[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 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  


            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

