and give homeowners the benefit of historically low 
Federal Reserve rates that are not translating, for many 
reasons, into refinancings, and that is something I think the 
Realtors are very sensitive to, also. That would be very, very 
helpful. So point one.
    But point two, when we talk about the REO, we have been 
collectively working with Senator Menendez, Senator Merkley, 
and others, trying to get FHFA to kind of begin to think about 
creative ways of doing this, and there has been some progress. 
There was a request for information. I think many of your 
organizations submitted comments that they were moving on this 
front.
    And one of the issues, and let me open it up with Ms. 
Goodman, is the appetite, not just your company but for the 
investment community at large, to get into the acquisition of 
these properties as affordable rental properties. You think 
that is a real positive force out there?
    Ms. Goodman. Absolutely. There is a lot of capital being 
raised for exactly this purpose. Housing is quite affordable in 
a historical context. Buy-to-rent looks OK. It produces 
reasonable returns at current prices. And then there are two 
sources of upside.
    First, rents are likely to rise. That is because borrowers 
who are not making their mortgage payments at some point are 
apt to become renters and are apt to put more pressure on this 
market. Actually, we would argue that the homeownership rate is 
more like 61 percent than 66 percent----
    Senator Reed. Right.
    Ms. Goodman.----as four million of the 4.5 million 
delinquent borrowers are going to be unable to make it in the 
end.
    And third, home prices--investors have the option that home 
prices rise at some point. So I think it is a good investment 
and you are actually seeing a lot of capital raising for that 
purpose.
    Senator Reed. One of the other aspects that we have tried 
to stress is not only simply transferring the property to an 
investor, either not-for-profit or for-profit, but also 
encouraging retrofits or renovations so that you capture some 
of the new energy technologies, which in the long run is a 
benefit not only for the tenant, but also for the owner because 
it is more effective and efficient, and in the short-run also 
puts people to work, which is a desperate need. Instead of 
building new houses, retrofitting and weatherizing existing 
houses. Is that something that in the context of private 
investors would be looked at as a positive, I hope?
    Ms. Goodman. I think you would have to weigh the economics, 
how much does it cost, and build it into the purchase price. So 
the analysis would be on a home-by-home basis, and again, you 
would just have to weigh the economics.
    Senator Reed. The other aspect of this, we have found out, 
is that the FHFA, as the conservator, has a legal obligation to 
maintain value. I am sure there is another specific legal 
phrase. But essentially, when we get into this argument of is 
it a 200 unit minimum purchase or a 50 unit purchase, is it to 
small groups, et cetera, one of the decisive factors, I think, 
is going to be, frankly, FHFA looking to see what is their best 
return, and you might want to comment on that, also, in terms 
of being able to convince the GSEs, Fannie and Freddie, but 
more importantly the FHFA Director, that this approach is not 
only good for potential renters, not only good for kind of the 
industry, but this basically enhances the value, because the 
sense we have is that they feel it does not add value or 
diminishes, they cannot do it even legally. So I would like 
your comment, Ms. Goodman, and then open it up to the panel.
    Ms. Goodman. I think this would enhance value. The 
economics are such that what investors want to do is, at the 
minimum, continue to maintain the property, and more likely 
enhance the property so it can be rented out at the maximum 
rent.
    If Fannie and Freddie feel like they are giving too much 
away, there is the conceptual alternative that they join as 
joint venture partners. And, in fact, the FDIC has implemented 
this very effectively on their Legacy Loan Programs, where they 
basically are co-investors and also provide some financing. 
There is no reason why that could not be adopted to this 
environment.
    Senator Reed. Essentially along the lines of they would 
share in any appreciation upon a disposition of the property--
--
    Ms. Goodman. Right. It would be a partnership. Exactly.
    Senator Reed. And the other side--again, I will get to 
other people--I am running out of time--the other side of this, 
if--the status quo seems to be absolutely unacceptable for the 
real estate industry, for renters, et cetera. These properties 
sitting, and these are mostly single-family homes we are 
talking about, are sitting in the middle of the neighborhoods. 
The grass is not cut. The values are going down. It is a 
challenge. And again, I am sometimes frustrated because it 
seems so clear to us this makes sense, and yet we have had--it 
has been like pulling teeth, trying to get FHFA I have to say 
it properly--enthusiastic.
    Ms. Goodman. Every day you do not maintain the property, 
its value just continues to decline, and that is actually one 
of the big arguments for bulk sales.
    Senator Reed. I have got just a minute. Would anyone else 
like to comment on this general line of questioning?
    Mr. Nielsen. I absolutely agree. You need to maintain 
those. And, frankly, that is the reason why we think that the 
number of units that could be sold together should come down. 
We think that those that will maintain a community the best are 
those that are in that community. And we also think that has an 
effect on pricing, where FHA and Freddie and Fannie need to get 
the most money that they can for those houses. If you bring it 
down to a point where more and more people can bid on those, it 
is going to have an effect on pricing.
    Senator Reed. Well, I think from the perspective, and I am 
being presumptuous about FHFA, their whole notion would be, how 
do we maximize the price to us----
    Mr. Nielsen. Exactly.
    Senator Reed.----because that is what their legal--and if 
you can make that case effectively.
    The other issue, too, and just a comment more than a 
question because the Chairman has been most indulgent, there 
would seem to be a natural kind of connection between a 
national investor, particularly going to an unknown market, to 
reach out, I do not know if we make that a requirement, but to 
reach out to the local industry or at least someone in the 
local industry to be the representative. And I would think, 
again----
    Ms. Goodman. Absolutely. You would end up using local 
contractors, et cetera, who know the neighborhood. You would 
have to.
    Senator Reed. Local Realtors in terms of rental capacity so 
that----
    Ms. Goodman. Local contractors, local property managers.
    Senator Reed. Yes.
    Ms. Goodman. You need someone who knows the area and knows 
the community, absolutely.
    Senator Reed. I do not think it is necessarily kind of a 
disconnect between a big 200 units and no local participation.
    Mr. Krehmeyer. I think we just need a little help in 
getting us aligned. We, as a general rule, do not work together 
well without some incentives and a little prodding to get us 
there.
    Senator Reed. No, I think you are absolutely right, Chris.
    Mr. Dechert. Yes, Senator. The Realtors are not opposed to 
the bulk sale. We just have some concerns and want to have some 
guidelines and maintain the local involvement like you are 
talking about. That is what we want to do, too.
    Senator Reed. Well, one thing you have to do is thank your 
Senator, because he has been terrific in making sure that your 
voice is heard.
    Mr. Dechert. Yes.
    Senator Reed. I have never been to Avalon, but some day, he 
will invite me.
    Senator Menendez. All right. I will.
    Mr. Dechert. I will give you my card after the hearing.
    Mr. Nielsen. But, Senator, you want to be sure that the 
term ``bulk'' does not preclude people from participating. You 
want to make sure that it is small enough so that everyone can 
participate, or as many people as possible can participate in 
the process.
    Senator Reed. And the auction price determines----
    Mr. Nielsen. Exactly.
    Mr. Humphries. It is probably also worth pointing out, if I 
may, while a lot of the conversation has focused on bulk 
purchase, the vast bulk of properties being bought by investors 
are being bought by relatively small investors, and it is the 
long tail that actually drives a lot of this marketplace. So, 
certainly, there is a place for bulk investors, but I think 
things that do stimulate smaller investors, people in their 
communities who want to buy a house down the street for turning 
it into a cash-flow positive property, I think that is really 
where the bulk of--a lot of these sales go, and making sure 
that we continue--and that is these people who are buying all 
cash, paying all cash for homes and turning it around and 
turning it into rental properties, that is these people. And we 
need to make sure that we continue to have programs like FHA 
and Fannie Mae that are facilitating that part of the market, 
because that is the long tail and that is who is doing all this 
buying.
    Senator Menendez. Thank you.
    Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair.
    Mr. Dechert, I wanted to start with your mention of your 
support for lease-to-own strategies. Could you share your 
vision for how that would work?
    Mr. Dechert. Our vision, you know, as we had talked about 
earlier, there are just--we think it is a great program. We 
think it should be privately administered by local investors, I 
had said, local nonprofits. We would like to see local real 
estate agents involved, involved in the process there, and have 
some guidelines in contracts that are specific regarding the 
maintenance, purchaser responsibility, purchase price, percent 
of that downpayment. And then, also, which we think is very 
important, is minimize the detrimental effects on neighborhoods 
by implementing strict guidelines as far as the rehabilitation 
and continued maintenance of the property, and also setting up 
guidelines with the percent of payment allocated to 
downpayment, too. So I think it could be a good process.
    Senator Merkley. So you are picturing not just an option, 
but a negotiated purchase price arranged up front?
    Mr. Dechert. Yes, I think so. I mean, I have to really 
check a little bit more with our staff on that and get back to 
you on it, but yes, I think it might be something along those 
lines. Yes.
    Senator Merkley. OK. And, Ms. Goodman, you noted you 
support renting to current occupants. Do you have a specific 
vision of how you would like to see that executed?
    Ms. Goodman. Yes. I think you have to evaluate this 
property on a--you have to evaluate each piece of property on a 
one-by-one basis. There are some cases in which the current 
occupant cannot afford the rental income, cannot afford to be 
in the house at all, and there are other instances in which 
they can. I think you basically have to have an experienced 
manager work with borrowers on a one-by-one basis. But 
certainly to the extent the current borrower who is not paying 
his mortgage because he cannot afford his mortgage payment, but 
can afford to rent that property, there is no reason to kick 
the borrower and his family out and rent the property to a 
third party with a similar financial profile. There is no 
reason why the borrower has to dislocate his family, move from 
the community, and rent another home.
    Senator Merkley. Should the families have some sort of 
option to repurchase?
    Ms. Goodman. I think the answer is you want to give them 
the right of first refusal, but I think it is very, very hard 
to lock in a price up front.
    Senator Merkley. I want to turn to a concept that none of 
you have mentioned, at least not as advocating for, and that is 
home-buyer tax credits. In my work with low-income families 
through Habitat, I saw neighborhoods where the primary obstacle 
to homeownership was the downpayment, and one strategy is sweat 
equity, like Habitat. Another is an IDA strategy, Individual 
Development Account strategy, where you have matching grants. 
So there is certainly money being put in by the homeowner, but 
they earn over time through their savings matching grants to 
help them purchase a home. Those programs recognize that home 
ownership is one of the three main pathways to the middle 
class, one being small business, one being education, the third 
being homeownership.
    I look at the fact that we subsidize homeownership through 
the home mortgage interest deduction, about $100 billion a 
year, roughly. Why not, in addition, spend a little bit of 
money up front helping working families help absorb this 
inventory of foreclosed homes by being able to purchase a home 
now when the prices are very low, likely near their bottom. Why 
not spend a little money in a matching grant program, not 
simply on a temporary basis, and I think, Dr. Humphries, you 
have noted that a temporary basis simply shifts buyers forward, 
but as a longer-term aspect.
    I just want to know one other thing, is that for a working 
family, the 5 percent on a $200,000 house is less than the 
standard deduction, so a working family does not get any help 
from the mortgage deduction to become a homeowner in the first 
place. So we are spending all this money to help reduce the 
price of a house in the longer term. Why not spend a little bit 
of money up front to help working families become homeowners? 
Any thoughts?
    Mr. Krehmeyer. Yes, Senator. We in St. Louis carry out an 
Individual Development Account program. We have done so for 
about 10 years. Right now, we have about 400 account holders, 
and certainly we think it is a great idea, the idea of having 
people think long-term to build their assets and to build their 
wealth and provide them with the incentives. You commit, you 
make the sacrifices to save and get prepared for home ownership 
and we will, in turn, provide you with that financial support. 
I think it is a fantastic idea if we can create a national 
model that says we are going to create an Individual 
Development Account for households all across the country. I 
think that would be a great benefit to the current problem we 
are facing.
    Mr. Nielsen. And the Homebuilders would certainly support 
that program.
    Senator Merkley. What about tax credits, which are a little 
bit faster version of providing support to families' matching 
so it is not simply substituting for a homeowner's own, but the 
up-front costs are substantial. What if we had a $2,500 tax 
credit per person, $5,000 per person, had to be matched dollar-
for-dollar by the homeowner, to help people become homeowners 
right now, when the prices are low?
    Mr. Nielsen. Absolutely. Any program that makes it easier 
for folks to get into a home makes total sense to us.
    Senator Merkley. Mr. Dechert, what is your----
    Mr. Dechert. I was going to say, Senator, I agree with 
that, and the first-time home buyer tax credit program that was 
in effect last year and extended was great as far as getting 
people into the market and getting first-time home buyers 
involved. So I think anything that could be done along those 
lines would be great for the market.
    Senator Merkley. Mr. Humphries, I know you had concerns 
about a short-term program just shifting demand, but we have 
long-term programs. Why not a long-term working family matching 
tax credit?
    Mr. Humphries. Yes, I think it is an interesting idea, and 
if I understand--I do not understand all the details of what 
you are proposing, but certainly in terms of the shorter-term 
version, as you already mentioned, Senator Merkley, the tax 
credits in 2009-2010, we did extensive research and survey work 
at that time and we believe that it did primarily just shift 
demand around within the year. So we definitely saw a boost in 
home sales during the period of the tax credits, but we did see 
a fairly--almost a commensurate decrease in home sales 
following the expiration of that tax credit. So our sense is 
that it did not have a long-term impact on the trajectory of 
the housing market but did have a short-term impact.
    In terms of a longer-term stimulus as you are suggesting, 
and I do not know all the details of what you are proposing, I 
guess a mild concern I would have is whether--is the possible 
distortive impacts of that policy. We do have extensive--a host 
of other ways that we do make homeownership advantageous. You 
mentioned the mortgage deduction, certainly the implicit, now 
explicit, backing of Fannie and Freddie behind the mortgage 
market has kept rates low and it was an implicit subsidy to the 
housing market. We have numerous ways in this country that we 
do stimulate housing because we consider it to be very useful 
for, as you said, a pathway to the middle class.
    I guess I would be concerned that, one, about the 
distortive impacts and whether we are over-subsidizing housing 
at that point and distorting people's choices from some people 
for whom renting is actually a very good option, based on the 
long-term stability of their income and some other factors, 
perhaps their mobility preferences, and whether we are then 
incentivizing them to actually buy when actually renting is 
right for their financial situation.
    Senator Merkley. Thank you.
    Senator Menendez. Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman, and thank you so 
much for holding this hearing.
    Sometimes in this town, I feel like people are forgetting 
what people in our States are really going through, through 
this incredibly difficult economic period. It manifests itself, 
I think, very clearly in housing, where there are these twin 
problems that people are suffering through. One is the negative 
equity issue that I want to hear you on, Dr. Humphries, and the 
second, the other, is the cash-flow issue, people that are 
underemployed or unemployed and cannot afford to stay in the 
houses. They are related, obviously, but distinct, and I wonder 
if you would talk a little bit about the observation in your 
testimony that negative equity is much harder to solve, more 
than the other pieces of this.
    Mr. Humphries. Yes, and this is--I guess this is an issue 
that I wrestled with a great deal, because I do not have an 
ideological position on it. My----
    Senator Bennet. Another--I am sorry. Another way of saying 
negative equity, the issue is is there a way to prop up the 
values of people's homes, or do we need to take the pain as an 
economy going forward?
    Mr. Humphries. Well, I think, in general, I guess I tend to 
advocate taking the--you can pick your poison. Either you are 
going to take the pain now and you are going to get back to a 
normal market sooner, or we are not going to take the pain and 
we are going to go through a longer period of malaise before we 
get back to normal market conditions. And I think that both are 
quite detrimental to homeowners and U.S. citizens, and I tend 
to prefer probably getting the pain over with and getting back 
to normal market conditions with the realization that anything 
we can do through forbearance and refinancing programs that do 
try to stretch out the length of the payments and other things 
that try to keep people who can reasonably need some help in 
their homes is a good idea.
    I guess in terms of directly answering your question about 
negative equity, the reason it is a thorny problem, I think, is 
because, essentially, there are three classes of homeowners out 
there. We have got a large number of homeowners who do not need 
our help. They are in mortgages, and they may be down from 
where they bought--their home value may be down from where they 
bought it at, but they can still afford the mortgage.
    And then we have got the second group of people who do not 
really--who cannot benefit from our help----
    Senator Bennet. Because they are so underwater.
    Mr. Humphries. They are so underwater. They are in long-
term unemployment and essentially no amount of help that we are 
able to give them is going to keep them in that house.
    And then there is this third group of people who a little 
bit of help could actually make the difference for them. 
Reducing their payments $200 or $300 a month could actually 
keep them in their home, and that is the group that I think we 
are all united in saying, we should find something to target 
that group.
    The trouble is that that group is very small relative to 
the first and second groups, and it is very hard to target 
policies at that group without the first and second group 
coming in to avail themselves of those policies, and that tends 
to drive up the cost of these programs enormously, like we saw 
with the tax credits, where by our research, on the first round 
of tax credits, four out of five people who took the tax credit 
were going to buy a house anyway. So, basically, we were paying 
money for people who were going to buy a house, making the 
effective cost of that tax credit, instead of $8,000 per house, 
it ended up being almost $45,000 per house of the new homes 
that we were incentivizing because most of the people were 
going to buy the house anyway.
    So these programs, while if there was a silver bullet to 
solve negative equity and keep foreclosures at bay, I would 
definitely--want that silver bullet. It is such a thorny 
problem because, typically, of moral hazard problems.
    Senator Bennet. Ms. Goodman, do you have something you 
would like to add?
    Ms. Goodman. Yes. I would like to add on something to that, 
and I think, actually, Senator Menendez hit the nail on the 
head there. I think the way you have to deal with negative 
equity is by doing principal reductions. We know exactly what 
it takes to do a successful modification. You need to modify 
early. You need a significant payment reduction. And you need 
to do principal reduction to re-equify the borrower.
    If the question is, how do you deal with the moral hazard 
issue. Well, I am sitting there at a 150 LTV. I get a principal 
reduction down to 115 in exchange for giving up 50 percent of 
my upside. Stan Humphries, a much better borrower than me, is 
sitting there at a 120 loan-to-value ratio. He is not willing 
to give up 50 percent of his upside to get written down to 115. 
So, basically, a shared appreciation mortgage allieviates the 
moral hazard issue. If you accept a principal reduction, you 
then have a shared appreciation mortgage. This deals very 
nicely with the moral hazard issue.
    Essentially, we have to stop thinking of mortgage default 
as a moral issue and we have to start thinking of this as an 
economic issue. How do you put into place the economic 
incentives to get people to make the decision you want them to 
make. That is, you want me, at 150 LTV, to accept the principal 
reduction. You want him, at 120 LTV, not to, and you can easily 
do that.
    Senator Bennet. How do you feel about that?
    Mr. Humphries. Well, I guess I would have to understand, in 
terms of when I say moral hazard, I do mean the economic sense 
of moral hazard----
    Senator Bennet. Right.
    Mr. Humphries.----not the actual ethics of that issue. But 
I would have to understand in terms of--so you are suggesting a 
product, I guess, which does not exist out there
    Ms. Goodman. It actually does. It actually exists. There is 
one major servicer who is currently doing it.
    Mr. Humphries. OK, so----
    Senator Bennet. And who is that?
    Ms. Goodman. That is Ocwen.
    Mr. Humphries. And I guess if you were then to walk away 
from--if I were to sell my home subsequently, would I be left 
with a second mortgage equal to the amount that I had not paid 
on that shared appreciation upside possibility? Is that how 
that would work?
    Ms. Goodman. That would be a principal reduction to, say, 
115 percent of the mark-to-market LTV, and then you would share 
your upside with your lender.
    Mr. Humphries. But if I took the shared appreciation 
mortgage and 2 years later sold that house, am I left with any 
debt burden in that scenario----
    Ms. Goodman. No. No.
    Mr. Humphries.----because I certainly would see the upside, 
but I could----
    Ms. Goodman. No.
    Mr. Humphries.----at that point, I am walking away from 
that debt. Is that how that would work?
    Ms. Goodman. You do not owe anything more than what you 
have been written down to. It would be essentially a 
forgiveness program.
    Mr. Humphries. Right. So I guess the concern there, would 
that be moral hazard in slow motion, then? Would you get a 
shared appreciation mortgage now and then you would incentive 
people to a year or two later walk away and release themselves 
of the debt at that point? Is that how----
    Ms. Goodman. No. They still have 50 percent of the upside, 
so they would stay in their home at payments they can afford 
and----
    Mr. Humphries.But I guess in the scenario where I have got, 
let us say, a $150,000 mortgage and my home is only worth 
$100,000, you are going to write me down to $100,000 and then 
you are going to give me a shared appreciation mortgage so that 
I can participate in the upside. But, I guess, what is to 
prevent me from then selling my house a year or two later and I 
have now shorn myself of $50,000 of debt? Is that how that 
would potentially work?
    Ms. Goodman. You probably want to include the requirement 
that you buy into that principal forgiveness over, say, a 3-
year period.
    Senator Menendez. The Chair has been----
    Ms. Goodman. I do not want to----
    Senator Menendez.----extremely liberal here----
    [Laughter.]
    Senator Menendez.----in trying to maximize the discussion, 
both by Members' time as well as by interaction between the 
panel, which I am happy, as long as the Senator is using his 
time for this purpose.
    Senator Bennet. I appreciate it, Mr. Chairman. The only 
thing that I would ask Mr. Nielsen, who looked like he wanted 
to get in on this, to comment, and then I will get out of your 
way.
    I do think it is--throughout all the hearings that we have 
had and the work that has been done, I think it is very clear 
that what continues to elude us here is an alignment of 
incentives that could help create some velocity in the market. 
I do not think we could prop up these values myself. I think we 
have to let the market do what the market does. But to the 
extent that there are impediments and there are incentives that 
are unaligned from the outcomes that we would all like to see, 
that is the place where we need to be in order to begin to see 
this market start turning around. Obviously, employment being a 
big piece of all this.
    But, Mr. Nielsen, you get the last word in. You stand 
between me and the Chairman's patience.
    Mr. Nielsen. Well, to that end, Senator, you heard the 
dialogue, so there is lots of devil in the details.
    Senator Bennet. Yes.
    Mr. Nielsen. And those details need to be worked out. But I 
think it is important to understand that even though, as Laurie 
said, there are servicers that are doing some of these workout 
programs and there are States like the State of Nevada which 
mandate workouts between banks and homeowners, it is not 
getting done.
    Senator Bennet. Right.
    Mr. Nielsen. So whatever we are going to do, it has to be 
hard and fast and probably legislated. So thank you very much.
    Senator Bennet. Thank you. Thank you, Mr. Chairman.
    Senator Menendez. Well, thank you.
    I just want to just come back to revisit a central point 
here. I appreciate moral hazards as much as anyone else. I 
think there are moral issues into how people were led into 
mortgage products they should have never been into. That is a 
whole issue, as well. There is a moral issue when 4 million 
families will find themselves outside of their home, and the 
list goes on.
    So I am concerned about how we move this market forward, 
and it seems to me that one of the fundamental issues that we 
have talked about here a little bit, but I would like to just, 
if I can, nail it a little further down with the panel, and 
that is the whole question--the primary concern for the GSE 
about bulk sales is taxpayer reimbursement, and, of course, 
that is something this Committee is sensitive to. But I look at 
it in a little bit broader picture.
    Right now, who is the biggest holder of this liability? It 
is all of us as Federal taxpayers through the GSEs and the FHA? 
So I would want to limit that liability as much as I can and at 
the same time try to get a market moving. So I look at it maybe 
in a little different way because surely holding on to the 
proposition that I want 100 percent of what I have got when 100 
percent of what I have got is dramatically different in terms 
of value today than it was is a write-down in and of itself.
    And so looking at this in a way that--I think the GSEs 
think that selling properties in bulk will result in lower 
prices for taxpayers, but bulk sales also force investors to 
buy both the homes--the desirable properties and the less 
desirable ones, as well, and that has a value to it in and of 
itself when that is done in one bundle rather than in cherry 
picking the best. Others would suggest that improvements to the 
overall housing market from the bulk sales approach would help 
with individual sales and taxpayer returns on other properties, 
as well.
    So I get a sense that there should be a broader view as to 
how we ultimately get the taxpayer in the best position as well 
as stabilize neighborhoods and create greater values, and I 
would like to hear some direction to that, because I think that 
goes to the very heart of the matter. Do the GSEs and the FHA, 
you know, their concern for getting the best return for 
taxpayers by selling homes one on one or selling them in bulk, 
you know, how do you address that question? I open that to 
anyone on the panel who wants it. Mr. Nielsen.
    Mr. Nielsen. We hope there is a happy medium there, and 
that is why we are advocating that the number of homes be 
smaller, because it gives you more participants in that auction 
concept. In addition to that, I would say, with deference to 
Mr. Krehmeyer, that we should not limit anything to nonprofits. 
They are good at what they do and they should be equal 
participants with for-profit organizations. I think the more 
folks you have involved, the better off the pricing will be to 
the GSEs and to FHA.
    Mr. Krehmeyer. Yes. I think there is not an easy answer. 
Otherwise, we would have moved forward, Senator, and I think 
you framed it perfectly in terms of the two ends of the 
spectrum, about how do we manage taxpayers' dollars and how do 
we move the housing market forward.
    The genesis of our financial meltdown was the housing 
market. If we are going to return to being strong and healthy, 
my opinion is we have got to get the housing market going 
quickly, and again, we have to be bold and aggressive and say, 
short-term, this may not be the best thing that we feel 
comfortable with, but if we do not start moving units, if we do 
not start getting them reoccupied and positive use for new 
homeowners and for rental property, strengthening communities, 
pick up property values, increase the tax base, create some 
more jobs, we are going to continue to struggle.
    And again, I hope we can find a way to be bold and to be 
aggressive and to not be timid on this, because each and every 
day we wait, the problem gets bigger and bigger.
    Ms. Goodman. We have talked a lot about getting as many 
investors as possible involved. The current one-by-one system 
actually squeezes out the large investors because they are not 
able to buy in bulk and put into place the infrastructure that 
is necessary.
    Mr. Humphries. I guess I would suggest that it is 
fundamentally an issue of the flow of foreclosures by the GSEs 
and by the FHA. Are they happy with the current pipeline and 
the flow in which they are being released onto the marketplace? 
If they are not, then there is a price issue. They could lower 
the price, and from the investors' side, yes, I think the 
reason more bulk investors are not--they could move into the 
marketplace now and buy them individually and over time 
aggregate enough supply in individual markets to actually make 
a workable business. I think the issue that prevents investors 
from doing this is the fact that the price point is not right 
for investors.
    So, yes, they would like the prices lower, but if 
individual buyers are willing to buy them at a higher price, 
then I think the GSEs should sell them at the higher price. If 
they cannot sell them, then, yes, they will have to lower the 
price and that might become more interesting for larger bulk 
investors if they did so.
    Senator Menendez. While we have focused here on the 
foreclosure element of the marketplace, while I have the 
expertise on the panel, let me ask this final question. What 
about getting the GSEs to just let people who are presently in 
place lower rates to refinance at lower rates today? This would 
create, number one, certainty in that universe that that would 
not add to potential defaults. Second, it would create, 
obviously, a whole flow of money into the economy that 
individuals would have. Is that something that is desirable? 
Mr. Dechert.
    Mr. Dechert. Yes, I think it is, Senator. I think it could 
be very helpful, as long as we could work that out. You know, 
what we are seeing is--I mean, the pendulum as far as the banks 
were concerned, first, it was over here. It was way over here 
back in 2006-2007. They were giving some mortgages out that 
should not have been and they were pretty liberal. And now it 
has swung over here and they are being so tight and so strict 
with all the guidelines that it is tough to get the flow of 
money in there. And if we could get the pendulum back in the 
middle and work to maybe do something like you are talking 
about there, that would be very helpful, I think. It really 
would be, because keeping the homeowner in the property is a 
benefit for everybody all the way around and ultimately the 
taxpayer, too.
    Mr. Nielsen. But it clearly needs to be a specific policy. 
I mean, it needs to be stated so that there is no unequivocal 
decision to be made there. A good example--this may be a little 
bit off-track, but a good example is in multi-family, where 
there are some foreclosures where people have tried to work 
with the GSEs and sometimes have to resort to the Bankruptcy 
Court to set those issues aside and make it work, and that is 
wrong. But if there were a policy that you all decided on, this 
is the way it is going to work, then I think it would work.
    Mr. Humphries. That, if I may----
    Senator Menendez. Yes, Mr. Humphries.
    Mr. Humphries. I think that policy response--it is 
intriguing to me. I guess it has grown on me, the more I look 
at it. If you were to entertain that idea, I think you would 
have to do so as a form of economic stimulus for the economy, 
rather than a housing solution. I think that, for the reasons I 
articulated when I discussed negative equity, this program will 
not have a huge impact on the housing market. I think we are 
not going to avoid a lot of defaults. We will avoid some 
defaults by doing that, but I think we will not materially 
change the outcome of that in that marketplace there. But 
certainly it does offer the potential of $50 to $70 billion of 
stimulus, which may be helpful on the stimulus side, on the 
larger economic stimulus side. But I would not do it for 
reasons of helping housing.
    Ms. Goodman. I actually think that enhancing refinancing 
opportunities is a very noble goal, and, in fact, those most 
prone to default are paying the highest rates and oftentimes 
are the most difficult to refi.
    Having said that, I think it is very difficult to refi, 
enhance refi opportunities significantly in such a way that it 
is not NPV negative to Fannie and Freddie and, therefore, would 
not be inconsistent with the idea of conservatorship. I think 
the goal is noble. I think it is incredible difficult to get it 
done.
    Senator Menendez. Well, I guess that the conservatorship 
would have to look at what it is going to get at the end of the 
day if people default, what is the real value there. I mean, 
there is this presumption that there is, you know--if you 
bought your home, for argument's sake, at $400,000, and it is 
now worth $250,000, well, the entity that has backed the loan 
is looking at a valuation of $250,000, not $400,000. And so the 
question is, if I can allow that individual to refinance, stay 
in that home, and be able to, in doing so, over time, have an 
appreciation again that we expect, that that would be a whole 
different ball of wax. But if you want to just go and say, you 
know, I want to get that piece of property now, let us 
foreclose on it, it is not worth what the loan amount was. So 
it just seems to me that that has got to be part of the 
equation when we are trying to determine what is value at the 
end of the day.
    Senator Merkley, do you have anything else? Senator 
Merkley.
    Senator Merkley. Well, thank you, Mr. Chair. Yes.
    I wanted to explore a little bit more this bulk sale 
concept, and, Ms. Goodman, you note that you bring in the big 
investors when you do very large sales, but certainly you are 
providing a convenience to big investors, but there is nothing 
that stops them from acquiring homes in smaller batches, but 
you definitely exclude smaller investors. There are very few 
folks who can buy 200 homes at a time, for sure.
    There has to be a discount involved in that, and I am 
familiar with one bulk sale that occurred from a savings and 
loan in a neighborhood that I am very familiar with in which 
the investor bought the homes at roughly a 50 percent discount 
on what they would have sold individually. What do you estimate 
the discount to be if one investor buys 200 homes?
    Ms. Goodman. I think we actually have not seen that, so it 
is really hard to estimate what the discount would be, if there 
would be a discount at all. I would argue that there is so much 
capital raising going on for investors to participate in this 
market, and if you have several large bidders, there may not be 
a discount at all--and, in fact, you might end up getting 
better execution than you would one-by-one because, in fact, 
the large investors could accumulate the properties as a group 
and could put in place the necessary management structure all 
at once.
    Senator Merkley. I am slightly dubious about that because I 
have not seen large sales that were not done at substantial 
discount. Dr. Humphries, what do you think?
    Mr. Humphries. I mean, just to ballpark it, not looking at 
a specific deal, but if you look at some of the deals that were 
done through the PPIP where bulk purchases of FDIC inventory, 
those were oftentimes 50 percent of the outstanding mortgage 
balance, and that was--oftentimes those portfolios were, if you 
think that they were nationwide and home values are down 30 
percent, then that puts about a 20 percent discount, roughly, 
on those deals, just as a ballpark.
    Senator Merkley. I guess one thing I would be interested in 
is whether there is a way in which homes could be offered, if 
you will, to homeowners for a month or some period of time at 
the level that they would otherwise be included in the 
investment package. If they do not sell, then you include them 
in the investment package.
    My point is that if you are going to do a substantial 
discount, why not give individual families who have suffered 
with so much difficulty in this economy the chance to be a 
homeowner first and take advantage of that discounted rate? Any 
thoughts about that? Yes.
    Mr. Dechert. I would agree with that, Senator. I mean, the 
affordability index now is--I mean, it is at an all-time high 
and rates are low. If there could be some type of an 
opportunity for home buyers to get involved in a process like 
that, it could be very beneficial. I think it would be very 
helpful, and maybe even help to keep the property values up 
some, too.
    Senator Merkley. Ms. Goodman, would that kind of hybrid 
both accomplish what you are looking at, which is to be able to 
bring larger investors in to help clear this inventory and have 
them well managed, but also give individual families a chance 
to participate at whatever discount the homes are going to sell 
at?
    Ms. Goodman. I think the problem is that a lot of the 
distressed homeowners are not going to be able to buy a new 
home. They are going to be turned into renters, and it is not 
the way you or I would want it, but that is the economic 
actuality. They are not going to be able to afford a 
downpayment on a new home, and if there is one thing we have 
learned from the crisis, it is that you need to have some--the 
borrower needs to have some skin in the game.
    So I think it would be very disruptive to offer the 
homeowner the ability to buy the home for a month. And to the 
extent that you offer someone a free option for a month, I 
think you end up with cherry-picked homes that end up being 
substantially less valuable at the end of the day. And I think 
maybe you do some as bulk sales and some as individual sales, 
but I do think you need the bulk aspect. It would not be 
improper to maintain some individual sales, as well, but I 
think allowing cherry picking is just going to guarantee you a 
worse price at the end of the day.
    Senator Merkley. Yes. Mr. Krehmeyer.
    Mr. Krehmeyer. Yes. I would suggest on the idea of bringing 
distressed homeowners, I think it has some possibilities, but I 
would urge, put some home buyer education and training with 
that to make sure, OK, are we positioned, are we ready, have we 
done all the analysis, are we positioned for long-term success 
and do not have any short-term challenges.
    And I would also suggest that the idea of taking a family 
that is being foreclosed and let them stay in their home as a 
renter, about 3 or 4 years ago, that idea was not very 
palatable, in my estimation. As the problem continues to grow 
and get worse, right now, it seems, quite frankly, anything we 
do to keep families in their homes seems to me to make a great 
deal of sense. If we can create a structure where, again, the 
ownership can be transferred, that family stays, the children 
do not get uprooted, the neighborhood does not lose another 
homeowner, another asset goes down the tubes, if we can create 
a model like that, in addition to everything else we are 
talking about, I think that makes a ton of sense.
    Ms. Goodman. I could not agree with him more.
    Senator Merkley. Well, Ms. Goodman, in your concept, not 
all those homes would be occupied by families, because many of 
them are empty, right? A lot of the homes that would be in 
these inventories----
    Ms. Goodman. Yes. I mean, I really like the idea of 
investors buying up blocks of nonperforming loans and, where 
the borrower is clearly not going to make it in the end and 
wants to stay in his home, turning him into a renter. As Chris 
suggested, I think that makes a ton of sense. My firm is 
already doing it on a very small scale.
    Senator Merkley. I would argue with the point you made 
earlier a little bit in which you said, if there is one thing 
we have learned, it is that there needs to be skin in the game. 
I would say, if there is one thing we learned, liar loans are 
unacceptable. Predatory teaser rate loans are unacceptable. And 
steering payments in which the mortgage originators have an 
incentive undisclosed to the buyer to steer people into 
predatory loans are unacceptable.
    And I say this because I saw so many families who were able 
to become homeowners and pay less as a homeowner than they did 
in rent, and they had a huge incentive to stay in those homes 
even if they did not have a huge amount of money up front for a 
downpayment. But the families that got tossed out, or largely 
got tossed out because they were steered into predatory loans 
or they lost their jobs in this downturn of the economy, I 
mean, there are other factors that have a much bigger impact on 
what occurred than, I would say, the size of the downpayment. I 
will just throw that out.
    Yes, Mr. Nielsen.
    Mr. Nielsen. You know, we would absolutely agree. We think 
it has a whole lot more to do with underwriting than it does 
the size of the downpayment. If they are underwritten properly, 
if people are underwritten properly, they are in the home. In 
fact, there are programs with very small downpayment 
requirements, from historically, that worked very, very well 
because they were well underwritten.
    Senator Merkley. Thank you all very much.
    Senator Menendez. Let me thank the panel.
    I know that prices, home prices, are low, and interest 
rates are about as low as they get. That still has not moved 
the market forward. So there are challenges here beyond that. 
You cannot have lower interest rates, and you cannot have 
prices that have significantly gone down and still see no 
action. So there are other challenges here.
    Certainly, I get concerned when I see the suggestion that a 
qualified residential mortgage is now 20 percent. And while I 
totally believe, Ms. Goodman, that there has to be skin in the 
game, no question about that, I also think that when you say 20 
percent, it seems to me that the broader criteria of 
determining the lending criteria is important.
    This is going to take a whole universe out of the market 
who can be responsible borrowers at the end of the day and help 
the market, and the market seems to have gone there 
notwithstanding that there has not been any regulation to that 
effect yet. So this is a little bit chilling to me, so I hope 
we can deal with that issue, as well.
    It is the focus of the Subcommittee from its last hearing 
and today and continuing to, as a result of some incredibly 
good testimony here and on the panels we had last week, to try 
to devise an overall plan as to how we work with the 
Administration and get this market moving again, because it is 
difficult to be optimistic about the economic future without 
having a housing market that is more robust than it is today.
    So with the thanks of the Committee to all of you for your 
testimony, the record will remain open for 1 week so that any 
of our colleagues who may not have been able to attend, or who 
attended and have further questions, can do so. We would ask 
you to respond to those as quickly as you can in pursuit of our 
efforts here to have some action in the very close days ahead.
    With that, this hearing is adjourned.
    [Whereupon, at 11:28 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]


            PREPARED STATEMENT OF ALLAN H. ``DUTCH'' DECHERT
             President, New Jersey Association of Realtors
                           September 20, 2011

INTRODUCTION
    On behalf of the more than 1.1 million members of the National 
Association of Realtors (NAR), thank you for holding this timely 
hearing on new ideas to address our Nation's continuing foreclosure 
problem.
    My name is Dutch Dechert, and I am the 2011 President of the New 
Jersey Association of Realtors. I have been a Realtors since 1981, 
and am the broker/co-owner of Ferguson Dechert Real Estate, Inc. in 
Avalon, N.J. Over the years, I have served the New Jersey Association 
of Realtors in many capacities (e.g., director, division officer, and 
committee chairperson), and in 1990, and again in 2001, was selected as 
Realtor of the year by the Cape May Association of Realtors. In 
addition to my involvement within the Realtor community, I am a 
trustee of the Avalon Chamber of Commerce, where I served as president 
from 2004 to 2007, and am also a member of the Cape May Chamber of 
Commerce.
    The U.S. housing sector is in a precarious state. According to many 
economists, it appears to have reached bottom and sales volumes and 
prices are beginning to stabilize. However, the uncertainty that has 
plagued the sector's recovery looks like it could be reintroduced as 
expirations dates for the national flood insurance program and loan 
limits quickly approach. As we begin the process of repairing the 
housing sector, let us remember that the first goal should be to do no 
more harm.

ADDRESSING THE NATION'S FORECLOSURE CRISIS
    Realtors appreciate the Administration's attempts over the last 
two and half years to keep families in their homes, and its recognition 
that homeownership matters. The foundation of our economy is housing. 
Over a million small businesses have developed from it, and many more 
thrive because of it, including real estate sales services, housing 
finance, and construction and rehabilitation services.
    Though several Federal programs were put into place in an effort to 
keep families in their homes, nearly all have depended on the efforts 
of large financial institutions to assist consumers. To date, all of 
these programs have fallen far short of their ambitious, but achievable 
goals. Realtors  are concerned that many of these same financial 
institutions, who received vital funding from both the Treasury 
Department and Federal Reserve Board at the onset of the economic 
crisis, continue to deny similar support for distressed households 
across the country. A key purpose of the extraordinary support that 
these institutions received was to ensure that liquidity--for all types 
of lending--was available throughout the crisis. Yet many creditworthy 
households, specifically those requiring new or refinanced mortgages, 
are unable to obtain fair and affordable loans.
    Realtors know firsthand that another attempt needs to be made to 
fix the housing sector, particularly the large inventory of real estate 
owned (REO) properties that exists and continues to grow. Realtors 
believe the any proposal designed to address this issue must:

    Focus on providing mortgage financing to qualified home 
        buyers and investors to increase the absorption rate of the 
        current REO inventory and prevent increases to existing REO 
        inventory,

    Expand resources dedicated to pre-foreclosure efforts, 
        including loan modifications and short sales (foreclosures are 
        typically more costly than loan modifications and short sales, 
        so this would minimize the need for more taxpayer dollars being 
        used to support the GSEs), and

    Continue the timely and orderly disposition of REO 
        inventory assets, and in limited geographic areas where 
        alternatives are needed, rely on the expertise of local 
        businesses including contractors, real estate brokerage firms, 
        and professional property management companies.

    NAR suggests that, as the Government evaluates proposals in 
response to the recent request for information regarding the renting of 
Government-backed foreclosed properties, the basic principles of any 
proposal should be to assist in reducing the number of properties in 
the foreclosure process that will add to the REO glut, maximize the 
recovery on REO assets currently held by FHA and the GSEs, and preserve 
housing values in neighborhoods across the country.

FINANCING
    In response to the 2008 economic crisis, the Obama and Bush 
administrations have taken extraordinary steps to ensure that most of 
our large financial institutions survive. Most of these large 
institutions received funding from both the Treasury Department and 
Federal Reserve at extremely favorable rates considering the inherent 
risk. Yet, private capital in support of the mortgage market--meaning 
without Government participation via FHA, VA, or the GSEs--virtually 
disappeared.
    The lack of financing is putting downward pressure on home values, 
increasing the number of homeowners whose mortgages exceed the value of 
their home, and increasing foreclosures. Since the beginning of the 
crisis, the GSEs and FHA have provided about 90 percent of all mortgage 
lending. During this time, FHA has raised its insurance premiums, the 
GSEs have raised their upfront fees (including loan-level pricing 
adjustments), and the lending industry as a whole has tightened 
underwriting standards to the point that only those with pristine 
credit histories have access to reasonably priced mortgage credit. 
Increasing access to financing for qualified borrowers and investors by 
reassessing the higher fees and excessively tight underwriting 
standards will increase the availability of mortgage lending for all 
types of housing, and will go a long way in allowing potential 
homeowners and investors to absorb excess foreclosed (REO) inventory.

Increasing Consumer Lending
    As a consequence of extreme economic events, most notably high 
unemployment, lower home values, and tighter credit, many families now 
find that renting is their default option. Moreover, many creditworthy 
consumers continue to experience difficulties in obtaining fair and 
affordable mortgage loans. NAR supports strong underwriting standards; 
however, potential home buyers have become discouraged during this time 
of unprecedented housing affordability due to high fees, unduly tight 
underwriting standards, and the lack of availability of private 
mortgage capital.
    Realtors ardently believe that the lending industry should 
reassess its policies and increase lending. The excessively stringent 
underwriting standards that are preventing creditworthy buyers from 
obtaining loans now need to be weighed against the broader recovery of 
the economy, because they are impeding the confidence of potential 
mortgage applicants and threatening to reproduce cracks in a very 
fragile housing recovery.

Liquidity for Investors
    Realtors firmly believe it is important to have private capital 
return to the mortgage market and give the Government the ability to 
reduce its market share. Unfortunately, the refusal of financial 
institutions to return in support of the housing finance sector and 
provide mortgage financing means all borrowers, including investors, 
are finding it more and more difficult to obtain affordable mortgage 
options.
    Realtors recognize the importance of affordable rental housing. 
For markets with large numbers of REOs and a high foreclosure pipeline, 
Realtors support giving local investors the opportunity to finance the 
purchase of distressed REO properties for rentals until the market 
recovers or to rehabilitate for more immediate resale. In order to 
facilitate this, the Government should implement temporary financing 
policies to give local investors the opportunity to purchase 
properties. Here are two examples of existing Agency policies that can 
be modified to offer incentives to investors:

  (1)  HUD should open up the FHA Section 203(k) rehabilitation program 
        to investors. This will facilitate the rehab of the existing 
        housing stock and increase the availability of financing for 
        rental housing, and

  (2)  The GSEs should temporarily suspend investor financing 
        limitations, especially the limit on the number of mortgage 
        loans allowed for any one investor/borrower (currently 4 for 
        Freddie and 10 for Fannie), to enhance affordable rental 
        opportunities.

    Amending these policies will give small, private investors the 
opportunity to absorb some of the excess inventory, resulting in the 
stabilization of prices for existing REO properties. Also, hard hit 
communities would benefit from improvements made to the vacant 
properties, and local economies would improve as small businesses would 
have the opportunity to participate in the rehabilitation of these 
properties by providing, as an example, renovation and property 
management services.

PRE-FORECLOSURE
    The current economic and political environments are very budget 
conscious. Therefore, REO disposition programs that appear to increase 
taxpayer losses while seeming to enrich large institutions would raise 
concerns among Congressional members and millions of taxpayers, who 
remain angry that ``Wall Street'' received Federal support while ``Main 
Street'' was left behind. Realtors believe the best opportunity to 
reduce costs to taxpayers and assist in the stabilization of housing 
values and neighborhoods is to respond more effectively to, and provide 
more resources for, pre-foreclosure efforts on loans insured by FHA or 
owned or guaranteed by the GSEs. These efforts not only are net-
positive outcomes for homeowners, but taxpayers as well.
    Since early 2008, NAR has continually urged the lending industry to 
take every feasible action to keep families in their homes with a loan 
modification or, in cases where it is not possible to avoid 
foreclosure, a short sale.

Commitment to Loan Modification and Short Sales
    Realtors are acutely aware of the downward pressure that 
foreclosures have on housing market prices. To relieve this, Realtors  
recommend that the Government reassess current policies to make sure 
that as many loan modifications and short sales are approved as 
possible. This will reduce adding to the ever increasing glut of REOs. 
A recent Office of the Special Inspector General for the Troubled Asset 
Relief Program (SIGTARP) report noted that less than 5 percent of TARP 
funds allocated for housing support programs, such as the Home 
Affordable Modification Program (HAMP) and Home Affordable Foreclosure 
Alternatives Program (HAFA), has been used. The success of these 
programs depends on the resources available and efforts of 
participating large financial institutions. Repurposing a portion of 
the existing housing focused funds to increase borrower participation 
will improve the performance of these programs, and will reduce the 
pipeline of severely delinquent mortgages that end up in foreclosure. 
Loan modifications keep families in their homes and reduce the 
probability of default.
    Short sales, for those unable to meet their mortgage obligations, 
stabilize home values and neighborhoods, by keeping homes occupied. 
Also, short sales help reduce taxpayer losses by selling the probable 
foreclosure at a premium over its potential REO sales price. 
Unfortunately, our members' report that many potential home buyers 
still choose to simply walk away from a short sale due to the length of 
time it takes for the lender to complete the transaction. The 
dependence on large financial institutions has resulted in a short sale 
market that is clearly not functioning as it should. Realtors believe 
that homeowners and taxpayers deserve better.

IMPROVED DISPOSITION OF REO INVENTORY

Bulk Sales
    In August, the Administration requested advice from market 
participants on the pooling and disposition of GSE and FHA REO 
inventories. FHFA, Treasury and HUD expect these disposition strategies 
to involve REO assets totaling at least $50 million in value, and in 
the case of joint ventures, up to $1 billion. Though bulk sales may 
quickly alleviate the critical mass of REO inventory held by the 
agencies, these types of proposals will likely require taxpayers to 
accept larger losses than is necessary.
    As described earlier, Realtors  strongly believe that every effort 
should be made to incentivize individual versus bulk sales because 
individual sales maximize recovery on the assets and minimize the 
impact on housing values. Exclusively selling in bulk to large national 
investors at deep discounts will only work to further consolidate a 
large section of the housing market into the hands of a few market 
participants
    Realtors are also concerned that the unintended consequences of 
bulk sales at the proposed scale could devastate communities across the 
country. Providing a few large, private investors access to cheap 
assets for rentals could very likely erode market rent and sales 
prices. The consolidation of a large number of rentals to an 
institutional investor could mean that small landlords would be unable 
to match the rental prices that an institutional purchaser of a 
discounted pool of agency assets could offer. Rather than encouraging 
bulk sales across the board, bulk sales should only be considered in 
small geographic areas with high rental demand and should contain 
rigorous stipulations that ensure the revitalization and stability of 
local communities. It is also important that consideration be given to 
the pricing of these pooled assets to prevent the negative effect bulk 
discounts could have on the rest of the market and smaller competitors 
if the discount is so large that the bulk purchaser can sell these 
properties quickly at a deep discount.

Structuring Bulk Sale Proposal
    Should a pilot program be implemented for the bulk sale of 
distressed properties, the Federal Government should first offer local 
governments, investors, and housing authorities, with vested interests 
in their communities, the opportunity to purchase the properties. Such 
limited sales could be made to non-profit and for-profit organizations 
that must meet specific program requirements and are familiar with the 
needs of the communities where the homes are located. Ultimately, the 
success of any program will be determined by its stabilizing effect on 
a particular locale and whether it maximizes value for taxpayers.
    Maximizing recovery on the assets will depend on the determination 
property valuations and the assurance that the valuations are accurate, 
appropriate, and reflective of current market conditions. Realtors 
strongly recommend that entities investing in pools of distressed REO 
inventory be required to have a local presence and work locally with 
contractors, real estate brokerage firms, and professional property 
management companies. Knowledge of regional and local markets is 
crucial in the orderly disposition of REO assets and minimizes taxpayer 
losses related to REO properties.

Lease-to-Own
    Realtors believe that sustainable rental housing is an integral 
component of the housing market. Furthermore, they understand the 
opportunities affordable rentals provide for potential home buyers as 
they save for down payments. Therefore, an option to combine REO 
disposition with affordable rental is a lease-to-own program. NAR 
recommends that any lease-to-own solution should be first focused on 
keeping families in their homes. FHA and GSE policies should minimize 
foreclosures that will result in the sale of the properties at a very 
large discount to a purchaser in a bulk sale, regardless of whether the 
purchaser has a lease-to-own component in place. Where lease-to-own 
programs are an appropriate solution, they should focus on the 
rehabilitation of blighted properties, affordable homeownership and, 
where it makes sense due to excess REO supply and significant rental 
demand, rental opportunities without an initial purchase requirement.

Structuring Lease-to-Own Programs
    As the Government considers REO disposition solutions, Realtors 
believe that the following principles supporting affordable rental and 
homeownership opportunities should be considered. Lease-to-own joint 
ventures:

    Should not be run or administered by the Government,

    Should be administered, whenever possible, by local 
        investors or local non-profits that can manage the specialized 
        needs and challenges of local markets,

    Should be widely marketed by real estate agents to ensure 
        visibility and encourage homeownership,

    Should have clearly defined expectations,

    Should have guidelines and contracts that are specific 
        regarding maintenance, purchaser responsibility, purchase 
        price, and percent of payment allocated toward a down payment,

    Should include Condominiums, and

    Should minimize detrimental effects on neighborhoods by 
        implementing strict guidelines on the rehabilitation and 
        continued maintenance of properties, ensuring that the 
        properties do not become rentals that are in disrepair.

ADVISORY BOARD
    Finally, as the President recently noted, a recovery of the housing 
market cannot be accomplished solely by the public sector. As the 
Government reviews ideas for alleviating the foreclosure crisis, 
including the pooling of properties for bulk sales and lease-to-own 
joint ventures, NAR recommends the creation of an advisory board made 
up of public and private industry participants. A wide range of board 
members including Government staff, asset managers, real estate 
professionals, professional property managers, and others with 
extensive real estate industry experience can work to ensure that the 
efficient disposition of Government-owned REO properties minimizes 
taxpayer losses and negative effects on local real estate markets.

CONCLUSION
    The recovery of the broader economy depends on housing. The last 
two and half years have shown that, with housing prices bumping along 
the bottom, a robust economic recovery will remain exceedingly 
difficult. NAR believes that the best way to extinguish the glut of 
foreclosed properties is through an expansion of financing 
opportunities to qualified home buyers and investors, bolstering loan 
modifications and short sale efforts, and focusing on enhancing the 
orderly and efficient disposition of REO assets. Where bulk sales or 
lease-to-own programs are unavoidable, NAR urges you to consider our 
recommendations. Doing so will reduce taxpayer losses on REO assets, 
minimize the impact distressed assets have on local real estate 
markets, and ensure the stabilization of neighborhoods.
    I thank you for this opportunity to present our thoughts on the 
foreclosure crisis, 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.
                                 ______
                                 
                  PREPARED STATEMENT OF ROBERT NIELSEN
      Chairman of the Board, National Association of Home Builders
                           September 20, 2011

    Chairman Menendez, Ranking Member DeMint and Members of the 
Subcommittee on Housing, Transportation and Community Development, I am 
pleased to appear before you today on behalf of the National 
Association of Home Builders (NAHB) to share our views on how to 
address the glut of foreclosed homes that are currently on the market. 
We appreciate the invitation to appear before the Subcommittee on this 
important issue. My name is Bob Nielsen and I am the 2011 NAHB Chairman 
of the Board and a home builder from Reno, Nevada.
    NAHB represents over 160,000 members involved in home building, 
remodeling, multifamily construction, property management, housing 
finance, building product manufacturing and other aspects of 
residential and light commercial construction. NAHB commends this 
Subcommittee for seeking solutions to the major problem of home 
mortgage foreclosures, through this hearing on reducing the inventory 
of foreclosed homes as well as last week's hearing on new ideas for 
refinancing and restructuring mortgage loans. As these sessions 
illustrate, there are two distinct components to the foreclosure 
program--shrinking the large pool of foreclosed homes and reducing the 
flow of additional homes into that pool.
    Home mortgage foreclosures continue to have a significant negative 
impact on the housing market and contribute to the lag in the Nation's 
economic recovery. While the majority of foreclosures have been 
concentrated in a handful of States, no State has avoided the negative 
effects on prices created by foreclosures. Home prices have fallen by 
record amounts across the country, making consumers hesitant to 
undertake home purchases and making it more difficult for homeowners to 
sell their current home in favor of a new residence. Many mortgage 
borrowers are ``underwater''--with their house values lower than what 
is owed on their mortgages. Not only is this impacting household wealth 
and spending, more recently there is a growing problem of strategic 
defaults, where borrowers who could afford to make their monthly 
payments instead choose to walk away from their homes.
    The decline in house prices makes it difficult for new home 
construction to compete in current market conditions, as the cost of 
building a new home can be higher than the final appraised value. Many 
times foreclosed or distressed property sales are used as comparable 
sales in these appraisals, which further depresses home values and puts 
new construction at a disadvantage. As a result, new home construction 
is at a record low level. The downward spiral in values is also 
adversely affecting outstanding residential construction loans, as 
lenders demand equity pay-ins to offset declines in collateral value, 
and making it more difficult for builders to obtain adequate funding to 
start new projects. Ultimately, stopping this trend in foreclosures 
will have benefits beyond the housing industry. Stabilizing home values 
will improve the balance sheets of financial institutions and will 
reassure home owners that their biggest asset will retain its value.

NAHB Recommendations
    The Federal Housing Finance Agency (FHFA), in consultation with the 
U.S. Department of Housing and Urban Development (HUD) and the U.S. 
Department of Treasury, recently issued a Request for Information to 
solicit ideas for strategies on disposing of the substantial inventory 
of Real-Estate Owned (REO) properties held by Fannie Mae and Freddie 
Mac (the Enterprises) and the Federal Housing Administration (FHA). 
NAHB appreciates that the agencies are seeking input from industry 
stakeholders before moving forward with disposition strategies. We 
support the agencies' goals of reducing the REO portfolio in a cost-
effective manner; reducing average loan losses to the Enterprises and 
FHA; addressing property repairs and rehabilitation needs; responding 
to economic and real estate conditions in specific geographies; and 
stabilizing neighborhoods and local home values. NAHB submitted 
comments to the agencies in response to the Request for Information, 
and we would like to share those comments with the Committee as they 
are relevant to today's hearing topic.

General Principles
    NAHB believes that it is extremely important for the Enterprises 
and FHA to take a balanced approach in disposing of their large 
inventory of REO properties to avoid further disruptions to pricing and 
markets and to limit losses to the Enterprises and FHA. In particular, 
the Enterprises and FHA should avoid bulk sales to large investors that 
have no stake in the neighborhoods in which these properties are 
located. Local and small businesses should be the driving force behind 
the disposition of the REO inventory, which will result in the creation 
of jobs and the stabilization of neighborhoods. In addition:

    The FHFA should allow a more decisive approach to mortgage 
        modifications, which would help reduce the number of 
        foreclosures.

    The excessive bias against investors in the current system 
        must be removed in order to facilitate innovative solutions and 
        assure adequate capacity to effectively reduce the REO 
        inventory.

    For-profit companies should be permitted to fully 
        participate in all aspects of the disposition of the REO 
        properties, including the purchase, management, leasing, and 
        rehabilitation of the properties. With the scale of the problem 
        so large, it is necessary to deploy all resources in both the 
        private and nonprofit sectors.

    The disposition process should facilitate local job 
        creation. Local businesses and small businesses should be 
        primary players in this effort, particularly local home 
        builders and remodelers, as well as property managers and 
        realtors.

    The disposition process should not further adversely affect 
        values. Do not allow ``fire sales'' of REO properties. It is 
        critical that the disposition process helps stabilize house 
        prices, not contribute to further devaluation.

    The process should facilitate homeownership opportunities 
        where feasible and available.

    Rental opportunities should be created where appropriate, 
        but the agencies should ensure that the disposition of REO 
        properties does not result in concentrations of large numbers 
        of rental properties in any single neighborhood.

    It is essential to return to more balanced credit 
        requirements for home purchasers. Current credit requirements 
        are so restrictive that it is difficult for many potential 
        purchasers to obtain a loan.

    NAHB strongly suggests extending the higher Economic 
        Stimulus Act (ESA) loan limits beyond the September 30, 2011, 
        expiration date. This is not a time to lower loan limits as the 
        lower limits will exclude many homes and home buyers from FHA 
        and the Enterprises loan programs, particularly in areas like 
        California where there is substantial foreclosure inventory. 
        NAHB would specifically like to thank the efforts of 
        Subcommittee Chairman Menendez for his leadership in extending 
        the loan limits past the current expiration date, and strongly 
        supports his legislation (S. 1508) to extend the higher loan 
        limits through December 31, 2013.

    NAHB understands that establishing credit risk retention 
        rules was required by the Dodd-Frank Act. However, NAHB is very 
        concerned about the immediate impact this proposed rule will 
        have at this precarious point in the economic recovery. We are 
        also concerned about the implications of overly restrictive 
        rules on future growth of the housing market and the entire 
        economy. NAHB has recommended the elimination or postponement 
        of any new restrictive regulations. The proposed rule has far-
        ranging implications across the housing and development 
        sectors, particularly the narrow definition of a Qualified 
        Residential Mortgage (QRM), which, if implemented, would have a 
        severe adverse impact on the availability and cost of 
        residential mortgages.

Modify Federal Housing Programs To Allow Investor Participants
    Modifications to Federal housing programs to allow investor 
participation in disposing of REO properties is appropriate at this 
time. These modifications could be made on a short-term basis while the 
inventory of REO properties remains high.

    Modify the FHA Section 203(k) program to allow for-profit 
        investors, which will help expedite the sale of vacant and 
        distressed properties until the foreclosure crisis is 
        alleviated. Understanding that investor/non-owner occupant 
        loans present higher risks, FHA could impose prudent 
        restrictions such as higher down payments and providing owner-
        occupants a first look before offering to investors. In 
        addition an incentive could be developed to encourage investors 
        to sell the property to an owner occupant within a reasonable 
        period of time through lease purchase or other targeted 
        programs.

    Encourage HUD to provide guidance to participating 
        jurisdictions (PJs) on the use of HOME funds to help purchasers 
        buy foreclosed properties. Although PJs set their own 
        priorities for spending HOME funds, HUD can play a role by 
        providing best practice approaches for using HOME funds to help 
        with neighborhood stabilization.

    Improve the Neighborhood Stabilization Program (NSP) to 
        allow more for-profit participation, expand income levels 
        served and generally streamline the process. States and 
        localities should be encouraged to undertake both homeownership 
        and rental programs.

    Encourage USDA Rural Development to use Section 502 to help 
        homeowners purchase foreclosed homes or REO properties.

    Consider changes to loan terms in all Federal programs 
        (e.g., stretch amortization to 40 years; allow higher loan-to-
        value).

    Considering the most recent data, FHA-financed condominium 
        purchases are performing stronger than other purchase loans 
        with a delinquent/claims rate of 1.14 percent, which is less 
        than half of the overall claims rate. The FHA condominium rules 
        should be relaxed to provide greater liquidity to this sector 
        of the market. We support enhancements that would 1) eliminate 
        owner-occupancy ratios, enabling more buyers to purchase units 
        and help stabilize those developments and the community; 2) 
        amend or, at least, temporarily suspend the FHA concentration 
        limit; 3) increase the investor ownership percentage owned by 
        one investor, particularly if the investor is the builder or 
        developer; 4) reduce or eliminate pre-sale requirements; and 5) 
        extend delinquent Home Owner Association (HOA) assessments from 
        30 days to 90 days.

Modify Fannie and Freddie Programs
    The economic crisis pushed the Enterprises to implement overly 
stringent credit requirements and other restrictions, in addition to 
ceasing programs that were once in operation. However, prudent 
modifications to several programs could greatly assist in the reduction 
of the REO inventory without excessive risk to the Enterprises.

    The Enterprises should prudently modify existing mortgage 
        programs that are overly restrictive and prohibit originators 
        from adding any overlays that would be more restrictive.

    The Enterprises should remove excessive bias against 
        investors by increasing the number of GSE loans an investor can 
        have. Currently Fannie Mae limits investor properties to 10, 
        including their primary residence, and investors with 5 to 10 
        properties face more rigid underwriting criteria. Freddie Mac 
        is even more restrictive, allowing only four.

    The Enterprises' renovation programs like Fannie Mae's 
        HomeStyle Renovation should be reevaluated. The guidelines 
        should be targeted to include investors and to provide 
        incentives to home buyers to acquire deteriorated inventory and 
        recondition them.

    Both Enterprises have operated lease-to-own programs in the 
        past which are now dormant; the Enterprises need to do more in 
        this area by facilitating the creation of investor lease-to-own 
        programs that can be operated at scale.

    The Enterprises should ease their condo policies to provide 
        needed liquidity to reduce the excessive inventory. Similar to 
        recommendations for FHA, we support enhancements to owner-
        occupancy ratios, investor ownership ratios, pre-sale 
        requirements and delinquent HOA assessments. Enhancements to 
        the Enterprises' condominium rules will ensure the still-
        fragile recovery stays on track and will protect the long-term 
        value of homeownership in the United States.

New Programs
    NAHB suggests that new programs, such as described below, could 
contribute to the reduction of the REO inventory.

Investment Fund
    The Enterprises could transfer REOs to a newly created investment 
fund (REIT-like) that is open to individual investors. The funds would 
have full faith and credit backing by the Federal Government and a 
guaranteed rate of return similar to the current Ginnie Mae (GNMA) 
rates. Local real estate management companies should be used to inspect 
and manage the properties and report quarterly on the condition of 
properties to the fund.

Lease-To-Own
    A new lease-to-own program should be developed that is geared to 
all income levels, as the foreclosure crisis has affected families from 
all walks of life. Such a program could be operated at various scales, 
with 50 to 100 units as a minimum. An effective program would include 
the following elements:

    A 12 to 24-month lease period to allow time to save for the 
        downpayment, repair credit, bring up FICO scores; downpayment 
        funds would be escrowed over this period. There would be a 
        penalty if the participant drops out (some or all of the 
        escrowed funds would be forfeited; those funds revert to the 
        builder/investor to be used to repair the unit and remarket 
        it).

    Downpayment escrow of 5 percent of the purchase.

    Mandatory homeownership counseling to consist of both 
        financial literacy (understanding mortgages, credit 
        requirements, etc.) as well as home maintenance and 
        responsibilities of being a homeowner.

    Participant responsibilities during the lease period to 
        include interior maintenance; exterior maintenance 
        responsibilities would depend on whether there is a homeowners 
        association and if those services are included otherwise.

Project Rebuild
    The President proposed in his American Jobs Act of 2010 to create 
``Project Rebuild.'' Project Rebuild would authorize $15 billion to 
rehabilitate and refurbish vacant and foreclosed homes. Two-thirds of 
the funding would be allocated by formula to State and local 
governments, with the remainder allocated through a competitive 
process. NAHB is particularly pleased that the proposal would allow 
for-profits builders to compete directly for the funds. NAHB commends 
the Administration for recognizing the urgent need to deal both with 
vacant and foreclosed homes as well as to promote job creation in the 
construction industry.
    While Project Rebuild has the potential to create more than 100,000 
jobs \1\ in the remodeling and home building sector, the draft 
legislation also seeks to impose the prevailing wage and administrative 
requirements of the Davis-Bacon Act of 1931 on the use of these funds. 
Extending Davis-Bacon in this manner will undermine the very objective 
of the legislation: job creation. The vast majority of home building 
and remodeling companies are very small businesses who simply lack the 
ability to tackle the complex administrative requirements of Davis-
Bacon. Congress has previously imposed Davis-Bacon requirements on the 
use of stimulus funds in the American Recovery and Reinvestment Act 
(ARRA), and this requirement became a significant barrier preventing 
struggling construction companies from accessing these funds. A 
February 2010 Government Accountability Office report analyzing the 
effects of Davis-Bacon under ARRA noted that `` . . . Davis-Bacon 
administrative requirements would require a more detailed payroll 
tracking system, which would be particularly burdensome for small 
companies.'' [page 16] Additional Government regulation is not the path 
to successful small business job creation.
---------------------------------------------------------------------------
    \1\ NAHB estimates that for every $100,000 spent on residential 
remodeling, 1.11 jobs are created.
---------------------------------------------------------------------------
Conclusion
    Thank you again for the opportunity to testify on this important 
issue. NAHB stands ready to work constructively with this Subcommittee, 
as well as the full Senate Banking Committee, to address the critical 
issue of foreclosures and their impact not only on the current housing 
market but on the economic recovery of the Nation as a whole.
                                 ______
                                 
                 PREPARED STATEMENT OF CHRIS KREHMEYER
                   President and CEO, Beyond Housing
                           September 20, 2011

    Chairman Menendez, Ranking Member DeMint and all Committee Members, 
it is my honor to be here today to discuss the very critical issue of 
the glut of foreclosed homes that are currently on the market. I am the 
President/CEO of Beyond Housing, a Neighborworks America network 
organization and a 35-year-old not for profit in St. Louis, Missouri. 
In addition, I am on the Board of Directors of the National 
NeighborWorks Association, a national membership group that works to 
unite housing and community development practitioners to advocate for 
affordable housing and economic opportunities for individuals, 
families, communities and neighborhoods across the country. I currently 
chair the Association's External Policy Committee.
    Furthermore, I am a founding board member of Practitioners 
Leveraging Assets for Community Enhancement, or PLACE. PLACE is the 
single unified voice of housing and community development practitioners 
who build, preserve, and maintain adequate and affordable housing and 
promote community development for low- and moderate-income families 
across the country. Our members are the expert end-users of Federal, 
State and private housing and community development funding, leveraging 
various sources of capital to build and strengthen America's 
communities.
    So, I'm the local guy; the practitioner on the ground who works 
with housing programs and policies to get things done in local 
communities.
    My organization tries to tackle the problem of foreclosures and the 
damage it does to families and communities each and every day. Our 
staff confronts this issue from every angle starting with prevention in 
our first time home buyers work where we provide the needed and 
necessary guidance to ensure that families are truly prepared for long 
term, sustainable homeownership. Prevention continues with foreclosure 
counseling work using the National Foreclosure Mitigation Counseling 
(NFMC) program that is run in an incredibly efficient manner by 
Neighborworks America. Our efforts also include the purchase and rehab 
of foreclosed homes using the Neighborhood Stabilization Program (NSP) 
and other resources we are able to secure. In the past twelve months we 
have used NSP funds to buy and rehab 30 homes that were added to our 
rental portfolio of over 340 single family homes. Just last month we 
created a community land trust to use as a vehicle to secure property 
in our targeted community in St. Louis. We plan to purchase and rehab 
six vacant/foreclosed properties before the year is out with the land 
trust.
    Our work was recently cited by the White House in their July 2011 
``Neighborhood Revitalization Initiative Report''.
    So what can be done to stem the tide of foreclosed properties 
causing such great damage to the neighborhoods and communities across 
the country? I would be remiss to not state that the best thing that 
can be done is to keep families in their homes. This is not the focus 
of this hearing but it is indeed critical and greater action such as 
across the board principle reduction must be looked at right away if we 
are to slow down the pace of foreclosed homes coming in the market 
place.
    Here are critical, over arching principles that need to be in place 
no matter the end use or type of developer that were created by myself 
and group of peers from across the country who are all a part of the 
Neighborworks America network:

    Recent and emerging neighborhood stabilization could be put 
        at risk if there is no alignment of the investment by third-
        parties with the commitments to community stabilization 
        activities underway in these communities.

    Long-term affordability would not be served by a blanket 
        transfer of properties without consideration for pricing 
        discounts to be provided along with affordable income 
        qualifications.

    Long-term downward drag on these communities would continue 
        if for-profit investment is not able to manage a long-term 
        investment strategy (3 to 5 years). Short-term investment 
        strategies may require assets to be sold at distressed values 
        and thus perpetuate the current situation.

    Community value is not strengthened if non-local investors 
        neglect maintenance and repair of properties. Good stewardship 
        of properties during the transition phase is important to 
        strengthen viability of communities and protect other asset 
        values in neighborhoods.

    Property values continue to suffer unless sufficient 
        reinforcement of appraisal guidelines on valuing in distressed 
        communities so that the bulk transfers do not further erode 
        value in these communities.

    The following address the specific methods of disposition called 
out in the testimony confirmation letter.

Conversion to Rental Properties
    Managing and maintaining a scattered site, single family portfolio 
is challenging but as my organization's 35-year track indicates it is 
possible. As recent data sadly reflect more families live in poverty 
today than ever. The need for safe, affordable rental housing has never 
been bigger. There are a number of for-profit and not-for-profit 
developers and property managers across the country that can both 
perform the management services and train others to also be successful. 
The key elements of this strategy will be:

    Aligning the goals of the public sector, servicers, 
        investors, community leaders, for-profit developers and not-
        for-profit developers. Failure to do so will create a delivery 
        system that fails to meet expectations as we have seen in the 
        foreclosure counseling work.

    Significant discounts in pricing to acknowledge the 
        financial challenges in bringing the home back on line as a 
        sound asset for the community and for the owner. (Detailed 
        financing structure is presented later in testimony)

    Ensuring the debt structure subsequent to total development 
        costs provides a debt coverage ratio of at least 1.2, i.e., 
        given reasonable occupancy rates and after paying mandatory 
        costs (insurance, taxes, management, maintenance, utilities, 
        etc.) there is still enough revenue to pay the debt service 
        plus 20 percent. The 20 percent is for reserves and 
        unanticipated costs.

    Securing experienced and qualified property management 
        firms to ensure that the home remains in good condition and an 
        asset to the community.

Demolition
    There will be a portion of the foreclosed properties that simply 
need to be demolished. In most cases the only possible way to dispose 
of a home in this situation would be to donate the parcel to the local 
government or qualified entity with a guarantee that the home will 
indeed be demolished. The use of land banks or land trusts should be 
expanded across the country to be the holder of these properties until 
redevelopment can occur. There are instances where demolishing a home 
on a block can provide much needs emotional and psychological 
assistance to existing community residents to let them know positive 
things can occur.

Bulk Sales Partnership with Government-Sponsored Entities (GSEs)
    A partnership model that was designed by a group of my 
Neighborworks America network peers and I would create a great vehicle 
to address the glut of foreclosures. The model builds on existing work 
and could really move the needle on getting homes back into productive 
use.
    The partnership model proposed below leverages many institutions 
created by the community development industry in response to the 
crisis. This includes the National Community Stabilization Trust, which 
NeighborWorks America, Enterprise, LISC, Housing Partnership Network, 
National Council of La Raza, and the Urban League helped form. The NCST 
provides a critical function to aggregate REO inventory among servicers 
and create a platform for offering this inventory to nonprofits across 
the country and simplifying the execution process to transfer these 
assets.

    This partnership model can deliver on several fronts:

    It can collectively reach a substantial volume of property 
        transfers that individual relationships would not be able to 
        achieve--thus creating a wholesale-like execution.

     It can connect REO assets in these communities to 
        nonprofit community builders that are paramount to rebuilding 
        the communities and establish new residents and quality 
        housing.

    It can assure that those assets of most strategic value to 
        the community and most influence community value are handled by 
        local interests.

    It leverages the established tools in the marketplace 
        (e.g., the National Community Stabilization Trust (``NCST'')) 
        to handle aggregation and transfer of multiple assets to 
        multiple locations from multiple servicers.

    It allows for quality rehab to take place (including energy 
        efficiency to create long-term financially and environmentally 
        sound properties) and returns housing assets to productive use.

    It can ensure that when assets are made available for sale 
        as owner-occupied units that low- and moderate-income 
        households have opportunity and options to purchase these 
        assets.

    It recognizes that GSE's and FHA should be able to be 
        compensated for the asset if the market returns.

    In general terms, the nonprofit community development/affordable 
housing program alternative would carry the following characteristics:

    GSE's and FHA identify and reserve assets that are located 
        in either NSP markets or similar targeted geographies being 
        worked by nonprofits (``target markets'').

    These assets are made available to NCST as the ``First 
        Look'' clearinghouse of assets to qualified nonprofits. The 
        assets are available for acquisition by qualified nonprofits 
        for a set period of time after which the assets revert for 
        broad market sales.

    Qualified nonprofits working in the target markets would 
        purchase assets at a prudent, transparent discount price that 
        considers the balance between the costs of acquisition, 
        rehabilitation, and management and feasible rents to low- and 
        moderate-income families in these markets. In consideration for 
        this discounted price the non profits would execute an 
        agreement to share gain on sales if they would occur with the 
        GSE's or FHA.

    Nonprofits take title to assets from Enterprises or FHA.

    Nonprofits rehabilitate the housing stock to appropriate 
        levels at a target percentage of appraised value and improve 
        the longevity and operating cost of the home by including as 
        much energy efficiency and additional green improvements within 
        the budget. To facilitate this rehabilitation, the Enterprises 
        or FHA offer the nonprofits the opportunity to take out a 
        mortgage as the mortgagor from Enterprises or FHA that covers 
        the rehabilitation costs of the home. The mortgage would be 
        assumable by a future buyer of the property. (Alternatively, 
        the nonprofit could use a working capital lines to finance 
        rehabilitation.) The nonprofit improves the property and makes 
        the home available to a low-/moderate-income family.

    The nonprofit manages the asset as rental property and uses 
        rental income to cover mortgage note payment (or line of credit 
        costs) and operating costs; any additional rental income 
        proceeds are kept by nonprofit to further its community 
        improvement strategy.

    At a point in time when values have stabilized, the 
        nonprofit markets the property as an affordable housing unit to 
        a low-/moderate-income family.

    The GSE's and FHA make available specific mortgage products 
        with flexible terms to allow low-/moderate-income families to 
        purchase the homes.

    Nonprofit sells asset and shares an established percent of 
        the difference between costs of asset (e.g., rehabilitation 
        costs, holding costs, sales costs, developer fees) and sales 
        price with the GSE's or FHA.

    The nonprofit community development/affordable housing approach is 
offered as a strategy to deliver quantities of quality affordable 
housing and simultaneously address the destabilizing influences of 
foreclosure. It achieves these goals by creating strong, community-
based owners of assets with an interest in community improvement 
through a partnership between the GSE's and FHA in the redevelopment of 
these communities along with fair consideration for the assets. The 
outcomes of this approach are many. Existing homes are used to provide 
affordable housing and meet the demand for this product throughout the 
Nation. Properties are improved to make them longer-term assets that 
meet higher energy efficiency standards; thus preserving assets for the 
long term and making the homes more economic to operate for lower 
income households.
    The rental properties are maintained to high standards in the 
community. The property values are not diminished in the community as 
the nonprofit will market to preserve value in the community as sales 
will occur when market stabilizes. The Enterprises and FHA get 
performing assets on their books in the rehabilitation loans and they 
are compensated for assets through a shared gain on sales approach. 
And, in the end quality, affordable homes are returned to low-moderate-
income families for rental and eventual homeownership.

Coordination of Strategies
    The strategy detailed above would fit in perfect alignment with 
existing work already taking place using the NSP and NFMC programs all 
across the country. Overt and intentional coordination needs to occur 
if we are to derive the collective impact of these programs. Local 
community leadership, not-for-profit developers, for-profit developers 
and local units of government will be tasked to ensure and prove levels 
of coordination through Memorandums of Understanding (MOU). These MOU's 
will call out specific objectives, deliverables and responsibilities 
for all parties. Failure to work in this intentionally integrated 
fashion will hinder any opportunity for community wide success.
    Again, thank you for the opportunity to present my ideas and the 
ideas of my not profit peers from across the country to address the 
serious challenges we face each in every day as we try to make a 
difference in the lives of those we serve.
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              PREPARED STATEMENT OF STAN HUMPHRIES, Ph.D.
                        Chief Economist, Zillow
                           September 20, 2011

Introduction
    Thank you Chairman Menendez, Ranking Member DeMint, and Members of 
the Subcommittee, for the invitation to speak today. I am the chief 
economist of Zillow, the leading real estate information marketplace, 
where I closely follow and report on the state of the housing market.
    I'd like to preface my statements by noting the perspective with 
which Zillow approaches analysis of the housing market. We launched our 
Web site in 2006 with the goal of creating more transparency of real 
estate information for consumers. As a media-supported business, we 
have no vested interest in the outcome of this debate, other than the 
hope that whatever is decided will best address the needs of consumers 
(by which I mean sellers, buyers and homeowners with no intent of 
moving).
    Today I'll make three points about the housing market and about how 
to address foreclosures.
    First, don't underestimate the market's ability to fix itself. This 
is, in fact, already happening. We may not like the timetable, but 
economic recovery can't always happen overnight.
    Second, many policies addressing foreclosures are simply addressing 
symptoms, not fundamental drivers of a healthy housing market. Yes, 
declining values have led to foreclosures, which have created an excess 
supply of housing. But eliminating this excess supply can't easily be 
achieved via policy. But policy can help the demand side, chiefly when 
targeted at decreasing unemployment.
    Third, in trying to speed up the recovery of the housing market, 
the first priority of the Government should be to do no harm. The 
Federal home-buyer tax credits of 2009 and 2010, while they stimulated 
sales in the short term, did not materially change the trajectory of 
the housing market in the long term. In fact, it is arguable that they 
delayed the ultimate market bottom. We should be sure not to make 
similar mistakes in the future which are incredibly costly to taxpayers 
but net very few positive long-term results.

How the housing market is fixing itself
    Regarding my first point about the ability of the housing market to 
fix itself, there are several reasons I believe this is already 
happening. It is true that there is a large pool of previously 
foreclosed properties owned by banks, and by entities like Fannie Mae 
and Freddie Mac. Estimates suggest that there are more than a half 
million real-estate owned properties held by lenders and Government-
sponsored enterprises, about 2.2 million more homes in the foreclosure 
process, and still another 1.9 million homes with mortgages that are 
delinquent more than 90 days. These homes are flooding the marketplace 
with abundant, cheap inventory which pushes prices down near-term and 
will keep a firm lid of price appreciation in the long-term even after 
the bottom in home values has been reached.
    But, while we often focus on the dismal state of the purchase side 
of the housing market, the other side of this same coin is a booming 
rental market. With the foreclosure epidemic converting many homeowners 
into renters, rental supply is reportedly as tight now as it was prior 
to the recession, and effective rents are estimated to rise 4 percent 
this year. The homeownership rate crested in 2004 at 69.2 percent, 
fueled by easy lending, low rates, and a positive feedback loop of 
appreciation and irrational expectations. During the housing recession, 
this rate has fallen to 65.9 percent currently, still not even in line 
with the longer term historical average of 64 percent.
    Investors smell a distinct opportunity in this situation: The 
chance to buy an asset cheaply and rent it out dearly. In fact, close 
to one-third of the purchases of existing homes this year have gone to 
all-cash buyers, the bulk of whom are real estate investors.
    The private market is stepping in briskly to buy up distressed 
homes and convert them to rentals (or, in some cases, fix them up and 
sell them on to other buyers). Additionally, thanks in part to these 
investors, the inventory of foreclosed homes owned by Fannie Mae, 
Freddie Mac and the FHA declined at the end of the first quarter. This 
market-clearing is sometimes hard to watch. It's a slow process of 
healing, but one that plays out when natural dynamics are not 
disrupted.

Addressing the continuing problem of foreclosures
    Regarding the second point I outlined, the two fundamental factors 
that will affect housing over the next several years are negative 
equity and unemployment. Negative equity--estimated by Zillow as 26.8 
percent of single-family homes with mortgages--contributes to 
foreclosures and also suppresses housing demand. Unemployment affects 
household formation and consumer confidence. Unfortunately, negative 
equity is a difficult problem to influence via policy and it will only 
recede slowly over time.
    But employment is more easily addressable by policy action. Make no 
mistake, the quickest and best way to improve the housing market is to 
grow jobs faster. Just last week, we were reminded where so much 
housing demand has gone during the recession when the Census Bureau 
reported that almost 22 million households are currently doubled up. 
Grow jobs and these households can start to uncompress and occupy 
additional housing units. A jobs plan is a housing plan.
    There have been numerous proposals to more directly stem the tide 
of foreclosures, many of which we have already tried, but which have 
unfortunately yielded more limited results than we hoped. I greet with 
great optimism each new idea about how to help prevent more 
foreclosures because the aggregate numbers defining this crisis mask 
such terrible suffering for millions of individual homeowners who 
experience foreclosure.
    But the reality is that most proposals to fix this issue become 
problematic or infeasible because targeting only the people who truly 
need and can benefit from help is exceedingly difficult. With respect 
to foreclosure risk, there are essentially three categories of 
homeowners: 1) those who don't need our help; 2) those who need more 
help than we can possibly give them because they are facing a 
fundamental change in their household financial situation; and 3) those 
for whom modest assistance like principal reduction, reduction in 
mortgage rate, or unemployment forbearance can make a difference in 
outcomes.
    Helping this third group, which is the smallest, without spilling 
over into the much larger first and second groups, where our money is 
wasted because they don't need it or because it won't fundamentally 
help them, is extremely challenging. And ineffective targeting of any 
policy balloons the cost and creates substantial unintended 
consequences, usually involving moral hazard in which people will avail 
themselves of the remedy even when they do not truly need it. I believe 
that the need to thread the eye of the needle so closely here is why 
we've seen such lower than expected outcomes for programs like the Home 
Affordable Modification and Refinance Programs.

Assuring Government policy does no harm
    Finally, let me return to my third point about Government policy 
doing no harm. One idea being explored is that of Fannie and Freddie 
getting into the rental market in some fashion. I've already discussed 
how private investors are soaking up distressed inventory and 
transforming many of these homes into rentals. The Government should be 
very careful about trying to interfere with this natural process. 
Investors have been and currently are betting that more foreclosures 
will create more renters, and they are moving to serve that market. Any 
plan that may upset this balance--such as Fannie and Freddie getting 
into the rental market and creating competition--will have a chilling 
effect on private investment in the one segment of the housing market 
that is performing well. Yes, Fannie and Freddie becoming landlords 
could decrease the number of foreclosed homes coming into the market, 
but at the expense of further decreasing demand because investors will 
no longer buy properties for conversion and buyers may choose to rent 
instead of buy.
    Our recent experience with the Federal home-buyer tax credits 
should tell us something about the limits of policy in shifting long-
term market dynamics. Yes, we were successful in stimulating more 
housing demand during the period of the tax credits. Unfortunately, 
this demand was largely stolen from future months, resulting in a 
decline in sales after the tax credit expiration which was commensurate 
with the increase during the credits. We should be cautious about 
similar proposals that, like the tax credits, would stimulate the 
market only in the short-term, when what we really need is long-term 
recovery.
    In summary, forces in the housing market are at play that will lead 
to long-term stabilization. But it's a delicate balance that should be 
well-understood before the Government steps in to help it along.
    Thank you again for the opportunity to address you today and I look 
forward to answering any questions that you might have.





 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER FROM ALLAN H. 
                       ``DUTCH'' DECHERT

Q.1. I have heard from some banks that in order for renting to 
be a viable option from a ``net present value'' modeling 
perspective, there would have to be tax breaks on the rental 
income. That is, it doesn't make economic sense for banks to 
undertake lease-to-own programs with loans on their book unless 
there are tax incentives. Have any of you seen similar 
analysis?

   If homeowners cannot afford to make mortgage 
        payments, are we sure they will be able to afford to 
        make rental payments that are sufficiently high to 
        offer the investor a sufficient return? This concept of 
        turning REO properties into rentals is being billed as 
        something of a panacea. But are you sure that there is 
        a rental price low enough that people can afford but 
        high enough for it to make sense to investors?

   You all point out that negative equity is a major 
        problem right now. I agree. If we are thinking about 
        not having to live through a catastrophe like this ever 
        again, doesn't it make sense to require a sensible down 
        payment so that homeowners have more of an equity 
        buffer against price downturns? We are requiring banks 
        to have more equity. What about homeowners? Isn't 
        equity a vital buffer to market downturns?

A.1. Tax Incentives to Facilitate Lease-to-Own Programs

    Our research has uncovered no analysis that indicates that 
lenders would require a tax incentive to lease their real 
estate owned (REO) properties. Banks currently have the ability 
to rent their REO property for up to 5 years while they 
actively work to sell it. Moreover, if they require additional 
time, they may ask their regulator to extend the period of 
rental. Within these situations, there is the possibility that 
the renter would have an opportunity to purchase the rental 
unit. And as mentioned, our conversations with lenders have not 
revealed their need for a tax incentive in order to facilitate 
the rental or sale of their REO property.

REO to Rental Properties
    NAR believes that the GSEs' policies should first be 
focused on keeping families in their homes through loan 
modifications or short sales if that's a better option, and 
that the agencies should not expedite foreclosures so that 
those properties could be included in a lease-to-own program. 
Moreover, Realtors believe that any lease-to-own programs 
should not be administered by the Government, but instead 
should include the participation of local investors or 
nonprofits that can manage the specialized needs and challenges 
of the local market.
    Realtors  believe the Government has an opportunity to 
minimize the impact of distressed properties on local markets 
by expanding financing opportunities, bolstering loan 
modifications and short sales efforts, and enhancing the 
efficient disposition of REO properties. This will help 
stabilize home prices and neighborhoods and help support the 
broader economic recovery.
    NAR believes that the lack of available and affordable 
mortgage financing is hurting REO sales and the entire housing 
market, and urged increased consumer and investor lending. 
While NAR supports strong underwriting standards, the lack of 
private capital in the mortgage market, unduly tight 
underwriting standards, and increasing fees have discouraged 
many potential home buyers from applying for mortgages. NAR 
believes ensuring mortgage availability for qualified home 
buyers and investors will help absorb the excess REO inventory.
    To prevent further REO inventory increases, NAR also 
recommends that the agencies take more aggressive steps to 
modify loans and, when a family is absolutely unable keep their 
home, to quickly approve reasonable short sale offers that 
allow families to avoid foreclosure.

Mortgage Down Payments
    Your question regarding the need for borrower equity via 
higher down payment is the issue that NAR, and a coalition of 
housing advocates, are discussing with the regulators who will 
determine the qualified residential mortgage (QRM) rule.
    NAR's members believe the impact of the proposed narrow 
definition of QRM would be to curtail the ability of 
creditworthy households from obtaining mortgages to purchase a 
home. Focusing the QRM exemption on underwriting factors that 
do not significantly improve loan performance (e.g., a 
mandatory high percent down level) means millions of families 
will fail to qualify for a QRM mortgage and will have to pay 
higher rates and fees for a non-QRM mortgage, if they are even 
able to qualify. A review of loans originated in 2008 reveals 
that reducing the down payment from 20 percent to 5 percent 
increases the default rate by only 0.6 percent, but makes 18 
percent more borrowers eligible for a QRM loan.
    Moreover, based on NAR estimates, assuming that 100 percent 
of family savings are dedicated toward a down payment and 
closing costs, it would take more than a decade for a family 
with a median household income to save enough for a 20 percent 
down payment for a $150,000 home (lower than the current 
median). Even a 10 percent down payment would take a family 
more than 8 years to save.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR WICKER FROM ALLAN H. 
                       ``DUTCH'' DECHERT

Q.1. What existing programs, if any, are in place to help 
veterans or service members take advantage of the opportunity 
to prudently invest in rental property, and are they being 
utilized effectively? What could be done to make these programs 
more effective? What more could be done to help prepare 
veterans or service members to invest in homes that are 
available for sale (due to the recent surge in foreclosures or 
in the normal course of events) and to manage rental property?

A.1. Based on NAR's research and inquiries with agencies that 
provide education for first-time home buyers, and potential 
real estate investors, there are no known programs that are 
geared specifically toward service members to help them 
understand and navigate real estate investment opportunities. 
There are numerous course offerings and software available to 
the general public on the topic of real estate investment, of 
which our service members can partake; however, none that are 
geared specifically to that population segment.
    The void in educational opportunity for service members on 
this topic may be an opportunity for the National Association 
of Realtors to provide our expertise to a population segment 
that could derive some benefit. I will work with the 
association to see if there is an opportunity within our 
forthcoming Realtor University for such an effort.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER FROM CHRIS 
                           KREHMEYER

Q.1. I have heard from some banks that in order for renting to 
be a viable option from a ``net present value'' modeling 
perspective, there would be have to be tax breaks on the rental 
income. That is, it doesn't make economic sense for banks to 
undertake lease-to-own programs with loans on their book unless 
there are tax incentives. Have any of you seen similar 
analysis?

A.1. I have not but we rather see a simple conveyance model to 
the next owner/manager of the home and not make the transaction 
more complicated. Further, I have not seen a successful, 
scalable lease purchase model and therefore believe a 
conventional rental model is the correct approach.

Q.2. If homeowners cannot afford to make mortgage payments, are 
we sure they will be able to afford to make rental payments 
that are sufficiently high to offer the investor a sufficient 
return? This concept of turning REO properties into rentals is 
being billed as something of a panacea. But are you sure that 
there is a rental price low enough that people can afford but 
high enough for it to make sense to investors?

A.2. The complexity of this problem does not allow this or any 
other solution to be a panacea. The economic analysis will 
regrettably be on a parcel-by-parcel basis and for some this 
idea will not work due to the simple mathematics of the 
transaction. That being said, having a home sit vacant with no 
income and the great potential of deterioration and vandalism 
makes one believe it should be considered in a real and 
meaningful way. I am convinced that we can make this model work 
for a portion of the REO inventory currently sitting vacant and 
harming all those involved.

Q.3. You all point out that negative equity is a major problem 
right now. I agree. If we are thinking about not having to live 
through a catastrophe like this ever again, doesn't it make 
sense to require a sensible down payment so that homeowners 
have more of an equity buffer against price downturns? We are 
requiring banks to have more equity. What about homeowners? 
Isn't equity a vital buffer to market downturns?

A.3. Prior to the sub-prime crisis prudent underwriting, modest 
(3-5 percent) down payment and home-buyer advisement services 
to those in the low- to moderate-income cohort created 
successful long-term homeowners and protected the market place. 
Once underwriting was dramatically loosened including the 
modest down payment requirement and no mandate of advisement 
services prior to purchase this is when the systemic failures 
occurred. Large down payments as put forth in the Qualified 
Residential Mortgage proposal would make it near impossible for 
so many hard working, fiscally responsible families to get 
their part of the American Dream. There is lots of blame to 
share on the mortgage mess we are all trying to clean up today 
but a radical shift in the amount of down payment required will 
not strengthen the system but rather inadvertently dramatically 
diminish who can participate in homeownership.

Q.4. In your testimony you outline a cooperative partnership 
model. Does the local infrastructure exist to make these 
programs like block sales or rental conversations, successful 
while also protecting the taxpayer? I doubt very much that 
Fannie and Freddie, with existing personnel and resources in 
DC, can successfully manage such an undertaking, and I think 
you and I agree here. How would the taxpayer be protected in 
your model?

A.4. I believe there is local infrastructure in place, to 
varying degrees across the country that could implement a 
cooperative partnership model. The question of taxpayer 
protection comes down to when will the haircut take place? We 
can take a hard stance on valuation of Fannie and Freddie's 
REO's today and have them sit vacant and lose more value or we 
can move property to productive use now garnering some return 
while executing a shared equity appreciation agreement with the 
local partner. I cannot speak to Fannie and Freddie's capacity 
but do not believe we are curing cancer here--these are 
financial models that can be reviewed quickly, efficiently and 
determined which parcels can be moved on and which need to stay 
in the portfolio. In both cases trying to strike the balance of 
protecting the taxpayer and putting the home back in productive 
use and all the upside financial gains that will occur when 
this happens.
                                ------                                


   RESPONSE TO WRITTEN QUESTION OF SENATOR WICKER FROM CHRIS 
                           KREHMEYER

Q.1. What existing programs, if any, are in place to help 
veterans or service members take advantage of the opportunity 
to prudently invest in rental property, and are they being 
utilized effectively? What could be done to make these programs 
more effective? What more could be done to help prepare 
veterans or service members to invest in homes that are 
available for sale (due to the recent surge in foreclosures or 
in the normal course of events) and to manage rental property?

A.1. I am not aware of any significant programs in this vain.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER FROM LAURIE 
                            GOODMAN

Q.1. I have heard from some banks that in order for renting to 
be a viable option from a ``net present value'' modeling 
perspective, there would have to be tax breaks on the rental 
income. That is, it doesn't make economic sense for banks to 
undertake lease-to-own programs with loans on their book unless 
there are tax incentives. Have any of you seen similar 
analysis?

A.1. I do not think tax breaks are necessary for renting to be 
a viable option. My employer, Amherst Securities, has purchased 
100 homes in Phoenix, and we are operating this profitably 
without tax incentives. It is the case that the current return 
on the initial investment, after costs, is reasonably modest 
(6-8 percent). However, with Treasury rates below 2 percent, 
this return looks reasonable to alternatives. Moreover, there 
is some potential upside to investors. The upside can come from 
either from increases in rental income over time, or increases 
in housing prices once the market stabilizes.

Q.2. If homeowners cannot afford to make mortgage payments, are 
we sure they will be able to afford to make rental payments 
that are sufficiently high to offer the investor a sufficient 
return? This concept of turning REO properties into rentals is 
being billed as something of a panacea. But are you sure that 
there is a rental price low enough that people can afford but 
high enough for it to make sense to investors?

A.2. You are correct. Selling properties to investors to rent 
them out is not a panacea. Not all homes will work for this 
purpose. The home price must be such that the rental income is 
sufficient to entice investors, and rental demand is available 
in that market at that price. It would be difficult to rent out 
higher priced homes, as the rental income cannot justify the 
purchase price. It is also hard to rent out homes in 
communities where the economy is so weak there is no rental 
demand. However, the majority of REOs are rentable, and this 
would be a very valuable program to help stabilize the housing 
market.

Q.3. You all point out that negative equity is a major problem 
right now. I agree. If we are thinking about not having to live 
through a catastrophe like this ever again, doesn't it make 
sense to require a sensible down payment so that homeowners 
have more of an equity buffer against price downturns? We are 
requiring banks to have more equity. What about homeowners? 
Isn't equity a vital buffer to market downturns?

A.3. I agree, it is critical that homeowners have equity in 
their home at the time of initial purchase. Down payments are 
critical, as equity is the single most important determinant of 
mortgage performance.

Q.4. Your main thesis is that investors are the key to finding 
a bottom in home prices. So you advocate loosening standards 
for investors to get credit that is guaranteed by the taxpayer. 
Do you think this should be a permanent change to Fannie and 
Freddie guides? Or just temporary until we get through the 
overhang? One thing that concerns me about making this a 
permanent change is that investor properties traditionally have 
higher default rates, and we need to be moving in a direction 
of reducing taxpayer exposure to risk, not increasing it.

A.4. I don't advocate loosening standards for investors to 
obtain credit that is guaranteed by taxpayers. I advocate 
loosening the hard caps on the number of properties that can be 
purchased, but maintaining conservative rules on necessary down 
payments to limit default risk. The down payments on investor-
owned properties should be higher than on owner-occupied 
properties. We would suggest a minimum of 25-30 percent down on 
investor properties. Freddie currently allows for the purchase 
of only 4 properties by a single investor, Fannie allows for 10 
properties. I don't understand the rationale for this. I 
believe the cap should be unlimited, with a sufficient down 
payment. To use an extreme example, if an investor was willing 
to put 40 percent down on 2,000 properties, I believe that 
Fannie and Freddie should be willing to finance all 2,000 
properties.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR WICKER FROM LAURIE 
                            GOODMAN

Q.1. What existing programs, if any, are in place to help 
veterans or service members take advantage of the opportunity 
to prudently invest in rental property, and are they being 
utilized effectively? What could be done to make these programs 
more effective? What more could be done to help prepare 
veterans or service members to invest in homes that are 
available for sale (due to the recent surge in foreclosures or 
in the normal course of events) and to manage rental property?

A.1. I am not an expert in veterans programs. This question is 
better addressed to some of the other witnesses.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER FROM STAN 
                           HUMPHRIES

Q.1. I have heard from some banks that in order for renting to 
be a viable option from a ``net present value'' modeling 
perspective, there would have to be tax breaks on the rental 
income. That is, it doesn't make economic sense for banks to 
undertake lease-to-own programs with loans on their book unless 
there are tax incentives. Have any of you seen similar 
analysis?

A.1. No, I haven't seen analyses related to this issue. In 
general, my sense is that rent-to-own programs are best 
administered by private companies that purchase the delinquent 
mortgages from the bank, not administered by the bank or loan 
servicer directly as this is not their core business.

Q.2. If homeowners cannot afford to make mortgage payments, are 
we sure they will be able to afford to make rental payments 
that are sufficiently high to offer the investor a sufficient 
return? This concept of turning REO properties into rentals is 
being billed as something of a panacea. But are you sure that 
there is a rental price low enough that people can afford but 
high enough for it to make sense to investors?

A.2. The homeowner may not be able to afford the mortgage based 
on the original home value, but could afford a mortgage based 
on the current lower home value. Alternatively, the home could 
be bought by an investor, at the current lower home value, and 
rented back to the current occupant at a rent price which is 
lower than the occupant's current mortgage payment but higher 
than the investor's new mortgage payment based on the lower 
current price.

Q.3. You all point out that negative equity is a major problem 
right now. I agree. If we are thinking about not having to live 
through a catastrophe like this ever again, doesn't it make 
sense to require a sensible down payment so that homeowners 
have more of an equity buffer against price downturns? We are 
requiring banks to have more equity. What about homeowners? 
Isn't equity a vital buffer to market downturns?

A.3. Yes, equity in the home is one element of the overall 
default risk of a mortgage holder. But credit worthiness and 
debt-to-income ratios are also very important. All homeowners 
should be asked for some down payment, but the amount needed to 
influence default risk can vary depending on the other two 
factors.
                                ------                                


   RESPONSE TO WRITTEN QUESTION OF SENATOR WICKER FROM STAN 
                           HUMPHRIES

Q.1. What existing programs, if any, are in place to help 
veterans or service members take advantage of the opportunity 
to prudently invest in rental property, and are they being 
utilized effectively? What could be done to make these programs 
more effective? What more could be done to help prepare 
veterans or service members to invest in homes that are 
available for sale (due to the recent surge in foreclosures or 
in the normal course of events) and to manage rental property?

A.1. I am not aware of any special programs targeted at 
stimulating real estate investment by current or former 
military service personnel. They presumably have equal access 
to credit from Fannie Mae for the purchase of up to 10 
investment properties. There may be an opportunity to better 
raise awareness of these general opportunities to military 
personnel.

              Additional Material Supplied for the Record

                 Steven Pearlstein: How about Refi.gov?
                The Washington Post, September 17, 2011
                          By Steven Pearlstein

    It's been less than 2 weeks since President Obama spoke to Congress 
and the Nation about the urgency of taking additional steps to 
stimulate job creation by increasing public and private spending in the 
short term. Since then, two things have happened.
    The economic outlook has only gotten worse, largely because of the 
financial turmoil in Europe and further declines in consumer 
confidence.
    Meanwhile, the political outlook for actually doing something about 
it has gotten worse, because the business community and cowardly 
Democrats failed to rally behind the president's plan, giving 
Republicans the political head room to continue peddling their Rotary 
Club nonsense that what's holding back the economy is a crushing tax 
burden, stifling regulations and all-consuming worry over the budget 
deficit.
    Given the almost certain prospect of a continuing political 
stalemate, the president's best option is to use the power he's had all 
along to deliver tens of billions of dollars in additional stimulus by 
allowing millions more households to refinance their mortgages at 
today's low rates.
    I'm not talking about significant modifications to troubled 
mortgages, which the banks and mortgage bond investors have done a 
fabulous job of preventing since the last years of the Bush 
administration.
    Nor am I talking about providing taxpayer relief to homeowners who 
have fallen behind on their payments and are facing foreclosure.
    I'm talking about the millions of households that are paid up on 
mortgages that still have interest rates of more than 5 percent and 
could use the lower rates engineered by the Federal Reserve to reduce 
annual payments by an average of $2,500 a year.
    Here's a statistic that tells you pretty much all you need to know: 
Back in the recession that began in 2001, roughly 85 percent of 
households that were eligible to refinance their mortgages did so, with 
an average decline in interest rates of about 1.3 percentage points. 
That freed up about $67 billion each year in bond payments that could 
be spent on other things.
    This time, only about 25 to 30 percent of mortgages has been 
refinanced, despite the lowest interest rates since the Great 
Depression. The average decline in rates on those refinanced loans has 
been less than half a percentage point, resulting in $45 billion in 
overall savings to borrowers.
    The biggest reason for this refinancing gap was a decision by 
Fannie Mae in 2008 to increase the fees it charges to guarantee all new 
loans, including refinancings. The fee varies by borrower, but is 
particularly steep for those with low or middling credit scores, those 
with loans that are 90 to 125 percent of the current market value of 
the house and those living in areas where home prices declined the 
most.
    Given the shoddy underwriting during the credit bubble, this may 
have seemed like a reasonable step for Fannie to take as it related to 
guaranteeing new loans. But in terms of refinancing loans that it 
already guaranteed, it was rather short-sighted. Refinancing would have 
lowered the monthly payments and, therefore, the probability that the 
homeowner would default, which has turned out to be Fannie's biggest 
risk and the biggest contributor to its quarterly losses.
    Essentially, Fannie's clever strategy was to use its near-monopoly 
power to charge higher fees for assuming smaller risks knowing full 
well that the extra fee would discourage refinancing. The fees ranged 
from half a percentage point to 3 percentage points, which for many 
pretty much wiped out the potential benefit of refinancing.
    Why did Fannie do that? Because in addition to being in the 
business of providing mortgage bondholders a guarantee, or insurance, 
against the risk of default, Fannie also owns a huge portfolio of those 
bonds. And as a bondholder, refinancing a loan means it would receive 
less money every month from the borrower. The extra fees were designed 
not only to discourage refinancing, but to make up for any decline in 
monthly cash flow.
    Historically, whenever Fannie raised or lowered fees, its twin, 
Freddie Mac, would quickly follow. But this time when it did not, 
Freddie Mac executives were ordered by its new regulator to do so, 
apparently with the idea that it would lower the cost of the Government 
bailout. What may have been good for American taxpayers in the short 
run, however, turned out to be bad for the economy. Also contributing 
to increased refinancing costs were the handful of big banks that own 
or service most of the mortgages in the United States. With the demise 
of aggressive (and foolhardy) players such as Countrywide, the mortgage 
banking industry went from being hyper-competitive in terms of price to 
being not very competitive at all. As a result the spread--the 
difference between what the banks pay for money and what they charge--
widened considerably.
    The effect of all this was to thwart the impact of Fed's ultra-low 
interest rate policy by allowing Fannie, Freddie and the big banks to 
capture much of the benefits rather than having them pass through to 
households and the broader economy. Those who still found it worthwhile 
to refinance tended to need the help the least--wealthier households 
with higher credit scores and lower loan-to-value ratios. Middle-income 
borrowers whose home values had fallen below the level of the 
outstanding loan were largely shut out. The result: a weaker economy, 
more foreclosures and a steeper decline in house prices.
    Over the past 2 years, there have also been numerous proposals for 
how to fix this problem by ordering Fannie and Freddie to roll back its 
fees and by somehow limiting the spreads charged by mortgage bankers. 
But these have been quietly opposed by bondholders who didn't want 
lower interest payments and by industry executives and some top 
Administration officials who warned that it would raise the interest 
rates on all new mortgages in the future. Some Republicans also were so 
determined to kill Fannie and Freddie once and for all that they 
couldn't stomach the idea of using them again as instruments for 
Government management of the mortgage market.
    Now, however, with prospects dimming for other stimulus proposals 
and the housing market still fragile, a bipartisan consensus for mass 
refinancing may be emerging. Obama mentioned it in his recent speech to 
Congress. And a Senate hearing last week found support from both 
parties as well as a number of prominent economists.
    The best proposal I've seen comes from Glenn Hubbard, a former 
economic adviser in the Bush White House, Chris Mayer, his colleague at 
Columbia Business School, and Alan Boyce, a trader in mortgage bonds. 
The trio's idea is to order Fannie and Freddie to reduce its fee to a 
flat \4/10\ of a percent for refinancing any fully paid-up loan that it 
already guarantees. The process would be streamlined, eliminating 
appraisals and income verification. The fee would be lower than now, 
but higher than it has been in normal times, and sufficient to offset 
the reduced monthly cash-flow from refinanced borrowers.
    As for the banks, those that accept a lower refinancing fee of \3/
10\ of 1 percent would be granted immunity from lawsuits stemming from 
loans issued during the bubble--a huge cloud that hangs over the big 
banks. Those who refuse the arrangement would lose their ability to 
sell their mortgages to Fannie and Freddie, which are pretty much the 
only games in town since the housing bust began.
    The big losers would be the private holders of mortgage bonds--
mostly pension funds, hedge funds and other money managers, along with 
foreign governments--who might take solace in the fact that they have 
enjoyed three more years of interest payments at the old, higher rates 
than they would have if the Fed's monetary stimulus had been allowed to 
pass through to homeowners. And because of the salutary effect of lower 
mortgage rates on the economy, bondholders eventually would recoup a 
fair portion of their ``lost'' income through reduced foreclosures.
    Hubbard, Mayer and Boyce estimate that their plan could allow as 
many as 25 million households to refinance mortgages and have an extra 
$70 billion every year to spend and invest--the equivalent of a $70 
billion-a-year tax cut that can be had at no cost to taxpayers.
    A new wave of mortgage refinancing is not an economic silver 
bullet, but it is a positive step that everyone can agree on 
conceptually and can be implemented quickly within existing law. What's 
been missing so far has been the cooperation of Fannie and Freddie's 
regulator and a determination on the part of the White House and the 
Treasury to get over all their technical objections and political 
qualms and just get it done.
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