[Senate Hearing 112-382]
[From the U.S. Government Publishing Office]
S. Hrg. 112-382
NEW IDEAS FOR REFINANCING AND RESTRUCTURING MORTGAGE LOANS
=======================================================================
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
EXAMINING NEW IDEAS FOR REFINANCING AND RESTRUCTURING MORTGAGE LOANS
__________
SEPTEMBER 14, 2011
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.fdsys.gov /
U.S. GOVERNMENT PRINTING OFFICE
73-368 WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, gpo@custhelp.com.
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
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, Subcommittee Staff Director
Jeff Murray, Republican Subcommittee Staff Director
(ii)
?
C O N T E N T S
----------
WEDNESDAY, SEPTEMBER 14, 2011
Page
Opening statement of Chairman Menendez........................... 1
WITNESSES
Senator Barbara Boxer of California.............................. 2
Prepared statement........................................... 35
Senator Johnny Isakson of Georgia................................ 3
Prepared statement........................................... 35
Richard A. Smith, Chief Executive Officer, Realogy Corporation... 6
Prepared statement........................................... 37
Mark A. Calabria, Director, Financial Regulation Studies, Cato
Institute...................................................... 8
Prepared statement........................................... 63
Ivy Zelman, Chief Executive Officer, Zelman & Associates......... 10
Prepared statement........................................... 69
David Stevens, President and Chief Executive Officer, Mortgage
Bankers Association............................................ 20
Prepared statement........................................... 87
Marcia Griffin, President and Founder, HomeFree-USA.............. 22
Prepared statement........................................... 94
Mark Zandi, Chief Economist and Co-founder, Moody's Analytics.... 23
Prepared statement........................................... 97
Anthony B. Sanders, Distinguished Professor of Real Estate
Finance, and Senior Scholar, The Mercatus Center, George Mason
University..................................................... 25
Prepared statement........................................... 116
Christopher J. Mayer, Paul Milstein Professor of Real Estate,
Columbia Business School....................................... 26
Prepared statement........................................... 125
(iii)
NEW IDEAS FOR REFINANCING AND RESTRUCTURING MORTGAGE LOANS
----------
WEDNESDAY, SEPTEMBER 14, 2011
U.S. Senate,
Subcommittee on Housing, Transportation, and
Community Development,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 2:02 p.m., in room SD-538, Dirksen
Senate Office Building, Hon. Robert Menendez, Chairman of the
Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN ROBERT MENENDEZ
Chairman Menendez. This hearing of the Senate Banking
Committee's Subcommittee on Housing, Transportation, and
Community Development will come to order. I was trying to give
a little time to my colleagues who are going to be on our first
panel to get here. I am sure they are on their way. So I will
start off with our opening statements, and then hopefully by
then they will have arrived, and we will recognize them. We
have got a very robust agenda here. We want to hear from all of
the expertise that we have assembled and try to move it along.
This hearing of the Subcommittee on Housing,
Transportation, and Community Development will focus on both
the state of the housing market as well as new ideas for
refinancing and restructuring mortgage loans. This is a very
important hearing not only for me but I think for those of us
who are concerned because the housing market is often what
anchors the broader economy. We need to fix the housing market
to get the broader economy moving again to create jobs as well
as meet the challenges of present homeowners as well as keeping
the aspirations alive of future homeowners.
On a regular basis, I hear from New Jersey homeowners who
have trouble with their home loans, whether it is being denied
the opportunity to refinance at today's lower interest rates
because they are underwater or banks are not willing to do a
principal reduction from them when they have hit hard times.
It is hard to be optimistic about economic growth if the
housing market remains in its present status. For most families
in America, their home is their single largest asset and their
source of appreciated wealth.
So the hearing today is divided into three panels. The
first panel consists of my two distinguished Senate colleagues
to discuss their bill, which I am proud to cosponsor, the
Helping Responsible Homeowners Act, S. 170, which will help
homeowners who are underwater to refinance more easily. The
second panel will discuss the state of the housing market and
specifically the state of home sales, home prices, consumer
demand, short sales and foreclosures, rents and rental
availability, and whether these problems continue to be
nationwide in scope or are they becoming more regionalized. And
the third panel will discuss ideas to refinance or restructure
existing home loans, including shared appreciation, mortgage
modifications, refinancing existing loans to take advantage of
historically low interest rates and the barriers to doing so,
and allowing the FHA short refinance program to be used on the
GSE inventory.
It is my hope through this hearing and a subsequent one
that we will follow up on next week that we can develop a
housing policy and promote initiative that gets our housing
market moving again.
With no other Member that I see wishing to make an opening
statement, let me call upon my two distinguished colleagues for
their statements, Senator Boxer of California and Senator
Isakson of Georgia. I am happy to welcome them. They both have
strong records in housing policy, and they will talk about a
bill they have introduced to jump-start the housing market and
help millions of homeowners refinance their mortgages. And with
that, Senator Boxer.
STATEMENT OF BARBARA BOXER, A U.S. SENATOR FROM THE STATE OF
CALIFORNIA
Senator Boxer. Thank you so much, Mr. Chairman. I am very
proud to be here with Senator Isakson, and he has a long
profession, a long time in his profession, which was before he
came here he was in the real estate business. So I am very
proud that he is on this bill.
And just to say this before I read any of my statement. Our
bill is based on a very simple premise. If you have paid your
mortgage all along through all these difficult times, and it is
at a high interest rate, but you never missed a payment, as the
value of your home went down and down and down, you find
yourself underwater, Mr. Chairman, and you are still stuck at
that 7-percent, 6-percent rate, you should be rewarded with a
program like this. And what we say is you should have a chance,
if you want, to refinance at the current levels. This is such a
win-win.
Number one, Fannie and Freddie, because these would all be
home mortgages that are backed by Fannie and Freddie, Fannie
and Freddie actually make money on this, as we looked at the
CBO analysis, about $100 million, because it would stop many
people from defaulting right away.
Second, if you are the homeowner, you are going to have
thousands of dollars in your pocket because you refinanced. And
I remember the years when Bill Clinton was President, and one
of the reasons there was such a prosperity there is the
tremendous number of refinancings. It is the best way to get
money into our economy quickly.
So essentially this is what our bill does. It says if you
have a loan that is backed by Fannie and Freddie, and if you
have a high interest rate and you would like to take advantage
of these lower rates, then you should have a chance to do that,
not be disqualified because you are underwater, and have those
ridiculous fees that they have in place now waived so you can
take advantage of these rates. We call it the Helping
Responsible Homeowners Act. We are heartened that the President
mentioned something like this in his address to the Congress.
We are heartened that you are on our bill. We are thrilled with
that. Our bill has been endorsed by Mark Zandi, who I know is
going to testify later, the chief economist at Moody's
Analytics; by William Gross, managing director and co-CIO of
PIMCO; and then Thomas Lawler, housing economist. It has been
endorsed by the National Association of Realtors, the National
Consumer Law Center, the National Association of Mortgage
Brokers, and many others. So it is a win-win for Fannie and
Freddie.
Now, they can do this without our legislation, and Senator
Isakson and I are saying today, please, if they are listening
somewhere or out there somewhere, please do this. This will
save you money. You know, this will save Fannie and Freddie
$100 million. This will help, by the way, CBO says, up to 2
million homeowners. But when they made that estimate, that is
when interest rates were higher, and we believe you are looking
at perhaps 3 to 4 million homeowners, 5 million are actually--
close to 5 million are eligible for this.
So that is our story and we are sticking to it, and we are
strong on this. The FHFA we hope will follow through on some of
the nice statements they have been making recently. But this is
going to help our economy. It is going to keep people in their
homes. And for once, Mr. Chairman, I beg you, let us get out in
front of this crisis. We are, you know, a dime late and a
dollar short. We have been following this along. Let us get in
front of these folks. These are the good folks who have never
missed a payment. Let us help them stay in their homes, and I
think you help America when you do it.
I thank you very much.
Chairman Menendez. Thank you, Senator Boxer.
Senator Isakson.
STATEMENT OF JOHNNY ISAKSON, A U.S. SENATOR FROM THE STATE OF
GEORGIA
Senator Isakson. Well, thank you very much, Mr. Chairman,
and I would ask unanimous consent that my prepared statement be
submitted for the record.
Chairman Menendez. Without objection, it shall be.
Senator Isakson, thank you very much for calling this very
appropriate hearing on the housing industry, and I am
particularly pleased to join with Senator Boxer of California
in this particular piece of legislation which addresses a new
phenomenon that has taken place in the most protracted housing
recession America has seen since the Great Depression, and that
is called ``strategic foreclosure.''
There are 10,900,000 American homeowners who are underwater
right now today, as estimated. That is 10,900,000 people who
are making payments on mortgages that the payoff is more than
the house is worth. A new phenomenon is something called
``strategic foreclosure'' where homeowners who are underwater
are looking at the future of real estate, looking at the future
of values, and they are walking away from their loans and going
off and buying a foreclosed house down the street thinking they
will be better off. This has made the marketplace worse, put
more foreclosures in place, and continues to contribute to the
downward pressure on home values.
What this bill basically says is that of that 10,900,000
people who are underwater, up to 2 million of them--and as
Senator Boxer has stated, maybe more since rates have gone
down--can make the strategic decision, instead of walking away
from a loan that is underwater, to refinance that existing
balance at the current lower rates, put more money in their
pocket, and make the maintenance of that mortgage better for
them in the long run when housing recovers. That is all it
does. It is not a boost to the housing market from the
standpoint of creating sales, but it is a depressant on more
foreclosures. It does make it less likely that people will use
strategic foreclosure as a mechanism to deal with their
financial situation. And it should help to stabilize home
values in the long run and in the short run.
I commend Senator Boxer on her leadership. She originated
this thought. I have been proud to work with her, and I think
it is something Fannie and Freddie ought to do. I am not
interested in pride of authorship. If they will do it tomorrow
by policy, we are ready for them to do it. And it does make
good sense, and the CBO score is outstanding.
Let me address a second subject, if I might, Mr. Chairman,
dealing with housing. Your second panel is terrific, and I am
not going to be able to stay for all of it, but I want to
commend to you in particular Mr. Richard Smith of Realogy and
Ivy Zelman who are going to testify on this panel. They are two
of the best authorities in the real estate industry that I know
of. Realogy has about 25 percent of the market share of the
residential housing market in the United States. It is an
outstanding consortium of companies that deal with residential
brokerage. Ivy Zelman, I have attended her seminars. I know
people who she consults with. She is as good as anybody I have
ever heard, and both of them will make a significant
contribution.
Second, I appreciate your leadership on the loan limit
situation which is confronting us by the end of this month. We
do not need to do things that make things worse in the housing
market. We need to do things that make it better.
What Senator Boxer is proposing along with me and my help
to her on this is good for waiting off strategic foreclosures,
but keeping loan limits and expending them after the end of
this month is important to maintain the housing market that we
do have. It is not the time for the Government to constrict
availability of mortgage capital for people who are qualified
to buy houses because of a limitation on those loan limits, and
I commend you on your leadership on that and look forward to
answering any questions you or Senator Merkley may have.
Chairman Menendez. Well, let me thank you both for your
initiative and your insights, and I hope our friends over at
the agencies hear it and get it and do not wait for us to push
through legislative action, but we will if we have to. And I
appreciate your observations, Senator Isakson, and am proud to
have you with me on the efforts of ensuring that the present
loan limits are retained before the end of the year. I think it
is a critical part of the element of the things we have to do
in the market, so I appreciate your long-term leadership in
this field and joining with me and others in trying to preserve
this.
I have no questions for either one of you. Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair, and I
wanted to express my appreciation for the work you have done on
this. Helping homeowners stay in their homes and decreasing the
number of foreclosures is absolutely essential.
I would ask a short question in regards to the CBO score.
My understanding is this would save money for the GSEs, but
because the Fed holds a number of the securities that might
diminish in value with the lower interest rates, there is some
cost they estimated. Could either one of you kind of just
clarify what the CBO was pointing to?
Senator Boxer. Yes. Just a second. I have it here.
How much will the bill cost? Fannie and Freddie actually
gain, as we said before, from the changes in the bill by up to
$100 million because the savings realized by a reduction in
defaults and foreclosures would outweigh any lost revenue due
to the elimination of the risk-based fee and the reduced
portfolio income. Because of large holdings of Fannie and
Freddie mortgage-backed securities, the Fed would experience
reduced investment income of $2.6 billion over 10 years. So
this means there is a net cost--so although this means there is
a net cost to these changes, the Federal Government should not
be profiting--this is my feeling--from borrowers paying higher
interest rates than they should have to. The fact that the Fed
holds these securities should not create perverse incentives
for the Government to keep borrowers trapped in higher-cost
loans. So that is the answer. That is how I feel about that.
Senator Merkley. That is excellent, and I appreciate the
work you all have done on this.
Senator Boxer. Thank you.
Senator Isakson. If I can just add to that?
Chairman Menendez. Yes, Senator.
Senator Isakson. You know, you are dealing with what we
refer to in business as ``inside baseball.'' You have got the
conservatorship control of Freddie Mac and Fannie Mae, and you
have got the Federal Reserve buying paper. And, yes, if you
lower the rate or the yield on a mortgage, you will lower the
value financially of that instrument. But if, on the other
hand, you are stabilizing a loan that would otherwise have been
defaulted on under any form of dynamic scoring, this is a net
gain to the U.S. housing economy and the U.S. Government. There
is just no question about it.
Chairman Menendez. What is the interest rate on walking
away on your----
Senator Isakson. I am sorry?
Chairman Menendez. What is the interest rate on walking
away on your obligation?
Senator Isakson. Well, that is a great question. Let me
tell you what the consequences are. You probably would not be
able to borrow money for 7 years at best, and Richard Smith can
address that subject, but that would be my guess. If you walk
away from your mortgage and default, your credit score goes in
the tank, and every interest rate you pay on credit cards and
car finance, student loans, whatever else, is going to go up,
not down. You are probably not going to be able to get a home
mortgage for 7 years, if that soon, and the disruption it does
to your financial statement and to your credibility as a
homeowner goes away. So the cost is far greater to the country
for somebody to default on the loan and have it foreclosed on
than it ever would be a loss to help them stay in the house.
Chairman Menendez. Absolutely. With that and the thanks of
the Committee, thank you to both of you.
Senator Boxer. Thanks so much.
Chairman Menendez. Let me ask our next panel to come up to
the table, and I will introduce them as they come up and be
seated.
Let me welcome my fellow New Jerseyan, Richard Smith. He is
president and CEO of Realogy Corporation, a global provider of
real estate and relocation service which is headquartered in
Parsippany, New Jersey. Mr. Smith oversees the Realogy
Franchise Group consistent of many well-known companies such as
Better Homes and Gardens, Century 21, Coldwell Banker, and
Sotheby's International Realty, among others. He is a member of
the Business Roundtable, and the Committee looks forward to his
testimony today.
Mark Calabria is the director of financial regulation at
the Cato Institute and has worked there since 2009. Before
that, he was a senior member of the professional staff of this
Committee. In that position, he worked on issues relating to
housing, mortgage finance economics, banking, and insurance for
Ranking Member Shelby. He has appeared before this Committee
many times, and we thank him for his present this afternoon as
well.
Ivy Zelman is the CEO of Zelman & Associates and has over
19 years of experience in the housing and related industries.
Zelman & Associates, which she founded in 2007, delivers
research on the housing market and has been repeatedly
recognized for its expertise. Prior to that, she worked at
Credit Suisse Group, including 8 years as a managing director,
and we are pleased to have you today to discuss the state of
the housing market.
With that, Mr. Smith, welcome and we look forward to your
testimony. I would ask you each to synthesize your testimony to
about 5 minutes or so. We are going to include your full
statements for the record, and we look forward to having a
discussion with you. Mr. Smith.
STATEMENT OF RICHARD A. SMITH, CHIEF EXECUTIVE OFFICER, REALOGY
CORPORATION
Mr. Smith. Good afternoon, Chairman Menendez and
distinguished Members of the Subcommittee, and thank you for
those kind introductions.
As to the current state of housing, we will make the bold
statement that existing home sales in our view have stabilized
on a unit basis in the range of 4.9 to 5.1 million units on an
annual basis. However, average price will continue to move in a
range of down 4 percent to up 2 percent.
New homes should see slight improvement in year-over-year
growth for new homes, and price we think is also going to move
in that range, but more on the positive side from flat to up
about 2 percent. We think the high-end and the first-time
buyers make up the majority of the market. The middle market or
the move-up buyer is noticeably absent. High-end buyers are
typically paying all cash. First-time buyers are financing with
FHA and less than 20 percent down.
It is important to note that 25 to 27 percent of all
homeowners have little to no equity, which is a point that you
made earlier in the Chairman's opening comments.
Renting is certainly in vogue. It is a very popular topic
in the media these days. It will run its course, however. It is
certainly most cost-effective today to own in most markets in
the United States than to rent. Rents are increasing at the
rate of about 5 to 7 percent annually. New York City as an
example is 10 percent year over year.
What is holding back housing? High unemployment, the
foreclosed inventory overhang, low consumer confidence, and
failed or marginally successful Government intervention
programs.
We are going to recommend some remedies. We are going to
start with jobs. I would be remiss in not stating that the
unemployment number that concerns us in housing is not the 9.1
or 9.2, but the U.S. Bureau of Labor Statistics standard, which
is currently at 16.2. Underemployed or temporary employees do
not buy homes.
Foreclosure is a major issue for us. It is depressing
prices nationally. Although most foreclosures occur in ten
States, predominantly in five, it is nevertheless an overhang
that needs to be addressed. The continued delay in the
foreclosure process is harmful to housing. The sooner the
foreclosures are permitted to continue and accelerate, the
sooner we will see some balance in average sales price, and
thus the equity that is in the homes owned by taxpayers.
We are very much in favor of efforts to mitigate or prevent
foreclosure. We are strong proponents of the short-sale
process. We like in particular the debt-for-equity program that
has been recommended by a number of people where both the
lender and the homeowner share in the equity of the home.
We also like assumability. We think that in the current
environment some measure of loans could be assumed or have an
assumable loan characteristic so that at some future date a new
buyer could be in a position to assume those very low interest
rates that we enjoy today.
We are strongly in favor of refinance programs. We think
that, again, is an effort to mitigate and prevent foreclosures.
So the expansion of HARP or any program that makes it possible
for homeowners to refinance at the current rate of 4, 4.5
percent we are very much in favor of.
We also are very much in favor of not permitting the
current GSE loan limits to expire in October. We think that is
damaging to a very fragile market. We are strongly in favor of
the Chairman's and Senator Isakson's efforts to extend those
for at least 2 years. This is not a time to run the risk of
upsetting again a very fragile market.
The National Flood Insurance Program needs to be extended.
If not, that is going to put about 500,000 homes at risk. We
would encourage an extension very strongly.
And I would be remiss in not mentioning for the benefit of
this Committee and for others who may be watching the very
substantial concerns we have with respect to Dodd-Frank, in
particular the qualified residential mortgage component of
Dodd-Frank, which we think is particularly punitive to low- to
moderate-income home buyers.
GSE reform is not something that we view should be
entertained in this environment. The market is too fragile and
too uncertain. GSE reform can certainly be handled at a later
date. It is working quite well now. We know there are
fundamental reasons for a focus on GSE reform. That will come.
It is just not appropriate in this environment.
We very much appreciate the opportunity to speak to the
issues. We know that we will have an opportunity to elaborate
on these items when we go to panel discussion, and I want to
thank the Chairman for his leadership on this very important
issue. And, again, we are available as a resource in any manner
you think is appropriate.
Thank you.
Chairman Menendez. Thank you very much. You actually had
time left on your 5 minutes.
Mr. Smith. I did my very best.
Chairman Menendez. You have led the way here.
Mr. Calabria.
STATEMENT OF MARK A. CALABRIA, DIRECTOR, FINANCIAL REGULATION
STUDIES, CATO INSTITUTE
Mr. Calabria. I will try to keep within that.
I want to start by saying that there is actually a fair
amount of consensus in terms of what is going on in the market,
and I think the differences would be the hows, whys, and
wheres. So I want to emphasize that. I am not going to talk
about the things we agree upon and put most of my time on the
attention that I think where some of the disagreements and some
of the details are. That is not to undermine the widespread
agreement, and I really do want to emphasize jobs is incredibly
important, and we think we are at the point where the labor
market is more so driving the housing market than the labor
market, although obviously there is a feedback between the two.
And I also want to emphasize the point that Mr. Smith made
about the foreclosure process really does need to be fixed and
needs to be sped up; otherwise, we are continuing to have a
huge overhang of homes out there, and I think that is
important.
So I just want to touch on a couple of facts, the first of
which is that, despite the price declines we have seen, in many
parts of the country housing is still very expensive relative
to income. Nationally we have seen median home prices fall to
about 3 times the median income, and that is about historical
average. So overall it looks like housing is back to the
affordability it should be, but if we look at places like San
Francisco, you are still looking at median house prices being
about 8 times income. So it is important to keep in mind we are
looking at a lot of different markets. There are lots of
markets that are still unaffordable by any stretch of the
imagination. There are also a number of markets where new home
prices still remain above production costs. Over the long run,
in a competitive market prices are going to fall to meet the
price of production. Up until about 2003, that was actually the
trend. I do think as we see in other markets that reassert
itself, prices are going to continue to fall in those markets.
I think it is also worth noting the total existing home
sales in 2010 were only 5 percent below their 2007 level. But
if you look at new home sales, they were 60 percent below the
2007 level, and I think the primary reason for this difference
is that existing home prices have fallen considerably more than
new home prices. To me as an economist, this illustrates that
markets actually work. If you let prices fall, volumes will
clear. And I think we need to not be so concerned about any
price declines. I recognize there are costs to price declines,
but there are also costs to keeping prices above market-
clearing levels.
It is also worth noting that for the first 6 months of this
year, existing home sales were 12 percent above the last 6
months of last year, and that is on a seasonally adjusted
basis. So as you have seen these minor price declines continue,
you have actually seen sales start to go up, and I want to echo
again something Mr. Smith said, which is I think we are near
about the bottom in terms of volume of sales, and I think we
will continue to slowly climb our way out. I do want to
emphasize we are years away from seeing anything that looks
like the activity of 2005-06. So I think it is going to be a
slow climb getting there.
I think there is also a fair amount of consensus about you
have got a number of units, about 2 million, in pent-up demand
that I think once you get to the point where people--where
confidence is back in the market, prices are back where people
still feel comfortable, I think this demand will start to come
back. But I think we are a ways away from it. I think borrowers
still are very much concerned that if they buy today, they are
going to continue to see price declines. My recommendation
would be I really believe we need to get to a point where
buyers believe prices can go no further. And that absolutely
risks overshooting on the downside, but, again, I think the
risks of overshooting on the upside outweigh the risks of
overshooting on the downside.
I would also emphasize I look at housing as one of life's
basic necessities, so I do not see it becoming cheaper is a bad
thing. And so I think in many markets, again, the San
Franciscos of the world, I would like to see house prices
actually decline even further because I think that would open
up opportunity for middle-class families to actually buy houses
that they are priced out of buying today.
I also am very concerned about interactions between the
unemployment and the mortgage policies we have. I like to use
the example of if you are a carpenter in Tampa, you are
unlikely to find a job as a carpenter in Tampa anytime in the
next couple of years. We need to encourage you, assist you,
help you move to someplace like Austin where they might be
creating jobs. And so I do think we have locked people in place
in a way that has hurt the labor market. There are a number of
statistics in my testimony that show some of the discrepancies,
and I want to emphasize to me it is really illustrative of, for
instance, San Jose is a very tight market, whereas Riverside is
a very loose market. So even within the same State, you can
have housing markets that are very different, and we need to
target our policies in a way to keep that in mind.
Let me talk very briefly about the rental market, which is
we have started to see some minor declines, but we also still
have about 4 million vacant rental units although that is down
about 500,000 vacant units from last year. Again, the ease or
the tightness of rental markets tends to mirror the overall
housing market we are in.
But let me end emphasizing I think a point sometimes we
overlook when we talk about the housing market, which are those
without homes. And while there are a variety of statistics that
are not as good as what we have on the other side of the
housing market, by any indication homelessness has increased
over the last year, the last 2 years, several years, and it has
increased particularly among family homelessness, and it has
increased particularly in suburban areas. So I do think a
rethinking of our current homelessness assistance programs to
see that they assist people in these newer areas instead of the
traditional focus on central cities is something that merits
attention.
Chairman Menendez. Thank you.
Ms. Zelman.
STATEMENT OF IVY ZELMAN, CHIEF EXECUTIVE OFFICER, ZELMAN &
ASSOCIATES
Ms. Zelman. Good afternoon, and thank you, Mr. Chairman and
Senator Merkley, for having me here today to talk about the
state of the U.S. housing market.
As we enter the sixth year of the worst recession in
housing since the Great Depression, many have suggested that we
have become a ``Renter Nation'' and the American dream of home
ownership is dead. I do not believe this to be the case. We
believe that--or I should say I believe that our great Nation
is still forming households, which is supported by population
growth, and we expect that population growth and household
formation will translate into nearly triple the activity from
today's depressed levels.
With that said, there has clearly been a disconnect between
the longer-term demographics and the near-term reality. I
estimate there are currently 2.5 million ``excess'' vacancies
that need to be absorbed before a return to ``normal'' building
activity levels can be justified. This number has the potential
to move even higher given the current pipeline of 4.1 million
mortgages that are either in the foreclosure process or 90 days
delinquent.
I believe the most powerful tool that Washington can
provide is a rental program to dispose of these vacant REO and
future foreclosures in an orderly manner. The most efficient
and cost-effective way to achieve this goal is for the GSEs to
ease financing terms and expand financing options to investors
that would purchase properties at low LTVs and pursue a single-
family rental strategy.
Over the past 5 years, single-family rental has been the
fastest growing residential asset class. From 2005 to 2010,
single-family rentals grew at 21 percent versus just a 4-
percent increase in total housing units. In the hardest-hit
markets, such as Nevada, Arizona, and Florida, single-family
rental grew at approximately 48 percent while apartment units
were basically flat or unchanged.
Facilitating an orderly transfer of these distressed units
should also have a favorable impact on pricing. Given modest
improvement in the economy, record levels of affordability, and
a reduction in inventory, through the first 7 months of 2011
home price deflation has diminished. In fact, prices of
traditional homes, excluding foreclosures, only declined 1
percent year over year as of July, according to CoreLogic;
whereas, the total decline was approximately 5 percent,
suggesting double-digit deflation for distressed sales, which
currently account for approximately one-third of transactions.
The second piece of the equation is demand, which remains
at all-time record lows measured by sales activity. Despite
favorable affordability and historic low interest rates, this
has not been enough to drive more home buyers off the sideline.
Nevertheless, according to the University of Michigan Consumer
Sentiment Survey, 72 percent of respondents believe that now is
a good time to buy a home. Furthermore, a recent survey by our
firm of 1,500 renters conducted in five markets showed that 67
percent of those surveyed want to become homeowners over the
next 5 years, with 82 percent of renters in the key 25-34 age
group expressing their desire to buy a home.
So if people want to purchase a home and think now is a
good time to do so, why aren't they doing it? The answer, I
believe, is twofold. First is the weak condition of consumers'
balance sheets, which are still laden with high levels of net
debt and negative equity. Indicative of these challenged
consumers, our renter survey showed that just a third of
respondents were able to come up with the 3.5-percent
downpayment necessary to purchase a median-priced home using
FHA financing today.
The second issue is uncertainty, which I believe is a
nationwide problem negatively impacting home sales and prices
given the volatility created by prior tax credits, fear of job
loss, and mixed messages sent by the Government around future
housing policy.
However, regional differences are significant, with major
dichotomies dependent upon levels of unemployment, distressed
inventory, negative equity, delinquencies, and vacancies.
Nationally, one of the most significant problems
prospective home buyers face today relates to stringent
underwriting criteria, magnified by strict credit overlays
being imposed by banks due to unknown risk related to putbacks
or other future unexpected Government burdens. As a result,
many qualified home buyers are being turned away.
Creating a business environment that would encourage banks
to remove these stringent overlays that are above and beyond
already tight lending criteria would be a catalyst to spur
housing activity. I also believe that given the still-tenuous
nature of the housing market, allowing the GSE and FHA loan
limits to roll back to lower levels on October 1st is a
significant mistake and should be put off until the market is
on more solid footing.
Similarly, any legislation related to eliminating or
reducing the mortgage interest deduction should be carefully
crafted and only considered with a longer-term implementation
in mind.
In closing, housing has historically been a significant
driver of recessions and recoveries. Currently, residential
investment represents just 2.2 percent of GDP, representing an
all-time trough and well below the long-term median of 4.4
percent, suggesting that the industry has been a significant
head wind on economic growth. Housing's recovery is essential
to the overall success of a broad economic recovery, and
without it the economy will continue to languish.
Thank you again for the opportunity to testify today.
Chairman Menendez. Well, thank you all. You have covered a
lot of waterfront here and we will continue to do a little bit
more in our question and answer. We will start a round and then
we will see how our time goes.
If I were to ask you, you have a magic wand and outside of
the issue of jobs, which clearly the President was focused on,
came to the Congress, laid out his vision, and I would hope all
of us are focused on that as the number one job before the
country, getting people to work. Obviously in an economy that
70 percent GDP is consumer demand, and without a job, there is
no income, and without an income, there is not demand, so that
is critical and I think we collectively can agree on that.
The next question is, so, setting that aside for the moment
as something that we have a plan, there are different views how
else we might do that, what specifically on the housing front,
if you had one or two initiatives that could come from the
governmental side to incentivize moving this marketplace
forward, what would you say would be? Mr. Smith.
Mr. Smith. Well, we would begin with the comment I made
regarding the foreclosure problem. It is a major overhang. It
is, in fact, impacting values across the board, not only in the
10 States that I mentioned but nationally. We need to
accelerate that and get it behind us. We need to get those
nonperforming assets back into the marketplace as performing
assets that generate true economic value. It is inevitable that
there are going to be foreclosed assets at some point.
Accelerate it, get it behind us, and let the market correct.
I agree with many of the comments that the market will
correct itself, but it needs a little help in this case. This
overhang needs to be lifted permanently, and----
Chairman Menendez. What is the size of that? Can you
quantify it?
Mr. Smith. The size of the foreclosure problem, there are,
depending on who you are listening to, there are about 1.6 to
1.7 million homes. I think the latest S&P estimate is about 1.7
million homes that are at some stage of foreclosure that need
to be moved through the pipeline. That is probably a low
estimate. I think Ivy and others may actually be of the view
that it is much higher than that, because not only those that
are in foreclosure but those that are likely to be in
foreclosure. You will see estimates as low as 1.3. You will see
estimates as high as seven million units. The good news is that
inventory is shrinking a bit.
The banks are very hesitant to proceed on the foreclosure
for the Attorney General lawsuit reasons and a number of other
regulatory reasons. But it is definitely a major overhang. In
fact, in many of our conversations with buyers and sellers,
principally with buyers, they are generally of the view, more
often than not, certainly in those 10 States, that if they just
wait, that foreclosure inventory will be released, bringing
pricing down even lower, creating better opportunities. So they
are literally sitting on the sidelines, well prepared,
perfectly capable of proceeding with the transaction, but they
are waiting, and that is taking a lot of wind out of the
market.
Chairman Menendez. Waiting, thinking that they will get
even a lower----
Mr. Smith. A much lower price, yes. That is a common
problem that we----
Chairman Menendez. So your answer to my question is dealing
with the overhang issue.
Mr. Smith. I do not know how we can move beyond that. I
think that fundamentally must be put behind us.
Chairman Menendez. Mr. Calabria.
Mr. Calabria. I want to echo that, and I certainly would
include that as one of my two. And maybe to flesh out the
numbers a little bit, my estimate, which is from the Mortgage
Bankers Association, is you have about 1.6 million loans that
are at least 90 days late. Of that, my own estimate is you are
looking about between 400,000 and 500,000 that are over 2 years
late. So those core, you can start with a pretty good
assumption that someone who has not been able to make a payment
for 2 years is very, very unlikely to become current again.
So what I would say is I think you need a triage process.
We need to decide who is savable, who can we keep in the home,
who can we help, who can we not, and we have to be realistic
about it because this is a triage and we will not be able to
save everybody.
So I would say for those segment in which the owner has not
paid for a very long time, we need to streamline the process.
We need to get those houses back into inventory very quickly,
let the prices adjust. So that would be my number one.
My number two, which might be echoed by Ivy, I think we
need to find a way to get some of this excess inventory held by
Freddie, Fannie, FHA, out into the private market, back into
the market, either via investors--now, some of it does make
sense to me as a rental. For instance, I would much rather--I
go back to my carpenter in Tampa argument. I would rather help
pay that guy's rent in Austin where he can find a job than to
encourage him to stay in the house that he is in because he is
not going to have to pay the mortgage. So we do need to change
the dynamics in helping people adjust in their life.
So those are my two, but I will also emphasize it is
important to keep in mind that, first, it should be do no harm.
I think we do need to think through proposals and make sure
that we are sending the right signal to buyers, make sure we
are sending the right signal to investors, and all that does
need to be kept in mind.
Chairman Menendez. Ms. Zelman.
Ms. Zelman. Well, first, I would say that we need to
instill confidence in the asset class, and the way you instill
confidence is you mitigate deflation. How do you mitigate
deflation? You have demand and supply back in balance. How do
you get supply back in balance? You absorb it through a rental
program that the Government has the ability to implement. That
rental program is appropriate given the consumers' balance
sheets are too weak for consumers to purchase homes today, yet
households need dwellings. Single-family dwellings today by far
outpace the magnitude of population living in 50-plus unit
apartment buildings and these people that have been displaced,
if they were living in a single-family rental with three kids
and two cars and a dog, they are moving across the street to a
single-family rental. So there would be orderly disposition.
By doing so, we would mitigate new dwellings on the market.
That would put pressure on prices and we would stabilize home
prices, which would take the consumer who is sitting on the
sidelines just because he is afraid, actually allow him to be
back in the market. That is my first response.
My second response would be, today, consumers that are
qualified are being turned away because we have now taken
underwriting to an extreme. The stringent underwriting is
important and needs to be sound, but because of a black and
white underwriting process, as well as incremental credit
overlays, very strong potential home buyers with downpayments
exceeding 30, 40 percent are being turned away in some cases
because of a situation where they are self-employed, for
example. We have made it very difficult for qualified buyers
who have credit scores that might be a 639, it falls below the
640, which, by the way, FHA will insure a mortgage at 580 or
higher, but underwriters will not underwrite a mortgage unless
it is 640 or higher. So we have taken the pendulum and swung it
too far to bring in real qualified buyers.
So I think really two-fold, all of which would bring back
confidence, and confidence, we think, is the biggest impediment
to recovery in the housing market. But first, eliminate
deflation through getting rid of the supply.
Chairman Menendez. Mr. Smith, what about the rental idea?
Mr. Smith. Well, two, with the Chairman's permission, two
points. There is the thought in the marketplace that foreclosed
properties are not selling. I would dispute that. We are one of
the largest resellers of foreclosed properties in the United
States. Sixty percent of our sales are going to individual
investors. They are typically small. They are not
institutional. They are family owned and operated. The balance
are first-time buyers. The investors are paying cash and the
first-time buyers, the 40 percent, are generally FHA financing
with less than 5 percent down.
So there is a very robust market. From the list date to the
actual close of the transaction is taking us 80 days. So we are
turning our inventory over every 80 days. So there is a very
robust market for this. We should not think that they are in a
warehouse somewhere. They move rather briskly. So that is an
important point.
As to the rental, we think rental programs can be effective
to the extent it is not being used to create subsidized
housing. Subsidized rental programs, in the cases that we are
familiar with, which in one case we manage, it was a dismal
failure. They were taking a home that was a GSE inventory,
putting it into a market, it was a single-family marketplace,
and they were making those homes available at half the local
market rate. That created property value problems. It created
significant problems with the local taxpayer, the local
homeowner. It just--if that is the intent, that is, I think, a
poor strategy and is not going to benefit anybody long-term.
If, however, the intent is to put it back in the marketplace at
market rental rates, I think that is perfectly acceptable.
Chairman Menendez. Let me ask one final question. I
exceeded my time, but since it is only Senator Merkley and me
here at this point, I will yield to him in a moment.
Twenty percent down is a constant. Is that a good idea?
Ms. Zelman. I think 20 percent is probably too high. I
think that we have sound underwriting with 10 percent probably
as a more reasonable level, along with FHA financing today,
which is critical to stay at the 3.5 percent downpayment level.
But I think 20 percent is too high.
Chairman Menendez. I get the sense that, institutionally,
there has almost been an adoption of the 20 percent, even
though there has not been, in fact, any, obviously, regulations
to that effect. That is concerning to me because that takes a
whole universe of responsible borrowers off the marketplace. I
think we definitely need to deal with that.
Ms. Zelman. If I may, Mr. Chairman----
Chairman Menendez. Surely.
Ms. Zelman. ----just say that the single family renter is
actually getting the unit made available to him by the purchase
of the foreclosure that Richard Smith spoke of by investors.
And so they are rehabbing those homes and they are putting
tenants into those homes. So the process of disposition is
happening, but because of rental yields for investors need to
be at a certain level. Today, they are running about 6 to 8
percent. With leverage, like multifamily is provided Government
funding to do construction loans and development loans at very
attractive financing, but yet single-family renters have no
financing available to them. Only the single-family mortgage
market and the multifamily mortgage renter has Government
assistance of funding.
With leverage, the Government can get a better return,
because if you provide leverage to investors, there is
significant demand for this type of asset class. We would get a
higher bid, the Government would get a better return, and
everybody wins.
Chairman Menendez. Very good.
Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair, and I
apologize. After I ask my questions, I will have to head to the
floor to preside. I would be very interested in the second
panel, but I will not be able to be here and so I apologize for
that.
I wanted to ask a little bit about if anyone has a take on
how the Boxer-Isakson bill differs from what the President is
proposing. I have not seen details yet on what the President is
proposing so I am not sure if you all have, and if you have, it
would be helpful to give some insight.
Mr. Smith. I, for one, have not seen the President's bill,
so I----
Mr. Calabria. I would say I have not seen the President's
bill. I am not sure that there is a detailed plan. But it would
seem to me to be the difference is--I mean, the concept is the
same. You are going to try to refinance underwater borrowers.
There certainly are a couple important questions that would go
along with that. One, is it voluntary, and under the Isakson-
Boxer bill it seems like the borrower has to come forth and
request. What are the fees that are going to be waived? What is
the LTV going to be? For instance, under the Isakson-Boxer
bill, there is no LTV. You could arguably have a 300 percent
loan-to-value ratio and you could still get refinanced.
I have a hard time thinking that FHFA on its own--I mean,
my understanding is their current discussions at FHFA are to
raise the 125 under HARP higher. Again, I would have a hard
time seeing it removed altogether. So those, I think, are
important details in how it functions, but the core concept is
basically the same.
Senator Merkley. And Ms. Zelman.
Ms. Zelman. Thank you, Senator Merkley. From what I--I have
not seen more specifics other than talking. The President
mentioned something about a Rebuilding America, which would
take foreclosure units through some type of partnership with
maybe investors and refurbish foreclosure units. That is the
only thing that was mentioned as far as I know in the
President's Create Jobs bill.
As it relates to Senator Boxer and Senator Isakson's bill,
you know, I think today the Administration is more focused on
improving upon the existing HARP program, and I think the
challenges of executing implementation of a mass refi are
significant and could cause some major unexpected consequences.
I am supportive of helping consumers, but I also realize that
there could be unexpected consequences, one of which is
breaking contract law by waiving appraisals, also the mortgage-
backed security investors that today would get prepaid could
have significant consequences on the secondary mortgage market
as they would lose several hundred basis points of what they
have in their portfolios. Also, and more importantly, I think
right now, we do not know for certain if these people who are
going to be refinanced still do not walk away, if they still
have negative equity even though you have reduced their
payment.
So I am not against it. I just think it would be difficult
to execute successfully with unexpected consequences.
Senator Merkley. Thank you. And in that context, do either
of you want to share what you think the strengths or weaknesses
are of the Boxer-Isakson approach?
Mr. Calabria. Well, I think--I will first reiterate
something that Senator Isakson said, which is this is not
really as much about the housing market as it is about trying
to create consumption because you are just refinancing people
who are already in their existing home. I think there is
actually some argument to be said by lowering their rate, you
reduce the chance that they will buy another home in the future
because they have to take that into consideration 5 years from
now when they might buy a house and the rate might be 6 or 7
percent and they have a four. That is something that is going
to interact their decision making.
So I would reiterate, this is not about the housing market.
It is about are you creating increased consumption by lowering
somebody's monthly payment so that they have money to go and
spend it on other things. And so the core of this is about
getting the economy going in terms of spending.
The question that I have in my mind, which essentially is
an empirical question and I do not really know if there is any
way you can answer it without a fairly detailed study, is a
mortgage is one person's liability, it is another person's
asset. So you are increasing somebody else's wealth by reducing
their monthly payment. You are decreasing somebody else's
wealth by reducing their bond payment.
It is not clear to me as an economist that the effect on
consumption is going to be any different than zero. So I think
that that is something that needs to be studied fairly
significantly before we know there is actually a positive
consumption impact. And again, my read of it and my read of
Senator Isakson's statements is this is all about trying to
create a boost to consumption, and that is where the focus
should be.
I would raise one concern. I will preface, I am an
economist, not a constitutional lawyer. But the resubordination
of second liens within the bill strikes me as coming very close
to a takings, and I certainly think that somebody--any investor
out there who has got a pool of second mortgages is likely to
challenge that. I can almost guarantee you that somebody will
challenge that in court. But again----
Senator Merkley. If I understand right, this person in the
second position would be in no worse shape than they are
currently. So they do not suffer, if you will, a reduction of
their position, and it is contingent upon access to a future
privilege, if I understood the bill correctly. It cannot be a
taking if they are not in a worse position----
Mr. Calabria. Exactly. So it would depend on how--well, it
would depend on how it would be interpreted. You would argue
that you would be in a better position with the refinance, but
I think that is something that would definitely be dragged out
in the courts. And again, we have seen this, for instance, in
the Countrywide settlements and----
Senator Merkley. Yes. Yes. No, it gets messy quickly.
Mr. Calabria. Yes.
Senator Merkley. Mr. Smith.
Mr. Smith. Sir, I think Senator Isakson said it well in his
statement that this was not going to impact sales. It was to
create stability where stability does not exist. And arguably,
it is complex. It will run afoul of contract law in general, I
believe. But given the circumstances, which are unique, and
given the possibility of strategic default, which is a real
event happening on a daily basis, this is an attempt on the
part of Congress to get ahead of that, as Senator Boxer said,
and to be more proactive than we have been in the past. So I
applaud that effort and I fully recognize there are a lot of
details that are going to have to be worked out. But I think
the end goal is to create stability where it does not exist.
Senator Merkley. Thank you all very much.
Chairman Menendez. Let me take advantage of one more set of
questions before I bring over our next panel. We love having
your expertise here.
So, just so I understand well, Ms. Zelman, in reference to
getting an asset class that would be purchased and then rented,
what is the incentive there? Is it just market incentive or is
it something the Government will do, and what is the guarantee
that the person will move toward a rental along the way?
Ms. Zelman. Well, first, there is very strong demand for
the rental product. With respect to occupancies right now, they
are in the 90 percent range. So I think that the incentive to
the Government is to allow for an orderly disposition to a
product that is deflating the current market and do so with a
rental would basically mitigate that from occurring. So their
recoveries on the assets would actually stabilize and we would
see the cost of holding these REO the cost of holding REO every
day is annually running about 12 percent, 1 percent per month
to pay for property insurance, taxes, safeguarding the
property. All of those are mitigating or increasing severities
daily. So we would stabilize the losses or reduce the losses on
the Government balance sheet and we would put people in homes
that cannot afford to buy them through investors purchasing
them with provided leverage.
Chairman Menendez. And finally, under the guise of do no
harm that Mr. Calabria has suggested, it seems to me that if we
do not act and have the mortgage loan limits at the end of this
month expire, the higher loan limits, it is going to further
destabilize the mortgage market. Certainly, I hope that our
legislation, the Home Ownership Affordability Act of 2011,
which Senator Isakson and I have introduced so that we can keep
the maximum loan limit right now for the next 2 years for FHA,
VA, and GSE insured home loans, will take effect. If it does
not, what is the consequences of that, briefly.
Mr. Smith. Well, you would substantially limit the
availability of financing in certain markets. To a point that
was made earlier by one of the panelists, there are certain
markets in the United States that are high-cost markets. They
are going to suffer, principally the coastal markets, I think,
in an environment that is as fragile as this one.
Further limiting the availability of credit, to Ivy's
point, is not a good strategy. It is certainly not going to be
helpful. The unintended consequence will be a slowdown in sales
and, again, the restriction of credit, and I think that is a
bad outcome given the environment.
Mr. Calabria. As an economist, I am always reluctant to
generalize from anecdote, particularly my own, but it seemed
like an appropriate place to start since I am in the middle of
a refinancing and I live here in the District of Columbia. And
as you could imagine, prices are kind of expensive here and it
is a market in which it is going to go down. And the options
that are facing me are getting a loan just below that limit and
a soft second at a higher rate.
Now, looking at the rates I have been offered, 4.25 for my
first one and 4.5 for the soft second, that does not strike me
as terribly onerous to me. I am not happy about it necessarily,
but I recognize I think we need to transition at some point,
sooner rather than later. I do remember in the past when many
of us tried to fix Freddie and Fannie in the past and we were
told the housing market was too strong then, and now we are
told it is too weak. So those who say we should not ever do
anything about Freddie and Fannie, maybe they could at least
help me detail what are the market qualifications in which we
are able to take reform and so when I get there I can know.
But I do think that, A, if you look at the segment of the
market that is there that we would shift, there is a tremendous
amount of bank capacity to do that. So we are not talking a
very large segment of the market. We are talking fairly high
income. So I guess my point would be I think we need to start
transitioning away from Freddie, Fannie, FHA, to the private
market. I am very open to ways to do that and say which part
should go first. But maybe it is the progressive deep inside of
me that says rich people are the place to start.
Ms. Zelman. Well, Mr. Chairman----
Chairman Menendez. I am tempted, but I will just go on.
[Laughter.]
Ms. Zelman. Mr. Chairman, in response to the--we believe,
as well--I believe that conforming loan limits should not be
allowed to roll back to their normal limits. Looking at FHA
endorsements, the negative impact, at least for FHA, quantified
for the Nation would be approximately 3 percent. The hardest-
hit States would be Connecticut and the District, Washington,
about 8 percent with respect to FHA.
I would say when you look at the level of sales activity,
let me put it in perspective for you today. We are running at
300,000 annualized new home sales. This is an all-time record
low, since records have been ever kept. We are at housing start
levels today approximately 600,000. That level of housing
starts compares to 1982's trough when unemployment was 10.7
percent and mortgage rates were 16 to 18 percent were over a
million. We are at such a depressed level of activity. Even
though existing home sales have actually been increasing, if
you excluded foreclosures, distress sales, which are
deflationary, we are at all time record low traditional home
sales. So putting that in perspective, anything that you take
away from housing today is going to be a negative in further
eroding the level of sales and activity, putting further
pressure on home prices.
Chairman Menendez. I appreciate that. That is my concern.
With thanks to the panel, we appreciate your insights. I
look forward to being able to continue to pick your brains as
we move through this process and thank you very much.
Let me call up our next panel and ask them to come forward
to the witness table. David Stevens is the President and CEO of
the Mortgage Bankers Association in Washington, and prior to
this current position, he was the Federal Housing
Administration, FHA's, Commissioner, appointed by President
Obama, confirmed by the U.S. Senate. Many Members of the
Committee have worked constructively with Mr. Stevens and I am
pleased to welcome him back to the Committee one more time.
Marcia Griffin is the President and Founder of HomeFree-
USA, which is a nonprofit home ownership development,
foreclosure intervention, and financial empowerment
organization. Ms. Griffin was moved to found HomeFree-USA after
working at a loan servicing center and witnessing firsthand the
abuses that many families were subjected to. Her experience
will be very informative for the Committee and I thank her for
her presence today.
Mark Zandi is the Chief Economist of Moody's Analytics,
where he directs research in analytics. Some of Mr. Zandi's
recent research has looked at the causes of mortgage
foreclosure, personal bankruptcy, as well as appropriate policy
responses to bubbles in asset markets. He has been quoted
widely by major media outlets and has appeared before many of
the Senate's committees as well as this one. We are thankful to
have his expertise with us again.
Dr. Anthony Sanders is a Professor of Finance in the School
of Management at George Mason University. He has previously
taught at the University of Chicago, the University of Texas,
the Ohio State University, and although he is from Rumson, New
Jersey, we wish he would come back and teach somewhere like
Princeton or Rutgers.
[Laughter.]
Chairman Menendez. His research and teaching focuses on
financial institutions, capital markets, real estate, finance
and investment. We welcome him to the Committee again.
And Professor Christopher Mayer is the Paul Milstein
Professor of Real Estate and Codirector of the Richmond Center
for Business Law and Public Policy at Columbia Business School.
I would like to see your business card. There must be a lot of
room on that card to get that all in. His research explores
many topics in real estate, financial markets, including real
estate cycles, credit markets, debt securitization, mortgages,
and many other topics. He has advised many policy makers in the
past and we look forward to his testimony and expertise today.
Thank you all. As I said to the previous panel, we are
going to include your full statements for the record. We ask
you to synthesize your statement in about 5 minutes or so so we
can have a discussion.
With that, Mr. Stevens, welcome back and we look forward to
your testimony.
STATEMENT OF DAVID STEVENS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, MORTGAGE BANKERS ASSOCIATION
Mr. Stevens. Thank you, Chairman Menendez, for the
opportunity to be here today and talk about ideas for
refinancing and restructuring mortgage loans.
I am encouraged that the focus of today's hearing is toward
the future and the role that private capital can play in
driving our housing recovery. MBA and its members strongly
believe that housing will be a key factor to our economic
recovery.
The MBA recognizes that our ability to effect change
depends on rebuilding badly shaken trust by restoring
credibility, transparency, and integrity to our industry. We
all know that there are many who share responsibility for the
mistakes that led us to this place, including mortgage bankers
and servicers. However, rather than pointing fingers today, all
stakeholders need to work together to stabilize and revitalize
the housing industry. MBA is grateful for the variety of relief
efforts undertaken by Congress and two Administrations,
including HARP, HAMP, 2MP, and the variety of other efforts
that have been implemented. Clearly, the challenge is greater
than these programs could support on their own.
Mortgage services have already participated by completing
4.8 million loan modifications in the last 4 years, and any
successful solution must include those entities as part of the
effort. Additionally, any new programs must give lenders
adequate time to implement these changes.
In searching for solutions, MBA members continue to be
concerned about the ongoing conflicting policy objectives
emanating from all stakeholders. The regulatory and legal
ambiguity is causing consumers to pay an uncertainty premium in
the form of increased costs and diminished access to credit.
The MBA recently convened a task force to develop new solutions
to reinvigorate the housing market by bringing private capital
back to absorb excess supply. We believe any program to help
spur the housing recovery should be prioritized in the
following order, and I elaborate on each of these in my written
testimony.
First, we need to help the large number of borrowers unable
to refinance at today's near record low interest rates. While
policy makers have introduced programs to help some distressed
borrowers, eligibility criteria excludes a significant number
of borrowers who would benefit from refinancing. Some advocates
have called for other types of large scale mortgage refinance
programs that would include principal forgiveness by lenders
and new mortgage rates below current market rates. Although
such programs could have a positive impact on the housing
market and the economy, the CBO and other analysts indicate
that the programs could also entail significantly higher costs.
The MBA believes the preferred approach is adjusting the
guidelines of existing programs. Policy makers should consider
reducing the GSE's loan level price adjustments on HARP-
eligible loans, which would reduce costs to borrowers that are
arguably unnecessary because the GSEs already assume the credit
risk of the existing loan. Other options include considering
streamlining the appraisal process and closing requirements in
order to reduce the time and expense of refinancing and raising
HARP's LTV, loan-to-value, requirements to enable more
otherwise qualified underwater borrowers to refinance into a
lower mortgage rate. Finally, FHFA should expand the loans
eligible for HARP refinance to loans that were originated after
June 2009.
Senator Menendez and others have suggested a shared
appreciation mortgage, where a lender agrees to reduce the
principal balance of a troubled borrower's mortgage in exchange
for the borrower sharing any future increase in the home's
appreciation with the lender. We look forward to further
discussions with you on this and other possible solutions to
help borrowers.
Second, we should encourage local investment in the
existing housing inventory. Local investors understand the
local rental market and have a long-term stake in the
community. Existing Government programs should be modified to
support financing and availability for local investment in
rental housing. Unfortunately, individual sales and local
investors cannot provide the economies of scale required to
recover the housing market, so the MBA also supports bulk
investor sales of properties in order to alleviate the REO
inventory.
In order for any large scale program to be successful, it
needs to be simple, quick to administer, and attractive to
investors. Safeguards need to include investor screening, buy
and hold covenants, revenue sharing, rehabilitation incentives,
though they should not be so restricted as to sabotage the
program's success.
We also believe the GSEs should consider a mechanism to
allow investors to identify and aggregate REO properties,
likely enhancing multiple property sales.
Mr. Chairman, thank you again for the opportunity to
testify today. I look forward to working with you and other
Members of the Committee to find creative solutions to these
critical issues. As we work to attract private capital back to
the housing market, I urge you to pay careful attention to the
relationship between housing an the overall economy, as well as
to the importance of certainty for consumers, lenders, and
investors. I believe it is important to remember that no part
of the housing market operates in a vacuum. Instead, the
housing market is a series of complex but interdependent
systems, and well-intentioned changes may result in unintended
consequences that could result in increased cost and diminished
access to credit for consumers.
I look forward to taking your questions.
Chairman Menendez. Thank you very much.
Ms. Griffin.
STATEMENT OF MARCIA GRIFFIN, PRESIDENT AND FOUNDER, HOMEFREE-
USA
Ms. Griffin. Thank you very much, Senator. I appreciate the
opportunity to be here with you today.
At HomeFree-USA, we represent the marriage between the
interest of the mortgage servicers and the investors and the
borrowers. Since this mortgage crisis began in 2008, among our
21--well, we fund 66 organizations there in HomeFree-USA, but
21 of our nonprofit counseling organizations focus primarily on
this foreclosure crisis.
I am here to say that despite all that is said and heard,
and it is good to hear some great things from the testimonies
today, that the people--many of the borrowers that we interact
with, and we, as I said, have worked with over 30,000 to date,
many of these borrowers cannot afford to pay a mortgage. They
perhaps cannot afford to pay the mortgage that they have right
now. But they can afford to pay something. These people are
employed. They are trying to do the right thing. You know, they
want to be good citizens.
We are here certainly on the ground working with--working
between the servicers and investors and the borrowers and are
here to say that this idea of the shared appreciation
modification is a sound one. We encourage and certainly would
be honored, you know, to work with you in any way in the bill
that Senator Boxer, the Homeowners Responsibility bill, because
we want you to know that homeowners do want to be responsible.
These borrowers need an opportunity.
And, you know, it is really important, too, that through
the work that you are doing and through the work that our
Government is doing, we have to really bring back a level of
fairness, and this is one of the advantages that the shared
appreciation modification provides. So you reduce the mortgage
payment for the person for a period of time so that they can
afford to pay that mortgage, and at the back end when they sell
the mortgage or they refinance, everyone would share. The
investor would share. The homeowner would share in the
appreciation.
It is really key as we move forward that these homeowners
understand that this is a partnership here. We are trying to
work together. I can tell you that the sentiment on the level
of the borrowers is simply that the lender is trying to take my
home away from me, and everyone that we work with, you know,
everyone cannot keep their home, but there are a lot of people
who can. And this particular shared appreciation modification
program not only would minimize foreclosures, it would increase
property values because, obviously, people would not have to
move out of their homes. It creates a sense of fairness. It
gives people an incentive to stay rather than just walking
away, because now there is no incentive when their house is so
underwater.
People need to be brought back. We need to give more
consideration to our borrowers and give them a sense that we
are all working together, the Government, the mortgage
industry, the investor. We are all here as a win-win for each
other, and with that, I think that is the only way that we are
going to be able to turn around our mortgage crisis and really
improve the economic conditions of our country.
I thank you very much. You have my much longer written
testimony and I am certainly open for any questions that you
may have.
Chairman Menendez. Thank you very much.
Mr. Zandi, I see you are technologically advanced. You have
your testimony on----
Mr. Zandi. I do, I do, but these guys have iPads. They are
even a step ahead of me.
Chairman Menendez. Oh, OK.
Mr. Zandi. I have got one, but I just have not really
gotten around to working through it yet.
STATEMENT OF MARK ZANDI, CHIEF ECONOMIST AND CO-FOUNDER,
MOODY'S ANALYTICS
Mr. Zandi. I want to thank you for the opportunity. My
remarks are my own views, not that of the Moody's Corporation.
I will make three points in my remarks. The first point is that
the housing and mortgage markets remain under significant
stress, and as you pointed out, this is a significant
impediment to the economic recovery.
I think the housing market, broadly speaking, has hit
bottom, but this is still very unusual. At this point in the
economic recovery, housing would be contributing significantly
to economic growth.
So, for example, if you look at the economic recovery since
World War II, at 2 years into the recovery, and we are now 2
years into this one, housing would have contributed about one-
fourth of GDP growth to overall economic activity, and, of
course, this go-round, it has not been a contributor at all.
There are two fundamental problems. One is excess vacant
inventory because of the overbuilding in the boom. We just have
way too many vacant homes. By my calculation, the number of
excess units is close to 1.25 million, and the current housing
demand which is depressed, it will not be until 2013 before we
work through that.
The other fundamental problem is, as we have been talking
about, the foreclosure issue. By my calculation, there are 3.5
million first mortgage loans that are in foreclosure, or 120
days delinquent and, thus, obviously pretty close. And at the
current of resolving these foreclosed properties, it will not
be until 2015-2016 before we work through those properties. So
a long haul.
Given that, this gets to point number two and that is, I
think, policy makers should consider a number of steps to help
facilitate addressing the excess inventory and foreclosure
issue. There are a number of initiatives that are underway that
I think are helpful.
The Neighborhood Stabilization Fund, the President proposed
some more money for that in the American Jobs Act, I believe
about $15 billion. I think it is a very popular program and is
very helpful for blighted communities. The Administration has
also proposed trying to facilitate efforts by Fannie and
Freddie to partner with private investors to move their REO to
rental as opposed to selling it into the marketplace and
driving down prices, and I think that is a laudable goal.
And then your own effort with regard to shared appreciation
mortgages, I think, is a good initiative and I think it has
significant potential for helping in this regard.
I would suggest two other things that could help quickly
and meaningfully. First is, and this has been proposed already
by many of the members of the group, that is, I would not allow
the conforming loan limits--the higher conforming loan limits
to expire.
I was of a different view at the beginning of the year. I
understand the argument that it is important that Government
steps out of the market to see if we cannot get the private
market back up and running and stepping in. That is something
we need to do.
And at the beginning of the year when the housing market
and the economy looked better, I thought this would be a good
opportunity to take a crack at it, but given what is happening
in the economy and the housing market, I think that would be an
error at this point. I would at least extend the conforming
loan limits, current conforming loan limits for another year.
The second thing I would do is I would HARP. You know, HARP
is a reasonable program. It has fallen short of goals, but
850,000 folks have benefited from the program. The President,
when he proposed the program back in '09, had a goal of 4 to 5
million. I think that should be the goal. And I think there are
a few things that could be done to the program to get to that
goal.
The most obvious policy step to facilitate more mortgage
financing is rolling back the GSE's loan level pricing
adjustments. This is a key part of Senator Boxer and Senator
Isakson's legislation and why I support it. That just makes
eminent sense to me, and I think that should be done.
I think efforts to streamline the underwriting process is
very, very important with respect to appraisals, with respect
to income verification. The GSEs own this credit risk and we
can work through these underwriting issues more quickly, lower
the costs so that closing costs are lower for borrowers.
Third, I think it would be important for Fannie and Freddie
to think about waiving reps and warranties on HARP loans. These
are loans under the current program that had to have been
originated more than several years ago, January 2009. So I
think it is perfectly prudent to allow that to be waived. There
are a number of other things that are in my testimony, but I
think I would do that.
Finally, let me just end by saying that this is going to be
hard. There is no magic bullet here. All the things we are
talking about here are on the margin. This is going to take a
long time. So everyone's expectations should be in the right
place.
And moreover, I think it is important not to overreach.
Uncertainty is an issue in the mortgage market and I think what
lenders, servicers, everyone needs is policy clarity so they
can nail this thing down. Thank you.
Chairman Menendez. Thank you. Dr. Sanders.
STATEMENT OF ANTHONY B. SANDERS, DISTINGUISHED PROFESSOR OF
REAL ESTATE FINANCE, AND SENIOR SCHOLAR, THE MERCATUS CENTER,
GEORGE MASON UNIVERSITY
Mr. Sanders. Thank you, Mr. Chairman----
Chairman Menendez. If you would just put your microphone
on?
Mr. Sanders. And I will start over again. Thank you for the
opportunity to speak to you today and thank you for reminding
me that I wish I was at Princeton.
According to the recent data, owner equity in the household
real estate fell around $7.4 trillion from the peak of the
housing market to today. Headline unemployment remains at 9.1
percent. Real GDP is under 2 percent. And real personal
consumption expenditures fell in the second quarter of 2011. So
we can see we have a major problem still on our hands.
One way to jump-start the economy and reduce mortgages that
default is to streamline mortgage financing. When you add the
additional savings to borrowers' disposal income, they might
spend it in the economy or reduce delinquency and default, and
that is a very tempting thing to look at.
We have discussed why borrowers have not been able to
refinance, due to degraded credit after the housing market
collapse; negative equity; and servicing industry conflicts. To
be sure, streamlining the mortgage financing process could help
American households stimulate the economy and reduce defaults.
The CBO, however, using a stylized program, estimated that
2.9 million mortgages would be refinanced--again, this is not
under any specific program--and that would lead to 111,000 few
defaults on these loans. But 2.9 million mortgages being
refinanced at 4 percent or so would generate about $7.4 billion
for the economy in the first year. Depending on the
assumptions, that could, of course, be higher or lower.
In many of the high LTV loans we are talking about in some
of these programs are located in Florida, Arizona, and
California, so the stimulus effect would be more concentrated
in those States.
The stimulative benefits of $7.4 billion in 1 year, after
the refis take place, are actually relatively small compared
with personal consumption expenditures, which in the second
quarter of 2011, were $9.43 trillion. So again, $7.4 billion as
a percentage of $9.43 trillion is much less than 1 percent
added. So I am not sure it is going to have the stimulative
effect that someone would like to see, unless, of course, the
program is much larger than the CBO is estimating.
Another way to stimulate the housing market is to raise the
conforming limits for 1 year or 2 years. As I opined in
previous testimony before the House Financial Services
Committee with regard to a draw-down plan for Freddie and
Fannie, I felt it was appropriate to reduce the conforming loan
limit to allow the private sector back in the market.
However, I stated that if the housing market stalled, which
it has, then alternative strategies to be considered are
regarding the conforming loan limit such as letting it stay in
place for an additional year or two until the housing market
gets back on its feet and running.
Now, Senator Menendez has proposed an interesting idea and
that is a shared appreciation mortgage solution to try to
overcome the negative equity problem. The shared appreciation
mortgage, or SAM, has been used in the United States for
decades, although in low volumes, has been tried in the United
Kingdom to permit borrowers who have paid down their principal,
for example, 50 percent of their share of equity in return for,
say 50 percent of future gains in house price.
The Menendez proposal has a similar intention. The borrower
receives a write-down of principal, or such, in exchange for
giving away a percentage of appreciation and property value in
the future.
Now, there are problems with the SAMs, twofold. First,
capital markets have shown very little interest in it as a
product for investment, so generally, if you make it, you have
to keep it on your books. But second, there are some moral
hazard problems related to the incentive to maintain property
once someone receives the capital gain.
The third problem in the Menendez proposal has solved and
that is about trying to get independent appraisals. So again,
it has some issues, but it also has tremendous potential, and
it is one thing I would like to see them do a trial program for
SAMs. Now, whether or not this is done by private financial
institutions or the GSEs is a topic for later debate.
But again, I think it is one of the most innovative ways to
try to get out of the negative equity problem, because as I
said earlier, the program from Isakson and Boxer, I think, when
looked at the numbers, I looked at the CBO report, I do not
think that is going to get us much truck. But I think this one
has better legs on it.
Thank you very much for the opportunity to testify.
Chairman Menendez. Thank you, Professor. Mr. Mayer.
STATEMENT OF CHRISTOPHER J. MAYER, PAUL MILSTEIN PROFESSOR OF
REAL ESTATE, COLUMBIA BUSINESS SCHOOL
Mr. Mayer. Thank you very much, Chairman Menendez. I
appreciate the opportunity to be here today. Ten-year Treasury
rates are as low as they have been since the Great Depression.
Nonetheless, too few borrowers have been able to take advantage
of low interest rates to refinance their mortgage hampering
monetary policy and dampening consumer spending.
Unable to refinance their debt the way corporations have,
consumers are left with weak balance sheets and mortgage
payments often above the cost of renting, contributing to
excess delinquencies, foreclosures, and falling home prices.
Numerous frictions contribute to the slow rate of
refinancing. The GSEs charge up-front fees for refinancing a
mortgage for borrowers with moderate credit and the loan-to-
value ratio of 60 percent or more. Lender fears of litigation
from reps and warranties further discourage refinancing. Many
borrowers are underwater.
A streamlined refinancing program could benefit 25 million
or more borrowers with Government-backed mortgages. Decreasing
annual mortgage payments by up to $70 billion, about $2,800 per
year per borrower. The majority of savings accrue to borrowers
whose original mortgage was under $200,000.
This plan would function like a long-lasting middle class
tax cut without impacting the budget deficit. A copy of this
proposal made with coauthors Alan Boyce and Glenn Hubbard is
attached to my testimony, along with a State-by-State breakdown
of benefits under this program.
Under our plan, every homeowner with a GSE or FHE or VA
mortgage can refinance his mortgage at a current fixed rate of
4.2 percent or less, with the rate subject to changes in the
market price of bonds. So it is a market rate. FHA borrowers
would face slightly higher rates.
To qualify, the homeowner must be current on his or her
mortgage, or become so for at least 3 months. This plan rewards
responsible borrowers. These must be low-cost, minimal
paperwork refinancing, no appraisals, no income verification,
no tax returns, and a minimal title insurance policy. After
all, the Government already guarantees these mortgages.
Issuers of new mortgages would be indemnified against other
reps and warranties violations, a critical part of this
program. Under our plan, the GSEs would charge a guaranteed fee
of 40 basis points per year, more than offsetting any losses
they might face.
The GSEs would also benefit through fewer defaults by
borrowers with lower mortgage rates. Our plan would pay 30
basis points per year to cover the cost of originating and
servicing new mortgages, making it possible for originators and
servicers, making it profitable for originators and servicers,
given the streamlined process.
The plan must be attractive to market participants.
Servicers should have a short period of time to offer this
program to their customers on an exclusive basis, but only a
short time. Existing servicers, including the largest banks,
benefit by lower legal liabilities associated with reps and
warranties violations.
Second liens and home equity lines of credit are safer when
borrowers have lower first mortgage payments. Banks should find
streamlines refinancings increase both profits and customer
satisfaction. Mortgage insurers and second lien holders should
be required to modify policies and claims to facilitate this
plan.
The housing market benefits from our program. Lower
mortgage payments, reduced future defaults helping stabilize
house prices. More free financing activity should improve
consumer confidence in the financial viability of being a
homeowner. Reducing financial pressure on servicers,
originators, and mortgage insurers will help the mortgage
market start to recover, enabling new home buyers to get
mortgages.
Most gains from this plan come at the expense of investors
who understood and accepted interest rate risk. Private sector
or foreign owners hold about two-thirds of GSE bonds. Agency
bondholders have received unanticipated windfall from many
Government actions during the crisis, including policies that
led to extremely low refinancing rates, the decision to
explicitly guarantee GSE bonds against losses, and the Federal
Reserve's purchase of 1.25 trillion of agency mortgage-backed
securities.
Even with potential losses, some bondholders such as PICO
have publicly supported this plan because of its benefits to
the economy. Implementing this proposal would have a tremendous
affect and make a real difference on families. Until we fix the
housing market, it will be hard for the economy to recover.
I have also responded--put forward a proposal to RFI and I
very much support a number of the other proposals that people
on this panel, the previous panel, have made, including the
expansion of private institutional capital for rental,
encouraging efforts, such efforts, to have local partners, and
to provide responsible financing for investors who are going to
come in and help absorb some of the excess inventory.
I also think that there are many things that one could do
as shared appreciation mortgages, and one idea that I would
toss out to add to the mix is the idea of not necessarily just
tying it to one mortgage, but have that payback be across gains
from other residential property over time which might make such
a shared appreciation mortgage safer for the lenders who do it
and bring it closer to kind of, I think, a cost-effective
basis. So I think there is a lot of positives to do here.
So I appreciate the opportunity and be happy to answer
questions.
Chairman Menendez. Well, thank you all very much. It is a
broad swath of ideas. Let me start off taking off of your
suggestion, Mr. Mayer, and asking the panel in a broader
context beyond Mr. Mayer's specific proposal, is it not, at the
end of the day, I look at this and I say, Well, who is the
biggest holder of the major part of--significant part of the
liability here? It is Fannie and Freddie. And who is Fannie and
Freddie? It is the American taxpayer at the end of the day.
So would it not make sense for Fannie and Freddie to seek
initiatives that mitigate the potential of its, you know,
bosses and help us moving in the mortgage market? So that is a
broad proposition, but I just do not get the sense that that is
where Fannie and Freddie are headed, at least at this point in
time. Are there observations about that? Am I wrong on this?
Mr. Stevens. I think like everything we talk about here,
Senator, as you are well-aware and have been actively engaged,
these questions are often more complicated than the answer.
Actually, the answer is more complicated than the question.
The challenge of Fannie and Freddie is they are--they still
are essentially independent companies in conservatorship. They
have cost the taxpayers $150 billion. It is acknowledged, at
least by their conservator, that they were under-pricing the
guarantee fees when they originated these loans.
And so, I think the tradeoff we have to consider as we
utilize these two agencies, which are critically important,
obviously, considering the size and scope and influence on the
housing market, is it is clearly recognizing with eyes wide
open that anything they would do to participate more
aggressively, whether it is lowering loan level price
adjustments or changing loan-to-value requirements or reducing
documentation or relieving reps and warranties or all these
things are being discussed, that those are all--those bring
incremental risk associated with each of those steps.
And as long as that is acknowledged and recognized in the
process, I think good decisions can be made. I think it is
difficult, however, because they are in conservatorship and
there is no clear direct governance capability here, that it
makes it much more difficult to direct them to take action,
which may not be in their own best interest, especially at a
time when they are trying to bring themselves back to a level
of operating profitability.
Chairman Menendez. But I would assume--I understand what
you are saying, but I would assume the conservatorship,
ultimately its goal is to maximize or limit, actually, the
scope of the liabilities at the end of the day. And it just
seems to me that you have this stated public policy goal of
trying to limit the liabilities, and yet, not being able to do
some of the things that are essential to limit those
liabilities.
Mr. Stevens. And you are absolutely right. I mean, even the
CBO, which is, I am sure, not the most detailed at this point
because we do not know what the proposed specifics would be on
a refinance plan, but it clearly shows that it reduces risk to
the GSE's portfolio to make some adjustments, at least to the
HARP program, and I think all of--after hearing all the
panelists so far, it sounds like there is almost universal
belief that there is room to make changes there.
So I think our collective objective as stakeholders has to
be to continue those discussions with FHFA and the GSEs in
hopes that they do make the changes that are on the margin,
would be helpful here, knowing even to Tony's point that while
it may not have an extraordinary influence on stimulus, it will
have some impact on the 2.9 million families who would
potentially benefit from it.
Chairman Menendez. Any other observations from anyone?
Mr. Zandi. Well, I think if you look at the CBO work of the
assessment of the Boxer-Isakson plan, Fannie and Freddie come
out even, at least, to make a little bit of money on the deal.
It costs the Federal Reserve money on a mark-to-market basis,
but it is important to point out that the Fed is holding these
securities to maturity, and they do not mark their books. So
this is just an accounting loss. It is nothing more than that.
So, there are ways to do things here that do not cost
taxpayers money at all, any money, and I think this is one of
those things. Yes, it is true Fannie and Freddie are going to
take on some additional risk here, there are some costs here,
but they are also reducing the potential for default and credit
loss, and so net looks like it is a wash, maybe a little bit
down.
The thing I would point out is if HARP hits its goal of 4
to 5 million borrowers and that is another, say, 4 million
borrowers who get refinanced down and let us say they go from--
the average coupon or the median coupon on a Fannie or Freddie
loan is 5.5 percent.
So you have got half of borrowers that are over 5.5
percent. Let us say they can refi down to 4.25 percent, or
something like that. They save a little over a percentage
point. You do the math, that is about $10 billion in annualized
interest payments. That is not going to solve our problems, but
that is not insignificant, particularly with those households,
and many of them are in very distressed parts of the country
which could use that cash and use that money. It is something
that could happen quickly.
Chairman Menendez. But we would have to change HARP from
where it is now to accomplish that.
Mr. Zandi. Well, Fannie and Freddie, through the FHFA would
have to make some modest adjustments, roll back the LLPAs, make
some adjustments with reps and warranties, look at underwriting
and the cost of underwriting and appraisals, maybe even, I
think, change policy and become a little bit more proactive in
reaching out to potential borrowers because right now they do
not do that.
They reach out and say, you can make a real saving on your
monthly mortgage payment if you did this. These are the kinds
that are reasonable to do. I do not think they are difficult to
do and I think they could make a difference, a substantive
difference.
Chairman Menendez. Professor.
Mr. Sanders. Thank you. First of all, I do agree with what
Dave said. While it is trivial in terms of percentage of the
consumption expenditures for consumers, it is 2.9 million would
really appreciate the help, I am sure.
The one part of the CBO report, and I have greatest respect
for the CBO, in particularly Professor Lucas, is I am a little
squishy on the benefits to the GSEs from this program. I have
not heard Fannie, Freddie, or the FHFA come out with any
positive statements regarding it in that respect, so I am a
little nervous that it may be overestimated.
So I would actually make it more on the decision, do we
really think it is going to help borrowers avoid default and
would it actually help stimulate the economy? I think those are
the bigger selling points. But again, I think that the--I sure
like the shared appreciation mortgage idea the best.
Mr. Mayer. I would observe a couple of things. One, we have
referred a little bit to the CBO report. I would cite private
sector estimates from Goldman and Sachs, J.P. Morgan, Morgan
Stanley, even work that Mark has done that suggests an
appropriately structured program would generate $25 to $50
billion a year.
The J.P. Morgan report came out after the CBO report. They
respectfully disagreed. I am not sure anybody on Wall Street
thinks that a well-structured program would be as small as the
CBO estimated. So I do think there are good reasons to believe
that this would have a much bigger stimulus on the economy than
the CBO suggested.
I just point out that in 2002 and 2003, the last time rates
fell like they have so far this time, about 85 percent of
borrowers who could save 100 basis points on their loan took
advantage of prepaying over a 2-year period. The CBO estimates
a take-up rate, even among the most constrained households, of
30 percent.
So I think there the CBO estimate, predominantly on the
take-up rate, has been a bit conservative relative to kind of
other folks. I would go out and say, I think this can be a much
bigger effort. The key is appropriately structuring this, and
you rightly pointed out, Senator Menendez, that conservatorship
is a real barrier to this.
I think there are a number of ways to deal with that. One
of them is, if it does look like this is not so neutral to the
GSEs, as Professor Sanders has talked about, you could raise
the GSE fee a little bit--sorry--the GE fee, the guarantee fee
a little bit under such a program, which would ensure it was a
budget-neutral program to other parties and still benefit
homeowners enormously.
So I think the other thing that we have not discussed that
is really critical is mortgage insurance. There are a large
number of people, estimated 25 percent of the population, that
will not even get inside a door without a deal to think about
mortgage insurance. So they have to be brought into the mix as
well importantly.
Chairman Menendez. What about the--I raised this with the
previous panel--about the QRMs, the 20 percent? It seems to me
we take out a huge class of individuals in the country who
could be responsible borrowers and help us in this process. Are
there views on that, Mr. Stevens?
Mr. Stevens. Yes, I completely agree. I think that the
intentions of QRM were very dead-on accurate and effective in
terms of eliminating products with high risk characteristics.
So the QRM, as we all know, requires limits to owner-occupied
primary residence, full amortizing loans, loans that are fully
documented.
When you look at the actual default data, if you isolate to
those characteristics and not bring in the downpayment
requirement that is in QRM, you have solved 95 percent of the
problem just simply by isolating those characteristics.
The problem with downpayment, once you throw that variable
in, is it becomes particularly punitive to families without
amassed wealth or high income earners. And so, it tends to hit
those that need access to affordable home ownership the most,
first-time home buyers, African Americans, Latinos,
traditionally demographics in this society that do not have
large amounts of inherited wealth and maybe, at least
demographically, at the lower end of the income earning
spectrum simply the way that incomes are structured in this
country.
So we believe that you can implement a very safe and sound
QRM rule based on all the parameters, but that the loan-to-
value requirement ends up being particularly punitive and is
likely to set up some sort of separate but equal financing
system where a certain set of Americans go to FHA for all their
mortgages and then the wealthy get some other products set
through QRM, and that is something that I think we are very
concerned about as an organization looking at making sure there
is available liquidity for all Americans who can responsibly
pay for a home mortgage over the years to come.
Chairman Menendez. Ms. Griffin.
Ms. Griffin. I just wanted to mention one thing, Senator,
if I could on your last question. I did not respond to that. I
am going to let the experts talk about the mortgage side of it.
But where Fannie and Freddie are concerned, I am going to say
that, you know, I just do not think they know what to do and
that is why having you and our Senate and our Congress are so
important.
I think they really are trying to, with the conservatorship
and with FHFA, are trying to figure out a long-term profitable
arrangement that will benefit the taxpayers. I can say that
Fannie and Freddie both, on the ground, have created
environments where they are reaching out to homeowners in a
very unique way, using counseling organizations, setting up
borrower help centers and mortgage help centers, and really
using people who can interact on a face-to-face basis with
these homeowners and influence their behavior and really help
the servicers on the back end to make a determination help
these people, as to whether they can keep their mortgage or
not, and also help--if a lot of people are not going to be able
to stay in their homes, what will happen to these families?
Someone has to deal with this, and I just want to encourage
you and encourage FHFA and the GSEs and FHA. You know, the
counseling environment is so important because we are on the
ground with these homeowners and home buyers. We can convince
them, we can work with them, we can help them to understand
what they should and should not do.
Chairman Menendez. Very good. Thank you. Mr. Zandi.
Mr. Zandi. Turning back to QRM, I think the QRM, as
currently proposed, is overly restrictive for two reasons. One,
I think Dave said it nicely. If you look at credit risk at
higher LTDs or lower downpayments, I think there is strong
evidence that it makes perfect sense to allow for lower
downpayment loans, that it is not--after you control for all
the other risk factors, it is perfectly reasonable to allow for
lower downpayment loans.
The second reason, and this goes to broader GSE reform, if
you look at the FHFA data, under the current rule, I believe,
over time on average, only about a third of all mortgage loans
are QRM. And so, in a future world we do something about the
GSEs, I think that would be very restrictive.
It would mean that Government's role in the mortgage market
would be very, very limited, and I think that leads to all
kinds of problems with respect to the ability for borrowers to
get 30-year fixed rate mortgages, the cost of mortgage credit
to borrowers.
I think a more reasonable goal would be something closer to
two-thirds of mortgages, and if you adjust the LTD requirement
and allow for lower downpayments, you can, I think, quite
reasonably get to about two-thirds of the market and I think
that is a much more reasonable goal, not only with respect to
what is happening now, but long run in what we are going to do
about the mortgage market and Government's role in the mortgage
market.
Chairman Menendez. Dr. Sanders.
Mr. Sanders. Just to add to what Dave and Mark said, you
can actually go to the FHA Web site and they actually have the
listing of the data and what loans would qualify under QRM, and
it is very, very restrictive. And again, although well-intended
legislation died in terms of mortgage lending, does, in a
sense, represent a clear and present danger to the future of
the housing market if we do not do something about it. Way too
restrictive.
Chairman Menendez. Well, it seems like you have universal
agreement on that. Hopefully those who are going to make the
decision are listening. Mr. Mayer, let me ask you two final
questions here and then I will let this panel go. How does your
refinance proposal differ from Boxer and Isakson's legislation?
If you could give me some sense of that?
Mr. Mayer. Sure. Let me just pull up my notes here. So I
think there are several things. As I commented earlier,
mortgage insurers are a really big issue that I think we need
to address. The mortgage insurance industry, almost all the
companies, are rated Single-B. I am not sure their insurance is
as good as we would like to count on, as we do now.
So we are going to have to deal with the large number of
potential folks who have mortgage insurance, and I think there
are ways to do it. But that is going to be one key issue, and
reps and warranties is a related issue which gets to the
mortgage insurance question. Those issues, I think, are really
holding back a lot of people from being able to participate in
HARP, and if we do not address them, I do not expect that we
are going to get the take-up that we should.
I think, also, trying to take steps to bring down closing
costs is important, and I think we have to take seriously what
the cost is to the GSE on the balance sheet. I applaud the
Congressional Budget Office for having looked at that. But I do
think one may need to adjust the G-fee, the guarantee fee a
little bit to help adjust to ensure that it scores as a budget-
neutral program from the Congressional Budget Office.
But I do think there is some chance that a legislative
solution would succeed where we may or may not succeed with an
administrative one, particularly some of the parties involved
are kind of holding up the process. I do not think, by the
way--there was a discussion in the earlier panel on second
liens.
I am not sure that resubordination of second liens is
actually a big problem today. I think most of the major lenders
will do what they see as in their interest, to have a lower
payment on the first lien. So I am not sure that is the biggest
issue. I think it is in other areas.
Chairman Menendez. One question, Mr. Stevens, while I have
you here. It is a question related to your tenure as the
Commissioner of the Federal Housing Administration. As I
understand, FHA is required to have a capital reserve ratio of
2 percent, and for the past 2 years, the FHA's capital reserve
has been below that figure.
So given that number and FHA's critical role in the housing
market, are you confident that it can continue to be a source
of funding for low and moderate income borrowers?
Mr. Stevens. Well, as you said, Senator, and other members
of the panel have said, FHA is a critical resource for
providing financing, particularly to first-time home buyers,
and most data shows that in the first-time home buyer market,
FHA is making up the vast majority of the funding because of
the loan-to-value requirement.
The other variable I would highlight is FHA is one of the
few entities in the housing finance system that has operated
entirely on its own ability with its own capital.
However, that capital was stressed, it did drop below the
threshold of 2 percent on the capital reserve ratio, and the
actuarial studies over the last couple of years have expected
that the capital ratio would grow and there would be actually
net receipts, negative subsidy, as it were, on the budget side.
But all of that assumed that the home price index would
show some growth which is the flattening of that index has
continued to extend out year after year, and so despite a
variety of measures that have been taken under, particularly,
Secretary Donovan's administration with raising mortgage
insurance premiums three times, changing the underwriting
requirements, putting minimum FICO scores in place, changing
product terms, eliminating many lenders that were not
originating responsibly, it is still subject to the economics
of the housing system.
I have no inside information, obviously. I have left the
Administration, but I am concerned that just given the softness
in the housing market and the seasoning of some of these big
portfolios like the 2009 portfolio and other potential impacts
from the reverse mortgage program, that there may be some
impact to the capital reserve ratio, and I would hate to see it
go negative.
The good news about the program, it is operated under the
full faith and credit of the U.S. Treasury. But I am certain it
will bring extraordinary criticism and focus should it drop
negative. The study comes out at the end of the fiscal year
that ends at the end of September and usually is released
somewhere early November. So I am anxious to see how that fund
is doing given all the additional stresses that have occurred
in this housing market over the last 12 months.
Chairman Menendez. Well, I am anxious as well. We will have
to make sure we pay attention to the report.
Well, thank you all for your input, your expertise. I
appreciate all of our witnesses sharing their insights today. I
think the testimony here can be very useful in exploring both
problems that homeowners face in refinancing and restructuring
their loans in ways are potential actions that we can take.
The record is going to remain open--of this hearing--for a
week from today if any Senators wish to submit questions for
the record. And with the thanks of the Committee, this hearing
is adjourned.
[Whereupon, at 3:46 p.m., the hearing was adjourned.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF SENATOR BARBARA BOXER OF CALIFORNIA
Thank you, Chairman Menendez and Ranking Member DeMint, for
scheduling this important hearing and for the opportunity to address
the Committee.
Interest rates for 30-year home mortgages are at 4.12 percent--the
lowest rate in 60 years. Yet of the 27.5 million mortgages guaranteed
by Fannie Mae and Freddie Mac, over 8 million still carry an interest
rate at or above 6 percent.
That is why Senator Isakson and I have introduced S. 170, the
Helping Responsible Homeowners Act of 2011--and I would also like to
thank you, Chairman Menendez, for cosponsoring this bill.
When interest rates were higher, CBO projected this bill would
allow up to 2 million additional responsible homeowners to refinance by
removing the barriers that have kept them trapped in higher interest
rate loans, and it would put thousands of dollars back in the pockets
of struggling families. With interest rates now at record lows, we--and
many economists--believe that number would be even higher.
Our bipartisan bill has been endorsed by Mark Zandi, chief
economist at Moody's Analytics--who will testify later in this
hearing--William Gross, managing director and co-CIO of PIMCO, housing
economist Thomas Lawler, the National Association of Realtors, the
National Consumer Law Center, the National Association of Mortgage
Brokers, and others.
One reason existing refinancing efforts have fallen far short of
their goals is that Fannie and Freddie continue to charge homeowners
high, risk-based fees up front to refinance their loans. Fannie and
Freddie already bear the risks on these loans; yet this policy actually
makes it less likely that borrowers will be able to take advantage of
low rates and increases the chance they will eventually default.
The Helping Responsible Homeowners Act would eliminate these risk-
based fees on loans for which Fannie and Freddie already bear the risk,
and would also remove refinancing limits on underwater properties for
borrowers who have been paying their mortgages on time.
Fannie and Freddie hold or guarantee the mortgages for
approximately 5 million homeowners whose homes, through no fault of
their own, are now worth less than what they owe. For those borrowers
who have been doing the right thing, struggling to make their payments
on time, this bill gives them hope--and a reason not to simply walk
away.
Although we have introduced this legislation, most of what we
propose could be implemented administratively by Fannie and Freddie on
their own. We have urged them to take immediate action to remove these
barriers and were greatly encouraged to hear President Obama recognize
the benefit that doing so could provide in his jobs speech last week.
I was also heartened by the statement issued by the Federal Housing
Finance Agency following the President's speech that it is now serious
about reducing the barriers that have kept millions of homeowners from
refinancing, including those identified in our bill. But it will be
important to make sure that FHFA follows through on this commitment.
Implementing the provisions of this bipartisan bill, whether
through passage or administratively, would result in up to 54,000 fewer
defaults and produce a net savings up to $100 million for Fannie Mae
and Freddie Mac.
Homeowners would see immediate relief. A one and a half percent
reduction in their interest rate would save the average homeowner with
a $150,000 loan over $1,600 annually. And with up to two million
additional borrowers refinancing, this would pump up to $3.2 billion
annually into the economy.
Interest rates remain at historic lows, and they likely will remain
low for the immediate future. But they will not remain low forever.
Every day that we wait means more struggling homeowners who fall behind
on their payments and greater losses for Fannie Mae and Freddie Mac.
We cannot wait any longer. The Helping Responsible Homeowners Act
will be good for borrowers, good for Fannie Mae and Freddie Mac, and
good for the economy.
______
PREPARED STATEMENT OF SENATOR JOHNNY ISAKSON OF GEORGIA
Chairman Menendez, Ranking Member DeMint, and Members of the
Committee, thank you for permitting me to attend today's hearing.
I began my career in residential real estate in 1967 as a real
estate agent specializing in FHA and VA home sales with an average
price of $17,900. In 1968, I experienced the first of four housing
recessions I would face during my 33 years in the business. That first
housing recession was brought on by the failed FHA 235 no-downpayment
program.
In 1974, I was a branch office manager for Northside Realty in
Atlanta when our country experienced what at the time was the worst
housing recession our Nation had ever faced. That recession ended in
1976 after Congress passed a $2,000 income tax credit for the purchase
of a single family home in 1975. That tax credit effectively reduced a
standing vacant 3-year supply of housing to less than a 1-year supply.
In 1981, I was President of Northside Realty, and experienced my
third housing recession. Interest rates rose to 16.5 percent, and for
the first time ever lenders made negative amortization loans to make
monthly payments affordable.
In the late 1980s, the savings and loan crisis caused institutional
failures across the Nation, and the Resolution Trust Corporation was
created. This brought on the housing recession of 1990-91, and
mortgage-backed securities became the primary source of capital to fund
residential conventional loans. This is when Freddie Mac and Fannie Mae
became dominant in housing finance.
In 1995, I was asked to serve on the advisory board of Fannie Mae.
In 1999, I was elected to Congress and stepped down as President of
Northside Realty, which had grown into a residential brokerage company
with 1,000 agents, 25 offices, 11,000 annual home sales and volume
exceeding $2 billion dollars.
During my 33-year career in real estate, I experienced many
challenges and difficult markets, but never anything like the current
housing market in America. Even some 3 years after the initial
collapse, our Nation is still facing a total collapse of new
residential construction and development. The upcoming decline in
mortgage loan limits on September 30th will only further exacerbate
this problem and I encourage my colleagues to support the bipartisan
Home ownership Affordability Act of 2011 which will extend, and not
change, the current maximum loan limit of $729,750 for 2 years through
December 31, 2013, for FHA, VA, and GSE insured home loans. These
expirations will make a weak housing market even weaker, and it will
make it harder for middle class home buyers in 42 States to get
mortgages and buy homes when credit is already tight.
According to a recent CoreLogic report, 10.9 million Americans who
borrowed to buy their homes, or 22.7 percent of all homeowners with a
mortgage nationwide, are underwater. Congress should allow those that
are paying their payments on time and meeting their obligations to
refinance at current interest rates to free up capital.
Currently, interest rates for 30-year home mortgages remain at
historically low levels--at 4.12 percent. Yet of the 27.5 million
mortgages guaranteed by Fannie Mae and Freddie Mac, over 8 million
still carry an interest rate at or above 6 percent. For the average
homeowner--with a $150,000 loan--lowering the interest rate by 1.5
percent would save $1,600 a year. With up to two million additional
borrowers refinancing, this would pump up to $3.2 billion annually into
the economy.
The Boxer-Isakson Helping Responsible Homeowners Act of 2011 is a
bill which I strongly support. It will help up to two million
nondelinquent homeowners refinance their mortgages at historically low
interest rates by keeping them in their homes and boosting economic
growth.
To remove the barriers preventing responsible borrowers current on
their payments from refinancing their loans, I encourage Fannie Mae and
Freddie Mac to administratively:
Eliminate risk-based fees on loans for which Fannie and
Freddie already bear the risk;
Remove refinancing limits on underwater properties;
Make it easier for borrowers with second mortgages to
participate in refinancing programs; and
Require that borrowers are able to receive a fair interest
rate, comparable to that received by any other current borrower
who has not suffered a drop in home value.
I was happy to hear that President Obama recognized the benefit of
these refinancing provisions in his speech before congress last week
and I, along with Senator Boxer, continue to urge that these changes be
done administratively by Fannie Mae and Freddie Mac. By removing the
barriers that have kept these nondelinquent homeowners trapped in
higher interest rate loans, it would put thousands of dollars back in
the pockets of struggling families and have a direct impact on the
housing sector.
Thank you.
______
PREPARED STATEMENT OF RICHARD A. SMITH
Chief Executive Officer, Realogy Corporation
September 14, 2011
Introduction
Good afternoon, Chairman Menendez, Ranking Member DeMint, and
Members of the Subcommittee. Thank you for the invitation to speak to
you this afternoon regarding the state of the U.S. housing market. I am
Richard A. Smith, the president and CEO of Realogy Corporation, a
global provider of residential and commercial real estate franchise
services, real estate brokerage, employee relocation and title
insurance services. Our brands and business units include Better Homes
and Gardens' Real Estate, Century 21', Coldwell
Banker', Coldwell Banker Commercial', The
Corcoran Group', ERA', Sotheby's International
Realty', NRT, LLC, Cartus, and Title Resource Group.
Collectively Realogy's franchise system members operate approximately
14,400 offices, with operations in all 50 States and 100 countries and
territories around the world. We are headquartered in New Jersey.
State of Housing
I will open my comments with the statement that in our view
existing home sales appear to have essentially bottomed, and the
national average sales price for existing homes is close to its low.
New home sales have reached historic lows and may still see slight
downside on both unit sales and average sale prices.
From its peak at 8.3 million total new and existing home sale units
in 2005 and an average national sales price of $271,000, the U.S.
housing market steadily declined to 5.2 million total units in 2010 and
an average national sales price of $223,000, \1\ and thus far has
recorded a peak-to-trough price correction of approximately 30 percent.
This has been the worst housing correction on record. The headwinds of
the past almost 6 years have been substantial and persistently
stubborn. In spite of enormous challenges, we believe housing in the
macro sense appears to have essentially stabilized for now, although at
depressed levels.
---------------------------------------------------------------------------
\1\ National Association of Realtors (NAR) historical data.
---------------------------------------------------------------------------
The current industry forecasts for full-year 2011 and 2012 call for
annualized existing home sales in the range of 4.9 million to 5.1
million units, and the median sales price is expected to go from a
range of down 3 percent to down 4 percent year-over-year in 2011 to
between minus 1 percent and plus 2 percent in 2012. \2\ Residential
real estate values and home sales are historically determined by local
market influences such as the local job market, population growth,
quality of the schools, quality of life, and the features of the home
relative to the local market. The macroeconomics have substantially
influenced home sales during the past 6 years. Insomuch that housing
activity is now beginning to vary market-by-market it appears that the
microeconomics are beginning to overshadow the macroeconomics, which is
certainly a good sign.
---------------------------------------------------------------------------
\2\ NAR Economic Outlook, September 2011; and Fannie Mae Housing
Forecast, August 2011.
---------------------------------------------------------------------------
The current housing market, although stabilized, is at depressed
levels both in terms of sales and price. But the good news is we have a
stabilizing market. The not-so-good news is that it is very fragile and
only functioning for limited segments of the market. The make-up of the
market is noticeably different than it was just 5 years ago. The very
high end of the market, characterized as all-cash buyers, has been very
active representing a large percentage of sales in many of the major
markets. The balance of the market has been dominated by first-time
buyers and investors. The first-time buyer is compelled by historically
low mortgage rates and unprecedented pricing. In many of our markets,
take Florida as an example, more than 50 percent of our sales are all
cash. The middle of the market, characterized by the move-up buyer, is
noticeably absent. By most accounts about 25 percent of homeowners are
``underwater'' on their mortgages, \3\ meaning that they have little to
no equity and thus cannot sell their current house to ``move up'' to
the next home. That has clearly had a major impact on national home
sales.
---------------------------------------------------------------------------
\3\ ``New CoreLogic Data Reveals Q2 Negative Equity Declines'',
Sept. 13, 2011; and Zillow Q2 2011 Market Report, Aug. 9, 2011.
---------------------------------------------------------------------------
Investors, on the other hand, have a seemingly endless appetite for
distressed and foreclosed homes. As one of the largest brokers of
foreclosed homes in the United States, we currently have about 60
percent of our distressed inventory being sold to investors with the
balance going to first-time buyers as owner-occupied homes. The
investors are all-cash buyers and the first-time buyer is typically
using FHA financing with less than a 20 percent downpayment. Our REO,
or Real Estate Owned, inventory, which we believe is representative of
the national foreclosed housing stock, is typically a 3-bedroom 2-bath
home with 1,800 square feet. The list price is typically half the
unpaid principal balance and sells within 80 days at 98 percent to 99
percent of the list price. The typical buyer spends $10,000 to $16,000
to prepare the home for occupancy. The market for foreclosed homes is
very strong nationwide.
Distressed property sales, often called short sales, involve a
lender agreeing to accept a purchase price from a prospective buyer
that is less than the remaining principal value of the mortgage. If
accepted, the seller is often released from the obligation and the bank
avoids the cost and the difficulties of a foreclosure. According to the
most recent monthly survey information from the National Association of
Realtors, distressed properties--meaning foreclosures and short sales
typically sold at deep discounts--accounted for 29 percent of existing
home sales in July.
What are buyers experiencing? Mortgage lending, although available,
is very difficult. Lenders are requiring unprecedented levels of
disclosure and documentation. Appraisals are often conducted by
inexperienced personnel with little to no local market experience often
resulting in flawed value assessments, the outcome of which is a
rejected loan. The market value is no longer determined by what the
buyer and seller agrees is a fair price. It is now determined by an
appraiser and often an inexperienced one at that.
Renting is certainly in vogue for the moment and given the lack of
consumer confidence and the extraordinarily high rates of unemployment,
it is not a surprise. In most markets it is more cost effective to own
as rents continue to escalate nationally at a rate of 5 percent to 7
percent. In New York City alone, where we are the largest rental
broker, year-over-year rents will likely increase this year by 10
percent. Renting is not a long-term solution. In our view, home
ownership continues to be the goal of most Americans.
So what is holding back a housing recovery, and what are the
solutions? Unfortunately there are no silver bullets. We believe the
immediate issues are high unemployment, the persistent overhang of
foreclosed properties, low consumer confidence and failed Government
intervention programs.
Jobs
Unemployed and underemployed people do not buy homes. So for the
purpose of housing, our focus is on the U.S. Bureau of Labor Statistics
monthly underemployment report, which as of September is 16.2 percent,
a staggering number. \4\ When the full-time employment numbers rise, a
housing recovery will follow, marked by pricing stability and the
return of the move-up buyer.
---------------------------------------------------------------------------
\4\ Bureau of Labor Statistics, Table A-15. Alternative measures
of labor underutilization, Sept. 2, 2011.
---------------------------------------------------------------------------
Foreclosures
The Government's repeated efforts to mitigate the foreclosure
problem facing our country have done little but prolong the recovery.
In our view, lenders should be permitted to accelerate foreclosures in
the cases where reasonable efforts to avoid foreclosures have failed. A
resold foreclosed house generates economic value and aids the process
of stabilizing local market home values. Delaying the process has the
opposite effect. The Government's well-intentioned programs are
burdened with extensive layers of red tape that have substantially
limited the effectiveness of the effort.
Short Sales
A short sale, an agreement between a mortgage holder and a seller
to accept a sale price that is less than the mortgage, could be an
effective private sector solution. However, although short sales entail
a much improved process compared to foreclosures, the process has been
less effective in part because lenders are slow to respond to the
purchase offer and a frustrated buyer moves on. Nevertheless, short
sales should be encouraged as a superior alternative to foreclosure.
Debt-for-Equity
A debt-for-equity solution is a concept that we believe has merit
for underwater homeowners as well as lenders and/or loan servicers. In
place of foreclosure, a lender agrees to exchange the outstanding
mortgage for a new loan with a lower principal and, equally as
important, shares in the equity of the house. The homeowner agrees to
maintain the house, stay current on the new loan and when the house is
eventually sold the lender receives the proceeds from the retirement of
the loan as well as its share of any appreciated value. The full
description of the proposal is attached to our submitted comments as an
addendum (see, Addendum 1, ``Debt-for-Equity Solution for Underwater
Homeowners'').
Assumable Loans
Mortgage rates are at historic lows and locking in those rates for
the benefit of future buyers would stimulate current sales. Any
Government-backed loan originated during the next 2 years should be
assumable for the term of the loan. A new buyer would be required to
qualify under current underwriting standards but would assume the
historically low interest rate. We believe this provision should apply
to any size loan that is Government guaranteed.
Fannie Mae Rental Proposal
Much has been said of late about a Fannie Mae proposal to convert
foreclosed homes into affordable rental housing. Our experience with a
similar effort has thus far proven ineffective and usually detrimental
to neighborhoods. In the case of a similar effort in Florida, single-
family homes in owner-occupied neighborhoods were rented at rates
deeply discounted to the market rental rates. The result was lower
local property values and high eviction rates. In one instance, 50
percent of the renters were evicted after 6 months. At least on the
basis that has been described, we strongly oppose such a strategy.
Refinance Programs
The proposed expansion of the Home Affordable Refinance Program
(HARP) program to encourage the refinancing of loans guaranteed by the
U.S. Government, regardless of the lack of equity, will help reduce
foreclosures and stabilize select housing markets in the near term. We
caution, however, that an improved economy and value appreciation are
essential to any long-term solution. Underwater equity today that
remains underwater equity 5 years from now does little to improve the
long-term state of housing.
Loan Limits
A reduction in conforming loan limits for Fannie Mae, Freddie Mac,
and the FHA is scheduled to occur on October 1, 2011. It is often
argued that higher loan limits only benefit higher-cost markets but
that is not supported by the facts. The National Association of
Realtors estimates that reducing the current loan limits would reduce
the availability of mortgage loans in 612 counties in 40 States plus
the District of Columbia. We believe the current loan limits should be
extended for two or more years.
National Flood Insurance
The National Flood Insurance Program is the only source of
insurance in the case of at least 500,000 annual home sales according
to the National Association of Realtors. About 8 percent of the
Nation's housing inventory--or 10 million homes--is located in FEMA's
100-year flood plains. Until such time that an alternative private
market solution is available, the current National Flood Insurance
Program must be extended in order to avoid the risk of another near
term set-back for housing.
Dodd-Frank
The residential mortgage provisions of the Dodd-Frank Act will
negatively impact housing, which we addressed in our formal reply to
the Notice of Proposed Rulemaking released on March 29, 2011,
specifically with respect to the proposed Qualified Residential
Mortgage (QRM) and risk-retention criteria for securitization. As
written, the proposed QRM definition focuses almost entirely on a
minimum downpayment requirement. Had the proposed QRM definition's 20
percent downpayment requirement been in effect in 2009, 2010 and 2011,
then more than 70 percent of all home buyers would not have qualified
for a mortgage that could be securitized, resulting in higher costs to
the borrower.
Realogy supports the position taken by the Coalition for Sensible
Housing Policy that urges the redesign of QRM to make loans accessible
to a broad range of credit-worthy borrowers. The data is very clear
that a 20 percent downpayment would be punitive to low- to moderate-
income borrowers, clearly not an intended outcome. This requirement
will make homes less affordable for the vast majority of the population
that doesn't have the means to make a 20 percent downpayment. The
higher rates that low- to moderate-income borrowers will be forced to
pay means that middle-class Americans who are otherwise prudent
borrowers from an underwriting standpoint would be priced out of home
ownership. That's an unintended consequence waiting to happen, but it
is avoidable. The focus should be on underwriting standards, the
inadequacy of which caused this crisis, not on a minimum downpayment,
which as best we can determine played little to no role in creating the
current circumstances.
Dodd-Frank requires that lenders retain 5 percent of the face value
of the securities sold into the secondary market. The 5 percent
retention rule, although clearly well intentioned, will effectively
limit the private mortgage market to those lenders with the balance
sheets sufficient to commit such high amounts of capital. By some
estimates, more than 75 percent of private lending would accrue to the
top five FDIC lenders, further limiting the availability of mortgage
financing. In our response to the request for public comments, Realogy
outlined an alternative proposal that we labeled an ``Enhanced
Disclosure Approach'', requiring extensive loan portfolio data that
surpasses any previous SEC requirement (see, Addendum 2, ``Realogy's
Comments to Regulators Regarding Dodd-Frank Mortgage Rules'', July 22,
2011). The required disclosures would provide prospective residential
mortgage-backed securities investors with data that provides a thorough
and transparent risk profile of the securities (and the underlying
mortgage portfolio). Independent of rating agencies, investors will be
better able to evaluate the risks and the quality of the investment. We
believe the Enhanced Disclosure Approach is far more effective than the
proposed retention/QRM provisions of Dodd-Frank.
GSE Reform
The uncertainty regarding the future of the GSEs and the onerous
provisions of Dodd-Frank are contributing to the headwinds preventing a
housing recovery. The Federal Government's role in the housing finance
industry is institutionalized and will not change easily. Those
advocating no Government role fail to adequately appreciate the
circumstances that originally created Fannie Mae and Freddie Mac. Both
were created to support housing finance when the private markets
completely shut down, just as they did in 2008.
A pure private sector solution is not practical unless Congress is
willing to accept extended periods of time during which home mortgage
financing would not be available. In addition, it is also very unlikely
that the 30-year fixed conventional mortgage would survive in a purely
private market, resulting in almost exclusively variable rate mortgages
with higher rates, which is a less than desirable outcome for millions
of American families.
We have proposed a solution that consolidates all Federal
Government home lending--VA, FHA, U.S. Department of Agriculture,
etc.--into a restructured Fannie Mae and spins off Freddie Mac to the
private sector, in effect reducing its capacity and role, paving the
way for a stronger private sector. Redundant costs would be eliminated,
streamlining the Federal Government's role in home lending. Fannie Mae
would continue to operate as the Government guarantor, and, when
necessary, as the market maker in times of economic stress. The U.S.
Government would take warrants in Freddie Mac, and in the event it is
acquired and/or taken public, the U.S. taxpayer would recoup some or
all of its value.
Closing Comments
In summary, it is noteworthy that when housing sales improved in
the first two quarters of last year as a result of the Homebuyer Tax
Credit, we clearly saw the economy begin to follow an upward trend in
the third and fourth quarters. Likewise, once housing sales declined in
the third and fourth quarters of 2010, the effect on the economy was
visible as GDP fell noticeably in the first and second quarters of
2011.
That said, housing will recover when unemployment and
underemployment decline and consumer confidence is restored. Private
sector alternatives to foreclosure should be encouraged but when they
fail, lenders must be permitted to expeditiously pursue their legal
rights under the applicable foreclosure laws and regulations.
Prolonging the inevitable is not helpful to the housing market or the
economy. And last, but certainly not least, GSE reform and Dodd-Frank
entail major structural issues that must be approached with great care
and caution.
Thank you again for the opportunity to appear before this
Committee.
ADDENDUM I
[GRAPHIC] [TIFF OMITTED] T3368.001
[GRAPHIC] [TIFF OMITTED] T3368.002
[GRAPHIC] [TIFF OMITTED] T3368.003
[GRAPHIC] [TIFF OMITTED] T3368.004
ADDENDUM II
[GRAPHIC] [TIFF OMITTED] T3368.005
[GRAPHIC] [TIFF OMITTED] T3368.006
[GRAPHIC] [TIFF OMITTED] T3368.007
[GRAPHIC] [TIFF OMITTED] T3368.008
[GRAPHIC] [TIFF OMITTED] T3368.009
[GRAPHIC] [TIFF OMITTED] T3368.010
[GRAPHIC] [TIFF OMITTED] T3368.011
[GRAPHIC] [TIFF OMITTED] T3368.012
[GRAPHIC] [TIFF OMITTED] T3368.013
[GRAPHIC] [TIFF OMITTED] T3368.014
[GRAPHIC] [TIFF OMITTED] T3368.015
[GRAPHIC] [TIFF OMITTED] T3368.016
[GRAPHIC] [TIFF OMITTED] T3368.017
[GRAPHIC] [TIFF OMITTED] T3368.018
[GRAPHIC] [TIFF OMITTED] T3368.019
[GRAPHIC] [TIFF OMITTED] T3368.020
[GRAPHIC] [TIFF OMITTED] T3368.021
[GRAPHIC] [TIFF OMITTED] T3368.022
PREPARED STATEMENT OF MARK A. CALABRIA
Director, Financial Regulation Studies, Cato Institute
September 14, 2011
Chairman Menendez, Ranking Member DeMint, and distinguished Members
of the Subcommittee, I thank you for the invitation to appear at
today's important hearing. I am Mark Calabria, Director of Financial
Regulation Studies at the Cato Institute, a nonprofit, nonpartisan
public policy research institute located here in Washington, DC. Before
I begin my testimony, I would like to make clear that my comments are
solely my own and do not represent any official policy positions of the
Cato Institute. In addition, outside of my interest as a citizen,
homeowner and taxpayer, I have no direct financial interest in the
subject matter before the Committee today, nor do I represent any
entities that do.
State of the Housing Market
The U.S. housing market remains weak, with both homes sales and
construction activity considerably below trend. Despite sustained low
mortgage rates, housing activity has remained sluggish in the first
half of 2011. Although activity will likely be above 2010 levels, 2011
is expected to fall below 2009 levels and is unlikely to reach levels
seen during the boom for a number of years. In fact I believe it will
be at least until 2014 until we see construction levels approach those
of the boom. As other witnesses are likely to provide their economic
forecasts of housing activity, which are generally within the consensus
estimates, I will not repeat that exercise here.
Housing permits, on an annualized basis, decreased 3.2 percent from
June to July (617,000 to 597,000). While permits for both single family
units and smaller multifamily units increased slightly, the overall
decline in housing permits was driven by an 11.9 percent decline in
permits for larger multifamily properties (5+ units). Single family
permits increased from 402,000 to 404,000 in July. Permits for 2-4 unit
properties climbed to the highest level of the year (21,000 to 22,000)
in July. Permits for 5+ units dropped to 171,000 in July from 194,000
in June.
According to the Census Bureau, July 2011 housing starts were at a
seasonally adjusted annual rate of 604,000, down slightly from the June
level of 613,000. Overall starts are slightly up, on an annualized
level, from 2010's 585,000 units. This increase, however, is completely
driven by a jump in multifamily starts, as single-family starts
witnessed a significant decline. Total residential starts continue to
hover at levels around a third of those witnessed during the bubble
years of 2003 to 2004.
As in any market, prices and quantities sold in the housing market
are driven by the fundamentals of supply and demand. The housing market
faces a significant oversupply of housing, which will continue to weigh
on both prices and construction activity. The Federal Reserve Bank of
New York estimates that oversupply to be approximately 3 million units.
Given that annual single family starts averaged about 1.3 million over
the last decade, it should be clear that despite the historically low
current level of housing starts, we still face a glut of housing. NAHB
estimates that about 2 million of this glut is the result of ``pent-
up'' demand, leaving at least a million units in excess of potential
demand. \1\ Add to that another 1.6 million mortgages that are at least
90 days late. My rough estimate is about a fourth of those are more
than 2 years late and will most likely never become current.
---------------------------------------------------------------------------
\1\ Denk, Dietz, and Crowe, ``Pent-up Housing Demand: The
Household Formations That Didn't Happen--Yet'', National Association of
Home Builders. February 2011.
---------------------------------------------------------------------------
The Nation's oversupply of housing is usefully documented in the
Census Bureau's Housing Vacancy Survey. The boom and bust of our
housing market has increased the number of vacant housing units from
15.6 million in 2005 to a current level of 18.7 million. The rental
vacancy rate for the 2nd quarter of 2011 declined considerably to 9.2
percent, although this remains considerably above the historic average.
The decline in rental vacancy rates over the past year has been driven
largely by declines in suburban rental markets. Vacancy rates for both
rental and homeowner units remain considerably higher for new
construction relative to existing units.
The homeowner vacancy rate, after increasing from the 2nd and 3rd
quarters of 2010 to the 4th quarter of 2010, declined to 2.5 percent in
the 2nd quarter of 2011, a number still in considerable excess of the
historic average.
The homeowner vacancy rate, one of the more useful gauges of excess
supply, differs dramatically across metro areas. At one extreme,
Orlando has an owner vacancy rate approaching 6 percent, whereas
Allentown, PA, has a rate of 0.5 percent. Other metro with excessive
high owner vacancy rates include: Toledo, OH (5.5), Las Vegas (5.1),
Raleigh, NC (5.0), Riverside, CA, and Jacksonville, FL. Relatively
tight owner markets include: Springfield, MA (0.7), San Jose, CA (0.9),
and Honolulu, HI (1.0).
The number of vacant for sale or rent units has increased, on net,
by around 1 million units from 2005 to 2011. Of equal concern is that
the number of vacant units ``held off the market'' has increased by
about 1.5 million since 2005. In all likelihood, many of these units
will re-enter the market once prices stabilize.
The 2nd quarter 2011 national home ownership rate fell to 65.9
percent, the first time it broken the floor of 66 percent since 1997,
effectively eliminating all the gain in the home ownership rate over
the last 12 years. Declines in the home ownership rate were the most
dramatic for the youngest homeowners, while home ownership rates for
those 55 and over were stable or saw only minor declines. This should
not be surprising given that the largest increase in home ownership
rates was among the younger households and that such households have
less attachment to the labor market than older households.
Interestingly enough, the percentage point decline in home ownership
was higher among households with incomes above the median than for
households with incomes below the median.
While home ownership rates declined across the all Census Regions,
the steepest decline was in the West, followed by the Northeast. The
South witnessed the smallest decline in home ownership since the
bursting of the housing bubble.
Homeowner vacancy rates differ dramatically by type of structure,
although all structure types exhibit rates considerably above historic
trend levels. For 2nd quarter 2011, single-family detached homes
displayed an owner vacancy rate of 2.2 percent, while owner units in
buildings with 10 or more units (generally condos or co-ops) displayed
an owner vacancy rate of 8.7 percent. Although single-family detached
constitute 95 percent of owner vacancies, condos and co-ops have been
impacted disproportionately. Interestingly enough, over the last year
homeowner vacancy rates have been stable for single-family structures,
but have declined, albeit from a much higher level.
Owner vacancy rates tend to decrease as the price of the home
increases. For homes valued under $150,000 the owner vacancy rate is
3.1 percent, whereas homes valued over $200,000 display vacancy rates
of about 1.4 percent. The vast majority, almost 75 percent, of vacant
owner-occupied homes are valued at $300,000 or less. Owner vacancy
rates are also the highest for the newest homes, with new construction
displaying vacancy rates twice the level observed on older homes.
While house prices have fallen considerably since the market's peak
in 2006--over 23 percent if one excludes distressed sales, and about 31
percent including all sales--housing in many parts of the country
remains expensive, relative to income. At the risk of
oversimplification, in the long run, the size of the housing stock is
driven primarily by demographics (number of households, family size,
etc.), while house prices are driven primarily by incomes. Due to both
consumer preferences and underwriting standards, house prices have
tended to fluctuate at a level where median prices are approximately 3
times median household incomes. Existing home prices, at the national
level, are close to this multiple. In several metro areas, however,
prices remain quite high relative to income. For instance, in San
Francisco, existing home prices are almost 8 times median metro
incomes. Despite sizeable decline, prices in coastal California are
still out of reach for many families. Prices in Florida cities are
generally above 4 times income, indicating they remain just above long-
run fundamentals. In some bubble areas, such as Phoenix and Las Vegas,
prices are below 3, indicating that prices are close to fundamentals.
Part of these geographic differences is driven by the uneven impact of
Federal policies.
Household incomes place a general ceiling on long-run housing
prices. Production costs set a floor on the price of new homes. As
Professors Edward Glaeser and Joseph Gyourko have demonstrated, \2\
housing prices have closely tracked production costs, including a
reasonable return for the builder, over time. In fact the trend has
generally been for prices to about equal production costs. In older
cities, with declining populations, productions costs are often in
excess of replacement costs. After 2002, this relationship broken down,
as prices soared in relation to costs, which also included the cost of
land. \3\ As prices, in many areas, remain considerably above
production costs, there is little reason to believe that new home
prices will not decline further.
---------------------------------------------------------------------------
\2\ Edward Glaeser and Joseph Gyourko, ``The Case Against Housing
Price Supports'', Economists' Voice, October 2008.
\3\ Also see, Robert Shiller, ``Unlearned Lessons From the Housing
Bubble'', Economists' Voice, July 2009.
---------------------------------------------------------------------------
It is worth noting that existing home sales in 2010 were only 5
percent below their 2007 levels, while new home sales are almost 60
percent below their 2007 level. To a large degree, new and existing
homes are substitutes and compete against each other in the market.
Perhaps the primary reason that existing sales have recovered faster
than new, is that price declines in the existing market have been
larger. Again excluding distressed sales, existing home prices have
declined 23 percent, whereas new home prices have only declined only
about 10 percent. I believe this is clear evidence that the housing
market works just like other markets: the way to clear excess supply is
to reduce prices.
State of the Mortgage Market
According to the Mortgage Bankers Association's National
Delinquency Survey, the delinquency rate for mortgage loans on one-to-
four-unit residential properties increased to a seasonally adjusted
rate of 8.44 percent of all loans outstanding for the end of the 2nd
quarter 2011, 12 basis points up from 1st quarter 2011, but down 141
basis points from 1 year ago.
The percentage of mortgages on which foreclosure proceedings were
initiated during the second quarter was 0.96 percent, 12 basis points
down from 2001 Q1 and down 15 basis points from 2010 Q2. The percentage
of loans in the foreclosure process at the end of the 2nd quarter was
4.43 percent, down slightly at 9 basis points from 2011 Q1 and 14 basis
points lower than 2010 Q2. The serious delinquency rate, the percentage
of loans that are 90 days or more past due or in the process of
foreclosure, was 7.85 percent, a decrease of 25 basis points from 2011
Q1, and a decrease of 126 basis points from 2010 Q2.
The combined percentage of loans in foreclosure or at least one
payment past due was 12.54 percent on a nonseasonally adjusted basis, a
23 basis point increase from 2011 Q1, but was 143 basis points lower
than 2010 Q2.
Mortgage Policies
For those who can get a mortgage, rates remain near historic lows.
These lows rates, however, are not completely the outcome of the
market, but are driven, to a large degree, by Federal policy
interventions. Foremost among these interventions is the Federal
Reserve's current monetary policy. Of equal importance is the transfer
of almost all credit risk from market participants to the Federal
taxpayer, via FHA and the GSEs. Given massive Federal deficits as far
as the eye can see, and the already significant cost of rescuing Fannie
Mae and Freddie Mac, policy makers should be gravely concerned about
the risks posed by the current situation in our mortgage markets.
Immediate efforts should be made to reduce the exposure of the
taxpayer.
In transitioning from a Government-dominated to market-driven
mortgage system, we face the choice of either a gradual transition or a
sudden ``big bang.'' While I am comfortable with believing that the
remainder of the financial services industry could quickly assume the
functions of Fannie Mae and Freddie Mac, I recognize this is a minority
viewpoint. Practical politics and concern as to the state of the
housing market point toward a gradual transition. The question is then,
what form should this transition take? One element of this transition
should be a gradual, step-wise reduction in the maximum loan limits for
the GSEs (and FHA).
If one assumes that higher income households are better able to
bear increases in their mortgage costs, and that income and mortgage
levels are positively correlated, then reducing the size of the GSEs'
footprint via loan limit reductions would allow those households best
able to bear this increase to do so. As tax burden and income are also
positively correlated, the reduction in potential tax liability from a
reduction in loan limits should accrue to the very households benefited
most by such a reduction.
Moving beyond issues of ``fairness''--in terms of who should be
most impacted by a transition away from the GSEs--is the issue of
capacity. According to the most recent HMDA data (2009), the size of
the current jumbo market (above $729k) is approximately $90 billion.
Reducing the loan limit to $500,000 would increase the size of the
jumbo market to around $180 billion. Since insured depositories have
excess reserves of over $1 trillion, and an aggregate equity to asset
ratio of over 11 percent, it would seem that insured depositories would
have no trouble absorbing a major increase in the jumbo market.
Given that the Mortgage Banker Association projects total
residential mortgage originations in 2011 to be just under $1 trillion,
it would appear that insured depositories could support all new
mortgages expected to be made in 2011 with just their current excess
cash holdings. While such an expansion of lending would require capital
of around $40 billion, if one is to believe the FDIC, then insured
depositories already hold sufficient excess capital to meet all new
mortgage lending in 2011.
Moving more of the mortgage sector to banks and thrifts would also
insure that there is at least some capital behind our mortgage market.
With Fannie, Freddie, and FHA bearing most of the credit risk in our
mortgage market, there is almost no capital standing between these
entities and the taxpayer.
The bottom line is that reducing the conforming loan limit to no
more than $500,000, if not going immediately back to $417,000, would
represent a fair, equitable and feasible method for transitioning to a
more private-sector driven mortgage system. Going forward, the loan
limit should be set to fall by $50,000 each year. As this change could
be easily reversed, it also represents a relatively safe choice.
Reducing the competitive advantage of Fannie Mae and Freddie Mac
via a mandated increase in their guarantee fees would both help to
raise revenues while also helping to ``level the playing field'' in the
mortgage market. Given that the Federal taxpayer is covering their
losses and backing their debt, along with the suspension of their
capital requirements, no private entity can compete with Fannie Mae and
Freddie Mac. We will never be able to move to a more private market
approach without reducing, if not outright removing, these taxpayer-
funded advantages.
An increase in the GSE guarantee fee could also be used to recoup
some of the taxpayer ``investment'' in Fannie Mae and Freddie Mac.
Section 134 of the Emergency Economic Stabilization Act of 2008, better
known as the TARP, directed the President to submit a plan to Congress
for recoupment for any shortfalls experienced under the TARP.
Unfortunately the Housing and Economic Recovery Act of 2008, which
provided for Federal assistance to the GSEs, lacked a similar
requirement. Now is the time to rectify that oversight. Rather than
waiting for a Presidential recommendation, Congress should establish a
recoupment fee on all mortgages purchased by Fannie Mae and Freddie
Mac. Such a fee would be used directly to reduce the deficit and be
structured to recoup as much of the losses as possible. I would
recommend that the recoupment period be no longer than 15 years and
should begin immediately. A reasonable starting point would be 1
percentage point per unpaid principal balance of loans purchased. Such
as sum should raise at least $5 billion annually and should be
considered as only a floor for the recoupment fee.
In any discussion regarding costs in our mortgage market, we must
never forget that homeowners and home buyers are also taxpayers. Using
either current taxes or future taxes (via deficits) to fund subsidies
in the housing market reduces household disposable income, which also
reduces the demand for housing. None of the subsidies provided to the
housing and mortgage markets are free. They come at great costs, which
should be included in any evaluation of said subsidies.
Contribution of Federal Policy
Federal Government interventions to increase house prices,
including Federal Reserve monetary and asset purchases, have almost
exclusively relied upon increasing the demand for housing. The problem
with these interventions is they have almost the opposite impact
between markets where supply remains tight and those markets with a
housing glut. In areas where housing supply is inelastic, that is
relatively unresponsive (often the result of land use policies), these
programs have indeed slowed price declines. Areas where supply is
elastic, where building is relatively easy, have instead seen an
increase in supply, rather than price. For these areas the increase in
housing supply will ultimately depress prices even further.
A comparison of San Diego, CA, and Phoenix, AZ, illustrates the
point. Both are of similar population (2.5 million for Sand Diego, 2.2
million for Phoenix), and both witnessed large price increases during
the bubble. Yet the same Federal policies have drawn different supply
and price responses. In 2010, about 8,200 building permits were issued
for the greater Phoenix area; whereas only about 3,500 were issued for
San Diego. Existing home prices (2010) in Phoenix fell over 8 percent,
whereas prices in San Diego actually grew by 0.6 percent. This trend is
compounded by the fact that prices are almost three times higher in San
Diego than in Phoenix. The point is that Federal efforts to ``revive''
the housing market are sustaining prices in the most expensive markets,
while depressing prices in the cheapest markets, the opposite of what
one would prefer. As home prices are correlated positively with
incomes, these policies represent a massive regressive transfer of
wealth from poorer families to richer.
Among policy interventions, the Federal Reserve's interest rates
policies are perhaps having the worst impact. It is well accepted in
the urban economics and real estate literature that house prices
decline as distances from the urban core increase. It is also well
accepted that the relative price of urban versus suburban house prices
is influenced by transportation costs. For instance, an increase in the
price of gas, will, all else equal, lower the price of suburban homes
relative to urban. If loose monetary policy adds to increases in fuel
prices, which I believe it has, then such monetary policies would
result in a decline in suburban home prices relatives to urban. One can
see this dynamic play out in California. In general, prices in central
cities and urban cores, have witnessed only minor declines or actual
increases over the last year. According to the California Association
of Realtors, overall State prices are down just 2 percent from January
2010 to January 2011. Yet prices in the inland commuting counties--
Mariposa (-27 percent), San Benito (-14 percent), Butte (-29 percent),
Kings (-16 percent), Tulare (-16 percent)--are witnessing the largest
declines, in part driven by increases in commuting (gas) costs.
Foreclosure Mitigation and the Labor Market
There is perhaps no more important economic indicator than
unemployment. The adverse impacts of long-term unemployment are well
known, and need not be repeated here. Although there is considerable,
if not complete, agreement among economists as to the adverse
consequences of jobless; there is far less agreement as to the causes
of the currently high level of unemployment. To simplify, the differing
explanations, and resulting policy prescriptions, regarding the current
level of unemployment fall into two categories: (1) unemployment as a
result of lack of aggregate demand, and (2) unemployment as the result
of structural factors, such as skills mismatch or perverse incentives
facing the unemployed. As will be discussed below, I believe the
current foreclosures mitigation programs have contributed to the
elevated unemployment rate by reducing labor mobility. The current
foreclosures mitigation programs have also helped keep housing prices
above market-clearing levels, delaying a full correction in the housing
market.
First we must recognize something unusual is taking place in our
labor market. If the cause of unemployment was solely driven by a lack
of demand, then the unemployment rate would be considerably lower. Both
GDP and consumption, as measured by personal expenditures, have
returned to and now exceed their precrisis levels. But employment has
not. Quite simply, the ``collapse'' in demand is behind us and has been
so for quite some time. What has occurred is that the historical
relationship between GDP and employment (which economists call ``Okun's
Law'') has broken down, questioning the ability of further increases in
spending to reduce the unemployment rate. Also indicative of structural
changes in the labor market is the breakdown in the ``Beveridge
curve''--that is the relationship between unemployment and job
vacancies. Contrary to popular perception, job postings have been
steadily increasing over the last year, but with little impact on the
unemployment rate.
Historically many job openings have been filled by workers moving
from areas of the country with little job creation to areas with
greater job creation. American history has often seen large migrations
during times of economic distress. And while these moves have been
painful and difficult for the families involved, these same moves have
been essential for helping the economy recover. One of the more
interesting facets of the recent recession has been a decline in
mobility, particular among homeowners, rather than an increase. Between
2008 and 2009, the most recent Census data available, 12.5 percent of
households moved, with only 1.6 moving across State lines.
Corresponding figures for homeowners is 5.2 percent and 0.8 percent
moving across State lines. This is considerably below interstate
mobility trends witnessed during the housing boom. For instance from
2004 to 2005, 1.5 percent of homeowners moved across State lines,
almost double the current percentage. Interestingly enough the overall
mobility of renters has barely changed from the peak of the housing
bubble to today. This trend is a reversal from that witnessed after the
previous housing boom of the late 1980s burst. From the peak of the
bubble in 1989 to the bottom of the market in 1994, the percentage of
homeowners moving across State lines actually increased.
The preceding is not meant to suggest that all of the declines in
labor mobility, or increase in unemployment, is due to the foreclosure
mitigation programs. Far from it. Given the many factors at work,
including the unsustainable rate of home ownership, going into the
crisis, it is difficult, if not impossible, to estimate the exact
contribution of the varying factors. We should, however, reject
policies that encourage homeowners to remain in stagnant or declining
labor markets. This is particularly important given the fact that
unemployment is the primary driver of mortgage delinquency.
Conclusion
The U.S. housing market is weak and is expected to remain so for
some time. Given the importance of housing in our economy, the pressure
for policy makers to act has been understandable. Policy should,
however, be based upon fostering an unwinding of previous unbalances in
our housing markets, not sustaining said unbalances. We cannot go back
to 2006, and nor should we desire to. As the size and composition of
the housing stock are ultimately determined by demographics, something
which policy makers have little influence over in the short run, the
housing stock must be allowed to align itself with those underlying
fundamentals. Prices should also be allowed to move towards their long
run relationship with household incomes. Getting families into homes
they could not afford was a major contributor to the housing bubble. We
should not seek to repeat that error. We must also recognize that
prolonging the correction of the housing market makes the ultimate
adjustment worse, not better. Lastly it should be remembered that one
effect of boosting prices above their market-clearing levels is the
transfer of wealth from potential buyers (renters) to existing owners.
As existing owners are, on average, wealthier than renters, this
redistribution is clearly regressive.
PREPARED STATEMENT OF IVY ZELMAN
Chief Executive Officer, Zelman & Associates
September 14, 2011
[GRAPHIC] [TIFF OMITTED] T3368.023
[GRAPHIC] [TIFF OMITTED] T3368.024
[GRAPHIC] [TIFF OMITTED] T3368.025
[GRAPHIC] [TIFF OMITTED] T3368.026
[GRAPHIC] [TIFF OMITTED] T3368.027
[GRAPHIC] [TIFF OMITTED] T3368.028
[GRAPHIC] [TIFF OMITTED] T3368.029
[GRAPHIC] [TIFF OMITTED] T3368.030
[GRAPHIC] [TIFF OMITTED] T3368.031
[GRAPHIC] [TIFF OMITTED] T3368.032
[GRAPHIC] [TIFF OMITTED] T3368.033
[GRAPHIC] [TIFF OMITTED] T3368.034
[GRAPHIC] [TIFF OMITTED] T3368.035
[GRAPHIC] [TIFF OMITTED] T3368.036
[GRAPHIC] [TIFF OMITTED] T3368.037
[GRAPHIC] [TIFF OMITTED] T3368.038
[GRAPHIC] [TIFF OMITTED] T3368.039
[GRAPHIC] [TIFF OMITTED] T3368.040
PREPARED STATEMENT OF DAVID STEVENS
President and Chief Executive Officer, Mortgage Bankers Association
September 14, 2011
I. Introduction
Chairman Menendez, Ranking Member DeMint, and Members of the
Subcommittee, thank you for the opportunity to provide this statement
on behalf of the Mortgage Bankers Association (MBA) \1\ on the occasion
of this hearing on new ideas for refinancing and restructuring mortgage
loans. My name is David Stevens and I am MBA's President and Chief
Executive Officer. Immediately prior to assuming this position, I
served as Assistant Secretary for Housing at the U.S. Department of
Housing and Urban Development (HUD) and Federal Housing Administration
(FHA) Commissioner.
---------------------------------------------------------------------------
\1\ The Mortgage Bankers Association (MBA) is the national
association representing the real estate finance industry, an industry
that employs more than 280,000 people in virtually every community in
the country. Headquartered in Washington, DC, the association works to
ensure the continued strength of the Nation's residential and
commercial real estate markets; to expand home ownership and extend
access to affordable housing to all Americans. MBA promotes fair and
ethical lending practices and fosters professional excellence among
real estate finance employees through a wide range of educational
programs and a variety of publications. Its membership of over 2,200
companies includes all elements of real estate finance: mortgage
companies, mortgage brokers, commercial banks, thrifts, Wall Street
conduits, life insurance companies and others in the mortgage lending
field. For additional information, visit MBA's Web site:
www.mortgagebankers.org.
---------------------------------------------------------------------------
My background prior to joining FHA includes experience as a senior
executive in finance, sales, mortgage acquisitions and investments,
risk management, and regulatory oversight. I started my professional
career with 16 years at World Savings Bank. I later served as Senior
Vice President at Freddie Mac and as Executive Vice President at Wells
Fargo. Prior to my confirmation as FHA Commissioner, I was President
and Chief Operating Officer of Long and Foster Companies, the Nation's
largest, privately held real estate firm.
We all know there is plenty of blame to go around for the mistakes
made in getting to where we are today. Rating agencies overrated bonds;
Fannie Mae and Freddie Mac relaxed the terms of their loan
requirements; insurers provided credit enhancements to loans that were
not creditworthy; borrowers falsified key credit characteristics like
income, employment and occupancy status; lenders relied on overly
optimistic property appreciation assumptions; servicers were ill-
prepared to address significant loan performance and volume shifts, and
so on. Although I have said this publicly many times, it bears
repeating--mortgage lenders need to take responsibility for their share
of excesses during the recent housing boom. Since the market collapsed
in 2008, we have had to face some basic, if unpleasant truths--some
people who were given loans should not have received them. And as an
industry we excused, or at least overlooked, the unethical people and
practices, and the perverse incentives that motivated them.
I am encouraged by the fact that the focus of today's hearing is
toward the future and the role that private capital can play in
recovering from this extraordinary collapse of the housing market. MBA
is grateful for the variety of relief efforts undertaken by Congress
and two Administrations to bolster the markets such as the Home
Affordable Refinance Program (HARP), first-time home buyer tax credits,
and the Hardest Hit Funds. Clearly, the challenge is greater than these
programs could support on their own. The private sector also has risen
to the challenge of assisting borrowers in need by refinancing
approximately four million mortgages--five times as many as all Federal
programs combined. This is why MBA believes a long-term sustainable
remedy will only come from a return of private capital to the housing
finance sector.
Unfortunately, significant, but not insurmountable, obstacles are
preventing sufficient levels of private capital from returning to the
market. But I am convinced these obstacles can be overcome and we will
eventually be able to replace the Federal Government with private
investors as the primary source of housing finance liquidity. MBA
recognizes that our ability to affect change depends on rebuilding
badly shaken trust by restoring credibility, transparency and integrity
to our industry.
I also want to highlight the fact, as shown in recent MBA data on
delinquencies and foreclosures, that the foreclosure overhang is
heavily concentrated in just a handful of States. This has important
policy implications because more aggressive measures may be required in
some areas, while they may not be needed in others. For example, bulk
sales of real estate owned (REO) properties may be necessary and
helpful in severely impacted markets, but may be harmful in markets
that are currently muddling through. Different prescriptions may be
needed in different geographies.
In my remarks below, I will identify what MBA views as the primary
obstacles to a more robust level of housing finance transactions. I
will then offer possible solutions with which they can be overcome.
II. Obstacles to Recovery
Obstacle 1: High Unemployment
In his address to Congress last week, the President acknowledged
that the number one impediment to an economic recovery is the current
jobs situation. MBA looks forward to learning more about the
Administration's proposed solutions. In the meantime, I would like to
amplify the President's concerns by providing context to the
relationship between today's high unemployment rate and low real estate
finance activity.
Economic growth was disappointingly slow in the first half
of 2011, and job growth essentially halted during the summer.
The unemployment rate remained stuck at 9.1 percent as of
August, as no new jobs were created during the month. Private
sector job growth remains weak, while State and local
governments continue to cut back employees.
MBA expects the unemployment rate to be little changed
through the remainder of 2011, and only slight declines in the
unemployment rate in 2012, decreasing to 8.8 percent by the end
of 2012.
MBA forecasts economic growth to run at 1.3 percent for
2011, and 2.2 percent for 2012--barely enough to bring down the
unemployment rate over time.
On the housing front, we expect the purchase market will
remain slow. In short, the key obstacle to a more robust market
continues to be unemployment.
Obstacle 2: Conflicting Policy Objectives
Another obstacle to a sustained economic recovery is the numerous
conflicts that exist for policy makers. For example, as conservator of
Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA)
has a duty to preserve the value of these two Government sponsored
enterprises (GSEs). However, using the GSEs as vehicles to support the
housing recovery could further jeopardize their long-term viability.
It is well-recognized that the mortgage market is functioning today
because of heavy Government support--a position that is neither
sustainable nor desirable long-term. Providing borrower relief through
the GSEs or existing Government channels could make it even harder for
that to change.
Nevertheless, MBA believes it is possible for the GSEs to increase
their support for housing finance without significantly impacting their
safety and soundness profile. For example, MBA believes the GSEs could
expand their lending guidelines, or the origination deadline for HARP-
qualification could be extended. Specific consideration should be given
to maintaining the existing conforming loan limits in high cost areas.
Obstacle 3: Regulatory Uncertainty
We also recognize that changes are needed to ensure such excesses
will not be repeated in the future. Nevertheless, the continuing
onslaught of regulations and supervisory actions, all targeting the
mortgage industry, are doing more harm than good to the mortgage
market, and are clouding the future of our business. The sheer quantity
of new rules under consideration is placing great stress on lenders,
particularly smaller lenders who serve communities throughout the
Nation every day. Lenders are scaling back the number of production
employees as business declines, but are offsetting those cuts with new
compliance hires. This unfortunate allocation of resources runs counter
to any hope of recovery in the housing sector.
The avalanche of regulations triggered by passage of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank) is intended
to ensure that no single financial institution becomes too big to fail;
it also has spawned concerns about being too small to comply, raising
the very real possibility that borrowers may ultimately suffer from
decreased credit availability and the economic inefficiencies of a less
competitive market. For example, rules to implement Dodd-Frank's risk
retention and ``ability to repay'' frameworks have yet to be finalized.
Unless both of these overlapping frameworks are resolved with clear and
specific safe harbors, uncertainty will persist in the housing finance
markets. Evidence from Securities and Exchange Commission (SEC) filings
from Real Estate Investment Trusts (REITs) and other hedge funds
suggest an increasing level of interest in the housing market from
private investors. Unfortunately, these investors have expressed a
willingness to either refrain from participation or impose an
``uncertainty premium'' until the level of regulatory ambiguity
dissipates.
Obstacle 4: Repurchase and Litigation Risk
Another key obstacle that prevents many qualified borrowers from
being able to refinance is the loan repurchase demands made by the GSEs
to lenders. These repurchase demands are based on representations and
warranties (reps and warrants) to the GSEs when lenders sell the loan
to them. These reps and warrants certify that the lenders have met the
investors' standards on the loans, covering items like property
valuation, and borrower characteristics such as income, employment
status, assets and liabilities, and required documentation to evidence
these.
Under normal circumstances, if a loan goes into default, the GSE
may demand that the originator repurchase the loan if the originator
cannot prove the loan was adequately underwritten. Nowadays, the GSEs
are reportedly using repurchase requests to manage their own
performance profile by requiring lenders to buy back loans even though
the rep and warrant breach was unrelated to the performance of the
loan.
Additionally, refinancing a loan extinguishes the original loan's
reps and warrants and subjects the refinancing lender to a new set of
reps and warrants. As a result, few lenders are willing to accept the
rep and warrant risk on refinancing a higher-risk loan, even one with a
reasonably clear payment history and existing GSE guaranty. This is
because the GSEs consider a newly refinanced loan that defaults in the
first 6 months an ``early payment default'' and subject to repurchase
regardless of the payment history of the original loan.
MBA believes legitimate repurchase requirements are an effective
means of holding originators accountable for the quality of the loans
they underwrite. However, MBA believes originators should not be held
accountable for the performance of a loan if it met the GSEs'
guidelines and all applicable laws and regulations, but failed due to
changing economic circumstances. In light of the elevated repurchase
activity from the GSEs recently, MBA anticipates that lenders will
remain concerned about underwriting new mortgages, even if they are
already guaranteed by Fannie Mae and Freddie Mac. All lenders are
necessarily cautious with respect to protecting their capital base
given the widespread uncertainties in this environment.
For these reasons, MBA believes policy makers should consider
setting a clear limit on the duration of an originator's repurchase
obligation following the origination date.
Policy makers also should be mindful that litigation and penalties
to make reparations for past mistakes reduce the availability of funds
to extend to borrowers in the future. The ultimate impact of both
increased litigation and repurchase activity could be lenders holding
back capital to hedge against growing litigation and repurchase risk,
liquidity that is needed not just for mortgages, but for all sorts of
lending that helps drive investment in the economy and creates jobs.
Obstacle 5: Inconsistent Foreclosure Regimes
Foreclosures continue to be highly concentrated in just a few
States. According to MBA's National Delinquency Survey, in the second
quarter of 2011 five States accounted for 52 percent of the Nation's
foreclosure inventory. The single biggest factor determining whether or
not a State has a large backlog of foreclosures is whether the State
has a judicial foreclosure system, meaning whether or not a foreclosure
needs to go through the courts. In nonjudicial States, foreclosures can
proceed much more quickly simply because the procedure is not limited
by available court dates. Moreover, the process tends to be less
cumbersome. Particularly during this downturn, judicial States have
been overwhelmed by a backlog of foreclosure cases, while nonjudicial
States have been able to process the volume much more quickly. In the
second quarter of 2011, of the nine States that had foreclosure
inventory rates above the national average, eight have judicial
regimes. The only exception was Nevada, which has been particularly
hard hit.
One of the reasons the percentage of loans in foreclosure in
California (3.6 percent) is considerably lower than States like Florida
(14.4 percent), New Jersey (8.0 percent), Illinois (7.0 percent), and
New York (5.5 percent) is that California has a nonjudicial foreclosure
system. Therefore, as we work toward resolving the foreclosure overhang
in the housing market, we should be careful to distinguish between the
economic impediments to resolution and the legal impediments to
resolution.
Obstacle 6: Excess Housing Inventory
Today the Nation faces a disproportionately large inventory of
homes in the face of weak market demand. As of July 2011, there were
roughly 3.8 million new and existing homes for sale representing a
combined total of 9 months' supply. These numbers do not include the
so-called shadow inventory of properties with owners who are
significantly behind on their mortgages. These properties will likely
come on the market in the upcoming months as distressed sales, short
sales, foreclosure auctions, or as bank-owned properties. MBA estimates
that this shadow inventory of loans that are three or more months
delinquent or already in the foreclosure process totals approximately
four million homes across the country. MBA expects about one to 1.2
million foreclosure sales and short sales per year; based on that
estimate it will take the market 3.5 to 4 years to digest this shadow
inventory overhang.
Credit availability to borrowers who traditionally would have
comprised the demand for these homes has been limited. An Amherst
Securities Group study conducted in 2011 indicates that of the
borrowers with mortgages in June 2007, 19 percent of those borrowers
would not qualify for a mortgage today due to their credit histories.
For the population of potential home buyers who currently are
interested in purchasing a home, credit availability is an issue. The
average individual home buyer must meet increasingly stringent credit
qualifications. As it has been widely reported, average loan-to-value
(LTV) ratios for GSEs have declined from 75 percent to 68 percent in
2010 and average credit scores are 762.
First-time home buyers and minority home buyers are often the
engine in the purchase money market; however, the recession has
impacted these groups dramatically, and proposed regulations regarding
the Qualified Residential Mortgage (QRM) and the Qualified Mortgage
(QM) may further tighten underwriting. Therefore, we cannot rely on
these populations to fuel the housing recovery. Thus, our historical
home buying population is declining, the need for rental housing is
growing, and the economy is stagnating.
III. MBA's Recommended Solutions
With these obstacles as a possible backdrop, I will now offer
possible solutions that the public and private sectors can jointly
implement to overcome them. They are not mutually exclusive solutions;
rather they should be undertaken in a combined approach.
Solution 1: Restructuring Existing Mortgages
In addition to the significant numbers of foreclosed properties and
mortgages in some stage of delinquency or default, many borrowers are
unable to refinance to take advantage of historically low mortgage
rates. The unusually low level of refinancing has prompted policy
makers to introduce programs such as HARP, and others offered by FHA.
Although those programs have helped some borrowers, program features
and eligibility criteria exclude a significant number of borrowers who
would benefit from a refinancing.
In response, some advocates have called for other types of large-
scale mortgage refinance programs that would include principal
forgiveness by lenders. Mandatory principal write down raises several
serious concerns regarding the contractual rights of investors and
determining whether sufficient documentation exists upon which to
execute the transaction. MBA does not support mandatory principal write
down but does, however, support voluntary principal write down programs
such as the FHA Refinance Option, where such a transaction is
appropriate under the factual circumstances. We however stress that
these write downs must originate from a voluntary agreement between the
parties, not a Government imposed mandate.
Others have called for refinancing programs that would offer
borrowers new mortgage rates below current market rates. Although such
programs could have a positive impact on the housing market and the
economy, the Congressional Budget Office (CBO) and other analysts
indicate that the programs would entail significantly higher costs to
the Government.
Shared appreciation mortgage modifications also have been discussed
as a potential vehicle to help reduce the home foreclosure rate. Under
a shared appreciation mortgage modification, a lender agrees to reduce
the principal balance of a troubled borrower's mortgage in exchange for
the borrower sharing any future increase in the home's appreciation
with the lender. The shared appreciation is based on a predetermined
calculation and occurs upon the sale of the property. While we endorse
all safe and sound efforts to assist borrowers in need, we note that
shared appreciation mortgage modifications involve additional risk
layering to the lender who, in this scenario, is now reliant on the
home increasing in value in order to make this a truly favorable
transaction.
This type of instrument can also be quite complicated and confusing
for borrowers who, upon selling the home, may actually find themselves
owing more to their lender then they anticipated if the property does
increase in value. We also note shared appreciation loan modifications
can raise tax issues for borrowers, as described in an Internal Revenue
Service (IRS) revenue ruling. \2\ For these reasons, MBA continues to
have some concerns about this product and its value to homeowners.
---------------------------------------------------------------------------
\2\ Rev. Rul. 83-51; 1983-1 C.B. 48 (1983).
---------------------------------------------------------------------------
MBA believes the preferred approach is adjusting the guidelines of
existing programs. However each possible adjustment has its own unique
policy conflict. For example, reducing the GSEs' loan level price
adjustments (LLPAs) on otherwise HARP-eligible loans would reduce
borrower refinancing costs and are arguably unnecessary because the
GSEs already assume the credit risk of the existing loan to be
refinanced. On the other hand, reducing LLPAs increase taxpayer
exposure to paying for the GSEs' credit losses while the GSEs are under
Federal conservatorship. Another option to consider is streamlining
appraisal and other closing requirements in order to reduce the time
and expense of refinancing. Raising HARP's 125 percent LTV requirement
also could enable more otherwise qualified ``underwater'' borrowers to
refinance into a lower interest rate mortgage. However, existing
requirements of the ``To-Be-Announced'' (TBA) market and tax law may
pose insurmountable constraints to pricing securities with loans in
excess of 125 percent LTV at a level that attracts investor interest.
Given the multitude of conflicting policy objectives, MBA believes
programmatic changes should be conducted in a deliberate and
transparent manner that appropriates sufficient funding to offset
additional expenditures.
Solution 2: REO Inventory Sales
Of the excess inventory on the market a significant number of
properties are bank owned, or real estate owned (REO), properties. In
August, the FHFA, in consultation with the Department of Treasury
(Treasury) and HUD, released a request for information (RFI) soliciting
input on new options for selling single-family REO properties held by
Fannie Mae, Freddie Mac, and FHA. To respond to the RFI, MBA formed an
interdisciplinary REO Asset Disposition Working Group of industry
practitioners with expertise in this area.
MBA believes a top priority should be to stabilize neighborhoods
and long-term home prices through actions to reduce the overhang of
distressed properties. A reduction in the current REO inventory will
provide for the swiftest and most efficient return to market stability.
However, it is critical that public and private lenders balance
consumer protections and taxpayer interests to ensure responsible asset
disposition.
As many economists and policy makers have noted, the ideal
disposition of REO properties is sale to owner occupants because of the
market stabilizing nature of such transactions. Home buyers who intend
to occupy REO properties are likely to have the longest time horizon,
and the largest incentive to rehabilitate and maintain the homes.
Getting more REO properties into the hands of owner-occupiers would be
the best option for stabilizing neighborhoods. While sales to home
buyers, including first-time home buyers, cannot be the entire solution
for reasons stated previously, Fannie Mae, Freddie Mac, and FHA
programs that provide preferential financing to owner-occupiers (such
as the ``FirstLook'' programs) should be retained, expanded and
marketed to a much greater extent to enable them to reach their maximum
potential.
The next best option for REO disposition is sale to local
investors. Local investors understand their local rental market and
have a long-term stake in the stabilization of the neighborhood.
Existing Government programs should be modified to support the
financing and availability of local investment. Providing affordable,
responsible financing options to investors not only eliminates REO
properties, but also empowers neighborhoods by giving local residents
an increased stake in its success. These tools would be especially
beneficial in older, urban neighborhoods that face the challenges of
aging housing stock and neighborhood blight.
For example, FHA should introduce an investor program, specifically
one that includes a renovation option. One solution would be to
temporarily lift the moratorium on investors participating in the
Section 203(k) Rehabilitation Loan Program. The FHA Section 203(k)
Rehabilitation Loan Program helps buyers of properties in need of
repairs reduce financing costs, thereby encouraging rehabilitation of
existing housing. With a Section 203(k) loan, the buyer obtains one
FHA-insured, market-rate mortgage to finance both the purchase and
rehabilitation of a home. Loan amounts are based on the lesser of the
sum of the purchase price and the estimated cost of the improvements or
110 percent of the projected appraised value of the property, up to the
standard FHA loan limit.
HUD began promoting Section 203(k) to homeowners, private investors
and nonprofit organizations in 1993. Private investors were often able
to find undervalued properties, renovate them and sell them for more
than the purchase price plus the cost of improvements, or provide much
needed rental housing. Motivated by this profit potential, many
investors successfully renovated and sold properties ranging from
individual homes to entire blocks, thereby expanding home ownership
opportunities, revitalizing neighborhoods, creating jobs, and spurring
additional investment in once-blighted areas.
In 1996, however, following a report by the Inspector General
describing improprieties concentrated in New York and insufficient HUD
oversight, HUD placed a moratorium on all Section 203(k) loans to
private investors. The Inspector General noted rampant fraudulent
activity that resulted in financial gain for the participants and
unrehabilitated houses in the neighborhoods.
MBA recommends that FHA lift the moratorium on investors
participating in the 203(k) and reinstate it as a pilot to facilitate
the purchasing and rehabilitating of REO properties by local investors.
In recognition of the historical abuses of the program, MBA also
recommends that the program be modified to ensure responsible lending
and minimize fraudulent activity. Potential program requirements could
include, but would not be limited to, the following:
1. Requiring a 15-20 percent downpayment, depending on the number of
units;
2. Requiring that investors demonstrate a proven track record in
managing properties;
3. Providing financing to REO property owned by FHA, the Department
of Veterans Affairs, the Department of Agriculture, Fannie Mae,
and Freddie Mac;
4. Requiring contractors to be insured and bonded;
5. Requiring an inspection by an independent third party to ensure
that all of the work was completed, thus mitigating against
fraud; and
6. Limiting the number of 203(k) loans that any single investor can
have at any given time to ten, as well as limiting the number
of homes in the process of rehabilitation at one time to four
properties, with the option of a higher amount on an exception
basis.
Fannie Mae and Freddie Mac can also implement temporary program
changes to their HomePath and HomeStep programs respectively, such as
adjustments to LLPAs and an increase in the maximum number of
properties owned, if the investor has demonstrated the ability to
manage multiple properties. To illustrate, currently, with the Fannie
Mae's HomePath program, investors who put down 20 percent on an
investment property have to pay three points in fees (or about an
additional 1.5 percent in rate). If the investor puts down 40 percent,
the fees are 1.75 percent. \3\ These fees assume that the investor has
a credit score above 700. If the credit score is below 700, the
investor must pay another one point. Thus, a typical investor's rate
could be seven percent to 7.5 percent even in this historically low
rate environment.
---------------------------------------------------------------------------
\3\ Fannie Mae, Loan-Level Price Adjustment (LLPA) Matrix and
Adverse Market Delivery Charge (AMDC) Information, 12.23.2010, 2011.
---------------------------------------------------------------------------
Additionally, Freddie Mac limits investors to four properties \4\
and Fannie Mae limits investors to ten properties, in certain
circumstances. \5\ Care should be taken not to stretch the capacity of
the small, single-family investor; however, for investors who can
demonstrate significant experience with managing multiple properties,
FHFA should consider making the policy consistent between Fannie Mae
and Freddie Mac.
---------------------------------------------------------------------------
\4\ Freddie Mac Seller Servicer Guide, 22.22.1.
\5\ Fannie Mae Seller Servicer Guide, B2-2-03.
---------------------------------------------------------------------------
So long as the concerns raised above are addressed, MBA supports
bulk investor sales in an effort to move the U.S. housing market out of
its problematic housing supply and demand imbalance and alleviate the
REO inventory; however, it is imperative that safeguards be implemented
to protect against fraud and that the process chosen to dispose of the
assets be clear, transparent, and equitable to all interested and
qualified investors. The challenge in designing appropriate safeguards
is to avoid constraining the disposition process or to make the program
so restrictive as to sabotage its success. MBA recognizes in order for
the any program to be successful it should be simplistic, quick to
administer, and attractive to investors.
Bulk Sales Should Incorporate Mandatory Hold or Recapture
Provisions
One of MBA's chief concerns is to ensure that bulk property
purchases do not contribute to the destabilization of home prices. Any
program must also protect Fannie Mae, Freddie Mac, and FHA against
fraud and provide the greatest recovery so as to protect the taxpayer.
To achieve these objectives we believe that FHFA and HUD should
consider adopting one of the following approaches:
Mandatory Hold Period--One of the objectives of the RFI is
to remove the significant numbers of REO from the market that
are placing enormous downward pressure on home prices. Ideally,
converting these homes to rental properties removes at least
some of the REO supply from the market and helps improve the
stock of affordable rental housing. To increase the likelihood
that REOs sold to investors actually become rental properties
and do not simply get flipped, we suggest that Fannie Mae,
Freddie Mac, and FHA consider a mandatory hold period of 3
years. Such a hold requirement could be managed through deed
restrictions. We recognize, however, those deed restrictions
may reduce the pool of bidders or negatively impact bid prices.
Profit or Equity Sharing--Profit sharing would allow Fannie
Mae, Freddie Mac, and FHA to share in gains on sales of REO
properties later sold by the investor. MBA prefers equity
sharing provisions over mandatory hold periods because it
allows more asset liquidity. Such equity sharing could be
structured as a waterfall so that Fannie Mae, Freddie Mac, and
FHA would share in a greater percentage of the profit from
sales in earlier years. The equity sharing should decrease
incrementally over a period of time, such as 3 to 10 years. The
equity sharing concept might be preferable over a mandatory
hold period because it allows the investor to sell homes at any
time when the housing market improves more rapidly than
anticipated or for other liquidity purposes, but protects the
Fannie Mae, Freddie Mac, and FHA against fraud in valuation
(e.g., flopping). Importantly, terms of the waterfall may be
unique to each bulk deal, with clearly defined terms outlined
in the prospectus of the deal and the bidding process, and an
open and transparent bidding process. Profit or equity sharing
should not apply if companies sold the homes to a related
company, to achieve balance sheet management for example. MBA
notes that equity sharing agreements currently exist in the
market, so model agreements are readily available.
Evaluate Capital Gains Treatment
Currently the long-term capital gains rate is 15 percent but
assuming that the 2001-2003 tax provisions will expire, and with the
new Medicare tax on investment income the long-term capital gains rate
will increase to almost 25 percent. Thus, any policy which would shield
investors from this tax would be a significant incentive, as it could
increase the after-tax return substantially. It might be possible to
design a program that provided relief from these high capital gains tax
rates for investors in REO properties. However, it might be
operationally difficult to ensure that only REO investors benefit, and
may perhaps be inequitable to investors in distressed assets that may
have been purchased through short sales or foreclosure auctions. The
goal of such a policy would be to stabilize the market through
incentives to buy now, regardless of the channel of purchase.
The CBO would likely score any reduction in the capital gains tax
as revenue negative. However, if the policy works to stabilize certain
housing markets, in actuality it could be revenue neutral or positive
because the Government would gain revenue if home prices begin to
increase again, and if the pace of home sales were to return to more
typical levels.
As noted above, policy makers should consider methods provide
neighborhood stability such as requiring certain holding periods for
the properties, perhaps 3 to 5 years, or to mandate profit sharing over
the first 3 years after purchase so that investors have little
incentive to flip the properties.
This recommendation would require a change in the current tax code,
which would be difficult to accomplish in these budgetary sensitive
times. However, providing targeted, favorable tax relief would provide
significant incentive for investors and help expedite the return of a
normal balance of supply and demand as well as positively impacting bid
prices as the assets are sold.
Create Incentives for Investors To Rehabilitate REO
Properties
MBA estimates that 30-40 percent of the existing REO properties
require significant renovation. A focus of the RFI is to address
housing needs in strong rental markets by turning REO properties into
safe rental properties for families who are no longer homeowners. MBA
is concerned that REO properties will transfer from the Government's
balance sheet to the private sector's balance sheet without addressing
the goals of the RFI. MBA is also mindful of over-interference by the
Government in an already highly regulated market and does not want to
suggest program restrictions that constrain the investor or are
cumbersome for the Government to administer.
MBA recommends that FHFA conduct extensive due diligence on
investors who bid on the pools, with an emphasis on evaluating the
investor's record on properties being rented and experience with
rehabilitation. This due diligence would provide an indication of the
investor's willingness and ability to meet the program goals outlined
in the RFI.
Moreover, to incent investors to rehabilitate and rent or sell
properties quickly, Fannie Mae, Freddie Mac, or FHA could escrow a
percentage of the investor's proceeds, which would be returned if a
portion of the pool was rented within a predetermined time period, such
as 6 to 12 months. Being able to rent the home would indicate that the
property met local code requirements without Fannie Mae, Freddie Mac,
or FHA having to perform on-site inspections. If the homes were not
rented, there would not be a penalty imposed on the investor.
Limiting the bidding to qualified investors might reduce bid prices
to some extent. However, this cost is offset by the substantial benefit
of having long-term dollars committed to stabilizing neighborhoods.
Over time, this will help the market.
IV. Implementation Logistics
MBA notes that even minor changes to existing programs will entail
significant modifications to a host of customer service, sales,
underwriting, and servicing operations platforms. With relatively low
origination volumes in recent years and significant investments
required in the servicing area to handle delinquent loans and
foreclosures, many lenders may lack the resources to accommodate
greater demand. Existing personnel also will need to be educated and
retrained. Successful implementation, therefore, depends on providing
lenders and servicers as much lead time as possible.
V. Conclusion
MBA believes that restoring a strong and stable housing market in a
safe and sound manner is imperative to the financial well-being of this
country. MBA urges policy makers to carefully consider our suggestions.
We look forward to working with you on this very important initiative.
______
PREPARED STATEMENT OF MARCIA GRIFFIN
President and Founder, HomeFree-USA
September 14, 2011
Introduction
Thank you Chairman Menendez, Ranking Member DeMint, and
distinguished Members of the Subcommittee for the opportunity to
participate in this hearing today. My name is Marcia Griffin and I am
President and Founder of HomeFree-USA. HomeFree-USA is a HUD-approved
501(c)(3) not-for-profit home ownership development, foreclosure
intervention and financial empowerment organization. As a HUD
intermediary, HomeFree-USA funds 66 nonprofit organizations, 21 of
which focus their attention on the foreclosure crisis. These
organizations spend every day working to marry the needs of mortgage
loan servicers and homeowners who are in need of a mortgage loan
modification.
Since 2008, we have worked with more than 30,000 homeowners. Many
of the families we've worked with can afford to pay a mortgage, just
not the mortgage that they currently have. While many assume that those
in crisis bought homes they could not afford, or were in no financial
position to be homeowners, in many cases, the opposite is true. We have
worked with thousands of people who had good credit and a stable
financial life before they ran into mortgage trouble. Many of these
people are employed, they want to do the right thing, they want to pay
their mortgage, they want to stabilize their neighborhoods, and they
want to keep their families together. What they need is an opportunity.
After working in this space for several years, it has become more and
more evident that innovative ways need to be brought to the table and
tested in order to restore the housing and mortgage industry in this
country.
At HomeFree-USA, we share your sense of urgency to find a lasting
solution to our daunting foreclosure crisis--a crisis that lies at the
very heart of our Nation's economic problems and threatens millions of
families with the loss of their American Dream--their home.
With the bursting of the housing bubble, home prices declined
dramatically in virtually every market throughout the United States. As
a result, many American families are now living in homes that are worth
less than their mortgages. According to published statistics, this
``underwater mortgage'' or ``negative equity'' problem affects some 11
million homeowners, or about 24 percent of all mortgages in the United
States.
Upwards of two million underwater homeowners are expected to go
into foreclosure. Many will be the result of ``strategic defaults''--
borrowers driven to give up home ownership in favor of renting rather
than to continue to make monthly payments with no real prospect of
regaining positive equity in their home. From our work in foreclosure
prevention, we find that homeowners in a negative equity position are
far more likely to default on their mortgages than those with positive
equity.
Principal Reduction Modifications
The most effective way to prevent foreclosures due to the negative
equity problem is to modify delinquent mortgages by both reducing the
interest rate and forgiving a portion of the outstanding principal. The
principal should be reduced at least by the amount the home is
underwater, based on a reliable property valuation. In so doing, the
homeowner is provided a reduced monthly payment that is affordable and
restored hope of regaining positive equity in the home--for many
families, this is the primary, if not the only, means by which to build
net worth and financial stability. To build in an incentive for the
homeowner to stay current on the modified payment obligation, the
principal can be forgiven in increments over time so long as the
homeowner does not redefault.
Along with modifications, I would like to stress the importance of
financial counseling. One way that lenders can get consumers to be more
proactive about their financial troubles is to enlist the help of HUD-
approved counseling agencies, which can serve as intermediaries between
consumers and the mortgage industry. Consumers do not blame nonprofit
counseling agencies for their financial troubles, as they do the big
banks. Therefore, they are more likely to approach counseling agencies
for help. Also, HUD-approved counseling intermediaries spend the
majority of their time communicating with people in their communities
and developing relationships with them--relationships that mortgage
servicers do not have.
Of course, all modifications--with or without principal
reductions--must be designed to return to the loan investor greater
cash flow, on a net present value basis, than foreclosure proceeds.
This is what is referred to as a ``NPV-positive'' modification. The
lender or servicer designing the modification must take into account a
number of factors such as homeowner income, home valuation, degree of
delinquency, borrower acceptance of the modification, prepayment and
redefault probabilities, resolution timelines, and other relevant data.
With home prices so severely depressed in many areas, however, we
believe that principal reduction modifications of underwater mortgages
can be fashioned to be NPV-positive in the overwhelming majority of
cases.
The Shared Appreciation Feature
We are familiar with and support the idea of adding a shared
appreciation feature to principal reduction modifications. In a Shared
Appreciation Modification, the homeowner agrees to pay to the loan
owner a portion of any postmodification gain in the value of the home
upon a sale or refinance. In determining the percentage sharing, the
right balance must be struck between, on the one hand, maximizing
borrower acceptance of the modification--thereby avoiding foreclosure--
and, on the other hand, providing the loan owner with the prospect of a
meaningful payback in the future against the loss sustained due to the
principal write down. We believe most underwater homeowners would be
willing to make this trade off. The shared appreciation feature thus
ameliorates, to some extent, concerns that loan modifications create
the so-called ``moral hazard'' by rewarding imprudent over-borrowing by
consumers.
The shared appreciation feature also provides a fair opportunity
and an incentive for people to stay in their homes rather than walk
away from an underwater mortgage. It creates a level of fairness within
the mortgage industry. Right now everyone is pointing fingers at
everyone else. There is no trust among homeowners, lenders, and
investors. But in order to get through the mortgage crisis, we have to
pull everyone together to work profitably. The shared appreciation
feature will benefit all involved.
In addition, the shared appreciation feature holds everyone
accountable. Lenders and investors must offer sustainable solutions.
Families can stay in their homes and keep their families together, but
they have got to pay their mortgage on time. So this creates a level of
responsibility on the part of everyone.
In sum, we believe the principal reduction modification that is
NPV-positive and contains a shared appreciation feature is an effective
and balanced approach to preventing foreclosures of underwater
mortgages to the benefit of mortgage loan investors, homeowners, and,
ultimately, the housing market and our national economy. We recommend
that this idea not only be tried out across the country, but that HUD-
approved intermediaries like HomeFree-USA, be utilized as a resource to
bring homeowners and servicers together. We can create mutual benefit
for the mortgage industry, the homeowners and the local communities.
I thank you again for inviting me to testify today. I will answer
any of your questions and I ask that my full written statement be
entered into the record.
PREPARED STATEMENT OF MARK ZANDI
Chief Economist and Co-founder, Moody's Analytics
September 14, 2011
[GRAPHIC] [TIFF OMITTED] T3368.041
[GRAPHIC] [TIFF OMITTED] T3368.042
[GRAPHIC] [TIFF OMITTED] T3368.043
[GRAPHIC] [TIFF OMITTED] T3368.044
[GRAPHIC] [TIFF OMITTED] T3368.045
[GRAPHIC] [TIFF OMITTED] T3368.046
[GRAPHIC] [TIFF OMITTED] T3368.047
[GRAPHIC] [TIFF OMITTED] T3368.048
[GRAPHIC] [TIFF OMITTED] T3368.049
[GRAPHIC] [TIFF OMITTED] T3368.050
[GRAPHIC] [TIFF OMITTED] T3368.051
[GRAPHIC] [TIFF OMITTED] T3368.052
[GRAPHIC] [TIFF OMITTED] T3368.053
[GRAPHIC] [TIFF OMITTED] T3368.054
[GRAPHIC] [TIFF OMITTED] T3368.055
[GRAPHIC] [TIFF OMITTED] T3368.056
[GRAPHIC] [TIFF OMITTED] T3368.057
[GRAPHIC] [TIFF OMITTED] T3368.058
[GRAPHIC] [TIFF OMITTED] T3368.059
PREPARED STATEMENT OF ANTHONY B. SANDERS
Distinguished Professor of Real Estate Finance, and Senior Scholar, The
Mercatus Center, George Mason University
September 14, 2011
[GRAPHIC] [TIFF OMITTED] T3368.060
[GRAPHIC] [TIFF OMITTED] T3368.061
[GRAPHIC] [TIFF OMITTED] T3368.062
[GRAPHIC] [TIFF OMITTED] T3368.063
[GRAPHIC] [TIFF OMITTED] T3368.064
[GRAPHIC] [TIFF OMITTED] T3368.065
[GRAPHIC] [TIFF OMITTED] T3368.066
[GRAPHIC] [TIFF OMITTED] T3368.067
[GRAPHIC] [TIFF OMITTED] T3368.068
PREPARED STATEMENT OF CHRISTOPHER J. MAYER
Paul Milstein Professor of Real Estate, Columbia Business School
September 14, 2011
[GRAPHIC] [TIFF OMITTED] T3368.069
[GRAPHIC] [TIFF OMITTED] T3368.070
[GRAPHIC] [TIFF OMITTED] T3368.071
[GRAPHIC] [TIFF OMITTED] T3368.072
[GRAPHIC] [TIFF OMITTED] T3368.073
[GRAPHIC] [TIFF OMITTED] T3368.074
[GRAPHIC] [TIFF OMITTED] T3368.075
[GRAPHIC] [TIFF OMITTED] T3368.076
[GRAPHIC] [TIFF OMITTED] T3368.077
[GRAPHIC] [TIFF OMITTED] T3368.078
[GRAPHIC] [TIFF OMITTED] T3368.079
[GRAPHIC] [TIFF OMITTED] T3368.080
[GRAPHIC] [TIFF OMITTED] T3368.081
[GRAPHIC] [TIFF OMITTED] T3368.082
[GRAPHIC] [TIFF OMITTED] T3368.083
[GRAPHIC] [TIFF OMITTED] T3368.084
[GRAPHIC] [TIFF OMITTED] T3368.085
[GRAPHIC] [TIFF OMITTED] T3368.086
[GRAPHIC] [TIFF OMITTED] T3368.087
[GRAPHIC] [TIFF OMITTED] T3368.088
[GRAPHIC] [TIFF OMITTED] T3368.089
[GRAPHIC] [TIFF OMITTED] T3368.090
[GRAPHIC] [TIFF OMITTED] T3368.091
ADDENDUM
[GRAPHIC] [TIFF OMITTED] T3368.092
[GRAPHIC] [TIFF OMITTED] T3368.093