[Senate Hearing 112-468]
[From the U.S. Government Publishing Office]
S. Hrg. 112-468
STATE OF THE HOUSING MARKET: REMOVING BARRIERS TO ECONOMIC RECOVERY
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
ON
EXAMINING THE STATE OF THE HOUSING MARKET
__________
FEBRUARY 9 AND FEBRUARY 28, 2012
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia MARK KIRK, Illinois
JEFF MERKLEY, Oregon JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina
Dwight Fettig, Staff Director
William D. Duhnke, Republican Staff Director
Charles Yi, Chief Counsel
Beth Cooper, Professional Staff Member
Glen Sears, Senior Policy Advisor
William Fields, Legislative Assistant
Andrew Olmem, Republican Chief Counsel
Chad Davis, Republican Professional Staff Member
Dana Wade, Republican Professional Staff Member
Dawn Ratliff, Chief Clerk
Riker Vermilye, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, FEBRUARY 9, 2012
Page
Opening statement of Chairman Johnson............................ 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 2
WITNESSES
Mark Zandi, Chief Economist and Co-Founder, Moody's Analytics.... 3
Prepared statement........................................... 30
Christopher J. Mayer, Paul Milstein Professor of Real Estate,
Finance, and Economics, Columbia Business School............... 5
Prepared statement........................................... 49
The Honorable Phillip L. Swagel, Professor of International
Economic Policy, University of Maryland School of Public Policy 6
Prepared statement........................................... 59
Responses to written questions of:
Senator Toomey........................................... 67
Additional Material Supplied for the Record
Statement of the National Association of Realtors'.... 69
Statement submitted by Tim C. Flynn, CEO, National Value
Assurance, LLC................................................. 71
----------
TUESDAY, FEBRUARY 28, 2012
Page
Opening statement of Chairman Johnson............................ 73
Prepared statement........................................... 118
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 74
Senator Menendez............................................. 76
WITNESSES
Shaun Donovan, Secretary, Department of Housing and Urban
Development.................................................... 76
Prepared statement........................................... 118
Responses to written questions of:
Senator Shelby........................................... 183
Elizabeth A. Duke, Governor, Board of Governors of the Federal
Reserve System................................................. 98
Prepared statement........................................... 128
Edward J. DeMarco, Acting Director, Federal Housing Finance
Agency......................................................... 100
Prepared statement........................................... 157
(iii)
STATE OF THE HOUSING MARKET: REMOVING BARRIERS TO ECONOMIC RECOVERY--
PART I
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THURSDAY, FEBRUARY 9, 2012
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:03 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. I call this hearing to order. I thank our
witnesses for joining us.
Today's hearing is a continuation of our in-depth look at
housing finance reform that we just started last year in a
bipartisan fashion. Many of the previous hearings have examined
the long-term structure of the Nation's housing finance system.
In this hearing, we will focus on the current state of the
housing market and its effect on the larger economy.
In January, the Board of Governors of the Federal Reserve
System released a white paper entitled ``The U.S. Housing
Market: Current Conditions and Policy Considerations.'' In this
paper, the Board stated that continued weakness in the housing
market poses a significant barrier to a more vigorous economic
recovery.
The white paper documents the problems that so many
families and communities are facing, such as: declining home
prices and the loss of $7 trillion in home equity since 2006;
millions of responsible homeowners are underwater on their
homes through no fault of their own; excess supply of homes for
sale at the same time that rents are rising; obstacles to
refinancing at today's record low mortgage rates.
The paper also discussed policy options for addressing what
it identified as impediments to a housing--and ultimately
economic--recovery. Such impediments include: the excess supply
of homes for sale, tightened mortgage credit, and the flow of
additional homes entering the foreclosure pipeline under
current conditions. Many potential solutions are being offered
by a wide range of interested parties. In recent weeks, the
Administration has outlined administrative steps and
legislative proposals for overcoming barriers to housing market
recovery. An interagency group led by the Federal Housing
Finance Agency has begun taking steps to address the large
volume of real estate-owned properties held by the Government-
sponsored enterprises and Federal agencies, including pilot
projects converting some of these properties to rentals. I look
forward to hearing more from the Administration and FHFA about
their proposals.
Finally, this morning, we are expecting an announcement in
the long-anticipated mortgage servicing settlement. I look
forward to carefully reviewing the details of these agreements
as part of the Banking Committee's continued oversight efforts
to hold servicers accountable for their failures and protect
homeowners from abuse. I agree with the Fed's assessment.
Without an improvement in the housing market, the economic
recovery will also continue to drag. We must do everything we
can to help with economic recovery. This is important to me and
my constituents. This means we must find ways to improve the
housing market.
Today, we explore potential solutions with three highly
respected economists. I have invited our witnesses to share
their insights on barriers to and solutions for housing market
recovery. These witnesses have extensive experience analyzing
the housing market and broader economy. I hope to learn from
them practical solutions to improve the housing market, the
economy, and the lives of millions of Americans.
With that, I would turn to Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman.
Unfortunately, as we sit here today, I believe the only
realistic assessment of the state of our housing market is that
it is weak and has faced continued decline. Home prices
declined nearly 5 percent in 2011. This was the fifth straight
year of declines. Worse yet, some States saw declines of more
than twice that rate. In Illinois, prices declined over 11
percent; in Nevada, prices declined more than 10 percent.
The troubled state of our housing market should be a call
for Congress to take action. Traditionally, this Committee has
acted in a bipartisan fashion to address pressing problems
facing the Nation, and during my tenure on the Committee, which
is 26 years, we have worked across party lines to pass
important legislation to reform the GSEs and resolve the
savings and loan crisis. But there is a lot of work to do. I
believe we can and we should return to that practice.
Some have speculated that Congress will fall into gridlock
during the rest of the year. However, that does not have to be
the path of this Committee. Given strong bipartisan support for
helping homeowners, I believe that it is unfortunate that
Congress has yet to devise a thoughtful and effective program
to revive the housing market.
As early as 2008, right here I warned that, to be
effective, we needed to address the underlying fundamentals
driving the housing market and the mortgage foreclosures. We
have not done that. I warned that if we did not adopt such an
approach, we would risk wasting a lot of taxpayer money. And
perhaps we have. Unfortunately, the Administration has rolled
out one ineffective homeowner assistance program after another.
The Administration's latest proposal, as I understand it,
reveals its unwillingness to provide the leadership necessary
to make the tough choices required to really revive the housing
market. This appears to be today now an ideal time for the
Members of this Committee to step into the leadership vacuum. I
have no illusions that this will be easy. However, we will
never solve the problems with the housing market if we do not
start working together to find a reasonable solution here.
Thank you, Mr. Chairman.
Chairman Johnson. Thank you, Senator Shelby.
Are there any other Members who wish to make a brief
opening statement?
[No response.]
Chairman Johnson. If not, thank you all. I want to remind
my colleagues that the record will be open for the next 7 days
for opening statements and other materials you would like to
submit. Now I would like to introduce our witnesses here today.
Dr. Mark Zandi is the chief economist at Moody's Analytics.
Dr. Christopher Mayer is the Paul Milstein Professor of
Real Estate, Finance, and Economics at the Columbia Business
School.
And the Honorable Phillip Swagel is a professor at the
University of Maryland's School of Public Policy and the former
Assistant Secretary for Economic Policy at the Treasury
Department from December 2006 to January 2009.
Dr. Zandi, you may proceed with your testimony.
STATEMENT OF MARK ZANDI, CHIEF ECONOMIST AND CO-FOUNDER,
MOODY'S ANALYTICS
Mr. Zandi. Thank you, Mr. Chairman, Mr. Vice Chairman, and
Members of the Committee. I am the chief economist at Moody's
Analytics. My remarks, though, are not those of the Moody's
Corporation. They are my own views. You should also know that I
am on the Board of Directors of mortgage insurer MGIC. You
should know that.
I will make five points in my remarks.
Point number one is that the housing crash is not over.
Home sales and housing construction have hit bottom. They have
stabilized. There are even some signs of life there. But house
prices continue to decline. Since prices began declining 6
years ago, they have fallen by about a third, and I expect more
price declines in coming months.
The key problem is the still large number of properties
that are in the foreclosure process. Just to give you a number,
there are 3.6 million loans that are in foreclosure or pretty
close, 90 days and over delinquent. They are unlikely to cure,
and they will likely go to foreclosure. So the share of home
sales that are distressed, that are foreclosure and short, will
likely rise later this year, and that means more house price
declines.
Point number two is that when house prices are falling, it
is hard to be entirely enthusiastic about the economic
recovery. The home is still the most important asset that most
households own, most middle-income households. Many small
business people use their home as collateral to get a loan. So,
for example, when I started my company 20 years ago, I had to
go get a loan, and I put my home up as collateral. I doubt I
could do that in today's environment. Many local governments
obviously rely on property tax revenue, which has been falling
because of the decline in housing values.
Most significantly, though, is the risk that we fall back
into a vicious cycle that prevailed back in the recession; that
is, price declines result in more homeowners that are
underwater. By my calculation, there are 14.6 million
homeowners that are in negative equity positions, half of which
are underwater by more than 30 percent, and the average amount
of negative equity per homeowner is about $50,000. So that is
the fodder for more default; more default means more distressed
sales and more price declines.
This leads to point number three, and that is, I do think
the policy response to the housing crash has been helpful and
did, in fact, break that vicious cycle back in late 2008 and
early 2009. There were a myriad of policy steps taken to break
the cycle, everything from the Federal Reserve's quantitative
easing efforts, buying mortgage securities to bring down
mortgage rates, which has brought fixed mortgage rates to
record lows, to temporarily raising conforming loan limits, to
three rounds of housing tax credits; and, of course, the FHA, a
yeoman effort to fill the void in mortgage lending left by the
collapse of private mortgage lenders. So, in my view the policy
response, while obviously not perfect and we can take umbrage
with any individual aspect of the response, reasonable
criticism, I think the totality of the response was pretty
good.
Point number four is at this point I think policy makers
should remain supportive of the housing market and continue to
provide temporary, modest support to housing so that we do not
reignite that vicious cycle. We cannot allow that to occur
because if it does, there will not be any good policy response
and our economy will pay a price for it.
The proposals put forward by the Federal Reserve Board and
the Administration I think are pretty good. They focus on three
things, and I think this is where you should focus.
First is facilitating more marriage refinancing. I think
that is a slam-dunk idea in the context of record low fixed
mortgage rates. That is an immediate boost to these very
stressed homeowners.
The second thing is facilitating more loan modifications,
particularly principal write-down mods that are very well
targeted, and I think that dovetails very nicely with the
mortgage settlement that we are going to be getting, hopefully
today. I think facilitating that effort would be very helpful.
And then third is promoting REO to rental. The GSEs,
obviously--FHA has a lot of properties sitting in REO. We want
to get that into rental before it hits the market and drives
house prices lower. So anything that could be done--and there
are lots of things that can be done--to address those--to
facilitate those three policy steps.
Finally, my fifth point is that this should not cost
taxpayers money. These are things that can be done, I think,
without any cost to the taxpayer. Some of the things will
require some cost, particularly the principal reduction, if we
juice up HAMP and increase the incentives there. But we have
TARP money that has been budgeted for these purposes, and I
think they should be used.
Finally, let me say I think it is very important for
Congress, the Administration, the FHFA, and other regulators to
remain aggressive and vigilant, make sure that this housing
crash definitively comes to an end, because until it does the
recovery will not gain traction.
Thank you.
Chairman Johnson. Thank you, Dr. Zandi.
Dr. Mayer, you may proceed.
STATEMENT OF CHRISTOPHER J. MAYER, PAUL MILSTEIN PROFESSOR OF
REAL ESTATE, FINANCE, AND ECONOMICS, COLUMBIA BUSINESS SCHOOL
Mr. Mayer. Good morning, Chairman Johnson, Ranking Member
Shelby, and Members of the Committee. My name is Chris Mayer. I
am the Paul Milstein Professor of Real Estate at Columbia
Business School.
Despite record low interest rates, some signs of economic
recovery, mortgage activity and house prices continue fall.
Purchased mortgages last year were at the same level as in
1992, according to data from the Mortgage Bankers Association,
and refinancings were at the second lowest level since 2001. By
comparison, new consumer lending for items like autos and
credit cards is up 11 percent.
In its recent white paper, the Federal Reserve observes,
``Obstacles limit access to mortgage credit among creditworthy
borrowers, barriers to refinancing blunt the transmission of
monetary policy.''
Unfortunately for taxpayers, homeowners, and the economy, 3
years into the FHFA's conservatorship of the GSEs, Fannie Mae
and Freddie Mac continue to act as profit-maximizing private
firms determined to remain in the game for long-term profits
through their near monopoly power in the mortgage market rather
than making the market more efficient. The FHFA has taken a
narrow, ineffective, and harmful approach to managing GSE
activities.
Conservatorship has failed to adequately address critical
conflicts of interest between the two principal GSE businesses:
providing mortgage guarantees and managing a large retained
portfolio of mortgages and MBS. Examples abound of GSE actions
that padded their portfolio profits even while restricting
refinancing. Fannie Mae imposed new origination fees called
LLPAs that could be 3 percent or more of the mortgage balance
only weeks after the Federal Reserve announced its intention to
purchase what would eventually be $1.25 trillion of GSE MBS.
Freddie Mac followed suit 2 months later.
LLPAs were applied to those refinancing existing mortgages
even though lowering the payments for those borrowers would
save Fannie Mae and Freddie Mac and the taxpayers money by
lowering defaults. Existing borrowers with high loan-to-value
ratios, those at the greatest risk of default, were locked out
of refinancing altogether.
The GSEs made it harder to refinance with another servicer
despite borrowers' many complaints about poor service from
their existing servicers. Consumers now pay three-quarters of a
percent more per year for their mortgage to originators than
they did before conservatorship due to limited competition to
originate mortgages.
The GSEs failed to address critical problems in mortgage
insurance. The only seemingly plausible reason for policies
that unduly restrict credit and, thus, raise defaults by
existing borrowers is to protect high interest payments on
assets held in the GSEs' portfolio.
Reports by National Public Radio and ProPublica highlighted
these conflicts of interest and how they may have influenced
portfolio decisions at Freddie Mac. Instead of selling off its
MBS, Freddie Mac created and help complex, highly leveraged,
risky mortgage derivatives that had no value as a hedge. More
recently, Freddie Mac created new and complex long-term
financing for its mortgage-backed security positions called
MLANs. Both types of transactions were structured so that the
enterprise lost valuable interest payments if borrowers with
very high interest rates refinance their mortgages, a policy
that is substantially under the control of Freddie Mac. These
transactions also make it harder to unwind Freddie Mac and its
portfolio in the future, something all of us should be
concerned about.
While seemingly consistent with conserving and preserving
assets, these policies appear to violate a number of the GSEs'
other mandates under HERA to foster liquid, efficient,
competitive housing finance markets and to operate in a manner
consistent with the public interest.
Finally, the GSEs need to reform their loss mitigation
practices. Private portfolio lenders were the first to adopt
widespread mortgage modification programs and principal
reduction plans with their own loans and have also much lower
redefault rates than the GSEs. The GSEs need to follow
practices that portfolio lenders use for their own defaulted
mortgages and work to attract private capital to purchase and
manage nonperforming loans and REO.
We must change the mandate of conservatorship. Legislation
should mandate that an independent trustee wind down the GSEs'
retained portfolio of MBS and require other steps to attract
private capital. The GSEs should finally remove all of the
obstacles limiting access to refinancing for existing GSE
borrowers and address constraints on mortgage credit as
identified by the Federal Reserve. Conservatorship as it stands
now is laden with conflict of interest and is going to be
incredibly difficult to unwind these institutions.
I appreciate the opportunity to address you today and look
forward to answering any questions you may have.
Chairman Johnson. Thank you, Dr. Mayer.
Professor Swagel, you may now proceed.
STATEMENT OF THE HONORABLE PHILLIP L. SWAGEL, PROFESSOR OF
INTERNATIONAL ECONOMIC POLICY, UNIVERSITY OF MARYLAND SCHOOL OF
PUBLIC POLICY
Mr. Swagel. Thank you, Chairman Johnson, Ranking Member
Shelby, and Members of the Committee. The housing market
remains weak even as the job market improves. The latest
housing proposals we are considering today largely expand on
previous actions.
My concern is that the proposals share a common feature of
the previous actions, and that is their moderate impact, an
impact that is in every case less than was advertised when the
various policies were launched.
It is useful to consider a specific example of why the new
proposals will share this unfortunate feature. One proposal is
a broad refinance for loans to be refinanced by the FHA, the
Federal Housing Administration. The Administration's fact
sheet--and that is all we have is a fact sheet--says there will
be no red tape, no delays, no tax forms, no appraisals. The
policy applies to owner-occupied homes and not to investors.
Now, the problem is that the lenders have to verify that a
home is owner-occupied. This is the case even if a lender is
refinancing its own home because now it will be getting a
Government guarantee. Without access to tax forms, without
appraisals, it is not clear how the lender is supposed to do
this. Are they supposed to send someone to the house and look
in the window? So these implementation details matter greatly.
And, again, we have no text for the legislative proposal. We
just have a fact sheet, when these details are really crucial.
It is 2 weeks after the proposal has been announced. I have
serious doubts about whether it can actually be implemented in
practice, and there is really no way to know.
In general, what we have learned over the last 3 years is
that the one-at-a-time nature of the transactions involved in
dealing with the housing weakness is a considerable hindrance
to implementing these proposals.
Now, on their impact, I think it is clear that credit was
too loose before the crisis during the housing bubble, and I
think a good case can be made that now credit is too tight, and
access to mortgage financing is too difficult for many
homeowners.
To me, the lessons is to get the standards right, not to
have the standards be set by unelected and unconfirmed
Government administrators, but to think about what are the
right standards and let the private market decide how to deploy
capital and what risks to take on that capital.
I worry that there will be a modest impact from the new
proposals in terms of avoiding incremental foreclosures. Many
of these proposals might have made more sense in early 2009,
but at that time the measures were considered not prudent, not
a good ratio of benefits to costs. So here we are in 2012. If
anything, as my written testimony explains in detail, the ratio
of cost to benefits has gone up. There are fewer incremental
foreclosures avoided for each dollar of taxpayer resources
used.
If these proposals work, to the extent they do, it will be
mainly as economic stimulus, as writing checks from taxpayers
to particular homeowners. I think it is fine if someone wants
to make a case that we should have more fiscal stimulus. I
think that will have a limited impact and is probably not
needed in light of the improving economic data. But that debate
should be made openly as stimulus and not as a housing policy
or as pressure on a Government administrator.
Another point, related, is that Government aid should
probably be better focused. Rather than having the FHA
refinance anyone's mortgage, it might be useful to look at
which homeowners and which income levels. As I mentioned in my
testimony, the White House has recently defined the middle
class as topping out at $80,000 a year or $100,000 a year, and
it might be useful to limit FHA to homeowners of that income
level.
There are actions that can be taken that will be useful to
speed the housing adjustment. The REO initiative to move empty
houses into rentals I think will be very useful, and that
really should be the focus of policy, a focus on speeding the
adjustment. We want a recovery in housing. We need the housing
market to lift off the bottom. But, unfortunately, that does
mean the housing market has to hit bottom so that it can lift
off of it, and we want that to happen as quickly as possible.
We want to end the legal and regulatory uncertainties that are
now waiting on the market. Moving forward with housing finance
reform, reform of the GSEs in particular, will be helpful for
bringing private capital back to the market and moving the
housing market forward.
Thank you very much.
Chairman Johnson. Thank you, Professor Swagel.
As you mentioned at the outset, the long-anticipated
mortgage servicing settlement has been reached. Although we may
not have all of the details, I am interested to hear each of
your thoughts on the impact of this settlement on the housing
market. Dr. Zandi, we will start with you and go down with the
panel in turn.
Mr. Zandi. I think it will have a meaningfully positive
impact on the housing market and the broader economy for three
reasons:
First, it provides a substantive amount of resources for
more loan modifications, and it sounds like a fair number of
those will be principal reduction modifications, which the
servicers are already engaged in quite successfully. According
to OCC data, roughly 20 to 25 percent of their current mods are
principal reduction mods, so I think this will be helpful in
that regard.
And, by the way, the Administration proposal to triple the
benefits to principal reduction mods in HAMP I think would
dovetail beautifully with that settlement. And I think that is
meaningful. I think you will get a half a million to a million
homeowners that get substantive help here, and that will make a
big difference in terms of that share of home sales that are
distressed, and that will help to keep any future house price
declines limited.
The second reason is that I think this does help the
banking system. One of the reasons the banking system has been
slow to provide credit is the cloud hanging over it with regard
to various legal, regulatory issues. There are still many, and
there are still many clouds. But this was one significant
cloud, and I think lifting it will be helpful, and it will
allow the banking system to gain confidence and become more
aggressive in extending credit, which is very key to the
economic recovery.
Third, I do think this is consistent with Professor
Swagel's point about facilitating the foreclosure process. This
will allow the foreclosure process to reaccelerate for us to
move through the mountain of foreclosed property that is still
plaguing the housing market. Many of these foreclosed
properties are vacant. They are investor properties. They are
blighting communities. We need to work through these
properties; otherwise, we are not going to find a bottom. So I
am hopeful that this leads to a clearer path toward more
foreclosure--resolving more of these foreclosure issues and
coming to the day when we find the bottom of the housing
market. So I think this is a very encouraging development.
Chairman Johnson. Dr. Mayer.
Mr. Mayer. Yes, I agree with Dr. Zandi on many of these
points. I think it does continue a practice which private
lenders are doing with their own portfolios, which are
principal modifications.
What is unclear is how well we have bifurcated past actions
versus future results. One of the problems has been there are
many people who are not making their payments for 2 years or
longer and are remaining in their properties, and we are
starting to see in the data that people in judicial States
where that is happening are defaulting relatively more relative
to people in nonjudicial States. And so we should start to
worry about that moral hazard, and if this presents a path for
either modifying or foreclosing a home, we really need that. We
cannot have people who stay, you know, years in homes without
payments and without really having an ownership stake in where
they are.
The third is something that I think really highlights what
Senator Shelby said at the beginning of this hearing, which is
we are going to have a lot of stuff coming on the market, and
given the current structure of both the GSEs and the lending
market, we are not going to have the credit or the capacity to
absorb this stuff. If we end up with a couple million homes
that come on the market next year with the sale rate of, you
know, under 5 million today, a third of those home sales are
already cash sales; a third are home sales under contract; a
third, brokers report that their sales fall apart because of
credit problems. So it is critical for this Committee and for
policy makers to address the issue of restoring a more normal
credit standard in the market; otherwise, this flood of housing
may well push prices down a lot more and push us into a
situation where we have other problems.
So I think this is a wonderful proposal. Lots of people,
including myself, are talking about refinancing. But we also
need to open up a reasonable standard for new mortgages,
whether they be for people who are owner occupants, whether
they be investors buying in bulk. And the GSEs at the moment
are not accomplishing that goal, and I think that needs to
change.
Chairman Johnson. Professor Swagel.
Mr. Swagel. I also welcome the settlement on the robo-
signing. Obviously, the robo-signing was outrageous, and
illegal behavior should be--illegal actions should be punished.
I think the positive impacts will be twofold: One is there
will be some assistance for individual homeowners. I think the
bigger impact on the overall economy and on the housing market
is removing the uncertainty that is preventing banks from
operating and from lending going forward. We have to remove
that uncertainty to start origination going forward.
We have to be realistic about the impacts, 17 or 37
billion, somewhere in that range, in terms of principal
writedowns. Those are big numbers, but there is $700 billion or
more of underwater borrowers, negative equity. So the impact
will be pretty modest relative to the scale of the problem.
The original HAMP proposal was supposed to help 3 or 4
million, and it has helped less than a million. It is just an
indication that we should all be wary of these promises.
The last thing to mention is that the market is moving.
Lenders are paying homeowners to avoid foreclosure, and it
makes sense, right? If it takes 24 to 36 months to actually
foreclose on someone who is not even making their payments, it
makes sense for lenders to pay that person to move out, and
there is much greater dignity in that solution than in a
foreclosure.
So these adjustments are useful, and we want them to keep
happening, but, again, I think the biggest impact, positive
impact of the AG settlement is the certainty about market
conditions going forward.
Chairman Johnson. Dr. Zandi, we have heard arguments that
the market should be left to hit bottom. I would like to hear
your analysis of this issue. Do you see any barriers to the
market healing itself? Are there any risks with remaining
housing prices to fall further?
Mr. Zandi. Well, I would make two points. First, I think
house prices have fallen sufficiently to be consistently now
with household incomes and effective rents, so effectively
house prices are at bottom. They are at equilibrium.
Affordability is very high, and you have fairly strong investor
demand because rents have risen so considerably. So I think any
further house price declines would be what you might call
overshooting.
Second--and this is more important, and this goes to my
point about the vicious cycle--what concerns me or makes me
nervous is that once house prices start falling, it is very
difficult to see where that ends. We can get back into a very
vicious cycle. Prices decline. You have 14.6 million homeowners
underwater. When prices are falling, people think prices are
going to fall in the future, that gives them less incentive to
hold on. They default. The defaults lead to more foreclosures,
short sales, more price declines, more negative equity
homeowners, and you can see this dark vicious cycle taking
hold. And we had to throw enormous resources at this vicious
cycle in the recession to break it. And we did. If you look at
prices, they have basically--they are soft, but they have
basically stabilized since early 2009.
So I do not think it is worth taking the chance to allow
that possibility to occur. The tail risks, as you would say,
are very enormous.
So I think policy makers can do some things that are
modest, do not cost taxpayers significant dollars, and mitigate
that risk, and I think that is entirely appropriate.
Chairman Johnson. Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman.
Dr. Zandi, you estimated earlier in your testimony that an
additional 6 million homeowners will lose their homes before
the housing market recovers, and you also said that
foreclosures will not return to normal levels until 2015.
How could you rationalize--I know you are an economist.
Sometimes economists are right, sometimes they are wrong.
[Laughter.]
Senator Shelby. How do you rationalize the housing market
has bottomed out and so forth if you are going to have 6
million more foreclosures and so forth? You know, I hope you
are right, but I am not sure. Tell us why.
Mr. Zandi. Yes, very good question.
Senator Shelby. In other words, you are saying that the
price of housing is not going to continue to decline, but that
seems counterproductive to what we see.
Mr. Zandi. Yes, it is a very good question. First, let me
say there are three broad measures of the housing market:
Home sales--that is, housing demand. That has hit bottom.
It is actually starting to improve.
Senator Shelby. How do you determine that has hit bottom?
We hope it has hit bottom. What is your data?
Mr. Zandi. Existing home sales from the National
Association of Realtors, new home sales from the Census Bureau.
If you take a look, they have basically been moving along the
bottom for 3 years and are now starting to trend up a little
bit.
Housing construction, single-family, multi-family starts,
also Census data, that is starting to rise--admittedly, at very
low----
Senator Shelby. But not everywhere, right?
Mr. Zandi. No, of course not. I am talking nationally.
Senator Shelby. OK.
Mr. Zandi. But house prices, you are right, they are
continuing to be weak, and I do expect more house price
declines in the immediate future. But this is a very important
point, and it refers to something Dr. Swagel said. The key to
house prices is the change in the share of home sales that are
distressed, foreclosure and short. You can still have a very
high level of distressed sales, and we are because we have a
lot of property in foreclosure, and it is going to take many
years to work through that. But if you can start moving that
share downward, you are going to get house price growth. And
lots of good things will happen as soon as house prices are
moving north.
All I am arguing to you, sir, is that we are very close. We
do not need to solve the $700 billion, by my calculation $750
billion negative equity hole. We just need to get another half
million or a million homeowners on solid footing, get that
share of home sales that are distressed moving south, and we
will start making progress on house prices.
Senator Shelby. Do you have that same feeling in areas like
Florida, Nevada, California, you know, some distressed areas
where so many properties are underwater or is your language,
your testimony, basically across the Nation?
Mr. Zandi. Well, also a very good question. I so far have
been speaking nationally, but obviously there is a great deal
of variability across the country. Places like Florida,
Atlanta, Arizona, Nevada, Central Valley of California, parts
of Rhode Island, parts of the Midwest are encumbered with a
great deal of foreclosed property, so price declines there are
going to be more deep and longer. It is going to be harder to
get that share of distressed properties moving south in those
areas because the foreclosure problem is a bigger problem.
Senator Shelby. Dr. Mayer, do you have a comment on this?
Mr. Mayer. Sure. I am actually in the camp of prices have
fallen further than equilibrium. In many parts of the country,
house prices are below construction costs of comparable homes.
And given where interest rates are----
Senator Shelby. Is this an area where it is like Florida,
California, Nevada, Arizona, where----
Mr. Mayer. Yes, and Atlanta and Phoenix. You know, this is
true in many parts----
Senator Shelby. Where housing was overbuilt and oversold
perhaps.
Mr. Mayer. Yes, that is true. But the sort of question is
where--if you sort of think about where we should be in
equilibrium, that is the sort of analysis. Now, I think it----
Senator Shelby. That is the ideal way. If demand and supply
are in equilibrium, things are fine, right?
Mr. Mayer. Right. The problem with that is that, on the
other side of the coin, what is not working is access to
credit, which is part of what is contributing to prices hanging
below the market.
One of the things I would point out is that I pay a lot of
attention not necessarily to foreclosures but as well to sort
of vacant houses, because if you take a family who leaves a
home, they are going to go somewhere else, and someone else is
going to move into the home that they have. And the question
is, is there somebody--what determines house prices is, is
there somebody who can sort of buy that home and either provide
a rental or someone else who is going to occupy the property?
And that sort of transition is a place that I think policy
makers can and should be focusing on, which is: How do we make
sure that when people leave these homes, whether through short
sales, as Dr. Swagel talked about, or foreclosures, that there
is somebody else who can acquire that property without a huge
amount of distress and make it available for families to live
in so it does not become vacant and get destroyed?
The really big overbuilding is in a small number of parts
of the country, and in many other parts of the country house
prices are below construction costs, but we are not seeing it
because of this transition challenge.
Senator Shelby. Professor Swagel.
Mr. Swagel. Yes, I also worry about the impact of the
delayed foreclosures on house prices going forward. There is a
sense in which we have put a bunch of foreclosures on hold,
meaning millions of foreclosures on hold, but we have not
prevented them, especially with the economy having been
relatively weak over the last 3 years.
Senator Shelby. Is one of the problems of delayed
foreclosures that each State has a different law regarding
foreclosures and the speed of them and so forth?
Mr. Swagel. That is right, and judicial States take a lot
longer. That is right. We have started to see lenders
essentially paying homeowners considerable amounts to move out
of their home and avoid foreclosure. It seems like the market
then is finally starting to adjust.
Senator Shelby. Professor Swagel and Dr. Mayer, I will
refer this to you. In both of your testimonies, you cite the
lack of GSE reform, Freddie and Fannie, as impeding the
recovery of the housing market. So what will be the
consequences to the housing market if Congress continues to
neglect and push down the road GSE reform? Professor Swagel.
Mr. Swagel. I would say it is very much an impediment to
having the housing market recover, and it is an impediment to
the policy debate today. We see everyone pounding on poor Ed
DeMarco to adjust the refinancing standards. That should not be
his line of business. It should be the market. But we need GSE
reform for that to happen. It would be hard for private market
participants to lend someone money for 30 years when the
Government could change the rules entirely in a few years.
So that is what I would want. Move forward with GSE reform
and have private capital come in and take the risks.
Senator Shelby. Dr. Mayer.
Mr. Mayer. I am not as sanguine on the actions of the
conservator in this regard. I think there----
Senator Shelby. That we have now?
Mr. Mayer. Yes, the current conservator of the FHFA. As I
made comments, I think the conflicts of interest have been
material. The GSEs under conservatorship have imposed new fees,
new restrictions, and new things that never existed before
conservatorship and are enormous impediments to the recovery of
the mortgage market and can only be explained by the retained
portfolio. And these are things that, in principle, the
conservative could within his power adjust, but he has chosen
not to. So the conservator could hand, without legislation, an
independent trustee to manage and wind down the portfolio, but
the conservator has chosen not to do that. The conservator
could take many other steps that would reduce the losses and
foreclosures and open up credit but has chosen not to do it. So
while it does not require legislation----
Senator Shelby. Isn't that going to make it worse in long
run and harder to do and more costly?
Mr. Mayer. Actually, it is counterintuitive, and, you know,
this is based on work I have done with Dean Hubbard at Columbia
Business School, Alan Boyce, and James Witkin. What the GSEs
are doing is actually making it harder for them to be unwound.
So the way they are managing their portfolio with issuing--they
just put out 10-year debt. They have created these complex
derivatives. These are not transactions that are sort of making
it easier to unwind. They are actually making it harder to
unwind. And the frictions in the market that they are creating
are also making it harder to unwind them because nobody will
sort of--this is not a market anybody wants to be in. When you
sue your originator, same problem. The litigation creates a
harder space for private capital to----
Senator Shelby. Is this a philosophical design by the
conservator?
Mr. Mayer. I have had different views----
Senator Shelby. It is not an unknown.
Mr. Mayer. I would not want to speculate as to why the
conservator has taken the actions that he has. I just look at
the results of those actions. And I think as the manager of any
institution, one of the critical things, you know, that CEOs
have to deal with are conflicts of interest in an organization,
and not managing those conflicts of interest effectively is
something that a CEO should be held responsible for if they are
not doing that. And so to my mind, that is the sort of critical
question, and I do not want to--I cannot speculate. I do not
know why these have or have not been----
Senator Shelby. You might not speculate, but you can
evaluate the real data.
Mr. Mayer. Our report clearly--you know, I have done a lot
of writing on this, some of which is in my testimony, more of
which is written on a Web site that we have been maintaining.
We have been arguing this, Dr. Hubbard and I, since September
of 2008 when we saw the mortgage spreads go crazy and, you
know, conservatorship not fixing things.
Senator Shelby. Dr. Zandi, I know the time has eaten away,
but in fairness, what is your view here?
Mr. Zandi. Thank you. Yes, I think it is very important for
Congress to resolve Fannie and Freddie, that as long as they
remain in conservatorship, nothing good happens. Of course, you
have many other moving parts that you need to nail down before
you can actually resolve Fannie and Freddie. The private
residential mortgage securities market is, as you know, dead in
the water, and that needs to be revived before we can resolve
Fannie and Freddie.
But I agree with you. You know, the longer they are in this
no-man's-land, it is a problem for everybody.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Johnson. Senator Reed.
Senator Reed. Well, thank you very much, gentlemen, for
your excellent testimony.
Dr. Zandi, longer term we have to do lots of things, but in
the short term, I think that both you and to a degree Dr. Mayer
are saying there are steps that the conservator could and
should be taking right now. In fact, one of the recent
Presidential proposals through HAMP, as you have noted, Dr.
Zandi, for principal writedown modifications has given
additional resources potentially to FHFA and the Fannie and
Freddie to do that. And the question, I think, is why is it--it
should be increasingly difficult for FHFA to argue that they
cannot do it because of their obligation to preserve the
portfolio, et cetera, et cetera, et cetera, when, in fact,
there are resources available that will make the calculation
positive.
Just a final point, too. One of the themes that I sense out
is that, first of all, this settlement today I think is very
encouraging, but that essentially goes to the paper owned by
the banking institutions.
Mr. Zandi. Correct.
Senator Reed. And as many have noted, banking institutions,
good businessmen and women are making decisions about principal
writedown mortgage modification not because they want to help
the homeowner, but they are looking at their shareholders'
bottom line. So the business logic here is to get FHFA to do
what business is doing and use resources that have been
recently made available to start principal writedown
modifications and add further momentum. And that can be done
instantaneously. They do not have to wait for new statutory
authority. Is that accurate?
Mr. Zandi. Yes, I think first I would like to say the
principal goal of the conservator should be to preserve
taxpayer money, right? I mean, we have ante'd up $160 billion
for Fannie and Freddie, and this is getting to be very costly,
and I think it is prudent that the regulator focus on that.
But in that context, I think there are many things that can
and should be done. I think, for example, mortgage refinancing,
facilitating more mortgage refinancing--it perplexes me why
FHFA is not being more aggressive here in trying to promote
that activity.
Now, we had HARP II, the juiced-up HARP, and that is
progress. But even to this day, for example, I think HARP II
rules--and we can describe what they are, but it facilitates
more refinancing--should be extended to all Fannie and Freddie
borrowers. But Freddie has different rules than Fannie, and it
is just mucking up the process. This makes no sense and should
be resolved, as an example.
Moreover, REO to rental I think everyone agrees makes--you
know, it is a slam-dunk thing, I think. And I know it is a hard
process and we need to have pilot projects, and we are not sure
exactly--and we do not want to give too much away to investors.
I am on board with that. But it feels to me that this should be
moving at a much greater pace.
Moreover, the third point, to your point, I am perplexed. I
have my models, and I look at this data very carefully--with
the argument that Fannie and Freddie do not believe in
principal writedown, they believe in principal forbearance.
Well, under some circumstances, under reasonable assumptions,
principal writedown works better than principal forbearance.
Just to completely say we are not going to have any principal
writedown in a targeted way so we do not have moral hazard
issues, I mean, I understand that. I think that is just a step
too far.
So, as you can tell from my voice, I am frustrated. I am
frustrated by it.
Senator Reed. You are not alone because, you know, I have
been arguing in REO, for example, for 2-plus, 3-plus years to
move on that. That seems to be sort of something that is
obvious. And I think, Dr. Mayer, you, too, feel that the REO
issue is something that should be moved aggressively.
Mr. Mayer. Yes.
Senator Reed. It should have been done.
Mr. Mayer. Right. I should say one thing, which is I do
advise a group of a startup company that is working in the
space of trying to acquire homes on the rental market. I should
say that straight off. They are not actually deploying capital
at the moment, but I do believe in this as a really, really
important step to move the market forward.
I would respond to your question and also that of Senator
Shelby at the end about data and how to account for this. We
have posted an incredibly detailed model that goes through the
profitability of a mass refinancing program to all the various
parties. This model is, I think, a state-of-the-art model and
probably better than anything that we have seen out there in
terms of analyzing the costs and benefits, because I agree with
Dr. Zandi and Dr. Swagel, and I think the Members of this
Committee, that, you know, conserving and preserving assets is
an incredibly important goal.
If the GSEs were to do a refinancing program where they
added a modest increase in the G-fee--because many of the old
G-fees were as low as 12 to 15 basis points. If they were to
raise that G-fee on refinanced mortgages to 25 to 35 basis
points, which would still leave enormous benefit for
homeowners, a mass refinancing program would be enormously
profitable for taxpayers and for the GSEs and would actually
help wind down the process by reducing credit losses in the
future.
The problem is that that analysis is hard to do without
also considering the portfolio. We have done very careful work,
and if you sort of tell me that, gee, the portfolio has X, Y, Z
bonds in it--and, of course, the conservator has never made
public what kinds of bonds are sitting inside the portfolio.
But if you did that and you told me, gee, you know, 25 basis
points was not enough but 35 basis points would do it, given
that many of these borrowers have a 6-percent mortgage and they
could be refinancing in something below 4, there are 200 basis
points of spread there. There has got to be a place that that
is profitable for the GSEs, even considering their portfolio,
profitable for taxpayers. In fact, we even go through and
calculate the opportunity costs for the Federal Reserve because
we also believe that we should look at this in a very holistic
sense of the Government to include all the mortgages that the
Federal Government holds.
The other thing I would sort of say is I completely agree
on the mortgage modification. If you look, for example, in
2008, GSE modifications were about 40 percent less effective
than private lenders in their own portfolio. In 2009, same
thing. In 2010, the GSEs caught up, and their modifications
started to have similar effectiveness to private portfolio
lenders. In 2011, we are back to the GSEs' modifications being
about 40 percent less effective; that is, the redefault rates
are about 40 percent higher than what the private sector is
doing with their own loan modifications.
I think that is the best place to look, is when somebody
owns a loan outright, what do they do with it? Well, oftentimes
they sell it to special servicers whose job is to write down
the loan, modify it, get the people out, pay them, do whatever
they need to do to work forward. And the GSEs have consistently
lagged behind the private market, which sort of tells me that
what they are doing is not what is the state-of-the-art. And if
they cannot do that themselves, they should be selling off some
of those NPLs into the market and letting the private sector do
the kinds of things the private sector would do well, which I
suspect would get some of the principal modifications that many
people hope for, but would also sort of, I think, get us out of
the bureaucracy that we are in at the moment.
Senator Reed. Well, thank you.
Dr. Swagel, I must apologize because my time has long been
exceeded, and my colleagues are waiting, and they have
brilliant questions to ask, much more so than I. But just one
point is everything you have talked about I think can be
accomplished with the current authority of the conservator
right now. In fact, my sense is you are arguing that this is
really what he should be doing because of his obligations under
the present law to, you know, stabilize and to recover as much
assets and be as businesslike as possible. You are nodding your
heads. I will take that as unanimous.
Mr. Zandi. Yes.
Mr. Mayer. Yes.
Mr. Swagel. I would just make a very small point, if it is
OK.
Senator Reed. Can I just--go ahead, please.
Mr. Swagel. It ultimately comes down to numbers and the
costs. The Federal Reserve is a substantial owner of mortgage-
backed securities and would be affected by this. Mr. Garrett
asked Chairman Bernanke last week, ``You are in favor of this.
What is the impact on you?'' And the Fed has not done the
calculation. It is just puzzling that they are affected and
have not done the calculation. I wonder if there is a message
there.
Senator Reed. Hopefully they will do the calculation, and
it will be the right calculation.
Chairman Johnson. Senator Corker.
Senator Reed. Thank you.
Senator Corker. Thank you, Mr. Chairman, and I thank each
of you for your testimony, and I appreciate your being here.
I think that all three of you have said that Fannie and
Freddie staying in their present state in perpetuity is
probably not a very good thing, and in order for them to wind
down from their dominant position, what we have to do is really
bring the private sector back. They are on strike for lots of
reasons, and what we have to do is build a mechanism to bring
them back in and have a real TBA market on the private side and
make sure that reps and warranties are actually there and there
is actually the types of underwriting that they can expect to
take place. And if we can figure out a way to do that, then we
can really begin to diminish the amount of reliance we have on
Fannie and Freddie. Is there general agreement on that? And
that the longer they stay like they are, actually more mischief
kind of comes into play.
I would love to have your responses very briefly to
Congress, for instance, for 2-month payroll tax adding a G-fee,
if you will, to all Fannie and Freddie loans over the next 10
years to pay for that. Is that something that is good for our
housing industry? I think I get three noes.
So I hope there is a way that--we have a bill out there
that is just a marker for discussion. We want to attract one of
our great friends on the other side of the aisle and know that
changes have to be made to cause that to happen, and we only
did that to begin conversation. We never offer a piece of real
legislation until we have a Democratic cosponsor, but I sure
hope you will weigh in on that.
But let me move to another question. You know, we have this
chart of underwater loans, and it is pretty interesting how
they are concentrated more fully in a handful of States. Dr.
Zandi, what is the reason for that? I mean California and
Nevada and Arizona and Florida, why is the concentration so
heavy there?
Mr. Zandi. Well, as you know, that is where the housing
bubble was its most significant.
Senator Corker. Well, I know that, but why was that housing
bubble predominantly in those States?
Mr. Zandi. Well, a number of reasons. One key reason is
that these markets generally are supply constrained. It is hard
to build. So if you get any pick-up in demand for housing,
because of the supply constraints house prices start rising
very quickly. And once house prices start rising quickly, like
any asset market, people start forecasting with a ruler, and
they speculate.
Senator Corker. Speculation, yes.
Mr. Zandi. And then adding fuel to this fire was, of
course, very easy credit, so private label, subprime lending,
Alt-A lending, Option ARM lending provided the credit, the
juice to speculate, and you saw this surge in prices.
Senator Corker. I knew you were going to say that, and I
thank you. So----
[Laughter.]
Mr. Zandi. Uh-oh, that sounds scary.
Senator Corker. I enjoy so much working with you on the
auto deal.
Mr. Zandi. I got in some kind of trap.
[Laughter.]
Senator Corker. I say this to my friends from Colorado and
Oregon and Virginia and Alabama and Rhode Island and South
Dakota. I guess as I start looking at the principal reductions,
I have supported what Dr. Mayer said from the very beginning 3
years ago, that if Fannie and Freddie--if there were spreads
there and there was an opportunity for people to refinance at
lower rates, let us have at it within those institutions. It
made them strong, it made the homeowner stronger.
You start getting into principal reductions, and whether
using existing TARP money, which, you know, our country still
owns, or whether you are doing it through other mechanisms, in
essence what we are doing is really creating a transference of
wealth from Tennesseeans and Alabamans and Virginians and
Oregonians and people from Colorado, a transference of wealth
from their taxpayers to people in these States that speculated.
Now, why would we do that? It just makes no sense to me that
everybody has gotten on this bandwagon of principal reduction
when the creation of this bubble was exactly what you said.
Now, I want you to tell me how I go back home to Tennessee
and say that this is a great policy for you to send a check up
each year to the Treasury and let them write a check to Fannie
and Freddie for losses because we are going to do principal
writedowns.
Now, explain to me how that makes sense and why maybe it
would not be better just to say in California or Florida, in
places where people did a lot of speculation--which, by the
way, drove a lot of revenues for those States, I might add.
Wouldn't it be better if those States themselves put up the
money for those principal writedowns? I mean, it is a
geographic issue. It is not a national issue. I do not
understand why people have not thought about it in that way.
I would love for you to respond to that.
Mr. Zandi. Yes, you make very good points. This is a very
difficult problem, and fairness is, you know, at the heart of
it. You know, there are moral hazard issues. How do you do this
so you do not set off a firestorm?
Senator Corker. Right.
Mr. Zandi. I hear what you're saying, and I understand what
you are saying. This is not something that I would----
Senator Corker. Well, tell the farmer in west Tennessee the
answer to that question.
Mr. Zandi. OK. I would say a couple things.
The first thing I would say is that I would disagree a bit
with your characterization that this is only a California and
Florida----
Senator Corker. No, it is not ``only.'' All of our States
have those issues, but it is hugely disproportionate.
Mr. Zandi. It is by my calculation, 14.6 million--and I can
provide it for your State of Tennessee. It is not
insignificant. There are a lot of homeowners in your own State
that are underwater.
Senator Corker. But most folks in other States played by
the rules. They were not going and specking a housing bubble
with almost no money down.
Mr. Zandi. I am not so sure. Subprime lending was pretty
widespread.
Senator Corker. Well, tell me the answer for the west
Tennessee farmer.
Mr. Zandi. Let me get to the more fundamental point.
Senator Corker. All right.
Mr. Zandi. The more fundamental point is that I think we
are very close to solving this problem, to putting an end to
it, and getting house prices moving north. And if it requires a
half million to a million principal reduction mods that are
very well targeted and done by the banking system and some
hopefully by the GSEs, then I think that is a reasonable cost
to make a reasonable thing to do to get the housing market on
solid footing, moving north, and our recovery engaging. And
this will benefit all Americans, not just Floridians but people
in Tennessee who are unemployed.
You have to think about this--it is almost--you know, sort
of the metaphor is if someone else's house is on fire and you
are in the same block, you have to put that fire out because it
is going to save your block. Same deal. I know that does not
resonate particularly with the farmer in Tennessee, but the
reality is, I think--it is my judgment--that that is----
Senator Corker. Let me ask you another question. You know,
I have really enjoyed working with you on numbers of things,
and I always appreciate the input of all three of you. The
other thing we are looking at doing, we are going to take--I
understand about refinancing Fannie inside Fannie and Freddie
inside Freddie. But the fact that we are now going to take
private loans and banks and if they are going to be--let us say
they are 5.5, 6 percent rate and they want to refinance, we are
going to transfer those over to FHA, and the ones that are
going to be transferred obviously are the ones that are
problematic.
Do you think that is a good idea, to take from private
lending institutions, transfer them on to the Government's
balance sheet? Do you think that is a good idea? I am just
stunned by that.
Mr. Zandi. Well, I would put that at the bottom of the list
of things that I would be focused on. I think the most
important thing is to facilitate more Fannie/Freddie
refinancings and more FHA refinancings. If at the end of the
day there is a long list of things that have been proposed
here, I would put that near the bottom.
Senator Corker. Well, now, that is one of the top-list
things that is being proposed. I would love to have the input--
--
Mr. Zandi. Well, can I say, by my calculation, if you look
at the benefit of these various refinancing proposals, the
biggest benefit is to refinancing more Fannie, Freddie, and FHA
loans. That is where----
Senator Corker. Within Fannie, Freddie, and FHA.
Mr. Zandi. Exactly.
Senator Corker. I agree with that. And I do not know why we
would not do that. I agree that is an absolute no-brainer.
Is it OK if the other two respond to taking private lending
institutions and transferring them over to the FHA books as
thinking that is good public policy?
Chairman Johnson. Would you please make it brief?
Mr. Swagel. I will be very short, yes. FHA is already about
$50 billion under--is going to need a $50 billion or maybe a
$100 billion bailout. I think it would be difficult to
countenance transferring over more risk. A year ago the
Treasury report on GSE reform said we should shrink the FHA
from its 30-percent share back to 10 to 15 percent. And now
they are going in the opposite direction. So it is puzzling.
Mr. Mayer. Any such program that involved taking on the
risk of loans from private lenders I think should be
predominantly funded through the owners of those mortgages.
There might be ways to do that, but I think that would be an
important thing to look at in this regard.
Chairman Johnson. Senator Warner.
Senator Warner. Thank you, Mr. Chairman, and I appreciate
the comments of my friend from Tennessee. I have enjoyed
working with him, and I want to go back to his kind of somewhat
similarly answering I think a really legitimate issue that you
raised. As somebody on the principal reduction--and Lord knows
as somebody who spent more time on the business side than I
have on this kind of job, I absolutely start with the same
premise that you start with. But I do kind of think it is more
than just certain States' problems. We do have now $160 billion
worth of taxpayer exposure. The notion that one of the tools in
the toolbox, as long as it was narrowly defined that we would
exclude that tool from being used, particularly when we see the
private sector--and I think I go back to Dr. Mayer's comments,
that the private sector is using that tool and has a more--is
it a 40-percent lower redefault rate than the GSEs?--to me
argues--as hard as I would say if somebody would match my
capitalist credentials with you, you know, that we are in such
a hole here, and this has such a potential effect on the
overall national economy that I would not take that tool out of
the toolbox. But, you know, you make a great--I think you make
a very strong, strong case on the other side.
I guess one of the things I want to start with here is that
Senator Reed made mention a number of times about the fact that
the conservator can go ahead and take more actions than he has
taken at this point. It seemed to me, Dr. Mayer, that you were
saying--and I also agree with, I think, Senator Shelby and
Senator Corker that we need to move on fuller GSE reform. But
one of the things that I think, Dr. Mayer, you were saying, I
just want to make clear that you were saying perhaps as an
interim step that we need to legislatively make clearer to the
Administrator that you ought to not put these further
impediments in terms of unwinding the portfolio, that they need
to be--he needs to move more aggressively on the refinancing
opportunities. Did I hear that in your testimony?
Mr. Mayer. Yes, I think I fully appreciate the challenges
we all have with trying to figure out what the future of the
U.S. mortgage finance system is going to look like. That is an
enormously challenging problem, and, you know, I am an
economist, not a political scientist, but I know we have an
election coming, and, you know, there are a lot of issues going
on here.
That said, I think there are a number of areas which should
be in common ground across the parties that, unfortunately,
would require legislation because of the existing impasse in
the institutions. I liken it to the responsibility of a board
of directors when the CEO does not step in on his or her own to
manage an existing conflict of interest. That means that the
board of directors, unfortunately, has to step in and manage
that conflict of interest. And so I think----
Senator Warner. The conflict, again, to be clear, you are
saying implicitly, is the conflict between preserving taxpayer
dollars at the end of the day and the macro goal of one trying
to refinance and also trying to have overall economic health?
Is that----
Mr. Mayer. No, no. Actually, the conflict of interest is
more mundane than that, so to speak, which is the conflict of
interest is they are managing a portfolio of mortgages, of
hundreds of thousands of dollars----
Senator Warner. In Freddie's circumstance that was exposed
recently by NPR.
Mr. Mayer. Right. You know, but long before NPR, many
people had been talking about these issues, and, you know, the
conservator's comments were not to actually deny that there was
a conflict of interest, only to sort of say that he instructed
the GSEs in November of 2011 that they should not consider
their portfolio. But that conflict of interest has existed for
years, and I think it is still the only plausible explanation
for some of the comments that Dr. Zandi made about restrictions
on refinancing that exist today. And so I think, unfortunately,
that requires legislation.
Senator Warner. I would like to--again, I do not want to
take beyond my time, but I would like to get Dr. Swagel and Dr.
Zandi. It does seem to be that there is this common agreement
that we would all agree, whether some of the Administration's
new proposals merit or not, that the refinance opportunity, at
least within the GSE portfolio, we ought to be moving more
aggressively on it, and what else should we do--do you believe
that it requires legislation? Or what else should we do to urge
those actions to place? Dr. Swagel and Dr. Zandi.
Mr. Zandi. Go ahead.
Mr. Swagel. The refinance issue is a tough one. There are
people who are paying a higher interest rate than it seems like
they should. On the other hand, someone who has lost a job over
the last 3 years of the weak job market, it is not clear that
taxpayers should take on the additional risk.
One other note is that the proposal from the Administration
specifically is limited to people who have been essentially
current on their mortgage for a year. So in terms of preventing
incremental foreclosures, the impact will be modest because the
proposal is restricted to people who look like they are doing
OK.
So that is what I mean, it is really a stimulus, it is
writing people a check. That might be the right thing to do,
but it is not foreclosure avoidance, mainly. It is mainly----
Senator Warner. Wouldn't it be by definition, if they are
current, then their chances of default would actually be less
as well?
Mr. Swagel. Absolutely. Absolutely.
Mr. Zandi. Yes, I would disagree with Dr. Swagel. I think
this is a slam-dunk. You should work very hard to facilitate
more refinancing through Fannie, Freddie, and FHA loans. And I
think the Administration's proposal to extend HARP 2.0 rules to
all Fannie, Freddie, and FHA borrowers is a good one. It is not
only--and I should say this means a lot to a lot of people.
Just simple calculations, I think at least 5 million homeowners
at current mortgage rates, say fixed mortgage rates stay around
4 percent, about 5 million homeowners could refinance over the
next couple of years. And I think that makes a tremendous
difference to those households.
Senator Warner. How do we make that urgent? And then I will
stop now, but just do you think we just need to continue to
make that point, or do you think, as Dr. Mayer said, you
actually need legislative direction?
Mr. Zandi. I think at this point I would go down the path
of writing legislation and hopefully the FHFA, you know,
engages. So, for example, there is a piece of legislation I
have seen floating around--Senator Franken, I believe--trying
to require that Freddie adopt the rules that Fannie has adopted
with respect to refinancing. Something along those lines. That
is getting really into the weeds, and you would hope that, you
know, this would be done administratively, not legislatively,
because once you do legislation, things get complicated, right?
You do not want to do that. But I think I would start moving
down that path, and hopefully that lights a fire.
Chairman Johnson. Senator Merkley.
Senator Merkley. Thank you, Mr. Chair, and thank you all
for your presentations.
The perspective that folks bring to my town hall is that
the Government intervened with enormous support for our major
financial institutions, and as we know, a few months ago that
included additional support from the Fed--and I am including
the Fed as part of the definition of ``Government'' here--of
trillions of dollars of loans, more than $1 trillion. It rolled
over several times, which is what led us to that $7.7 trillion
figure. And folks say, you know, if the Government can
intervene with so much help and such low interest rate money to
help our major financial institutions, why can't they intervene
in that manner to help ordinary citizens wrestling with a
housing market that was put into a bubble by policies that
allowed predatory loans and teaser rates and steering payments,
if you will, kickbacks, an enormous set of Government policies
that drove that bubble?
I raise this because I think it is important to return to
that framework, and as we think about this question of
refinancing, it is helpful to have that citizen's voice in our
mind. It is easy for us to talk about those loans that are
currently guaranteed by the Government by chance; that is, when
someone comes into our casework team and says, ``Would I
qualify for what is going on?'' do you have a Fannie or Freddie
mortgage? Because if you do, then you may be able to get
refinanced. But they have no idea where their loan has been
sold until we help them find out.
So you have so many families out there at higher interest
rates who are wondering, well, why should it just be a matter
of the lottery, that if my loan happened to be acquired by
Fannie and Freddie, I qualify for this improved HARP program,
but otherwise not? And given we have been so generous in
helping financial institutions--I mean, let us not just look at
the economy from the top. Let us look at it through the success
of families. And certainly the economy in Oregon depends upon a
successful home ownership market.
We sell grass seed, which is down the tubes without people
buying homes. We sell nursery stock. We sell lumber. We sell
insulated doors and windows. And that is true for virtually
every State. A piece of their economy is driven by the housing
market.
I have listened to the conversation about let us focus on
those loans that happen to be with Fannie and Freddie, but the
rest, well, maybe we just leave those people adrift, I feel a
little bit of pushback that I wanted to share with you.
I do feel indeed like the conversation about the conflict
of interest, Mr. Mayer, that you have been pointing out with
Fannie and Freddie, where they have resisted financing because
they have high-interest loans. Well, this is an argument that
one can also make on the other side of the non-Fannie/Freddie
world and part of why exactly home modifications have been so
difficult to achieve. Maybe you would just like to share a
little bit about that.
Mr. Mayer. So, first, I share your concern about the
seeming unfairness of how the mortgage market and the economy
have worked at the moment, and I think that that is a very,
very deep concern, and I hear it a lot because I, you know, do
talk shows and NPR and other kinds of things, you know, and I
talk to a lot of people--not as many as you do, certainly, or
as any of the Committee Members do, but I share that, and I
have relatives who are locked into these situations as well. So
I feel that very deeply. The challenge is how to do that within
the existing structure.
I think there are ways that we could think more creatively
that fund something a little bit like the Home Owner Loan
Corporation, for example, or some other sort of structure where
the funding does not necessarily have to come from taxpayers,
but may also come from mortgage holders or other kinds of--you
know, I think there are some creative structures that one could
build to do this in a way that would encompass more people but
at the same time be respectful of taxpayers' obligations as
well. And I do think we have an obligation to think harder
about those things, so I think the Administration bringing this
up is important. I am not sure about a bank tax--how I would
fund it. I would like the incidence of this to be on the
holders of the mortgages so they understand their cost to that.
I would also sort of say that I think there are other--we
could help those people also by doing other kinds of reforms in
the market that help stabilize housing and that bring private
capital in as well. There is no single tool that is going to
fix this. It is going to be a variety of things. But I do think
that there are going to be ways, if there is bipartisan
support, to move this forward in a way that is respectful of
taxpayers but is inclusive of a broader group of people, and I
think those are both important concerns.
Senator Merkley. The 5 minutes disappears magically, so
quickly. So thank you. The HOLC model, there are many, many
variants of it. The President has put out one variant of it.
There are many other ways to tackle this, but I feel like time
is passing; that is, efforts that should have been concluded
and put in place very quickly 2 to 3 years ago, we still have a
window now, and we should get it done.
Chairman Johnson. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. And let me thank
several of you who have appeared before our housing
Subcommittee and given a lot of great insights, and I
appreciate it, as do the Members.
You know, I have, as the Subcommittee Chair, been listening
to a lot of our colleagues, and there seems to be a pretty
strong universe of those for the refinancing camp. And, you
know, I fully appreciate the question of the conservator's
challenge in conserving and preserving assets. The question is
whether you do that for a foreclosure or refinancing to a large
degree, because it is, you know, very well if it is a default
option, it is going to be one of those, too.
And so I do not get it when you could create a large base
of continuing responsible borrowers at the end of the day and,
therefore, solidify a significant part of the housing market
and have an economic stimulus, because if I have been patching
the roof because I cannot afford to, you know, get a new one
and now my mortgage rate is down and I have some extra money I
am going to go ahead and get the new roof, and that means that
there is going to be a stimulus in the economy as well as a
foundation for the housing base.
So that makes me wonder, then, and I would like to ask you,
Dr. Mayer, when I hear about Freddie Mac having investments--
some call it ``bets''--against the homeowners that are contrary
to the interests of homeowners, is that one of our challenges
here? Because I do not think people make investments to then go
against their investments.
Mr. Mayer. Right. I do agree that this is a very serious
concern. In my written testimony, I go through in fairly good
detail, particularly in the conclusion, how it is that that
ended up in a situation where well-meaning people ended up
doing things that present an enormous appearance of, you know,
a significant conflict of interest and a bet against
homeowners. And I think you do not have to have--you know, you
could believe, as I think was reported in that story, that
paying $2.5 million salaries to the people that created those
instruments might well have been involved in the process. I
know many Members of Congress have been very critical of the
salaries paid to, you know, some of the executives in those
organizations.
But I think there are--the conflict of interest of an
organization that controls an outcome and also holds securities
that are dependent on that control make it very, very difficult
to manage the portfolio, because if you try and sell those
bonds, people in the market look and say, ``But I do not want
to buy them because the only reason you are selling them is you
are about to refinance them 10 minutes later.'' And history
says that Fannie Mae and Freddie Mac--particularly Freddie
Mac--actually did that.
Senator Menendez. So do you think these investments that
influence Freddie's policies may very well have discouraged
homeowners with high-interest mortgages from refinancing?
Mr. Mayer. Yes, I think they have to do, and I go through
the logic in my written report. I would not follow the
conservator's argument that this is $5 billion in a $600
billion portfolio so who cares, this cannot really have driven
anything. I think that argument is not right because, one,
these are derivatives that are based on probably, you know, $26
to $30 billion of mortgages, not $5 billion. You never value
derivatives based on the value of the derivative. You value it
based on the value of the underlying.
But the second is that almost surely many of the other
mortgages in their portfolio look exactly--MBS--look exactly
like these. And so without disclosure of what the whole
portfolio looks like, I really think it is--we cannot conclude
that that conflict of interest is----
Senator Menendez. Do we know if Fannie or Freddie have
other investments or financing arrangements that are contrary
to the interests of homeowners?
Mr. Mayer. I think the mortgage-linked amortization notes
that I talked about earlier give Freddie Mac the same economic
interest, which is they finance over a 10-year period holdings
of high-interest rate mortgages, leaving them with a strip or a
spread which is 3.96 percent that lasts only as long as the
refinancing does not occur or default does not occur.
Senator Menendez. Well, this is a real concern to me
because I do not understand why you make a bet that you can
largely control the outcome of and want your bet to lose. I
think that is against human nature. So I am not quite sure
these firewalls exist in a way that are not affecting policies,
and that is a problem.
Let me ask any one of you, do you think the $25 billion
State-Federal foreclosure settlement is a good deal? Do you
think that that is the right amount? There is a lot of angst
out there in the country that says $25 billion fell short of
the mark.
Mr. Zandi. Well, I do not know what is appropriate in the
context of the misdeeds that were done. I do think $25 billion
is substantive and can make a difference in terms of responding
to the housing crisis. I think if $15, $20 billion go to
modifications and some additional refinancing, I think that is
substantive, particularly if it is executed over the next 12 to
18 months. So is $25 billion the right number? I do not know.
But it is a substantive number.
Senator Menendez. Do any of you have a view on that?
Mr. Swagel. I would just say we should expect a modest
impact and it will help some people. The biggest value is
removing the uncertainty and having the housing market move
forward and origination restart.
Senator Menendez. One last question. We talked a lot about
refinancing. I have been pursuing and am introducing
legislation today that creates a pilot program at the FHA and
the FHFA that would reduce principal writedowns to 95 percent
loan to value in exchange for the bank or the investor getting
a share of the profits when the home is sold or refinanced down
the line, generally known as ``shared appreciation mortgages.''
I think it takes away some of the concerns that Senator Corker
was talking about. It is not a complete question that we raise
very often here about the moral line. You are getting a
writedown, but you are also giving up the possibility of
appreciation in return for the writedown.
What do you think of that as a concept?
Mr. Zandi. I think that is an excellent idea. I wish I had
thought of that in my response to Senator Corker. But I do
think that that is appropriate, that there should be shared
appreciation of any principal writedown, and perhaps clawback
provisions, too, if homeowners do not execute in the way that
they are contracted to do in the principal reduction
modification. So, I think there are a lot of moving parts here,
and I am sure you know this may not work out as you would hope
for because there are just so many things going on. But I think
given that we have got this issue for the next 3, 5, 7 years, I
think this is entirely appropriate to do. Hopefully we will
learn from this and this will become part of the toolkit going
forward.
Mr. Mayer. I would support the idea of trying to look for
ways that--as you pointed out, the private sector are already
managing these mortgages, and we know some of them are using
shared appreciation mortgages. And I think in legislation, as I
note in the written comments, we should actively call for such
pilot programs modeled off of private sector initiatives.
The other thing I would sort of just point to in that
process is one thing that might help in this legislation would
be taxpayers could, in fact, have a clawback over a longer
period of time, which is to say homeowners could promise a
share of not only the appreciation of the existing home but
future homes to help pay for that. That could be done through
the existing Tax Code which has a deferral of certain capital
gains on homes and would be a way of making such a proposal
even more profitable or break even for taxpayers as well.
Mr. Swagel. I would just say that the shared appreciation
mortgage might be useful for some people. Again, I would worry
about a limited impact. People just do not like to share their
home with the bank or the taxpayer. We have some experience
with the so-called Hope for Homeowners program that was in the
2008 legislation, and there are more people in this room than
were helped by that program. So it is just a limited----
Senator Menendez. I appreciate it. Ocwen is doing this as
one servicer who is doing this pretty successfully, and we
think it can be, as referred to, a tool within a larger--thank
you, Mr. Chairman.
Chairman Johnson. Senator Hagan.
Senator Hagan. Thank you, Mr. Chairman. And thanks for your
testimony today.
I know the President recently released his plan to help
responsible homeowners and heal the housing market, and one
pillar of this plan is to establish a broad-based refinancing
plan for responsible homeowners. I understand that in both
public and private refinance plans there has been a problem
with take-up and lenders will present borrowers with
refinancing plans that would lower their interest rates and
monthly payments, but that some borrowers are simply not
choosing to sign up.
Can you shed any light, any of you, on this problem and
provide your thoughts on what might be done to remedy it?
Mr. Zandi. Well, you are absolutely right, I think there is
a problem with take-up, even when it ostensibly makes sense
from a financial perspective for the homeowner to engage in the
refinancing.
I do think that part of the problem in the take-up is that
people are just very nervous that if they come forward, they
are not sure what else in their financial lives is going to be
uncovered and what other kind of damage could be done to their
finances as a result. So I think it is very important, when
servicers go to try to execute on these refinancings, that they
make it very clear that, you know, they just want to make sure
you have a job and that is it. So you have to be very, very
clear that there are no other strings attached. All we want to
do is make sure you have got a job, you are getting paid. If
that is the case and you are current and you meet these other
very limited restrictions, then you are good; we are going to
refinance you.
The other thing is I think financial literacy obviously is
a very significant problem. People are just confused. They do
not know, they do not understand. And so I think anything that
could be done to really educate people as to, this is really
going to help you and make it very clear on one piece of paper,
this is your mortgage, this is your monthly payment, this is
exactly what is going to happen, you email it to them or you
put it in their mailbox, then, you know, hopefully that will
increase the take-up.
So I think it is a matter of communication and transparency
with respect to----
Senator Hagan. And how would you go about doing that?
Mr. Zandi. Well, I think when Fannie and Freddie and the
FHA sit down with the mortgage servicers and talk about how
they are going to execute on this plan, if, in fact, we move
forward on it, then these are the kinds of things that they
discuss. How are we going to do this so that we do get more
take-up?
Mr. Mayer. I agree that take-up is an issue, but I actually
think that the right approach is one word: competition. We did
not ever have to sort of push people to take mortgages. You
know, in 2002 and 2003, there were 35 million new mortgages
originated in this country. Those were predominantly not
subprime loans. Some of them involved cash-out refinancing. But
what drove that was competition among servicers for the
businesses, and I think one of the most significant barriers to
the take-up and one of the reasons that HARP in all its
incarnations, including potentially this one, do not work is
because you lock the existing servicer and you give them a big
advantage relative to other servicers.
So what you need is not only the servicers who are in that
room, but people who want to start a business as servicers who
are not sitting in that room should have the opportunity to
enter and take the business of the existing parties if they do
not serve their customers well, of which there is some evidence
is not happening. They are going to find lots of ways to reach
people that is not just by mail. They are going to advertise on
the Internet. They are going to be on late-night TV. They are
going to figure out ways to do it because it is in their
financial interest to do it, and that competition is also going
to drive down these incredibly high spreads between retail and
wholesale mortgage rates.
So my view is that we should be doing everything we can to
open this up to competition. We should put out a list
protecting privacy of borrowers who have Fannie and Freddie
loans. Your mortgage is already a public record in virtually
every State in the country. That should be available to any
servicer, existing or not, who wants to come and say, ``These
are people who are eligible for this program, and I will jump
in.'' My bet is that somehow those existing servicers will
really quickly discover how to refinance their existing people
if they think they are going to lose that servicing business.
Senator Hagan. Thank you.
Mr. Swagel. I would just add very briefly, it is a tough
issue. A borrower in trouble is being pounded by the bank, you
know, ``Pay up, pay up,'' and then gets a call, ``OK, now we
want to help you,'' and it is hard to know. So nonprofit
counselors have been a big success story, a big part of the
solution.
Just the other small thought is that it is a difficult
issue just because of the screening, trying to get the right
people to help, the more kind of screening you do to get just
the right people limits the effectiveness, and that is in my
written testimony as a concern I express about the White House
fact sheet, the announcement, is that they are trying to say,
OK, we want this to be no red tape, no hassles, but also no tax
forms, but only owner occupied, and those things do not go
together. You cannot make sure it is owner occupied if you do
not have tax forms and you do not have an appraisal.
So I just worry about the ability to implement the proposal
that the White House has proposed.
Mr. Zandi. Senator, could I say one other thing? Just one
other plug for the Administration's proposal, which is very
similar to the Federal Reserve's proposal, and this dovetails
with what Dr. Mayer is saying. The way this is designed is that
it is going to relax some of the reps and warranty features of
the refinancings, also the mortgage insurance companies, most
of them have given up rescission rights. This is very important
to the mortgage lenders, the servicers, and it is a reason to
believe that they are going to engage in a lot more competition
and do the kinds of things that Dr. Mayer has suggested.
So in the design of the proposal, there are a lot of good
reasons to believe that you will get more take-up because you
will have more competition. So just another reason why I think
you would want to execute on this.
Senator Hagan. Thank you. And, Mr. Zandi, your comment on
financial literacy is near and dear to my heart. When I was in
the State Senate, I mandated that financial literacy be taught,
at least a portion, in civics and education class in high
school, and it is certainly something that I am adamantly in
support, that you look at the financial crisis that hit, I
think we have got to do a better job educating our young people
in particular on financial literacy and the skills. You cannot
get by in the country today without understanding debt. You
really need to work on that.
Mr. Zandi. In my high school education, I learned how to
make a really good omelet. I had no idea what a mortgage was.
[Laughter.]
Mr. Zandi. I am not sure that makes any sense at all--
although I really make a good omelet.
Mr. Mayer. In my high school, the omelets were on the
ceiling.
[Laughter.]
Senator Hagan. Then I had one other question, Mr. Chairman.
Mr. Zandi, in your testimony you mentioned that Fannie and
Freddie have historically not engaged in bulk foreclosure sales
to investors or entered into agreements with property managers.
Do you believe that a properly constructed--any of you--REO to
rental program would reduce taxpayer exposure to Fannie and
Freddie?
Mr. Zandi. Yes, I think this is also a very fruitful area
for addressing the housing crash. I think that if you look at
property in REO, more than half now, and rising quickly, is at
Fannie, Freddie, and the FHA, and increasingly the share of REO
that is going to be Fannie, Freddie, and FHA is going to rise.
So anything that they can do to facilitate moving that REO to
rental as opposed to moving it through to a distressed sale is
really very positive for the economy.
The one problem is they have no experience with it and,
thus, it is taking them time to really get going. But Congress,
I think, should really be pushing this and asking FHFA to
really engage because this could reap enormous benefit.
And one other quick point. Again, this is a problem that is
going to be with us for a number of years, 5, 6, 7 years. So I
think we should--even if it does not reap benefit 6 months from
now or a year from now, this is something that should be
pursued very aggressively.
Senator Hagan. Thank you, Mr. Chairman.
Chairman Johnson. I would like to thank all of our
witnesses for your this and for being here with us today. A
strong, robust housing sector recovery is not just vital to our
country's homeowners; it is vital to our country's economic
strength. This Committee will continue to search for consensus
solutions to help responsible borrowers in these difficult
times.
This hearing is adjourned.
[Whereupon, at 11:37 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF MARK ZANDI
Chief Economist and Co-Founder, Moody's Analytics
February 9, 2012
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF CHRISTOPHER J. MAYER
Paul Milstein Professor of Real Estate, Finance, and Economics,
Columbia Business School
February 9, 2012
Good afternoon Chairman Johnson, Ranking Member Shelby, and Members
of the Committee. Thank you for inviting me to speak today. My name is
Christopher J. Mayer. I am the Paul Milstein Professor of Real Estate
at Columbia Business School. I have spent the last 18 years studying
housing markets and credit while working at the Federal Reserve Bank of
Boston and serving on the faculties of Columbia Business School, the
University of Michigan Business School, and the Wharton School of the
University of Pennsylvania. I also serve as Visiting Scholar at the
Federal Reserve Bank of New York.
The Federal Reserve recently issued a white paper documenting many
of the frictions in the housing finance system and suggesting how such
frictions have had a negative impact on the housing market and the
economic recovery. The Federal Reserve points out that ``Obstacles
limiting access to mortgage credit even among creditworthy borrowers
contribute to weakness in housing demand, and barriers to refinancing
blunt the transmission of monetary policy to the household sector.''
Despite record low interest rates, mortgage activity has fallen
precipitously. According to the Mortgage Bankers Association, the
dollar volume of mortgages originated to purchase homes in 2010 (the
last full year of data) has fallen to the same level as in 1992 (see,
Figure 1, at the end of this testimony). Although one might have
expected large numbers of refinancings because of low rates,
refinancing activity in 2010 was, in fact, at the second lowest annual
level since 2001 (Figure 2). So far, through the 3rd quarter of 2011,
mortgage lending is down almost 19 percent from the same period in
2010. By comparison, according to Equifax Origination Credit Trends,
new consumer lending is up 11.1 percent on a year-to-date basis in
November 2011 from the previous year, showing increases in nearly every
category including auto lending, credit cards, consumer finance, and
student loans.
Other housing data released since the white paper was published
continue to highlight the negative picture of the housing market that
the Federal Reserve discusses relative to the rest of the economy. S&P/
Case-Shiller indexes for 20 cities in November fell 1.3 percent from
October and 3.7 percent for the full year, both larger decreases than
anticipated and stoking fears that home prices might start falling
again if foreclosures pick up, as they inevitably must. Lender
Processing Services reports that 8.15 percent of mortgages are
delinquent and 4.12 percent of mortgages are in some stage of
foreclosure; both numbers that are nearly identical to June 2011. The
share of mortgages that were current 6 months earlier but seriously
delinquent now is higher than it was in June 2011. In other words, even
as the labor market has started to improve, the housing market remains
mired in difficulties.
Stepping back, it is important to understand the role of Government
interventions in the housing market and the unintended consequences.
After housing prices went into a free fall in 2007, private mortgage
credit collapsed shortly afterwards. Newly issued private first
mortgage securitizations, which once were nearly a trillion dollars per
year, fell to almost zero. Government sponsored entities Fannie Mae and
Freddie Mac (the GSEs) along with the Federal Housing Administration
(FHA) quickly came to dominate the market. Yet soon the bond market
became leery of lending to the GSEs, which did not have an explicit
guarantee on their debt. With their solvency in doubt, the Federal
Government backstopped the GSEs by putting them in conservatorship in
September 2008. The Federal Housing Finance Agency (FHFA), an
independent Government agency and previously the GSE's regulator,
became the conservator, taking over management of the GSEs. As well,
the Government provided an explicit guarantee on their debt. The
Government began further backing the GSEs when the Federal Reserve
announced at the end of 2008 that it was beginning the purchase of what
eventually became nearly $1.25 trillion of GSE securities.
Fannie Mae and Freddie Mac Under Conservatorship
In 2008, Congress passed the Housing and Economic Recovery Act
(HERA). Under HERA, which tasked the Director of the FHFA to ensure the
GSEs meet a number of conditions, including: \1\
---------------------------------------------------------------------------
\1\ See, H.R. 3221-11. I have abbreviated the rules to focus on
the relevant parts of the legislation for this testimony. This is not a
complete list of all legislative requirements.
1. ``each regulated entity operates in a safe and sound manner . . .
---------------------------------------------------------------------------
''
2. ``the operations and activities of each regulated entity foster
liquid, efficient, competitive, and resilient national housing
finance markets . . . ''
3. ``the activities of each regulated entity and the manner in which
such regulated entity is operated are consistent with the
public interest.''
Soon after taking over conservatorship of the GSEs, Director James
Lockhart restated the agency's mission: \2\
---------------------------------------------------------------------------
\2\ FHFA Strategic plan, 2009-2014.
Provide effective supervision, regulation and housing mission
oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan
Banks to promote their safety and soundness, support housing
finance and affordable housing, and support a stable and liquid
---------------------------------------------------------------------------
mortgage market.
As well, GSEs were required to start to reduce the size of their
retained portfolio of mortgages and mortgage-backed securities (MBS).
While many critics and observers also expected or hoped that FHFA
conservatorship would set the stage for the eventual wind down and
replacement of the GSEs, no such mandate was given to the FHFA. In
fact, Director Lockhart noted the strategic goal under conservatorship,
``FHFA preserves and conserves the assets and property of the
Enterprises, ensures focus on their housing mission, and facilitates
their financial stability and emergence from conservatorship.'' Nowhere
was there a goal to eliminate the GSEs.
Unfortunately for taxpayers, homeowners, and the economy, in the
more than 3 years since FHFA has taken over conservatorship of the
GSEs, the enterprises have continued to act as profit maximizing
private firms, taking advantage of their market power in the mortgage
market to earn profits rather than working to make the market more
efficient. In doing so, the GSEs have taken a very narrow, and
arguably, ineffective and harmful approach to managing their
activities. These actions have resulted in enterprises that are
arguably no easier to wind down today than they were 3 years ago. This
is despite the fact that almost all commentators and policy makers have
suggested that the GSEs as currently constructed do not represent an
attractive way to finance U.S. housing in the future.
Maybe the single biggest problem with the ongoing operation of the
GSEs has been to failure to adequately address critical conflicts of
interest in their operations. The evidence suggests that the conflict
of interest between the businesses of providing mortgage guarantees and
managing a large retained portfolio of mortgages and MBS have led to
the obstacles to normal credit conditions. This conflict of interest
was raised in recent reporting by National Public Radio and ProPublica.
\3\ In its white paper, the Federal Reserve noted that `` . . . easing
some of these obstacles could contribute to the gradual recovery in
housing markets . . . '' Even without considering the overall economy,
GSEs should be concerned with the health of the housing market, since
they now hold the risk for more than one-half of all outstanding
mortgages. Thus, absent a conflict of interest, it would appear to
directly benefit the GSEs to remove some of the obstacles the Federal
Reserve discusses.
---------------------------------------------------------------------------
\3\ See the recent story from National Public Radio and
ProPublica, http://www.propublica.org/article/freddy-mac-mortgage-
eisinger-arnold.
---------------------------------------------------------------------------
There are plenty of examples of how this conflict of interest might
have led the GSEs to take actions that padded their portfolio profits,
even while harming the mortgage market and the larger economy. Many
credit market decisions by the GSEs seem to be driven by a desire to
block refinancing. \4\ Fannie Mae raised up-front fees on all new loans
just weeks after the Federal Reserve announced its MBS purchase
program, with Freddie Mac following suit two months later. These new
fees applied even in cases where borrowers' mortgages were already
guaranteed and their refinancing not impose any additional risk. The
GSEs have taken steps to reduce competition between servicers, despite
borrowers' many complaints about poor service by their existing
servicers. Shrinking lending, increasing legal liability, and other GSE
policies appear to have contributed to a lack of competition to
originate mortgages, leading to retail spreads on mortgages that remain
near at all-time highs. The GSEs have failed to address critical
problems in the mortgage insurance industry, leaving many consumers
locked into high interest rate mortgages and making mortgage
modification more challenging and less effective. Since refinancing and
mortgage modification as well as lower retail spreads on mortgages
reduce the cost of mortgage guarantees by reducing defaults, the only
seemingly plausible reason for such policies is to protect high
interest payments on mortgages and MBS held in the GSE's portfolio.
---------------------------------------------------------------------------
\4\ In response to recent allegations of conflicts of interest,
the FHFA has pointed out that refinancing represents a large portion of
the GSEs overall business. As I discuss below, this fact is not
inconsistent with the allegations of a conflict of interest. Many of
the restrictions on refinancing did not impact all borrowers, but
instead reduced refinancing by borrowers with high mortgage rates that
may also be held in GSE portfolios.
---------------------------------------------------------------------------
The reports by National Public Radio and ProPublica highlighted how
these conflicts of interest may also have influenced portfolio
decisions at Freddie Mac. Instead of selling off the MBS that it
inherited when it entered conservatorship, Freddie Mac appears to have
created and held complex, highly leveraged mortgage derivatives that
are risky and nearly impossible to sell. In addition, Freddie Mac
created new and complex long-term financing for its MBS positions
(called Mortgage-Linked Amortization Notes, or MLANs) rather than
choosing to sell these securities into the open market and reduce the
size of its portfolio business. \5\ These transactions highlighted the
appearance of a conflict of interest since the transactions were
structured so that the enterprise lost valuable interest payments if
borrowers with very high interest rates were able to refinance their
mortgages, a policy that is substantially under the control of Freddie
Mac. Whether intended or not, these transactions also make it harder to
unwind Freddie Mac and its portfolio in the future.
---------------------------------------------------------------------------
\5\ http://www.businessweek.com/news/2012-01-17/freddie-mac-sees-
selling-40-billion-of-debt-tracking-mortgages.html
---------------------------------------------------------------------------
While seemingly consistent with the strategic goal listed above of
conserving and preserving assets to emerge as an ongoing entity, the
policies described above appear to violate a number of the GSE's other
mandates, which are to ``foster liquid, efficient, competitive, and
resilient national housing finance markets'' and to operate in a manner
``consistent with the public interest.'' From the first quarter of 2008
to the first quarter of 2011, the market share of the top five mortgage
originators has grown from 56 percent to 65 percent. As well, according
to Bloomberg (Figure 3) the spread between retail and wholesale
mortgage rates has widened by at least 0.75 percent (75 basis points)
between its average from 2000 to 2007 and its level at the end of 2011.
These facts suggest that conservatorship has resulted in less
competitive and less efficient mortgage markets.
The Dueling Business Interests of the GSEs: A Conflict of Interest?
To better understand these issues, it is important to look at the
historical context in which the enterprises arrived into
conservatorship. When the FHFA took over the management of Fannie Mae
and Freddie Mac (GSEs), the enterprises had two principal businesses:
mortgage guarantees and portfolio management. The mortgage guarantee
business involves collecting premiums and insuring bondholders against
credit losses. When a borrower defaults on a mortgage, the GSEs must
buy the mortgage out of a pool at par, so bondholders are made whole.
The portfolio business involves owning and managing a large balance
sheet made up of mortgage-backed securities (MBS) and mortgages. Both
businesses were considered to be in serious financial trouble when the
GSEs entered conservatorship.
The guarantee and portfolio businesses have always involved an
inherent conflict of interest--the GSEs know more about the mortgages
in the MBS than other parties. One study by researchers at the
University of California at Berkeley and Barclays argued that the
mortgage-backed securities market was a market for lemons. \6\ The
article showed that securities that Freddie Mac sold to the market were
of lower quality than those it didn't sell. Traders have always
recognized that the GSEs were more informed than they were and market
prices reflected this friction. Financial economists would note that
the existence of some traders using nonpublic information inherently
leads to less liquid and efficient markets, as other traders must
account for adverse selection when bidding on securities.
---------------------------------------------------------------------------
\6\ Downing, Chris, Dwight Jaffee, and Nancy Wallace. 2009. ``Is
the Market for Mortgage-Backed Securities a Market for Lemons?'' Review
of Financial Studies, 22(7):2457-2494.
---------------------------------------------------------------------------
Most public policy concern about the growth of the GSEs portfolio
was not about conflicts of interest, however, but risk. During the
2000s, the retained bond portfolio grew rapidly, taking advantage of
their implicit guarantee by taking on additional risk on behalf of
taxpayers. The GSEs even began to purchase securities with risky
subprime mortgages that were specially designed for them to acquire.
In 2008, the FHFA inherited the management of firms with $1.1
trillion of MBS, hundreds of billions in mostly failed mortgages, and a
bankrupt guarantee business. As well, with the demise of private
securitization and the fragile state of the financial services sector,
the GSEs and the FHA were guaranteeing more than 90 percent of new
mortgages, a condition that continues today. Without competition in new
mortgage origination, the conflict of interest between mortgage
guarantees and portfolio management once again rose to the forefront.
After all, actions that might lead to even a small percentage change in
the value of the portfolio would have a material impact on profits of
these formerly semi-private companies.
Soon after conservatorship, in December 2008, Fannie Mae announced
LLPAs (loan level pricing adjustments), up front fees that would be
paid by all borrowers on newly originated mortgages. These fees, when
combined with adverse market delivery charges, could equal more than
three percent of the mortgage amount, to be paid up front. Freddie Mac
soon followed with its own fees, although it never posted its fees
online the way Fannie Mae did.
While such fees have sometimes been defended as an attempt to add
risk based pricing to mortgage originations, they were also applied on
an equal basis to borrowers who were refinancing mortgages that the
GSEs already guaranteed. The Federal Reserve white paper referred to
such fees as ``hard to justify'' when applied to refinancing their own
mortgages. As well, imposing new, large up-front fees in the middle of
a serious recession and stock market decline when down payments were
scarce had the practical effect of reducing demand for mortgages among
affected borrowers. A seemingly preferable alternative would have been
to increase the annual guarantee fee (so-called ``g-fee'') on mortgages
for new purchases, which would likely have had a smaller negative
impact on demand. A fee structure that decreased demand for new
mortgages also would have cut the demand to purchase homes, helping to
contribute to a further decline in home prices. Falling home prices
materially increased losses in the GSE's mortgage guarantee business.
However, from the perspective of the portfolio, an equivalent increase
in the g-fee rather than a higher up-front borrowing cost (LLPAs) might
have allowed a much larger wave of refinancings, possibly leading to
portfolio losses. These large up-front fees were not a market outcome
nor were they mandated in any way by conservatorship, but were a
barrier imposed by the GSEs themselves, seemingly designed to protect
their own portfolios from prepayments, the very outcome that the
Federal Reserve's MBS purchase program sought to create.
The high up-front fees when applied to mortgages they already
guaranteed was just one of many steps the FHFA and the GSEs have taken
since conservatorship that have had the effect of preventing
refinancing of many mortgages. As early as September 2008, Glenn
Hubbard and I have argued for the Government to facilitate widespread
refinancing to reduce defaults, help stabilize the housing market, and
stimulate the economy. \7\ In our own analysis, Alan Boyce, Glenn
Hubbard, James Witkin and I have shown how a slightly higher g-fee on
refinancings would create a structure whereby the GSEs could more than
recoup any portfolio losses. David Greenlaw (Morgan Stanley), Mark
Zandi (Moody's Analytics), Bill Gross (Pimco), and many economists made
similar arguments in the intervening years, but with little success.
---------------------------------------------------------------------------
\7\ See a history of our research on widespread refinancing along
with our current proposals on our Web site: http://
www4.gsb.columbia.edu/realestate/research/housingcrisis.
---------------------------------------------------------------------------
In March 2009, the President announced the HARP (Home Affordable
Refinance Program). The program was an attempt to streamline
refinancings, but eventually resulted in fewer than one million
refinancings over a period of nearly 3 years. While HARP officially
applied to borrowers with a loan-to-value ratio (LTV) of up to 125
percent, technical barriers prevented take-up by all but a few
borrowers with LTVs above 105 percent. And up-front GSE fees (LLPAs)
still applied to HARP mortgages. As well, under HARP, only the
borrower's existing servicer could effectively pursue a new
refinancing. Even today under the new so-called HARP 2.0, existing
servicers have a large advantage over new servicers in pursuing a HARP
refinancing for a given borrower.
HARP also excluded borrowers with LTVs of less than 80 percent.
While some such borrowers might have had an easier time pursuing a
refinancing, many of these borrowers were still subject to up-front
fees and other barriers. LLPAs were charged for borrowers with LTVs in
excess of 60 percent and FICO scores below 760. Reps and warranties
liabilities likely prevented many such borrowers from getting
attractive quotes from other lenders. Also, many borrowers with
seemingly low LTVs had second liens, so that these borrowers would
likely have an elevated risk of default and thus could benefit from
lower mortgage payments.
Finally, all of the exclusions from HARP had an additional negative
effect on taxpayers and the overall economy. For example, Joseph Tracy
and Joshua Wright of the Federal Reserve Bank of New York point out
that refinancings are not simply a zero sum game and might instead `` .
. . stabilize the housing market and support economic growth.'' \8\
---------------------------------------------------------------------------
\8\ http://libertystreeteconomics.newyorkfed.org/2012/01/why-
mortgage-refinancing-is-not-a-zero-sum-game.html
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From the perspective of the mortgage guarantee business, it is
difficult to understand why the GSEs would limit refinancing on
mortgages that they already guaranteed. A widespread refinancing
program that lowered payments for risky mortgages would almost surely
reduce defaults. \9\ In fact, from the perspective of the mortgage
guarantee business, one might have expected the GSEs to go out of their
way to refinance the riskiest borrowers, who would otherwise be at
greatest risk of default. Yet the barriers imposed by the GSEs had
exactly the opposite effect, severely limiting refinancing by the
riskiest borrowers. The fees on refinancing were highest on mortgages
where the borrower had a low FICO score or high LTV. Mortgages with
high loan-to-value ratios were locked out of refinancing altogether.
---------------------------------------------------------------------------
\9\ Early research on the HAMP program showed the mortgage
modifications that lowered mortgage payments had a strong impact on
reducing defaults. See, Federal Reserve Bank of New York Staff Report
#417, originally published in December 2009, for example.
---------------------------------------------------------------------------
Looking back, the costs of these actions have become clear.
According to my own calculations using data from Lender Processing
Services, about one-sixth of all GSE guaranteed mortgages with a
mortgage rate above 6 percent in 2009 defaulted, compared to defaults
by about one in fifty mortgages with rates below 5 percent. Almost
surely a program to refinance high mortgage rate borrowers would have
lowered this default rate for this population, saving the GSEs from
some large losses from their mortgage guarantee business and reducing
the number of foreclosures and short sales that have contributed to
falling house prices and thus even larger future costs from mortgage
guarantees. In fact, the Congressional Budget Office's recent paper on
found that about for every 1,000refinancings that took place, 38
defaults would be prevented. \10\ According to the CBO, such a program
would have saved the GSEs billions of dollars in lower guarantee costs.
A program that facilitated millions of refinancings might have
prevented hundreds of thousands of defaults.
---------------------------------------------------------------------------
\10\ http://www.cbo.gov/ftpdocs/124xx/doc12405/09-07-2011-Large-
Scale_Refinancing_Program.pdf
---------------------------------------------------------------------------
It appears only possible to understand this behavior by looking at
the GSEs' portfolio management business. In fact, the CBO pointed to
possible portfolio losses when considering the costs and benefits of a
widespread refinancing program. While the GSEs have never disclosed
much detail about their portfolio holdings, many of their purchases of
mortgage-backed securities seem to have taken place in the mid-2000s.
The mortgages in these mid-2000s pools have mortgage rates that are 5.5
percent or above. These loans have much lower mortgage balances, which
indicate lower income households, and may be more likely to be under
financial stress. In other words, many of the mortgages inside the
securities held in GSE portfolios may also have been those at the
greatest risk of default. Refinancing mortgages for responsible
borrowers who were current on their mortgages, but also at great risk
of default, might well have imposed losses on the GSE portfolios while
saving significantly more for their credit guarantee businesses.
Let me put the hypothesis directly. The possibility of protecting
their portfolios explains why the GSEs have been so resistant to
refinancing certain mortgages. If not for the conflict of interest
between the portfolio and mortgage guarantee businesses, why else would
the GSEs have imposed so many barriers to refinancing?
Did Freddie Mac ``Bet Against Refinancing?''
Last week, National Public Radio and ProPublica reported that
Freddie Mac created risky securities called Inverse IO Floaters that
had the appearance of betting against household refinancing. These
securities involve creating a concentrated risk position that pays off
only as long as the underlying mortgages continue making payments. If
the mortgages refinance, the payments stop and the securities lose
significant value.
The FHFA responded with a statement arguing against the premise of
the story. It claimed that ``Freddie Mac's retained portfolio
investment in inverse floaters did not have any impact on the recent
changes to the Home Affordable Refinance Program (HARP). In evaluating
changes to HARP, FHFA specifically directed both Enterprises not to
consider changes in their own investment income as part of the HARP
evaluation process.'' As well, it argued ``Of Freddie Mac's $650
billion retained portfolio, only $5 billion is held as inverse
floaters.'' As well, FHFA points out that about 80 percent of its
recent business is refinancing mortgages.
It is important to understand what the statement says and what it
does not. This statement does not imply that Freddie Mac's credit
decisions prior to HARP 2.0 in November 2011 were unaffected by its
portfolio. In other words, the statement does not deny that the
conflict of interest between lending and portfolio management might
have impacted Freddie Mac's past practices. In fact, as argued above,
the retained portfolio appears to be the only plausible reason to
impose many of the lending restrictions that the GSEs have imposed over
time. What remains puzzling, as well, is why Freddie Mac and not Fannie
Mae imposed new and harsher restrictions on refinancing some mortgages
under HARP 2.0. If not for the portfolio, why would Freddie Mac impose
new restrictions on HARP 2.0 refinancings?
A recent posting by Alan Boyce on the Web site www.zerohedge.com
helps explain why FHFA's statement might be true but that the conflict
of interest might still have materially impacted lending. \11\ For
example, Mr. Boyce shows how the Freddie Mac might have simultaneously
been refinancing some borrowers while also protecting its portfolio.
The highest rates of refinancing have been for borrowers with
relatively low mortgage rates, large loan balances, high FICO scores
and low LTVs originated between 2009 and 2011. These loans were made
after conservatorship and at a time that Freddie Mac was reducing it's
MBS holdings. Refinancing such mortgages may be good business, but it
does not change the GSE risk profile much, because these mortgages are
already unlikely to default. But, of course, Freddie Mac may not own
many securities that contain recently originated mortgages.
---------------------------------------------------------------------------
\11\ http://www.zerohedge.com/contributed/qa-alan-boyce-freddie-
mac-and-inverse-floaters
---------------------------------------------------------------------------
NPR/ProPublica identified $3.4 billion of inverse IOs, which were
backed by the interest payments on about $19.5 billion of mortgages.
FHFA said that these risky derivatives were in fact larger, amount to
$5 billion in size, which could have been backed by $26 to $30 billion
of loans. The FHFA notes that inverse IO floaters represent only a
small portion of Freddie Mac's portfolio, implicitly suggesting that
such a small stake cannot possibly drive their lending restrictions.
These trades took place in a 6 month time period and had the effect of
reducing the total balance sheet of Freddie Mac by almost exactly the
amount required by Congress, not an insignificant sum. In addition,
FHFA does not describe the characteristics of the rest of Freddie Mac's
$224 billion holdings in its own MBS. Is the remainder of Freddie Mac's
portfolio also composed of high interest rate mortgages that Freddie
Mac has spent more than 3 years imposing restrictions and prohibitions
on refinancing? The entire Agency MBS market is trading at a premium,
which means that every bond is well above par. It cannot be the case
that taking an illiquid and highly levered position in inverse IOs can
provide any hedge value for the rest of their portfolio. In fact, such
a position would represent additional risk, in the same direction as
its other holdings. Portfolio holdings may also explain why Fannie Mae
has pursued refinancing restrictions that are nearly as strict as
Freddie Mac. Fannie Mae owns nearly as much MBS as Freddie Mac.
Mortgage Modifications Under Conservatorship
Rather than pursue a widespread refinancing program to help reduce
credit losses, the GSEs have attempted to manage the defaults of risky
mortgages once they occur. The problem has been that the GSEs have also
been slow and less effective at adopting loss mitigation practices that
the private sector has identified.
Private lenders, at least those who service mortgages in their own
portfolio, were first to adopt widespread mortgage modification
programs and have much lower redefault rates than the GSEs. (This is
not to say that the industry responded quickly; only that the industry
responded more quickly than the GSEs.) Consider data from the latest
OCC Mortgage Metrics Report. \12\ In 2008 and 2009, the redefault rate
on mortgage modifications by the GSEs was almost 50 percent higher than
mortgage modifications pursued by lenders on their own mortgages. In
2008, for example, the 12-month redefault rate was about 58 percent for
GSE modifications versus 40 percent for private lender modifications on
their own portfolio loans. In 2009, the GSEs performed even worse on a
percentage basis for the same measure (42 percent versus 25 percent for
portfolio loans). By 2010, the GSEs 12 month redefault rate had caught
up to that of portfolio loans. But in 2011, redefault rates for GSE
modification are once again much higher than modifications of portfolio
loans.
---------------------------------------------------------------------------
\12\ http://www.occ.gov/publications/publications-by-type/other-
publications-reports/mortgage-metrics-2011/mortgage-metrics-q3-2011.pdf
---------------------------------------------------------------------------
In looking at the recent data, one striking feature stands out.
Many portfolio lenders, as well as private servicers, have turned to
principal reductions to better manage defaults. Understanding what
private investors and lenders do with their own loans is very
instructive because it helps set a benchmark for behavior that is
unaffected by the many conflicts of interest in securitization. \13\
According to the OCC data, portfolio lenders pursue principal
reductions for more than 18 percent of mortgage modifications on their
own portfolios. The FHFA still refuses to allow any principal
reductions based on its calculations that more progressive modification
and principal reduction programs will cost taxpayers money.
---------------------------------------------------------------------------
\13\ See, for example, Tomasz Piskorski, Amit Seru, and Vikrant
Vig. 2010. ``Securitization and Distressed Loan Renegotiation: Evidence
From the Subprime Mortgage Crisis'', Journal of Financial Economics 97,
369-397.
---------------------------------------------------------------------------
In addition to the fact that private lenders often pursue principal
write-downs with their own funds at risk, other studies also support
the value of principal write downs that reduce LTVs as a tool for
modifying mortgages. A 2009 study by the Federal Reserve Bank of New
York concluded ``The data indicate that the redefault rate declines
with the magnitude of the reduction in the monthly payment, but also
that the redefault rate declines relatively more when the payment
reduction is achieved through principal forgiveness as opposed to lower
interest rates. \14\ As well, a recent study by Laurie Goodman supports
the same conclusion, noting ``Controlling for payment relief, we find
that principal reduction modifications are more effective than either
rate modifications or capitalization modifications. These differences
by modification type are larger for modifications on prime/Alt A/option
ARM loans than for subprime loans.'' \15\
---------------------------------------------------------------------------
\14\ http://www.newyorkfed.org/research/staff_reports/sr417.pdf
\15\ Amherst Mortgage Insight, 12/01/2011.
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Another problem with all of these studies, and an issue that does
not appear to be explicitly modeled by the FHFA analysis, is the risk
of moral hazard. Private portfolio lenders are certainly be aware of
this risk and have developed ways of minimizing moral hazard.
Nonetheless, Government backed lenders like the GSEs may face a higher
risk of moral hazard than private lenders would. This would be a place,
once again, where the GSEs might benefit from examining the practices
of private portfolio lenders.
For some GSE mortgages, the existence of mortgage insurance (MI)
appears to be a barrier to principal write-downs. However, the value of
such MI is likely dubious. The GSEs have as much as $150 billion of
insurance from various MI companies, but more than 80 percent of those
potential claims are underwritten by MI companies that are either
insolvent or have a credit rating of BB- or worse. The suspect nature
of these receivables gives the GSEs incentives to delay loss
resolutions as much as possible and may impact the extent to which the
GSEs efficiently manage losses and foreclosures.
Why Not More Private Capital and Expertise for the GSEs?
Another concern about the current process of how the GSEs have
managed the housing crisis has been the lack of steps to bring in
private capital and expertise in their businesses. It is important to
note that the existing mandates for conservatorship do not require or
even suggest that the GSEs bring private capital into their businesses.
Of course there is a mandate to reduce risk, but that could be done
without sharing the risks with private firms.
Nonetheless, the GSEs have not taken advantage of places where
private capital and expertise might be valuable in reducing losses or
helping to stabilize housing markets. For example, the fact that
private portfolio lenders appear to have much lower redefault rates on
mortgage modifications of nonperforming loans (NPLs) suggest that the
GSEs might profitably sell NPLs to specialized servicers. Private
portfolio lenders sell certain NPLs to such specialized servicers. One
might have expected the GSEs to do the same.
It is critically important to examine new ideas to help attract
private capital and ideas to address the housing crisis. In my
testimony before the Senate Subcommittee on Housing, Transportation,
and Community Development of this Committee I detailed a number of such
proposals, including how to sell non performing mortgages and why sales
of REO to long-term businesses dedicated to building a business in
renting single family homes. \16\ I also discussed the potential for
shared appreciation mortgages to help resolve the current glut of
seriously delinquent mortgages.
---------------------------------------------------------------------------
\16\ Chris Mayer serves as an advisor to Pathway, a start-up firm
in the business of purchasing houses for long-term rental.
---------------------------------------------------------------------------
Conclusion
I believe that the largest failure of conservatorship has been the
unwillingness of the FHFA to adequately address the conflicts of
interest it inherited when it took over management of the GSEs.
Consider the problem of how the GSEs would have managed a portfolio
of MBS with above-market interest rates--securities that might sell at
a price above the par value of the securities. For example, a pool of
MBS with a 6 percent coupon might sell for $1.10 for each $1 of
principal with such a high coupon. Given that the GSEs had more
information than buyers about their own intentions with regard to
refinancing, as well as greater information about the underlying
mortgages and their expected performance, buyers might be quite wary of
purchasing MBS at market prices from the GSEs. Buyers could be
concerned about the potential that the GSEs might then turn around and
take action that would result in widespread refinancing. Buyers might
also be worried that mortgages inside the MBS were at imminent risk of
default. In either case, the securities would pay off at par ($1.00),
leaving the buyer with an appreciable loss ($0.10). Aware of the
conflict of interest, buyers might appropriately diminish their bids
for agency MBS sold by the GSEs above par.
Under conservatorship, the FHFA could have appointed an independent
trustee to manage the sale of the MBS over time, with the explicit
mandate to maximize the returns for taxpayers. If the trustee were
truly independent, this plan would have mitigated the conflict of
interest and maximized the sale proceeds from the pool of MBS. Put
differently, taxpayers likely would have received higher proceeds from
the sale of MBS had the GSEs turned over management of their portfolio
to an independent, third party because buyers would have paid more for
the MBS absent a potential conflict of interest. \17\
---------------------------------------------------------------------------
\17\ Some might argue that it is necessary to have an investment
portfolio to ensure the solvency of the guarantee business. However,
since the GSEs are insolvent, the U.S. Treasury already serves the role
of liquidity provider under conservatorship. As the GSEs return to
solvency, they may want to acquire assets that help meet capital and
liquidity needs. However, there is no reason for the GSEs to make such
investments in their own MBS, which only amplifies the GSEs exposure to
various mortgage market risks. The trustee would use the proceeds from
the sale of the assets of the GSEs (MBS) to pay down the GSE's
liabilities.
---------------------------------------------------------------------------
Of course, the GSEs might have instead tried to earn even higher
profits by keeping their portfolio and imposing frictions on
refinancing. Even if imposing mortgage market frictions were to have
maximized short-run profits on their portfolio, effectively conserving
and preserving assets, it would have had other consequences in making a
less efficient, less competitive, and more illiquid mortgage market and
working against the public interest.
Nonetheless, such a policy would have ignored another option--
widespread mortgage refinancing--that can and should have been a
profitable business. My own analysis, conducted with Alan Boyce, Glenn
Hubbard, and James Witkin, shows that refinancing should be profitable
for the GSEs. By charging a slightly higher guarantee fee and creating
a small fund to cover any possible losses from reps and warranties
relief, refinancing could have been a way to help recapitalize the GSEs
and help minimize taxpayer losses. Combining mortgage refinancing with
an independent trustee would result in a win-win for taxpayers,
mortgage borrowers, homeowners, and the larger economy.
It is not too late to achieve that win-win scenario. The FHFA still
has the authority to follow such a prescription. However, current
policies do not make such a policy shift appear likely.
Instead, Congress should consider changing the mandate of
conservatorship to address its flaws. Legislation should mandate that
an independent trustee be appointed to wind down the GSE's retained
portfolio of MBS. The GSEs could continue to retain nonperforming loans
that they have bought back from securitizations as is necessary to
perform their mortgage guarantee business. Independent management of
the retained portfolio will make the eventual privatization or
replacement of the GSEs considerably easier. Legislation should also
mandate other steps to move towards attracting private capital into the
mortgage market, including ideas such as trial programs for the sale of
NPLs to third party servicers, the sale of REO to private investors,
and provisions that allow the GSEs to provide responsible amounts of
leverage for owners of single-family home portfolios in the rental
business on a temporary basis. \18\ Legislation should also ensure that
the GSEs remove all of the obstacles limiting access to mortgage credit
as identified in the Federal Reserve white paper. All borrowers should
have access to refinancing without restrictions or qualifications other
than being current on their mortgage and any refinancing programs
should be available to be offered by any qualified originator to any
qualified borrower.
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\18\ Any loans made available on portfolios of single-family homes
might have a sunset provision so that lending is reduced over time as
the private lending market recovers.
---------------------------------------------------------------------------
Until we fix the housing market, it will be hard for the economy to
fully recover. In this testimony, I have addressed a number of reasons
that the lack of GSE reform continues to hold back the housing market
and the economic recovery. I believe that immediate action is necessary
to address fundamental flaws in the structure of the GSEs.
Conservatorship as it now stands is laden with conflicts of interest
between lending and portfolio management and holds back the
reintroduction of private capital. These steps can occur now, even
without a consensus on what the future of the U.S. housing finance
system will look like.
I appreciate the opportunity to address you today and look forward
to answering any questions that you might have.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF THE HONORABLE PHILLIP L. SWAGEL
Professor of International Economic Policy, University of Maryland
School of Public Policy
February 9, 2012
Chairman Johnson, Ranking Member Shelby, and Members of the
Committee, thank you for the opportunity to testify on housing policy
and the state of the housing market. I am a professor at the University
of Maryland's School of Public Policy and a faculty affiliate of the
Center for Financial Policy at the Robert H. Smith School of Business
at the University of Maryland. I am also a visiting scholar at the
American Enterprise Institute and a senior fellow with the Milken
Institute's Center for Financial Markets. I was previously Assistant
Secretary for Economic Policy at the Treasury Department from December
2006 to January 2009.
The continued weak state of the housing market and the toll of
millions of foreclosures already, millions more families still at risk
of losing their home, and trillions of dollars of lost wealth all
reflect the lingering impact of the collapse of the housing bubble and
ensuing financial crisis. A range of policies have been undertaken over
the past several years aimed at the housing market--a recent summary
from the Department of Housing and Urban Development lists 10 separate
policy actions. \1\ These can be grouped into two broad categories.
What might be seen as ``backward-looking'' policies seek to avoid
foreclosures on past home purchases through actions such as incentives
for mortgage modifications and refinancing. By avoiding foreclosures,
these policies both assist individual families and help reduce the
supply of homes for sale (and in the overhang of the so-called ``shadow
inventory'') and thus reduce downward pressures on home prices that in
turn affect household wealth and the broad economy. In contrast,
``forward-looking'' policies seek to boost demand for home purchases,
such as with the first time homebuyer tax credit and the Federal
Reserve's purchases of mortgage-backed securities (MBS).
---------------------------------------------------------------------------
\1\ See the appendix of the January 2012 HUD-Treasury Housing
Scorecard: http://portal.hud.gov/hudportal/documents/
huddoc?id=JanNat2012_Scorecard.pdf.
---------------------------------------------------------------------------
The common feature of these housing policies is their limited
effectiveness. To be sure, these policies have done something: MBS
purchases resulted in lower interest rates for families buying a home
or refinancing a mortgage; some 930,000 homeowners have benefited from
permanent mortgage modifications through the HAMP program; and so on.
But relative to the scale of the weakness in home prices and housing
market demand, and especially compared to the tragically huge number of
foreclosures, the set of housing market policies to date appears to
have underperformed compared to expectation set at each policy
unveiling. Moreover, these programs have involved considerable costs
for taxpayers, with the benefits accruing mainly to a relatively small
group of recipients. And on top of the millions of foreclosures not
prevented by the policies of the past several years, there is likely
another huge wave of foreclosures set to take place in the next year or
two, with many of these representing foreclosures that were delayed but
not ultimately prevented by policies to date.
This experience is important to keep in mind as the Congress
contemplates a range of new and expanded housing policy proposals from
the Administration, along with a white paper from the Federal Reserve
that covers similar ground. Broadly speaking, the proposed actions look
to provide homeowners with reduced monthly payments through Government-
assisted refinances; to lower principal mortgage balances; and to speed
the pace at which vacant homes become rentals. The goal, as with all
policies throughout the crisis, is to have fewer foreclosures and
stronger consumer spending. These policies are well-intentioned.
Unfortunately, there is every reason to believe that the new policy
proposals for streamlined refinancing and principal reduction are
likely to have the same modest impact--and at an even worse tradeoff in
terms of cost to taxpayers for each foreclosure avoided than for the
policies to date. Simply put, we have learned that mortgage
modification programs are difficult to implement and execute because of
the intrinsically one-at-a-time nature of the transactions involved.
And the expansions of some programs, such as considerably increased
payments from the Government to motivate reductions in mortgage
principal, face less promising conditions now for being effective than
was the case when many of these policies were launched in early 2009.
Three years of a weak job market have forced many of the borrowers who
might have been helped by reduced payments or a lower mortgage balance
into foreclosure.
There are other approaches that can be taken to help heal the
housing market and speed the recovery of home prices and construction
while reducing the pain for American families. This testimony first
provides a critical analysis of recent policy proposals and then
discusses alternative steps that the Congress might consider. The goal
of these policies is for the housing sector to once again contribute
positively to the U.S. economy and to American society--to have a
housing system that works for families looking to buy homes, for
investors with funds to lend, and for taxpayers who deserve a stable
financial system and protection from another expensive bailout.
Mass Refinancing Proposals
It is useful to consider a specific example that raises the
question of whether the latest policy proposals from the Administration
will perform differently than previous initiatives. The White House
fact sheet for the Administration's refinancing proposal for a single
family, owner-occupied principal residence promises that there will be
``no barriers and no excuses'' (top of page 3) and no new appraisal or
tax forms involved in enabling eligible homeowners to refinance their
mortgages into an FHA-guaranteed loan with lower monthly payments.
Without access to tax forms, however, it is not clear how lenders are
meant to verify that a home is indeed owner-occupied--the natural
mechanism would be to look at the address on the homeowner's 1040 tax
form. Indeed, the lender could even just examine the address on the IRS
form 4506 by which the borrower requests that a copy of the tax return
be sent to the lender; this would be less intrusive than having the
lender examine the 1040 itself but is again off-limits in the new
proposal. A lesson of the past several years is that unverified
mortgage applications (so called ``no doc loans'') are convenient but
do not end well for either lender or borrower.
The alternative of having the lender send someone out to the home
also runs counter to the stated policy proposal--there are to be no
appraisals, and the need for possibly repeated site visits to confirm
the owner-occupied status seems to be exactly the barriers and red tape
that are not allowed (not to mention the intrusiveness of having
someone peek through the windows to figure out who is living inside).
On the other hand, lenders clearly will not be willing to allow
borrowers to simply attest that they are refinancing an owner-occupied
property. After all, this was a common misrepresentation during the
housing bubble and it would be outrageous for lenders not to check
carefully for loans receiving a Government-backed guarantee such as
with the new refinancing proposal involving the Federal Housing
Administration (FHA). Moreover, the Administration has launched an
investigation into possible abusive behavior in mortgage origination
and servicing; presumably this investigation and the similar effort
launched in 2009 will deter lenders from allowing potential fraud. But
this leaves the problem of how to comply with the contradictions
between the proposed policy and the rhetoric by which it has been
introduced.
This is just one type of hurdle that implementation of the latest
proposal for refinancing of non-GSE loans is likely to face--the
desired ease of the refinancing is defeated by the conditions of the
proposal itself. Perhaps there is some workaround in the offing for
this and the other inevitable problems of implementation that have
plagued past efforts, but it is now more than 2 weeks since the
proposals were launched by the President in his State of the Union
address and there is no legislative text to consider these important
details. Similarly, the Fed's white paper on housing proposals includes
a broad discussion of the possible beneficial impacts of widespread
refinancing, but does not get into the operational details that are
crucial to achieve actual policy outcomes. \2\
---------------------------------------------------------------------------
\2\ This is in some ways reminiscent of the 2008 Hope for
Homeowners program that likewise had only modest impact in reducing
foreclosures.
---------------------------------------------------------------------------
The lower monthly payments for homeowners that would result from
the proposed FHA-based refinancing scheme for non-GSE loans and the
expansion of the previous HARP (Home Affordable Refinance Program) for
GSE loans announced in October 2011 are meant to both reduce
foreclosures by improving affordability and to boost the economy
through increased spending by families with greater free cash flow as a
result of lower mortgage payments. That is, refinancing would be a sort
of stimulus analogous to sending a monthly check to qualifying
households. It is clear that mortgage credit was too easily available
in the run-up to the crisis, and a good argument can be made that the
pendulum has swing too far in the other direction now so that some
creditworthy borrowers do not have access to mortgages for home
purchases or refinancing. An important lesson of the current situation,
however, is to highlight the problem of having the Government so
intricately involved in setting mortgage standards. It would be
preferable for private suppliers of capital to fund housing and to take
on the risks and rewards of credit decisions. This provides an
important motivation for moving forward with housing finance reform.
With Fannie Mae and Freddie Mac in Government control under
conservatorship at present, it is inevitable that public officials will
be involved in the choice of credit standards. The driving force for
these decisions should be to find the appropriate balance between
protection for taxpayers against overly risky loans while maintaining
access to credit for homebuyers and rebuilding a responsible private
mortgage market--and not to have these decisions motivated by a desire
to implement a backdoor fiscal stimulus.
Indeed, stimulus is likely the best way to view the impact of the
two mass refinancing proposals involving HARP 2.0 for GSE-backed
mortgages and the FHA for non-GSE loans. Both refinancing proposals
would benefit borrowers with high loan-to-value (LTV) mortgages,
including underwater borrowers whose mortgage balances are greater than
the value of their home and who thus have an incentive to walk away
from their home and allow a foreclosure. The current proposals,
however, are restricted to borrowers who have been in their homes since
at least mid-2009 and have been nearly current on their payments for a
year (6 months with no late payments and no more than one 30-day late
payment in the preceding 6 months). In other words, the refinancing
assistance would go to borrowers who have shown that they want to stay
in their home and have done so for several years in the face of
declining home prices and a weak job market. To be sure, these
borrowers will benefit from the lower mortgage payments. But the
targeted population for the refinancing has already shown that they are
resistant to foreclosure, meaning that the program will avoid
relatively few incremental foreclosures per dollar of taxpayer expense.
This leaves stimulus as the main motivator for mass refinancing.
As noted in the Fed's white paper and in recent analysis provided
by the FHFA in a letter to Representative Elijah Cummings, both
refinancing proposals involve costs to taxpayers because the U.S.
Government is a beneficial owner of mortgages through MBS holdings of
both the Federal Reserve and the GSEs. This is not to say that U.S.
Government asset holdings should come before homeowners--not by any
means. The point is that the costs of the refinancing proposal must be
weighed against the benefits, keeping in mind that the principal
benefit is through a relatively targeted fiscal stimulus going to
particular homeowners (and not to renters, who tend to have lower
incomes than homeowners). One could imagine policy makers calling for
another round of taxpayer-funded fiscal stimulus such as through
providing checks or other tax benefits, but this should be debated
openly. It is hard to imagine that a new stimulus would involve the
relatively narrow targeting of the population of homeowners with high
LTV's who bought homes at a particular time period and who have been
able to afford their monthly payments.
In a time of tight fiscal constraints, one could also imagine
seeking to focus costly Government programs on homeowners who could be
seen as most in need of assistance and for whom refinancing programs
might be most effective. The refinancing proposals are limited by the
amount of the mortgage but one could further restrict this Government
assistance to people with desired income ranges. The White House has
recently defined the middle class as households with the median income
plus or minus 50 percent. \3\ With median household income around
$52,000, this would imply limiting the refinancing program to
households with incomes of no more than around $78,000--the top of the
White House definition of middle class. Alternately, one could use the
approximately $64,000 median income of family households (that is,
leaving out individuals, who tend to have lower incomes). This would
give a maximum income for the middle class as defined by the White
House as $96,000--rounding up would then give $100,000 as the maximum
income limit for eligibility for the Administration's FHA refinancing
proposal. One could imagine applying this income limit to all FHA
programs in order to best focus the taxpayer-provided subsidy implicit
in FHA activities to households most in need.
---------------------------------------------------------------------------
\3\ See, http://www.whitehouse.gov/sites/default/files/
krueger_cap_speech_final_remarks.pdf.
---------------------------------------------------------------------------
It should be noted as well that the February 2011 report to
Congress on ``Reforming America's Housing Finance Market'' by the
Treasury Department and HUD stated that the ``FHA should return to its
precrisis role as a targeted provider of mortgage credit access for
low- and moderate-income Americans and first-time homebuyers.'' \4\ The
report notes that the FHA market share (around 30 percent in early
2011) is already substantially above what Treasury and HUD see as the
historical norm of 10 to 15 percent. The Administration's refinancing
proposal thus represents a policy reversal that both goes in the wrong
direction for housing finance reform and increases the taxpayer
exposure to losses by the FHA when recent analyses indicate that the
agency is likely to require a taxpayer bailout of $50 billion or more
as a result of its existing obligations. \5\
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\4\ See, http://portal.hud.gov/hudportal/documents/
huddoc?id=housingfinmarketreform.pdf.
\5\ See, Joseph Gyourko, ``Is FHA the Next Housing Bailout?''
November 11, 2011. http://www.aei.org/papers/economics/financial-
services/housing-finance/is-fha-the-next-housing-bailout/
---------------------------------------------------------------------------
The Administration proposes to offset the costs of the FHA
refinancing proposal with a tax on large banks. As Treasury Secretary
Geithner noted at a press conference last week, ``there are pockets
where credit is tighter than it needs to be, including mortgage finance
and small business.'' The bank tax would expand these pockets, with
costs of the tax passed through to borrowers in the form of higher
interest rates and reduced availability of credit.
It is the case, as noted in a recent analysis from the Federal
Reserve Bank of New York, that foreigners have meaningful holdings of
U.S. mortgages in the form of mortgage-backed securities and would bear
some of the cost of the refinancing proposals. \6\ Given the U.S.
fiscal imbalance and ongoing current account deficit, it is likely that
the United States will rely on inflows of foreign capital for the
foreseeable future. Policies that are seen as unexpected or unfair to
foreign investors might then result in reduced demand for Treasury
securities and other dollar assets and thus higher financing costs for
American borrowers including the United States Government. This is not
a reason to avoid a refinancing proposal, but the potential impact on
future interest rates should be taken into account in evaluating the
costs and benefits.
---------------------------------------------------------------------------
\6\ See, Joseph Tracy and Joshua Wright, ``Why Mortgage
Refinancing Is Not a Zero-Sum Game'', January 11, 2012. http://
libertystreeteconomics.newyorkfed.org/2012/01/why-mortgage-refinancing-
is-not-a-zero-sum-game.html
---------------------------------------------------------------------------
Similar considerations apply to domestic suppliers of capital for
housing finance. Buyers of mortgages and mortgage-backed securities
plainly take on refinancing risk--the compensation demanded for this
risk accounts for part of the spread between yields on GSE-backed MBS
and Treasury securities. Continued expansions of refinancing proposals,
however, could give rise to the belief that mortgages going forward
have embedded in them a new feature that gives borrowers easier access
to a downward adjustment of interest rates than was believed to be the
case in the past. This regime change would then translate into market
demands for higher yields on mortgage-related securities and thus
higher interest rates going forward. In other words, current homeowners
would benefit from refinancing but future ones would pay more. This is
akin to the impact of so-called ``cramdown'' proposals that would
change the bankruptcy code to allow reductions in the principal balance
of mortgages: current homeowners would benefit from having reduced debt
but future homeowners would face higher interest rates and reduced
availability of credit. Relatively risky future borrowers, who tend to
have lower incomes, would be most adversely affected.
As noted above, there are reasons for concern about the impact and
cost-benefit calculus of mass refinancing programs. Nonetheless, it is
possible for the Administration to move forward with some aspects
without Congressional action. The expanded HARP refinancing is moving
forward though financial firms' computer systems are reportedly not yet
fully ready for the new program. Some FHA guidelines could be adjusted
as well to streamline the appraisal process and include some additional
mortgages (though the expansion to underwater loans would require
Congressional action). In other words, there are steps that could be
taken without waiting for the inevitable rejection of the proposed bank
tax.
Expansion of the Home Affordable Modification Program (HAMP)
The HAMP program involves Government payments to incentive mortgage
modifications that lower homeowner payments and thus seek to prevent
foreclosures. Lenders (typically servicers acting on the behalf of the
beneficial owners of mortgages) have an incentive to make such
modifications to avoid the considerable costs involved with
foreclosure, but many institutional features slowed the modification
process--to widespread frustration, including at the Treasury
Department when I served as Assistant Secretary. The difficulty with a
modification is to find the right targeting, amount, and structure of
the modification that balances effectiveness with cost. A lender will
not want to modify a loan for a borrower who can afford their original
payments or for a borrower who could not afford the lower payments
resulting from a modification that has an economic value equal to the
cost of foreclosure. The presence of underwater borrowers is an
important consideration, since an underwater borrower has an incentive
to walk away from a home even if the payments are affordable and the
lender will not recover the full value of the loan in a foreclosure.
But a modification involving principal reduction is especially costly
for the lender and gives rise to important concerns about strategic
behavior and spillover effects such as having other homeowners seek
unnecessary principal reductions. A further complication is that the
weak economy of the past several years has meant that some homeowners
who could initially afford the lower payments of a modified loan might
suffer an income decline such as from a job loss and then ``redefault''
on the modified loan (that is, default). It has been said that this
combination of factors leaves a potentially narrow aperture through
which to make a successful modification.
HAMP uses taxpayer dollars to tip the balance toward increased
modifications. Under certain conditions, the Treasury puts in money to
pay for part of the cost of the modification. The selection criteria
are crucial to the outcome of the policy and involve profound
challenges. It is natural to focus taxpayer dollars as tightly as
possible on incentivizing incremental modifications rather than
providing a windfall for ones that lenders would have done on their own
and to avoid as much as possible providing an incentive for homeowners
to stop paying their mortgages in order to qualify for assistance. At
the same time, implementing a tighter screening to focus on the right
set of borrowers translates into fewer incremental modifications. \7\
These considerations presumably went into the cost-benefit calculations
that were done with the original HAMP program, which was initially
predicted to lead to three to four million modifications by the end of
2012 but had chalked up somewhat less than one million permanent
modifications through December 2011.
---------------------------------------------------------------------------
\7\ For more discussion, see, Phillip Swagel, April 2009, ``The
Financial Crisis: An Inside View'', http://www.brookings.edu/economics/
bpea//media/Files/Programs/ES/BPEA/2009_spring_bpea_papers/
2009_spring_bpea_swagel.pdf.
---------------------------------------------------------------------------
A key feature of the Administration's recent HAMP proposal is to
substantially increase the taxpayer-provided payments to lenders that
reduce principal as part of a modification for underwater borrowers.
This is a relatively costly way of reducing monthly mortgage payments
compared to reducing a borrower's interest rate. If the focus of
modifications is on affordability, it would be more effective to extend
the term of a loan and reduce interest payments rather than writing
down principal. Still, one could justify a focus on principal reduction
if the goal is to avoid foreclosures by homeowners who can pay their
mortgage but choose not to because they are underwater. The key issue
is whether this is a cost-effective approach.
A concern about the expanded HAMP incentives recently announced by
the Administration is that this is a policy that would have been much
more cost-effective in terms of a lower cost to taxpayers for each
foreclosure avoided in early 2009. Three years later, underwater
borrowers who are still in their homes have demonstrated their
attachment to it. To be sure, a principal reduction will benefit
homeowners. But the cost to taxpayers will be much larger with the
expansion of HAMP payments, and the impact in terms of foreclosures
avoided is likely to be much modest than in 2009 given that the target
population has made it this far. This leaves a high cost-benefit ratio
from the HAMP expansion--presumably a much higher cost-benefit ratio
than was judged to be prudent when the program was designed in 2009.
A natural question then is to consider what is different today than
in 2009 that results in the apparent imperative to reduce foreclosures
in 2012 regardless of the cost effectiveness of the policy tools
involved. This is a worrisome approach to policymaking and to the
stewardship of taxpayer resources.
Pilot Program to Transition Real Estate Owned (REO) Property to Rental
Housing
The aftermath of the bubble has left the U.S. economy with too many
homes for sale or in the so-called ``shadow inventory'' of homes that
will be for sale once prices firm. The announcement by the FHFA of a
pilot program to transition REO properties to rentals is a welcome step
to speed up the adjustment of the housing market to post-bubble
conditions. Facilitating purchases of vacant homes by firms that can
manage them as rentals will help speed up the market adjustment, at
least modestly. This program will not be helpful in all parts of the
country, but it will be most useful in areas in which foreclosures and
vacant homes are especially acute. The inventory of REO properties held
by Fannie Mae and Freddie Mac has been declining as properties are sold
while inflows of new REO dwellings have slowed as the result of legal
uncertainties surrounding the foreclosure process. But there is likely
to be a wave of foreclosures in the pipeline and having this program
ready will be useful. At the same time, it will be important to ensure
that buyers of REO properties bring capital to the table rather than
relying heavily on the GSEs for financing. With Fannie and Freddie
under taxpayer control, this would constitute yet another Government
involvement in the housing sector. GSE financing of institutional
buyers would increase the firms' balance sheets and thus taxpayer
exposure to risk.
The importance of putting vacant homes to use can been seen in the
combination of rising rental costs and declining prices for home sold
under ``distress'' such as following a foreclosure. \8\ Overall indices
of home prices such as the S&P/Case-Shiller index declined to post-
bubble lows in the most recent data for November 2011, while the FHFA
purchase-only price index rose in November and has moved slightly above
the low point of March 2011. Downward price pressures involved in
distressed sales likely contribute to differences between these price
indicators. This conclusion is bolstered by recent press reports citing
RealtyTrac as calculating that bank-owned foreclosures and short sales
sold at a discount of 34 percent to nondistressed properties in the
third quarter of 2011.
---------------------------------------------------------------------------
\8\ For longer discussions from which this is drawn, see, ``The
Housing Bottom Is Here'' on http://www.calculatedriskblog.com/2012/02/
housing-bottom-is-here.html and Prashant Gopal, February 7, 2012,
``Banks Paying Homeowners To Avoid Foreclosures'', Bloomberg News.
http://www.bloomberg.com/news/2012-02-07/banks-paying-homeowners-a-
bonus-to-avoid-foreclosures-mortgages.html.
---------------------------------------------------------------------------
As discussed in the Fed white paper, the use of short sales and
deeds-in-lieu of foreclosure can reduce losses for lenders and provide
a better financial outcome for borrowers (and with greater dignity than
a foreclosure). Recent press reports indicate that use of these tools
is growing, along with payments by lenders to homeowners willing to
move out rather than go through the foreclosure process. With the
foreclosure process taking 24 to 36 months in States with a judicial
foreclosure process, quite large payments could be rational on the part
of lenders. \9\ The Treasury's Home Affordable Foreclosure Alternatives
(HAFA) program similarly provides modest payments to market
participants (servicers, homeowners, and investors) to choose short
sales over foreclosure. Given the substantial private incentives for
these short sales to take place it is not clear that the HAFA program
is needed.
---------------------------------------------------------------------------
\9\ See, Gopal, op cit. http://www.bloomberg.com/news/2012-02-07/
banks-paying-homeowners-a-bonus-to-avoid-foreclosures-mortgages.html
---------------------------------------------------------------------------
Housing Market Adjustment and Alternative Policy Approaches
Housing markets naturally adjust slowly because the typical
homebuyer must sell their existing home at the same time that they buy
a new one, while the stock of homes evolves slowly given that homes
tend to last for 50 years or more. The adjustment has been especially
slow in the wake of the crisis and recession as the result of reduced
household formation that has diminished the natural growth in demand
for housing.
The goal of policy moving forward should be to facilitate the
ongoing adjustment and quicken the recovery of both housing prices and
construction. By definition, a recovery commences only after the market
hits bottom. It is desirable to lift off the bottom quickly. Fostering
a stronger overall economy is perhaps the most important element of
this, since a stronger economy will boost housing demand, including
through increased household formation. Other policies could be useful
as well, notably actions that facilitate a more rapid market adjustment
and that strengthen demand.
Rhetoric about not wanting the market to hit bottom is a
combination of empty and factually incorrect--after all, a housing
market recovery by definition will start only after the market hits
bottom. What is desirable is for the recovery to start immediately--
that is, for the bottom to have been reached already.
In considering housing policy going forward, it is important both
to avoid policies that will prolong the housing downturn or lengthen
the time at which the market rests on the bottom. This implies that it
would be valuable to resolve legal and regulatory uncertainty facing
mortgage servicers and originators as quickly as possible. To be sure,
past wrongdoing should be punished, notably including inappropriate
foreclosures on servicemen and servicewomen. On the other hand, a
lengthy period of uncertainty will affect the willingness of banks to
take on housing-related risks. This concern has practical relevance for
the Administration's recent proposals. Bank A, for example, will
naturally hesitate to refinance a loan originally made by Bank B even
with an FHA guarantee if there is a concern about the possibility of
future litigation. The same applies to concerns about the ability of
banks to foreclose on borrowers in default--if a mortgage is no longer
a securely collateralized asset, then there would be widespread
ramifications to the detriment of future homebuyers. Imagine the cost
of financing a home purchase with an unsecured loan facility such as
credit cards.
There are important institutional and legal overhangs slowing the
housing recovery, including lawsuits and regulatory actions involving
the MERS title system, settlement discussions related to so-called
robosigning, putbacks of bad loans to originators by the GSE, and
perhaps others. Again, there should be appropriate consequences for
past wrongdoing and steps to avoid repetition. But there is also a
value in a rapid resolution of these uncertainties so that the mortgage
financing system can once again operate effectively to the benefit of
U.S. homebuyers and homeowners. A desire to punish the financial
industry sits awkwardly with the desire for a housing recovery. It is
important to keep in mind as well that some foreclosures are
unavoidable--just as hundreds of thousands of foreclosures took place
in years with a strong housing market before the recession. It is
important to have a foreclosure process that is accurate and fair and
that can move forward responsibly but without unnecessary delays.
Foreclosures are difficult and tragic events for households. Yet some
foreclosures are inevitable. A housing rebound ultimately requires that
adjustments including unavoidable foreclosures take place.
Government policies could also play a positive role in improving
industry weaknesses that have been highlighted in the various judicial
actions. The MERS titling system, for example, arose in part to
compensate for the varying information systems by which property title
information is kept, generally at the county level. A useful initiative
would be to develop standard formats for these data. This would
preserve local control over intrinsically local decisions and
information, but facilitate nationwide transmittal and analysis of
information. Similarly, better coordination of information regarding
second liens would facilitate some additional modifications based on
bargaining between owners of the primary mortgage and second lien.
Finally, moving forward with housing finance reform remains vital
for a sustained housing market recovery. It is now a year since the
Treasury Department and HUD released a report on housing finance reform
and concrete action is long overdue. Uncertainty about the future of
the housing finance system, notably the role of the Government, will
make private providers of capital hesitate to fund mortgages. This
leaves Government officials to make crucial decisions regarding credit
availability that are better left to market participants with
incentives based on having their own capital at risk.
I have written at length elsewhere about steps for housing finance
reform, including the future of Fannie Mae and Freddie Mac. \10\ The
steps involved in moving forward with reform involve a combination of
several policy levers: bringing in private capital to takes losses
ahead of taxpayers; reducing the scope of any guarantee; and increasing
the price or reducing the quantity offered of the guarantee. Moving
forward in these dimensions would help increase the role of the private
sector in housing finance and reduce Government involvement and
taxpayer exposure. Importantly, these steps could be taken without a
firm conclusion about whether there will be a Government guarantee on
housing at the end. Enough progress in utilizing these policy levers
would eventually lead to a housing finance system that is entirely
private, but the path to a private system would involve a mix of
private capital and incentives backstopped by a secondary Government
guarantee. This means that starting with reform that involves a
secondary Government guarantee does not rule out ending up with a fully
private housing finance system. The key is to move forward
expeditiously in order to provide increased certainty about future
market conditions and thereby bring private capital back into housing
finance. A useful additional step would be to make transparent the
budgetary impact of GSE activities. The use of the TARP to compensate
the GSEs for costs related to the Administration's housing proposals,
for example, obscures the underlying reality that the financial
consequences of activities of both the TARP and the GSEs show up on the
public balance sheet. H.R. 3581, the Budget and Accounting Transparency
Act that passed in the House of Representatives earlier this week,
provides a step forward in ensuring desirable clarity in budget
treatment. \11\ It would useful as well for the GSEs to make available
loan-level data that facilitates analysis of market conditions and
helps private participants to enter the housing finance market.
---------------------------------------------------------------------------
\10\ See, Phillip Swagel, ``The Future of Housing Finance
Reform'', October 2011 paper for the Boston Fed Annual Research
conference, http://www.bos.frb.org/economic/conf/LTE2011/papers/
Swagel.pdf, and Phillip Swagel, ``Reform of the GSEs and Housing
Finance'', Milken Institute White Paper, July 2011. http://
www.milkeninstitute.org/pdf/HousingFinanceReform.pdf
\11\ For more discussion, see, Chris Papagianis and Phillip
Swagel, ``Put Fannie and Freddie on Federal Books'', Bloomberg View
oped, January 22, 2012. http://www.bloomberg.com/news/2012-01-23/put-
fannie-and-freddie-on-federal-books-papagianis-and-swagel.html
---------------------------------------------------------------------------
Recent news reports indicate that Freddie Mac is developing a pilot
program under which private owners of capital would purchase a security
that absorbs losses on a pool of loans ahead of Freddie Mac itself.
This would have Freddie in a senior position and outside investors in a
first-loss position. Such a structure would have the GSEs lay off
housing risk on private market participants while obtaining a market-
based indication of the return market participants require to take on
housing credit risk. Such a pilot program would thus test the appetite
of the private market for first-loss risk on housing assets in exchange
(presumably) for higher returns, indicate the market's assessment of
the value of the Government guaranteed on mortgages, and illuminate the
path leading to a reduced role of the Government in housing finance. We
have learned that it is difficult for the Government to price its
guarantee for taking on risk, making it extremely useful to have a
market-based indication. One could imagine applying such a framework to
FHA loans as well to reduce Government exposure and protect taxpayers
compared to the current model under which the FHA does not share risk.
Conclusion
A revitalized housing sector and an end to the sadly elevated
number of foreclosures would mark salient progress in moving past the
consequences of the housing bubble and financial crisis. Government
policies can usefully contribute to the needed adjustment. But it is
essential to be clear about the costs associated with proposals such as
those from the Administration that would expand efforts to use taxpayer
funds to avoid foreclosures. It is far from clear that these efforts
will be effective and even less apparent that they will have a positive
impact commensurate with the taxpayer resources involved. It would be
better instead for Congress to consider steps that would hasten the
housing market adjustment, facilitate the return of private capital
into housing finance, and bring the housing sector more quickly to the
point at which home prices and construction activity lift off the
bottom into recovery.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM PHILLIP L. SWAGEL
Q.1. Last November, Congress passed legislation making loan
limits for FHA-insured loans higher than the loan limits for
privately insured loans purchased by the GSEs for the first
time in history. In December, Congress increased the GSE
guarantee fee by 10 basis points, which has the effect of
making privately insured loans bought by Fannie and Freddie
more expensive than loans insured by the FHA.
Aren't these actions going to further move the FHA far
beyond its core mandate of serving low to moderate income
borrowers who otherwise would not have access to home
ownership?
A.1. Yes, higher loan limits for FHA and higher fees on GSE-
backed loans both make FHA lending relatively more attractive.
This is in addition to the lower downpayments required for FHA-
backed loans than for GSE-backed mortgages. Having FHA provide
a guarantee for people buying homes with mortgages of up to
$729,750 is far beyond its core mandate to serve low to
moderate income borrowers. It is hard to understand why helping
people buy homes with a mortgage of $729,750 is an appropriate
use of Government resources.
Q.2. And in so doing, don't these moves supplant privately
insured loans with FHA-backed loans, thereby driving private
capital away from the housing market and putting taxpayers at
risk for losses that otherwise would be borne by the private
sector?
A.2. FHA guarantees mean risk for taxpayers; indeed, one of six
FHA-backed loans is delinquent. Were it not for the increased
FHA loan limits, the private sector would handle mortgages
larger than the conforming loan limit for Fannie Mae and
Freddie Mac. FHA activities thus displace private sector risk-
taking and private capital.
Q.3. Given that the FHA is severely undercapitalized and
teetering on the edge of a massive bailout, shouldn't the FHA
be focused on managing and containing its significant risk
exposure, and not on increasing its market share and financial
exposure?
A.3. As documented by Joseph Gyourko and Edward Pinto in
research released by the American Enterprise Institute (AEI),
FHA is in severe financial difficulty. As Pinto notes, the
agency is on track to end 2012 with only $3 billion in
reserves, considerably worse than the $11.5 billion in reserves
projected in November 2011 (http://www.aei.org/files/2012/08/
20/-fha-watch-no-8-august-2012_142920761624.pdf). The agency is
likely insolvent if measured by private sector standards rather
than governmental accounting methods. The FHA should focus on
managing and containing its risk, since FHA losses ultimately
would require a costly bailout by taxpayers.
Q.4. What actions should Congress take to mitigate these risks
and level the playing field?
A.4. Congress should refocus FHA on a core mission of assisting
homebuyers with low- and moderate-incomes. This could be done
by reducing the limit for mortgages to qualify for an FHA
guarantee and by imposing income tests on borrowers receiving
FHA assistance. These steps would help reduce the FHA market
presence back to the roughly 10-15 percent historical market
share. It would be useful as well to require FHA to provide
more realistic measures of its financial condition so that
Congress and the public have a full understanding of the
agency's financial condition and the risks borne by taxpayers.
Additional Material Supplied for the Record
STATEMENT OF THE NATIONAL ASSOCIATION OF REALTORS'
Introduction
On behalf of more than 1.1 million REALTORS' who are
involved in residential and commercial real estate as brokers, sales
people, property managers, appraisers, counselors, and others engaged
in all aspects of the real estate industry, thank you for giving us an
opportunity to share our thoughts on improving the housing sector, and
thus spurring an economic recovery.
It's no secret our Nation's housing markets remain depressed and
continue to suffer. While no one thought the crisis would carry on so
long, markets are slowly recovering, but remain in need of immediate
policy solutions to address the myriad challenges in order to stabilize
housing and support an economic recovery. REALTORS' have
long maintained that the key to the Nation's economic strength is a
robust housing industry. And, we remain steadfast in our belief that
swift action is needed to directly stimulate a housing recovery.
REALTORS' Plan To Improve Housing
REALTORS' are eager to work with Congress and the
Administration to put a plan into action that helps significantly
reduce monthly mortgage payments by reducing the barriers to low-cost,
streamlined refinancing for millions of homeowners as an alternative to
defaulting on their mortgage loans. Moreover, improving access to
simple, low-cost refinancing and streamlining the process will help
hardworking families who have also stayed current on their mortgage
payments, which also goes a long way to helping keep more families in
their homes.
With the mantra of helping the Nation's homeowners maintain their
homes, in late 2011, NAR worked with two well-respected policy think
tanks--the Progressive Policy Institute (PPI) and the Economic Policies
for the 21st Century (e21)--to organize and conduct a housing solutions
policy. ``New Solutions for America's Housing Crisis'' brought together
policy leaders, industry representatives, Members of Congress, thought
leaders and the media to present ideas and make actionable
recommendations intended to stimulate the growth necessary for a
sustained recovery in housing and extend an ensuing positive effect on
job creation and the broader economy.
Crafted from the conference's discussions are recommendations that
REALTORS' respectfully submit as examples of relatively easy
solutions that can help the housing sector recover. In recent weeks,
some of these ideas have been suggested as solutions by the
Administration and Federal Reserve. REALTORS' appreciate
their thoughtfulness in identifying a plethora of fixes that we believe
will make an immediate, positive impact.
Do Not Risk Weakening Our Nation's Housing Markets Any Further
There are a number of proposed rules and recent congressional
actions that actively thwart the housing recovery. Rectifying these
issues will offer confidence and reassurance to investors and
consumers, and bring them back into the marketplace.
1. Re-craft the Qualified Residential Mortgage rule mandated by the
Dodd-Frank Act to include a wide variety of traditionally safe,
well documented and properly underwritten products. Requiring a
20 percent down payment coupled with stringent debt-to-income
ratios and rigid credit standards--as defined under the
proposed rule by six Federal regulators--would be detrimental
to prospective home buyers, especially first-time and middle-
income buyers.
2. Restore higher loan limits supported by the GSEs to provide
additional liquidity in housing markets and to assure mortgage
financing options while stabilizing local housing markets.
3. Resist proposals that call for changing the tax rules that apply
to home ownership now or in the future. Without a doubt, now is
not the time to change the mortgage interest deduction or any
other housing incentives. Making gradual or targeted changes
would send the wrong signal further undermining confidence and
further depressing home values.
4. Reject further g-fee increases as a means to offset the costs of
a payroll tax extension. Additionally, we urge you to reject
measures that would increase Ginnie Mae's g-fees or FHA
mortgage premiums (both single- and multi-family) that will
disproportionately harm low- and moderate-income borrowers,
first-time homebuyers, renters with modest incomes, and others
when those funds are diverted to the Treasury and used as an
offset to pay for a 10-month extension of the current law.
Diverting these fees away from their intended purpose is a de
facto tax increase on homebuyers and raises costs on the very
same Americans the underlying bill sought to help.
Restore Vitality to Our Communities and Neighborhoods by Reducing the
Foreclosure Inventory
REALTORS' are more than business owners within local
communities--we are residents. As foreclosures mount,
REALTORS' are not just impacted by reduced sales, we are
also impacted by depressed home values that reduce Government services
and further deteriorate communities. Therefore, efforts to mitigate
foreclosures and restore communities are paramount to our members.
1. Support S.170, The Helping Responsible Homeowners Act, sponsored
by Senators Barbara Boxer (D-CA) and Johnny Isakson (R-GA).
Their bill would remove refinancing limits on underwater
properties for borrowers that have been paying on time, and
would eliminate risk-based refinancing fees charged by Fannie
Mae and Freddie Mac.
2. Support bipartisan Senate efforts calling for improvements to the
Home Affordable Refinance Program (HARP). Led by Senators
Barbara Boxer (D-CA), Johnny Isakson (R-GA) and Robert Menendez
(D-NJ), the time is appropriate to enhance HARP and provide
refinancing opportunities to at-risk borrowers as an
alternative to defaulting on their mortgage loans.
3. Direct Fannie Mae, Freddie Mac and servicers to prioritize short
sales above foreclosures.
4. Support all necessary foreclosure/loss mitigation efforts to keep
American families in their homes. Realogy Corporation's
President and CEO, Richard Smith, has proposed a debt for
equity approach to help underwater borrowers in trouble keep
their homes and lower their monthly payments while lenders take
a smaller hit than they would have with a default and
foreclosure. Realogy Corporation is a leading provider of real
estate and relocation services representing world-renowned
brands and business units that 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.
5. Ensure that any plans by Government agencies to sell foreclosed
properties in bulk are done on a limited scale, are carefully
tailored and appropriate for the markets in which they occur,
and provide flexibility should market conditions not ultimately
favor rental conversion of properties.
Open Opportunities for Private Capital To Return to the Mortgage
Marketplace To Foster New Demand Among Responsible Homebuyers
Reforming the secondary mortgage market is essential to ensuring a
reliable source of mortgage lending for consumers in all types of
markets and is integral to the Nation's economic and housing recovery.
NAR supports efforts to increase private capital in the housing finance
market and reduce the size of the Government's involvement. Below are
two quick fixes that we believe will immediately encourage the return
of private capital.
1. Open up the FHA Section 203(k) rehabilitation loan program to
investors to encourage purchasing of foreclosed property. This
will facilitate the rehabilitation of the existing housing
stock and help reduce the inventory of foreclosed homes.
2. Require the GSEs to temporarily suspend investor financing
limitations, especially the limit on the number of mortgage
loans allowed for any one investor/borrower (currently 4 for
Freddie Mac and 10 for Fannie Mae). This will give small,
private investors the opportunity to absorb some of the excess
inventory, resulting in the stabilization of prices for
existing real estate-owned (REO) properties.
Support a Secondary Mortgage Market Model That Includes Some Level of
Government Participation
Though REALTORS' agree that a properly functioning
housing finance market requires reducing the Government's participation
and increasing private capital, full privatization is not an effective
option.
REALTORS' oppose proposals that call for full
privatization of Fannie Mae and Freddie Mac. This is not an effective
option because private firm's business strategies will focus on
optimizing their revenue/profit generation. This model would foster
mortgage products that are more aligned with the businesses goals than
in the best interest of the Nation's housing policy or the consumer.
Conclusion
Home ownership matters. It represents the single largest
expenditure for most American families and the single largest source of
wealth for most homeowners. The development of home ownership has a
major impact on the national economy and the economic growth and health
of regions and communities. Home ownership is inextricably linked to
job access and healthy communities and the social behavior of the
families who occupy it. We recognize the serious public debate as to
which tax and spending policies will best support the sound fiscal
management that our Nation requires. However, we urge caution against
dismantling or eliminating vital resources for housing that provide
important economic, social, and societal benefits.
The National Association of REALTORS' sees a bright
future for the housing market and the overall economy. However, our
members are well aware that the future we see rests on the industry's
and the economy's ability to successfully navigate some significant
obstacles. Congress and the housing industry must maintain a positive,
aggressive, forward looking partnership if we are to ensure that
housing and national economic recoveries are sustained.
I thank you for this opportunity to present our view on improving
the housing market. As always, The National Association of
REALTORS' is at the call of Congress, our industry partners,
and other housing stakeholders to help facilitate a sustainable housing
and national economic recovery.
______
STATEMENT SUBMITTED BY TIM C. FLYNN, CEO, NATIONAL VALUE ASSURANCE, LLC
A Unique Strategy for Addressing the Enterprise REO Inventory Imbalance
A solution designed to be immediately deployable and without cost to
taxpayers!
The purpose of this submission is to present a new and compelling
strategy that will significantly reduce, or even eliminate the excess
REO inventory that is owned by the Enterprises. This strategy is best
described as the ability to provide qualified homebuyers, who intend to
be owner occupants, with the contractual assurance that their home
purchase will not be subject to the value degradation that has been
experienced by almost all homebuyers in America over the past 6 years.
In a phrase, we are referring to the strategy as ``homebuyer's price
(value) protection.''
Over the past 2 years, the inability of the American housing
economy to absorb it's excess housing inventory and install a solid
bottom to the downward spiral in home prices has been a great
disappointment. This is especially true in the case of the Federal
Reserve, which through various policy initiatives, has facilitated the
lowest costs for mortgage financing in the Nation's history. Most
regulators and policy makers believed that home affordability was the
key to resolving the Nation's housing problem. This strategy proved
ineffective, and the need to find a solution continued with increasing
intensity. Policy makers and the Fed are now defaulting to one of the
only remaining options: a bulk sales strategy discussed in the January
4 white paper.
The principal contention of this document is that the Enterprises,
neighborhoods, and taxpayers would be better served by occupying these
REO's with qualified buyers rather than ``bulk purchase owners.'' We
contend that this can be accomplished quickly and efficiently with a
``homebuyer's price (value) protection'' program. We disagree with the
conclusion that if the most favorable home affordability metrics in
history couldn't attract buyers, then individual qualified buyers were
not present in sufficient numbers to significantly impact REO
inventory. In our opinion, the major barrier to attracting qualified
home buyers in this market is crowd psychology. It's about fear--the
fear of losing principle value on the largest investment most families
will ever make.
Our strategy represents a substantial departure from traditional
thinking. The January 4, 2012, Fed white paper, entitled ``The U.S.
Housing Market: Current Conditions and Policy Considerations'', did not
include the concept of homebuyer's price protection in its analysis and
subsequent recommendation to Congress. It is our contention that the
implementation of this strategy into the Enterprises REO marketing plan
will result in a dramatic reduction of inventory and an optimum return
of capital to the taxpayer. It will also foster a rapid, if not
immediate, perceived bottom to the downward spiral in home prices.
We have created a model utilizing homebuyer's price protection that
projects a present value benefit in excess of $42 billion dollars, or
in our estimate, 36 percent in excess of the reasonable financial
returns from any ``bulk sales'' tactic that is being considered and
seems to be gaining momentum.
Certainly the financial implications are an important
consideration, but as suggested in both the August 15th RFI issued by
the Enterprises and the Fed white paper, another critical consideration
is to protect the value and integrity of affected neighborhoods. On
this point, there is universal agreement that the most desirable
occupants for the REO inventory are qualified owner occupants.
Our model that generated the above result assumed a 100 percent
utilization of one strategy versus another. We clearly understand that
the characteristics of the Enterprise REO inventory require multiple
approaches to attain a satisfactory result for taxpayers. However, it
is clear and financially irrefutable that the most beneficial solution
for all related parties is to install owner occupants into as many REOs
as possible and the only way to accomplish this is to use a form of
homebuyer's price protection.
Thank you.
STATE OF THE HOUSING MARKET: REMOVING BARRIERS TO ECONOMIC RECOVERY--
PART II
----------
TUESDAY, FEBRUARY 28, 2012
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:07 a.m., in room SD-38, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. I will call this hearing to order.
I thank our witnesses for joining us. Today's hearing is
part two of our examination of the state of the housing market
and steps that can be taken in the near term to remove housing
market barriers to economic recovery.
This Committee has undertaken a bipartisan, in-depth look
at long-term housing finance reform. I hope to continue this
effort with additional hearings and by working with Ranking
Member Shelby and Committee Members to seek bipartisan
consensus. In today's hearing, we will focus on the immediate
problems confronting the housing market and the larger economy,
which is a critical first step in finding a long-term solution.
In January, the Federal Reserve released a white paper
entitled, ``The U.S. Housing Market: Current Conditions and
Policy Considerations.'' In this paper, the Fed stated that
continued weakness in the housing market poses a significant
barrier to a more vigorous economic recovery.
As I stated during our February 9 hearing on this topic, I
share the concern that ongoing challenges in the housing market
are acting as a drag on the economic recovery. I want to find
practical solutions to help overcome them.
Today's hearing provides a good opportunity to discuss the
current housing market environment with regulators and the
Administration's top housing official. I would like to hear
from our witnesses about potential solutions, both legislative
and administrative.
In addition to the Federal Reserve's recent white paper,
other analysts, regulators, and the Administration have offered
up options and proposals to address barriers to housing and
economic recovery. Earlier this month, the Administration
outlined a new housing plan to give more families the
opportunity to refinance at today's low rates. Just yesterday,
the Federal Housing Finance Agency announced its first pilot
sale in an initiative to address the large volume of real
estate-owned properties held by the Government Sponsored
Enterprises.
At our February 9 hearing, the witnesses and a number of
Committee Members on both side of the aisle cited helping
families refinance at today's low interest rates as a powerful
example of an action that would help bolster the housing market
and stabilize housing prices. This is particularly true for
mortgages held by the GSEs. I would like to see the FHFA take
additional steps to facilitate refinancing for families
currently stuck in higher-interest mortgages held by Fannie and
Freddie. I look forward to hearing more from Acting Director
DeMarco on steps that FHFA is planning to take to speed up
these refinancings.
Without a robust housing market recovery, our economy will
continue to drag and millions of Americans will continue to
struggle to make ends meet. I look forward to continuing to
work with our witnesses and Members of the Committee to find
workable solutions to improve the housing market and lead us
further down the road to prosperity.
With that, I turn to Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman.
Welcome, again, Mr. Secretary.
Mr. Donovan. Good morning.
Senator Shelby. This is the second hearing this Committee
has held this year to examine the Nation's weak housing market.
Each witness before us today has a proposal to revive the
housing market and help struggling homeowners. Some of these
proposals would require Congressional action.
As I stated during our last hearing, I believe that this
Committee should come together and craft common sense
legislation to address the serious problems weighing on the
housing market today. Hopefully, today's witnesses will
identify some potential solutions to these problems and give
the Committee some options for its consideration.
Our first panel will be HUD Secretary Shaun Donovan, who
will discuss the President's most recent housing proposal. The
centerpiece of that plan, as I understand it, would allow
underwater borrowers with loans held in the private sector to
refinance with an FHA loan. To subsidize the additional risk
placed on the FHA fund, the President has proposed using money
from a bank tax. As we have not yet received many of the
details or any analysis of this plan, I look forward to hearing
more from the Secretary as to who this plan may help and the
Administration's estimate of its impact on the housing market
as a whole.
Because the President has proposed a new use for the FHA, I
would like Secretary Donovan to update us on the status of the
FHA fund. The President's budget predicted that FHA would
require a taxpayer bailout this year were it not for the funds
it would receive from the recent mortgage settlement. And given
the repeated assurances from the Secretary and multiple FHA
Commissioners as to the strength of the fund, this revelation
is troubling, although not unexpected for those of us here who
have predicted insolvency for the FHA for quite some time.
Hence, today's discussion should also include what changes
should be made, Mr. Secretary, I hope, to FHA to ensure that
the taxpayer is not on the hook for FHA losses.
We also, I believe, we need to learn more about the
settlement that is providing these funds to the FHA. To date,
Congress and the public have been given only broad outlines of
the terms of the settlement, and as a result, there are many
unanswered questions about how the settlement was reached and
how it will operate. The most important question, I believe, is
how will this money be distributed, Mr. Secretary. In
particular, is there a connection between how much harm a
homeowner suffered and the amount of compensation a homeowner
receives?
Although having the settlement compensate as many people as
possible may make sense politically, settlement funds, I
believe, should compensate homeowners who suffered actual harm
and deter future violations of the law. The settlement,
however, appears to come up short on both counts, but we will
wait and see.
For example, the Administration's press release indicates
that homeowners who were improperly foreclosed upon will
receive only about $2,000, and as a result, homeowners who were
wrongfully foreclosed upon will still likely have to pursue the
remainder of their claims in court or through financial
regulators. In contrast, many homeowners who suffered no legal
harm appear to be eligible for compensation under the
settlement, as well. I hope Secretary Donovan today can provide
more clarity on how the Administration will determine who will
be compensated under the settlement and for what.
Our second panel today, Mr. Chairman, as you pointed out,
will discuss two recent papers by the Federal regulators on
reforming the housing market. Federal Reserve Governor Duke
will be discussing the white paper that was recently sent to
Congress by Chairman Bernanke. This paper reviewed numerous
proposals but concentrated on measures to convert bank-owned
real estate to rental property.
FHFA Director DeMarco will be discussing the new strategic
plan he recently released outlining the future of the
conservatorships of Fannie Mae and Freddie Mac. The
conservatorship has already lasted over 3 years. The longer it
continues, the greater the risk is, I believe, that taxpayers
will suffer additional losses as Fannie and Freddie's uncertain
future erodes their ability to retain high-quality personnel
and make essential infrastructure investments.
But given the FHFA's limited legal authority as
conservator, only Congress, I believe, can determine the future
of Fannie and Freddie. I regret that Congress did not take
action with regard to these companies years ago. I look forward
to learning more about what FHFA intends to do until Congress
does act and what additional steps Congress should take to end
the conservatorships of Fannie and Freddie.
I believe the testimony of all three of today's witnesses
reveals that there is a great deal to be done to both revive
the housing market and reform the GSEs. It is always my hope
that this Committee does not delay any further in moving
bipartisan legislation to help struggling homeowners and to
reform our housing market.
Thank you, Mr. Chairman.
Chairman Johnson. Thank you, Senator Shelby.
Are there any other Members who wish to make a brief
opening statement? Senator Menendez.
STATEMENT OF SENATOR ROBERT MENENDEZ
Senator Menendez. Thank you, Mr. Chairman. I appreciate you
holding this hearing. I think it is incredibly important. It
has long been our top priority in the Housing Subcommittee that
I am privileged to chair to restore the housing market to full
health so that we can get the broader economy moving more
quickly. And we have made some progress in knocking down
barriers that are slowing the housing market rebound, but there
is a lot more to do.
So I welcome the Secretary. I am looking forward to hearing
more about the Administration's plan. Many of those items are
items that the Subcommittee has proposed. That includes helping
homeowners refinance more easily, which I am currently working
on a bill to implement. It also creates national servicing
standards so that banks are held accountable for following
foreclosure laws and fixing the vacant homes that are blighting
our neighborhoods and turning some of them into affordable
rentals in those places that make sense.
But last, I am really concerned, and I look forward to Mr.
DeMarco's appearance, Mr. Chairman. The FHFA has shown a dismal
lack of initiative in the housing crisis and needs to be far
more aggressive in taking steps that could both help homeowners
and taxpayers, particularly on the question of refinancing and
principal reduction. We can either achieve that through
foreclosure or we can achieve it through refinancing and
principal reduction. It seems to me that there are greater
benefits for both the housing market and American families
through that--via that process than what we have seen today,
and I think that we can do that without sacrificing taxpayers'
interest, because Fannie and Freddie's financial health is
directly tied to how quickly the housing market recovers. So I
look forward to the opportunity to hear from Mr. DeMarco as
well as the Secretary.
Chairman Johnson. Any other Members?
[No response.]
Chairman Johnson. Thank you.
I want to remind my colleagues that the record will be open
for the next 7 days for opening statements and any other
materials you would like to submit.
Now, I would like to briefly introduce our first panel
witness. Secretary Shaun Donovan is the 15th Secretary of the
Department of Housing and Urban Development. Secretary Donovan
has served in this capacity since January 2009. Secretary
Donovan, you may proceed with your testimony.
STATEMENT OF SHAUN DONOVAN, SECRETARY, DEPARTMENT OF HOUSING
AND URBAN DEVELOPMENT
Mr. Donovan. Thank you, Chairman Johnson, Ranking Member
Shelby, Members of the Committee. Thank you for this
opportunity to testify about how the Administration's housing
initiatives are helping remove barriers to economic recovery.
Thanks in part to the partnership of this Committee, this
is a very different environment than the one we faced when
President Obama took office. Back in January 2009, America lost
818,000 jobs. Housing prices had fallen for 30 straight months
and foreclosures were surging to record levels month after
month.
Today, more than 13 million homeowners have refinanced
their mortgages since April 2009, putting nearly $22 billion a
year in real savings into the hands of families and into our
economy. Because we provided responsible families opportunities
to stay in their homes, more than 5.6 million mortgage
modifications have been started in the last 3 years and
foreclosure notices are down about 50 percent since early 2009.
Because we helped communities struggling with concentrated
foreclosures, today, vacancy rates are down and property values
are up in areas where we focused Neighborhood Stabilization
dollars. Most important of all, our economy has added private
sector jobs for 23 straight months, totaling 3.7 million jobs.
Mr. Chairman, this represents important progress, but there
is more to be done. Three key barriers hold back the recovery
of our housing market, which is key to our broader economic
recovery. The first is keeping more families in their homes.
While the number of homeowners at risk of losing their home is
down significantly, there are still too many families that face
hardships and are underwater, and their unaffordable monthly
payments put them at an increased risk of default, dragging
down markets, reducing labor mobility and consumer spending.
Indeed, as economist Mark Zandi said, there is no better
way to quickly buoy hard-pressed homeowners than helping them
take advantage of the currently record low fixed mortgage rates
and significantly reduce their monthly mortgage payments. That
is why last fall, the President announced critical changes that
would help more families with loans backed by Fannie Mae and
Freddie Mac to refinance. Thanks to this work, another 300,000
families have already filed applications for refinancing and
stand to save an average of $2,500 per year, the equivalent of
a good-sized tax cut.
Similarly, we have also been taking steps to make FHFA
streamlined refinance available to more borrowers with loans
insured by the FHA, allowing them to refinance into a new FHA
insured loan at today's low interest rates without any
additional underwriting. This not only reduces homeowners'
monthly mortgage payments, but also risk to FHA.
Still, there is no reason why families with FHA loans or
loans backed by the GSEs should be the only ones who get help.
Millions of homeowners who have done the right thing and paid
their bills cannot refinance because they are underwater and
owe more than their homes are worth, leaving them stuck paying
higher interest rates that cost them thousands of dollars more
a year and putting them unnecessarily at risk.
That is why in his State of the Union Address President
Obama announced a plan that will give every responsible
homeowner in America the chance to take advantage of today's
record low interest rates. Any borrower with a loan that is not
currently guaranteed by the GSEs or insured by FHA can qualify
if they are current on their mortgage, meet a minimum credit
score, have a loan that is within FHA's conforming loan limits,
and are currently employed. While this program would be run by
FHA, it would be financed from a completely separate account
from FHA's MMI Fund. Indeed, by financing this proposal through
a dedicated funding source, it will have no impact on FHA's MMI
Fund. We look forward to working with Members of this Committee
to craft legislation to accomplish these goals and establish a
broad-based refinancing program.
At the same time we provide relief to responsible
homeowners and keep families in their homes, we also need to
attack the second barrier to our housing recovery, the overhang
of properties that are at risk of or already in foreclosure.
While targeted support to markets struggling with foreclosures,
blight, and abandonment has reduced vacancy rates, increased
home prices, and shrunk the inventory of homes for sale, an
overhang of properties at risk of or in foreclosure continues
to drag down property values and harm the hardest-hit
communities. With the rental market recovering faster, we need
to think creatively about ways we can dispose of this shadow
inventory.
With about a quarter-of-a-million foreclosed properties
owned by HUD and the GSEs, this August, HUD joined with FHFA
and Treasury to seek new and innovative ideas for absorbing
excess inventory and stabilizing prices. Yesterday, the FHFA in
conjunction with Treasury and HUD announced the first major
pilot sale of foreclosed properties to be repurposed into
rental housing. This marks the first of a series of steps that
the FHFA and the Administration will take to develop a smart
national program to help manage REO properties and ease the
pressure of these distressed properties on communities and the
housing market.
While expanding REO to rental is a critical tool, in the
hardest-hit markets where prices have dropped the most and the
most vacant and abandoned buildings are found, more needs to be
done to jump-start construction and reduce vacancy rates. That
is why President Obama has proposed Project Rebuild. Building
on the Neighborhood Stabilization Program, Project Rebuild
would allow commercial redevelopment essential to neighborhood
revitalization to be funded directly and expand the ability of
the private sector to participate with localities, ensuring
there is the expertise and capacity to bring these
neighborhoods back in a targeted way. Most important of all, it
would create 200,000 jobs in the places that need the most.
The third barrier to recovery, Mr. Chairman, is access to
credit. While we stabilize the market and put an end to the
worst abuses that caused this crisis, uncertainty over making
loans has made it too difficult to get a mortgage today.
Reducing this uncertainty is why we recently published our
indemnification rule to clarify standards in FHA's Lender
Insurance Program and continue to work with Congress to ensure
FHA direct endorsement lenders are subject to the same rules
and regulations. And it is why we believe it is important for
the Federal Housing Finance Agency to make clear the rules of
the road for GSE lenders with well defined, straightforward
reps and warranties that will further reduce uncertainty around
repurchase risk.
And, Mr. Chairman, a clear example of our efforts to clear
away all of these barriers to recovery is the historic $25
billion mortgage servicing settlement reached by the Obama
administration and an unprecedented coalition of 49 State
Attorneys General that spanned partisan and geographic lines.
The product of 16 months of intensive negotiations, the
settlement addresses the harm mortgage servicing abuses have
done to homeowners and the housing market more broadly. It
keeps more families in their homes by providing tens of
billions of dollars in relief for struggling homeowners, much
of which will come in the form of principal reduction for
distressed homeowners.
Keeping these families in their homes not only improves
their prospects, but also those of their neighborhoods who have
watched their own property values plummet by $5,000 to $10,000
each time a foreclosure sign goes up on their block. Indeed,
that is why we recently tripled the incentives for cost
effective mortgage modifications through the HAMP program that
include a write-down of the borrower's principal balance and,
for the first time, made these incentives available to Fannie
Mae and Freddie Mac. We believe this is good for taxpayers and
families alike.
The settlement attacks the shadow inventory by reducing the
number of homes that will need to go to foreclosure and by
establishing a clear foreclosure process, helping families who
are waiting to buy vacant homes and lifting neighborhood home
prices as a result. And it reduces uncertainty that impedes
access to credit by providing clear and fair servicing
standards that build upon the new protections in our Homeowner
Bill of Rights.
That means at the same time the new Consumer Financial
Protection Bureau is putting in place a single, straightforward
set of common sense rules that families can count on when they
are buying a home, the standards in this settlement will give
people the confidence that lenders and servicers are adhering
to a specific set of rights should they ever lose a job or have
a medical emergency that puts their home at risk. No more lost
paperwork. No more runaround. No more excuses. And by forcing
banks that service a majority of all mortgages in the country
to fix the types of problems we uncovered during our
investigations, these new protections set the stage for
servicing standards reform more broadly.
And so, Mr. Chairman, as you can see, we have made very
important progress in recent months to get our housing market
back on track, putting in place the most significant principal
reduction effort in history and establishing critical consumer
protections that hold powerful institutions accountable for
their actions, helping our housing market recover and giving
every homeowner the dignity, respect, and fair treatment they
deserve.
But for all this progress, we still need Congress to act to
ensure that every responsible family in America, regardless of
who owns their loan, has the opportunity to refinance. We still
need to continue our work together to create a robust private
housing system of housing finance and protect the FHA fund for
the future. And we still need a balanced National Housing
Policy that ensures Americans have choices in housing that make
sense for them and their families. That is the goal of all of
this work and it is fundamental to creating an economy that is
built to last. I look forward to working with Congress to make
it possible.
And with that, I look forward to taking your questions.
Thank you.
Chairman Johnson. Thank you for your testimony.
As we begin questions, I will ask the Clerk to put 5
minutes on the clock for each Member.
Secretary Donovan, some have stated concern about the
potential risk to taxpayers from the President's proposal to
refinance non- Government-backed loans through a new FHA
program. What policy do you believe FHA can adopt to ensure
that any risk to the FHA and taxpayers is paid for?
Mr. Donovan. Mr. Chairman, a very important question. First
and foremost, I think the focus of this program, this proposal,
is on borrowers who are paying, who have come through this
entire crisis even though they are underwater and continue to
be responsible and make their payments. Those are already low-
risk loans, and by lowering their payments further, on average,
about $3,000 a year, we would make them even less risky. So
that is the first important focus.
Second, as I mentioned in my testimony, we would set up an
entirely separate fund to--that would not affect FHA's finances
in its MMI or other funds and would identify a dedicated source
of funding to offset risk in those loans.
Third, we would also impose and look forward to discussing
with Congress a set of standards around what loans could
refinance. For example, we have proposed a cap of 140 percent
loan-to-value so that whoever owns the loans currently is
required to do principal reduction and reduce the risk on those
loans even further as they are refinanced.
But the last thing I would say, and this is perhaps the
most important, is the single most important thing we can do to
protect the taxpayer is to ensure that existing investments of
FHA, Fannie Mae, Freddie Mac, any Government-backed entity,
that those investments improve in value. And by stabilizing the
housing market more broadly, by putting billions of dollars
into the pockets of homeowners that can help to boost the
economy more broadly, we believe that these steps on
refinancing can lift the overall housing market and, therefore,
lower losses on legacy books of loans in the FHA and at the
GSEs.
Chairman Johnson. Mr. Secretary, a key component of the
multi-State Federal servicer settlement is that a uniform set
of servicer standards will be put in place for the five largest
banks. In your opinion, how will this part of the settlement
affect the foreclosure and loss mitigation process that
servicers engage in, and what benefits will be provided to the
housing finance sector as a whole? What is the time line for
implementation of these standards?
Mr. Donovan. A very important piece of the settlement, as
you recognize, is establishing these standards, and one of the
things I would point out, we worked very closely with the FHFA,
and I want to compliment them on their work on that, to make
sure that these standards did not just cover FHA and non-GSE
loans, but also would cover GSE loans. So it is comprehensive
in terms of the types of loans that it covers. And just the
five servicers that have signed on at this point--there are
others that we continue to negotiate with--but just the five
represent a majority of all loans serviced in the country. So
it is very important just to have those five signed on.
The three key benefits that I would identify in terms of
the servicing standards, one is that homeowners will be able to
depend on getting real help to stay in their homes, as required
by FHA standards and, frankly, in a way that will benefit the
investors in those loans, as well. We found in our
investigations significant noncompliance with our requirements
for FHA in terms of loss mitigation and other standards, and so
protections like, for example, not being foreclosed on while
your application for assistance is being evaluated by the bank
is one of the standards. Having a single point of contact at
the banks so that you are not shuffled from person to person,
your paperwork lost, et cetera. So those are important
consistent standards that are there that will help homeowners.
Second of all, by establishing these standards, we expect
to speed up not just the process of getting help to homeowners,
having fewer families falling into foreclosure, but right now,
the foreclosure process itself is dragging on across many, many
States and is hurting neighbors where homes are sitting vacant
in those communities. And so clarifying and having a single
foreclosure process across the country is a very important step
in terms of getting relief to housing markets, as well.
And then, finally, I would point out that investors in
these loans will also now have a more consistent set of what
they can expect in the way that loans are serviced and the
kinds of steps that will be taken to protect their investment,
just as they will the taxpayers' interest in the FHA.
Chairman Johnson. Secretary Donovan, can you provide
additional detail on how the elements of the servicing
settlement coordinate with the Administration's housing plan.
Mr. Donovan. I would be very happy to do that. I think two
specific points that I would make beyond the servicing
standards that we just spoke about. These servicing standards,
I think, are a good starting point for the broader work that we
are doing across all the regulatory agencies to create uniform
servicing standards by regulation, and so that is a first
important step. But two other points are very critical here.
One is that the settlement would make available to non-GSE,
non-FHA borrowers some amount of refinancing for current
borrowers. So it is, if you will, a downpayment, so to speak,
on the broader proposal that the President laid out in the
State of the Union Address. So that refinancing piece is
important.
Second, it is, as I said in my testimony, the most
important step that we have taken thus far of the crisis, to
get real significant principal reduction started. But by
combining that with increasing our incentives for principal
reduction through the HAMP program, making those incentives
available to Fannie Mae and Freddie Mac, we think that the
settlement could have a catalytic effect in really showing,
demonstrating that principal reduction is positive, not just
for homeowners and communities, but is also positive for
investors. When it is done in a net present value positive way,
in a way that increases returns to investors, we think it could
set a new standard along with these other steps that we have
taken to make principal reduction more widespread as a solution
to our housing challenges.
Chairman Johnson. Senator Shelby.
Senator Shelby. Thank you.
Secretary Donovan, in 2009, right here, you told this
Committee, and I will quote, ``Based on current projections and
absent any catastrophic home price decline, FHA will not need
to ask Congress and the American taxpayer for extraordinary
assistance. There is no need for any bailout.'' Those are your
words.
Despite this reassurance, OMB predicted that were it not
for the funds that FHA is to receive in the mortgage
settlement, FHA likely would have required a taxpayer bailout
this year. As Secretary of HUD, you are ultimately responsible
for ensuring the solvency of FHA regardless of unexpected
events or erroneous projections. Without any caveats or
qualifiers, can you assure this Committee that the American
taxpayer will not need to bail out the FHA fund?
Mr. Donovan. Senator, I wish I had a crystal ball----
Senator Shelby. I know that.
Mr. Donovan. ----of exactly how the housing market would
perform the rest of this year and beyond. The fact is that I am
confident, and I remain confident, that we are taking
responsible steps to protect the FHA fund and, at the same
time, to ensure that our housing market continues to recover.
And specifically to your question about the numbers in our
budget, as OMB made clear, those numbers were outdated at the
time that they were published. We did not include in our budget
additional premium increases that were announced yesterday
because we were waiting to see the outcome of the servicing
settlement and the recoveries that we would make there from our
increased enforcement activities.
Senator Shelby. What will the additional fees do for you?
How much money will it bring in, roughly?
Mr. Donovan. If you include both the--actually, not
including the premium increases that were included in our
budget, the additional changes that we announced yesterday will
net us over a billion dollars more between fiscal year 2012 and
2013.
Senator Shelby. OK. Secretary Donovan, there has been very
little information provided to the public regarding how the
Administration determined that the settlement compensates
fairly homeowners who have legal claims. In your review, how
many borrowers did you find that had been improperly foreclosed
upon?
Mr. Donovan. Senator, I think this is a very important
point about the investigations that we did. One piece of it was
on improper foreclosures.
Senator Shelby. OK.
Mr. Donovan. But we also--we began our investigation at FHA
in the summer of 2010 looking at, more broadly, at servicing
problems, not just in the foreclosure process but more broadly
in the servicing problems. And before even the word ``robo-
signing'' became a publicly used term, we were more than a year
into those investigations.
Senator Shelby. OK.
Mr. Donovan. And so, to be clear, what we found in the case
of some institutions, as high as 60 percent error rates in
servicing FHA loans, a whole range of different types of
errors. And then equally high rates of problems in foreclosures
with certain institutions.
We will be actually making public a number of those
investigations, redacting sensitive information that may be
there, but we will be making those available publicly this
week----
Senator Shelby. Would you furnish that----
Mr. Donovan. ----and that we would be happy to share more
detail on the----
Senator Shelby. With the Committee.
Mr. Donovan. ----specifics of those reports with the
Committee.
Senator Shelby. With this Committee.
Mr. Donovan. Yes.
Senator Shelby. Does a borrower under the settlement need
to have suffered any legal harm to be eligible for a refinanced
mortgage or principal reduction under the settlement?
Mr. Donovan. There are different pieces of assistance that
come from the settlement. There is direct compensation that is
available that really coordinates with assistance that is made
available by the OCC and the Fed through their process which
came out of the very same investigations. So there is direct
assistance there.
But one of the things that we found, Senator, as we went
through and investigated this is that there were many, many
harms to those who had FHA loans, for example, who, because
their paperwork was lost, did not get help or did not get help
as quickly. And in that case, it is very difficult to say
precisely what would have happened had they gotten help on
time. And so without the ability to say exactly what the amount
of harm is in each of those cases, we had to set some standards
for those who were harmed to help those homeowners. So,
honestly, there is no precise way to measure exact harm in all
of these processes that we had.
The other thing, frankly, that we found, as I said in my
testimony, is that if you live next door to a foreclosure, if
there was somebody wrongly foreclosed on, that harms your
neighbor who has done absolutely nothing wrong. And so we felt
having a settlement that provided broader help to those housing
markets that have been hardest hit through, for example,
refinancing for borrowers who are current, was a--had a real
connection to the type of harm that we saw as we went through
these investigations.
Senator Shelby. But should not compensation as a principle
be based on harm, in other words, somebody suffering harm?
Mr. Donovan. I could not agree more----
Senator Shelby. OK.
Mr. Donovan. and again, the number of families that I have
seen who have done everything right, who have paid their
mortgages, and because there was a wrongful foreclosure next
door, because somebody lost their home that should not next
door, their own house prices have been harmed as a result.
Senator Shelby. Mr. Secretary, shifting around a little
bit, about a month ago, President Obama told the American
people that he was sending this Congress a plan to address the
troubled housing market. Subsequently, he has given speeches
urging Congress to, quote, ``pass his plan.'' Today, it is my
knowledge, as of this morning, Congress has not received that
plan. We have not received it here. It has not been supplied to
the Committee. When will the Administration's housing plan be
sent up for us to consider?
Mr. Donovan. Senator, I think it is fair to say that we
have shared a plan of the program that we would like to see
enacted. We have had a series of meetings with your team, with
others on the Committee----
Senator Shelby. ----no more than----
Mr. Donovan. We do not at this point have specific
legislative language----
Senator Shelby. OK.
Mr. Donovan. ----but we want to make sure that we get the
input of Members of this Committee and others in Congress
before we settle on a final legislative proposal.
Senator Shelby. Thank you. Thank you, Mr. Chairman.
Chairman Johnson. Senator Tester.
Senator Tester. Yes. Thank you, Mr. Chairman, and I want to
thank you for bringing the folks together at this hearing to
determine what is happening in our housing market. I think we
heard some good news, recent data, and I think you have
presented some good news, Secretary Donovan, on the housing
market, but I think we all realize we have got a ways to go.
One important step toward a healthy market is resolving and
addressing the missed contact, which you addressed, that hurt
homeowners, that pushed them into foreclosure. And while I
appreciate the efforts of the State Attorney Generals and HUD
and the Department of Justice to hold mortgage servicers
accountable through this settlement, I still have questions how
this settlement is going to help Montana or rural America
specifically.
I understand that Montana is going to receive a portion of
the funds, and I know that Attorney General Bullock will put
those to good use with that flat payment, but it is not going
to be nearly enough to compensate, but it is a step. The bulk
of the settlement is targeted toward struggling homeowners
through refinancing as well as a menu of options, including
principal reduction, forbearance, and short sales. Each of the
parties of the settlement were required to meet dollar targets
through these options and receive varying amounts of credit
based on what sort of assistance is provided to original
homeowners. I am getting there.
As I understand it, the servicers the servicers are the
party which will have complete discretion in determining which
loans are modified, provided that they meet dollar obligations.
So the question is, is what guarantee--since the servicers are
making the call, what guarantee is there that any of the
troubled homeowners in Montana will see a benefit from this
settlement?
Mr. Donovan. Senator, we would be happy to share with you
specifics on what our estimates are of that help to Montana
homeowners. But I think you asked a very important question,
particularly given the experience we have had with past
settlements where what was promised was not delivered. And
there are three specific ways that we have built into this
settlement to make sure that what has been promised will
actually be delivered.
First of all, there are substantial financial penalties for
not reaching those specific numeric goals. Again, this is not,
like in some past settlements, a promise to knock on a door, to
send a solicitation to offer something to a homeowner. There
are very specific targets of what they actually have to deliver
in each of these categories, and if they do not, any amount
that they do not provide is converted to a cash penalty with a
25 percent or a 40 percent penalty on top of that amount.
Senator Tester. OK.
Mr. Donovan. Second of all, there is a very strong
monitoring system that has been put into place that will
include a State Monitoring Committee. They have the ability to
go into court, and both the monitor can levy fines up to $5
million for any violations and, beyond that, can go back into
court for other remedies.
Finally, and I think this is one of the most important
aspects, we have built into the settlement a requirement that
any principal reduction or any other help to homeowners has to
be successfully working for 90 days to be able to count. In
other words, it is not just that you have reduced principal,
but that you have done it in such a way that we can assure that
that homeowner has actually benefited and will continue to be
able to stay in the home, and that, I think, is very important
in terms of creating sustainable modifications for these
families.
Senator Tester. OK. And just correct me if I am wrong. Is
there--I mean, there are bigger incentives where there are a
lot of foreclosures, especially compared to rural areas of this
country, Montana being one of them, where we have had our share
of foreclosures, too, but not nearly as many from a numeric
standpoint. Is there anything that will require the servicers
to go into rural areas, or will they just focus on--or could
they just focus on the urban areas?
Mr. Donovan. So this was a--this is an important question
as we went through the settlement negotiations. Had we
established individual targets for every State around the
country----
Senator Tester. Right.
Mr. Donovan. ----we could have ended up--if you multiply 15
States by 14 servicers, we could have ended up with 700
different targets----
Senator Tester. Understand----
Mr. Donovan. ----which was not practical. What we did put
in, though, is a specific requirement that there can be no
actions that any of the servicers take that harm any particular
geography. So the monitor does have the ability to go and say,
wait a second. You are not reaching out to rural borrowers. You
are not treating rural borrowers in the same way that gives
them access to the same benefits. And we think that that
protection will be strong enough to make sure that, whether it
is Montana borrowers or other rural borrowers, do not get
treated in a different way than anyone else around----
Senator Tester. OK, and that monitoring system is the State
Monitoring Committee that you had talked about in a previous
question?
Mr. Donovan. There is a full-time monitor who has been
appointed who has very broad authorities to oversee. There is a
Monitoring Committee, including Federal and State officials,
that will have an ability to oversee the monitor. And then
there is the Federal District Court in D.C. that will oversee
the settlement. Should there be any disputes with the monitor,
they can be resolved in the Federal District Court.
Senator Tester. And so--not to put words in your mouth, and
my time has run out--but you feel confident that there are
protections in place--and it can go either way, by the way.
They could all focus on rural America. That has not
traditionally been the way it has been. So you feel confident
that there are entities in place that can force the settlement
to go into rural America.
Mr. Donovan. I do feel strongly that that is true. But I
would also say, Senator, do not take my word for it. Forty-nine
different State AGs, including yours, signed on----
Senator Tester. Yes.
Mr. Donovan. ----and many, many other rural States felt
confident that this would benefit their States.
Senator Tester. And there is no doubt that the payment that
those AGs are going to get is going to go to those States. I am
talking about----
Mr. Donovan. Absolutely.
Senator Tester. OK. Thank you, Mr. Chairman.
Mr. Donovan. Thank you.
Chairman Johnson. Senator Corker.
Senator Corker. Thank you, Mr. Chairman. Thank you, Mr.
Secretary, for being here.
With the AG settlement, what is the differentiation that is
being made between second lien holders and first lien holders?
It is my understanding that it appears that first lien holders
are going to be taking hits while second lien holders are not,
which is incredibly perverse. I would like for you to enlighten
us----
Mr. Donovan. Yes.
Senator Corker. ----if that is the case.
Mr. Donovan. A very important question, and there have been
some mistaken reports about this, so I am glad you asked the
question. There are two different ways that we are making sure
that lien priority is respected.
First of all, the credit for the write-offs of second liens
is different from the write-off for first liens. We are
recognizing----
Senator Corker. Let me just ask it a different way.
Mr. Donovan. Yes.
Senator Corker. I do not want this to take that long. You
are going to make sure that second liens are totally
extinguished first, is that correct, before first liens are
taking any heat, which is the way law works.
Mr. Donovan. The minimum--we are basically using the
standards for the HAMP program. The minimum is that it is at
least pari passu, and any seriously----
Senator Corker. So equal----
Mr. Donovan. If I could just finish, any seriously
delinquent second has to be completely written off in the----
Senator Corker. So you are going to do pari passu, equal-
equal----
Mr. Donovan. Equal----
Senator Corker. ----and even though contract law would say
that first lien holders have priority, you are going to pari
passu. You are going to let the second lien holder have equal
rights to the first lien holder, is that what you are saying?
Mr. Donovan. Senator, it is actually not correct that law
requires--if a second lien is current, for example, there is no
requirement that says it has to be totally written off. These
are standards that are in place for the HAMP program and that
work. I think they absolutely respect lien priority. It is at
least pari passu, but if it is significantly delinquent, it has
to be written off entirely in any of these transactions.
Senator Corker. How many of the homes--you all are really
interesting when you use the word ``improperly'' foreclosed.
What percentage would be your guess of loans that were
improperly foreclosed on over a technicality and over those
that actually were not making payments or behind, or maybe they
were making payments and were not behind but were foreclosed
upon?
Mr. Donovan. I think this is a very important point,
because I think the perception is somehow that the settlement
was all about folks who lost their homes that should not have,
and the percentage, as I think you imply, rightly, there are a
very few folks who actually lost their home that should not
have because of some error in the--still----
Senator Corker. It would be very good if you all would
actually say that instead of continuing down this rhetorical
path that you----
Mr. Donovan. Senator, I----
Senator Corker. ----and in your testimony alluded to on the
front end.
Mr. Donovan. I am not sure--I would be interested in your
point on the testimony, but what we did find was very
significant and very pervasive errors in the servicing process
more broadly that have real impacts on families. And we have
taken criticism, why is it only $1,500 or $2,000, the
compensation, because most of the errors did not cause somebody
to lose their home wrongly. Most of the errors were smaller
errors that might have delayed help for a month or fees that
should not have been charged, and that is why the predominant
help that we are providing is a smaller number.
Senator Corker. Yes.
Mr. Donovan. But if somebody did lose their home wrongly,
they should obviously be compensated, and we have set up a
system that can do that, as well.
Senator Corker. Do you think it is a good idea for someone
with a credit score of 580, just out in the private sector, to
come on the FHA's balance sheet? Do you think that is good
public policy?
Mr. Donovan. What I will tell you is the large majority of
the homeowners with 580 credit scores that we are making loans
to are successful homeowners----
Senator Corker. Yes.
Mr. Donovan. ----and I do not believe we should take away
the ability for somebody who can be a successful homeowner to
be one. We obviously have to make sure that we are implementing
risk controls. That is why when we first came in we raised the
downpayment requirement for low credit score borrowers, and we
have taken a series of other steps to protect that. But I think
if you look at the performance of our new books of loans, what
you see is the best credit quality in the history of FHA and I
think we are--you know, given that we have to find a balance
between protecting the fund and helping homeowners get access
to a home, and, frankly, making sure that the housing recovery
continues.
Senator Corker. You know, every now and then, a guy comes
along, or a person comes along in public service that you
really are excited to be here and you think that they are going
to be here really putting forth their honest opinions about
things and really be here about good public service. You are
one of those people.
Mr. Donovan. Thank you.
Senator Corker. You and I have talked often. I am really
disappointed in the overly political approach that you have
taken, and you and I talked about a GSE proposal and you put
forth a white paper a long, long time ago that had a multiple
choice.
I just want to tell you that I hope at some point you will
recover from the mode that you are in right now and that you
will actually bring forth solutions to our housing programs,
including a real GSE reform bill. I just want to tell you, I am
personally disappointed and I hope we will begin addressing the
real issues that we have here in our country in housing in a
way that is fair to all Americans, and I hope to talk to you
soon.
Chairman Johnson. Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman, and
Mr. Secretary, I want to thank you for your leadership.
Mr. Donovan. Thank you.
Senator Reed. I think most people acknowledge that this
Attorney General's settlement, although ably led by Attorney
General Miller of Iowa, would probably not have come together
without your personal involvement, and that is an extraordinary
achievement.
Mr. Donovan. Thank you.
Senator Reed. I think the paralysis that we have seen
around here, maybe it has been broken, because now, at least,
we have taken a step forward. There is tangible relief to
homeowners. It is not perfect. Seldom do we do perfect things
here. But it is progress and we have not seen a lot of progress
over the last few years.
Not only that, you have led the way with proposals to
expand the effectiveness of the HAMP program to make it more
useful, to apply it to a broader spectrum of Americans. All of
those have been practical solutions to this gnawing problem of
a housing market that was collapsed, frankly, not on your watch
but on your predecessor's watch, and you have been trying to
rehabilitate it. We have seen some modest progress, but not
enough.
Now, one of the things I think is interesting, and I think
you have sensed it, too, is that if you look at the people who
are the commercial banks that hold loans in their portfolio
that are--and bound by fiduciary obligations to make money for
their shareholders, they are actually writing down principal as
a way to keep people in their homes. In fact, yesterday, the
American Banker reported 80 percent of homeowners who received
a modification from these commercial banks saw their principal
cut, and yet we have not seen that by the GSEs and by others,
although I think you have made progress in the HAMP program by
giving further financial incentives. Could you talk about this
issue of principal reduction as the way to keep people in their
homes?
Mr. Donovan. Senator, thank you for asking about this
because I think it is--if I look at the sort of range of tools
that we have tried to use through the last few years in the
housing crisis, principal reduction is the one tool that we
have made perhaps the least progress on until recently. And
there is growing evidence that, particularly where someone is
deeply underwater, if they are looking at, you know, 10, 15
years of paying their mortgage without being able to start
building equity again, that at some point, that will have a
real impact on their ability to keep going and keep paying
their mortgage.
So the ability to begin to sort of break the logjam, if you
will--there are so many frictions that we see in this system
that we have to principal reduction, to be able to break
through some of those frictions to get interests aligned among
all the trustees and the owners of the loans and others is one
of the things that we have been focused on, particularly over
the last few months. And I think between the settlement itself
as well as these other incentives that we are providing, that
those are very important steps that we hope can jump-start more
principal reduction happening, which, again, we do think is
good both for homeowners and communities, but also for
investors in those loans where it can allow people to pay, stay
in their homes, and increase the value of those mortgages.
Senator Reed. As a follow-on point, one of the perceptions,
and I think this is borne by people throughout this country, is
that we have gone to extraordinary lengths to provide support
for financial institutions, mainly through Federal Reserve
policy of lowering interest rates very close to zero. And yet
many homeowners cannot take advantage of that because their
property values have deteriorated so much.
But if, in fact, through these principal reductions they
can refinance, that would be a tremendous boom to them. And as
I think it is reflected by the commercial banking experience,
it is a lot smarter for a bank to keep someone in their home
paying rent and maybe even have a principal kicker at the end
than to foreclose, maintain the property, pay property taxes on
the property, and in many cases watch the property deteriorate
despite all of that. That logic seems to be compelling to most
people back home, but it is having a--you are having a hard
time persuading lots of people here, is that fair?
Mr. Donovan. Well, look, I do think that given the scale of
the housing declines that we saw across the country, we are in
a little bit uncharted territory in terms of what this means.
It is one of the reasons why the settlement, we think, is
important, because it can establish a track record for
principal reduction. But there is increasing data available, we
believe, that shows that this principal reduction can be good
not only for homeowners and communities but for investors, as
well.
The other thing I would just say is we have a very big
opportunity with interest rates where they are today.
Typically, any homeowner who is less than about 130 percent
loan-to-value by refinancing to today's low interest rates can
get back above water in 5 years or less just through plowing
their savings from refinancing into rebuilding their equity.
And that is something we want to encourage with our plan. It is
why we have proposed eliminating closing costs and providing
other incentives to folks to choose to take their savings from
refinancing and plow it back into rebuilding their equity.
Senator Reed. Thank you.
Chairman Johnson. Senator Johanns.
Senator Johanns. Thank you, Mr. Chairman.
Mr. Secretary, it is good to see you again. I was looking
at your written testimony, and let me quote something that you
wrote. You did not say this in your oral testimony, but it is
here in front of me. You say on page one, near the bottom,
``Today, because the Obama administration moved to keep
interest rates low and restore confidence in Fannie Mae,
Freddie Mac, and the Federal Housing Administration,'' then you
go on to talk about homeowners refinancing.
Mr. Secretary, on both points, you do not seriously believe
that it was the Obama administration that kept interest rates
low, do you? I always thought that was the Federal Reserve
function.
Mr. Donovan. What I would say--I think it is perfectly fair
to point out the Federal Reserve had taken very significant
steps. There were additional steps that the Administration
took, particularly through Treasury, early on in the
Administration to keep interest rates low, as well. So if you
read as us taking full credit for that, it is certainly not
accurate. There are steps that we took, however, that
contributed to keeping interest rates low.
Senator Johanns. Now, on your second point, I have not run
into a single person since I joined the Senate 3-plus years ago
that came up to me and said, ``You know, Mike, thanks for your
efforts back in Washington. I now have confidence in Fannie and
Freddie.'' Do you really believe that, that confidence has been
restored in these gigantic operations that have been nothing
but a liability for taxpayers?
Mr. Donovan. Senator, there is no question that there are
additional steps that need to be taken and we continue to take,
and certainly as we laid out our plan for what should be done
with Fannie and Freddie, we said very clearly that it is
structurally a model that we should discontinue. It is not the
right model for the future.
On the other hand, in the midst of the crisis, we were very
dependent on ensuring that a new homeowner trying to buy a
home, because private capital was not available in the midst of
the crisis, that we needed to ensure at least that new loans
were available. And so when we talk about confidence that those
loans will stand the test of time, we took very difficult steps
to stand behind, to back those loans, to make sure that
interest rates continue to be at a level that folks could buy
homes.
So when we talk about confidence, what we really meant is
confidence that the backing of Fannie and Freddie would be good
for homeowners that were looking to buy homes or refinance.
Senator Johanns. Well, let me ask you about that, because I
think you are making my point. How much today would the
taxpayers be on the hook for when it comes to Fannie and
Freddie? Everything, right?
Mr. Donovan. There is no question that taxpayers are at
risk for those loans being made. What I would also say, though,
is all the evidence that we have is that the new loans being
made are safe, good loans. The exposure that taxpayers have is
to the legacy loans that were made before they went into
conservatorship, and this is----
Senator Johanns. And how much----
Mr. Donovan. and I think this is where the confidence issue
is important. The single most important thing we can do to
protect taxpayers is ensure that those old loans, which we
cannot make go away, perform in a way that improves their value
rather than has their value decline. And in that sense,
improving the housing market more broadly, keeping confidence
in the securities that are issued by Fannie and Freddie is
critical going forward.
Senator Johanns. How much are those legacy loans? If you
are the average taxpayer out there and you are tuned into this
hearing and you want to know how much you are on the hook for,
how much is that?
Mr. Donovan. I am sorry, Senator, I do not have a number in
front of me. Perhaps--I know that FHFA will be testifying on
the next panel. I am sure that they would have more specific
details. But it is obviously substantial, in the over a
trillion dollar range.
Senator Johanns. To me, that is not a confidence builder.
The average taxpayer is out there saying, are you kidding me? I
am on the hook for that, too, in addition to the massive
national debt?
Let me, if I might, ask you a quick question about the
investigations. When you talk about servicing errors, could
that be something like the failure of Mike Johanns to sign one
of the pieces of paper that you get at a closing?
Mr. Donovan. We did not look at closing specifically, but
there are clearly failures to properly review and sign
documents in the servicing and in the foreclosure process.
Senator Johanns. What percentage of all of that would you
say was due to just outright fraud? I want to take advantage of
this poor innocent person sitting in front of me.
Mr. Donovan. I would say the minority of those errors that
we found, I would say, could be linked directly to outright
fraud. On the other hand, the extent of the errors, as I said,
up to 60 percent error rates, serious error rates, in the worst
of the companies that we reviewed, did real damage to families
and to communities. So what I want to make sure people
understand about these investigations, what we found were not
just trivial errors that had no impact on families. These were
significant errors that had real impacts, cost families real
money, caused some families to lose their homes that should not
have. And, frankly, we felt they needed to be held accountable.
They were violations of FHA's rules, among other things, and
that is why we took them so seriously.
Senator Johanns. Mr. Chairman, thank you.
Chairman Johnson. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman, and Mr.
Secretary, thank you for your service. I think you have done an
extraordinary job.
Mr. Donovan. Thank you.
Senator Menendez. I want to follow my colleague, Senator
Johanns, line of question. What is the time frame in which this
explosion at Fannie and Freddie took place, of the challenges
we are facing now in terms of taxpayer exposure? What is the
time frame in which that took place?
Mr. Donovan. Well, their market share really took off sort
of in the middle of the 2000 decade, in the 2005 range, and
they were obviously taken into conservatorship before the
Administration came into office in 2009.
Senator Menendez. So----
Mr. Donovan. And so it is really those legacy loans in that
period that are at issue.
Senator Menendez. So everything you just described with
Senator Johanns was largely--that explosion took place
somewhere in the time frame of 2005 leading up to
conservatorship prior to 2009?
Mr. Donovan. That is correct.
Senator Menendez. So largely during the Bush years is when
this explosion took place. So I find it ironic at times that we
hear about these concerns, which are legitimate--they are
legitimate concerns, I share them--but there was no one putting
the brakes on during that period of time to make sure that
these institutions did not follow the marketplace in excesses.
Let me ask you about principal reduction. I know that my
colleague, Senator Reed, began on this. When you look at loans
that are in the banks' own private portfolios, the banks are
finding it profitable to give principal reductions to about 20
percent of their own loans, while, ironically, the Government
is not allowing principal reductions on any loans. Do you
think, or do you believe that it should be completely taken off
the table as an option in literally all cases, as the FHFA has
done with Fannie and Freddie?
Mr. Donovan. Clearly, given our focus in the servicing
settlement and the work we are doing elsewhere in HAMP that I
described, we believe principal reduction is an important tool
in the tool kit, if you will, that should be available where it
can be the most help to homeowners.
Senator Menendez. So, clearly, if the private sector is
looking at 20 percent and saying, this makes sense for us, and
we always hear about how the private sector can lead us in a
way, it seems to me that they are leading in a way in which 20
percent has already been principally reduced. So it is an
indicator, at least.
In that context, I have introduced a bill that basically
promotes shared appreciation mortgages at the FHFA and FHA as a
creative solution to the housing crisis, in part, and principal
reduction problems. In essence, a shared appreciation mortgage
or debt for equity is basically when lenders reduce principal
now in exchange for getting a percentage of future increases in
home prices. It seems to me that a lot of things are resolved
in that process. The homeowner can be kept in their home, be a
responsible--continuing to be a responsible borrower. The
question of moral hazard is largely resolved because the
appreciation value to the lender is there. And so, therefore,
they have opportunity to recoup equity. Do you believe that we
could see such a pilot program at FHA?
Mr. Donovan. First of all, I want to compliment you on the
work on this legislation. It is a creative solution, I think,
that you have come up with to what can be a very complex
problem of misaligned incentives between homeowners and
lenders. We have done a lot of work with your team and look
forward to continuing to do that. I do think that it is
something that could be valuable as a tool going forward.
I also would just say, on your earlier point, I do think
the fact that where--and this is what is increasingly being
found--where principal reduction is happening, it is happening
more frequently in the portfolios of banks with their own
loans, and I think that does show that where the barriers to
principal reduction are removed, which is exactly what we are
trying to do through HAMP, through the servicing settlement,
that more principal reduction will make sense because it is
better for those investors. If banks are doing that with their
own portfolios, I think it shows they have clearly made the
decision. It protects their own investments. So your point is a
very important one. I want to make sure it does not get lost.
Senator Menendez. And my final question is, how do you
anticipate that the settlement that was entered into with all
the AGs will interact with the appeals of foreclosures that are
being implemented by the consent orders between the OCC and the
Federal Reserve and the major servicers? It seems that there
are two parallel tracks going on. I want to clarify what that
means for homeowners.
Mr. Donovan. Yes. This is a great question because there
has been a lot of misunderstanding when you think about this--
--
Senator Menendez. I only ask great questions.
[Laughter.]
Senator Menendez. I am kidding, of course.
Mr. Donovan. And this relates to some of the earlier
discussion with Senator Corker and otherwise. What we have to
recognize is that many of the sort of harms that were done here
did not lead to somebody losing their home, but it might have
been a fee that was imposed that should not have or a month
delay in getting help which cost a homeowner a month's payment.
And we wanted to make sure that homeowners did not have to go
through a lengthy process of putting together documentation,
maybe even getting a lawyer that might cost more than the help
they would actually get. So we created through the settlement
almost like a class action process, where somebody can come in
very simply, in a very efficient, streamlined process, and get
help that averaged sort of $1,500 to $2,000.
For someone who was harmed much more significantly, the OCC
and the Fed have set up a separate process where they can come
in, demonstrate exactly what that harm is, and get full
restitution. If they lost their home and it was a cost of
$100,000 to them, they can get that restitution.
Those two processes work in concert, if you will, to make
sure that there are options available. Somebody taking $1,000
or $1,500 or $2,000 from the settlement does not stop them from
pursuing the longer, more detailed process. And, frankly,
neither of them stops a homeowner from going into court if they
feel like they have been wronged and their harm has not been
adequately addressed.
Senator Menendez. Thank you very much, Mr. Chairman.
Chairman Johnson. Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair, and thank
you, Mr. Secretary----
Mr. Donovan. Thank you.
Senator Merkley. ----for the hard work you are doing to try
to figure out the strategies in a very, very complex mortgage
world.
One thing I wanted to draw attention to was your commentary
over the Mutual Mortgage Insurance Fund, where you note that
there is a series of basis point insurance premium increases
and then some additional changes announced yesterday, and you
conclude that with these additional revenues, the capital
reserve is estimated to have sufficient balances to cover all
future projected losses without triggering a mandatory
appropriation under the Federal Credit Reform Act.
Essentially, since 2009, as you observe, we have been under
the 2 percent reserve ratio and kind of hanging by the seat of
our pants, but as I read this, I get the feeling that the
adjustments that have been made, that there is a little bit of
a sigh of relief that we are not going to have a major solvency
problem in MMI, that it is looking fairly decent minus a major
unexpected downturn in the economy.
Mr. Donovan. Yes. I would not say it is a sigh of relief at
this point from my perspective. I think we have to remain very
vigilant, because, frankly, the single most important thing
that drives the reserves of the fund and whether they are
adequate is what the performance of the housing market is going
to be more broadly. And given the expected direction of the
market, given what we have seen lately in terms of the most
recent numbers, we have taken steps between the settlement and
the additional premium increases that should protect us this
year. But, obviously, we are going to continue to watch very
closely, and if there are other unexpected changes in the
market, we will react accordingly.
Senator Merkley. In any event, it is good news and I
appreciate the vigilance going forward.
Mr. Donovan. Thank you.
Senator Merkley. Turning to HARP 2.0, I appreciate the
Administration really working hard to have the FHFA have this
program. How many actual HARP 2.0 loans have they actually
closed, if you will?
Mr. Donovan. So the estimates that we have at this point
are that about 50,000 loans have actually closed and that there
are about 300,000 applications that have been filed. Recognize
that the improvements--the HARP 2.0 improvements really started
to go into effect only in mid- to late-December and that the
most important change, perhaps, particularly for the hardest-
hit communities is the ability to refinance above 125 percent
loan-to-value. That was completely unavailable before HARP 2.0.
That only started to go into effect really this month.
So what I will tell you is we are encouraged thus far in
terms of the response. There are higher than we expected
response rates coming in terms of homeowners saying, yes, I
want to participate, and particularly in that above 125 percent
loan-to-value. So we are encouraged by those numbers so far.
Senator Merkley. So that is good, because I had not heard
that 50,000 had closed, so I think that is great news, and that
there is a whole pipeline coming into effect.
When folks come into my casework team with housing
challenges, there is always a bit of a lottery as to whether or
not their loan is owned by Fannie or Freddie and, therefore,
whether they are eligible for HARP 2.0. So the work the
Administration is doing to try to find a strategy to address
the non-GSE is important and very difficult.
I did want to ask you about one feature that you mentioned,
which is if a family does a 20-year loan, keeping their
payments higher and essentially gaining equity faster, they are
incentivized by having their closing costs covered. And the
reason I found this interesting is at first glance, it felt
counterintuitive to me in this sense, that one of our goals is
to reduce strategic defaults. So if your monthly payments are
lower, you therefore have less incentive, if you will, to walk
away and go to a rental. And second is to decrease financial
defaults, and if your monthly payment is lower, you therefore
are much less likely to financially default if your income
changes, you lose a part-time job or new job that pays less.
And so in some ways, I would have thought that maybe the
incentive would work the other way, encourage people to have
the lower monthly payment and, therefore, more robust or more
resilient finances. So I just thought I would have you share
just a little bit more of the thinking that went into that
strategy.
Mr. Donovan. Clearly, that is an option that is up to the
homeowner. They can make that choice, and they could even take
a portion of the savings and plow it into rebuilding equity. It
is not an all or nothing proposition.
We simply felt that given the substantial challenges that
negative equity provides, that--and the likely natural sort of
short-term focus that many homeowners would have on reducing
those payments, that we wanted to ensure that those homeowners
took seriously the option of rebuilding equity, as well. Again,
the numbers do show that it is not just payment reduction that
matters, but also how deeply underwater a family is to be able
to do that.
Senator Merkley. Thank you, and just a very short closing
question, which is it is my understanding that the AGs still do
not have all of the details in writing for the settlement, and
it is a little surprising that they have been asked to sign on
before having all the details in writing because, like every
contract, the details make a difference. When are the AGs going
to have all the details, and is it possible that when folks
look at those details, some that have said, ``Yes, I am in,''
might say, ``Hmm, I am going to rethink that''?
Mr. Donovan. The documents were finalized in terms of all
the significant aspects of the agreement when they signed on,
and so they had those documents. What is being finalized, and,
in fact, we expect the documents to be registered in court this
week and then they would become public--but what was being
finalized, for example, each State has the option to decide how
to direct their own funding through the AGs. There are a series
of individual qui tam actions that were being finalized in
particular States. Those had to be reflected in the documents.
So I would put it more in the dotting ``I''s and crossing
``T''s rather than in any significant terms of the settlement
that are being finalized in terms of the documents. And again,
they have been finalized. We expect them to be registered in
court this week and become available publicly.
Senator Merkley. Thank you.
Mr. Donovan. Thank you.
Chairman Johnson. Senator Hagan.
Senator Hagan. Thank you, Mr. Chairman.
Secretary Donovan, thank you for being here today.
Mr. Donovan. My pleasure. Thank you.
Senator Hagan. The premium changes announced by FHA this
week are expected to increase receipts to the FHA by $1 billion
and, obviously, improve the fund's capital position. Can you
discuss how and when we will know what this move--whether this
move has proven to be sufficient to restore the fund's capital
position?
Mr. Donovan. To be honest, Senator, we really will not know
until the end of the fiscal year. We will be watching it very
carefully and we will have early signs of that. But the--it
really will depend on the volume of business that comes in and
the trajectory of home prices over the remaining year, and we
will have a new actuarial report available to Congress in the
fall that will redo those projections based on these new
premiums as well as where we expect the fund to go.
Senator Hagan. The FHA is limited in statute from taking
certain emergency actions that could restore the fund's capital
position if an appropriation from the Treasury Department
became more likely. Can you discuss some of those limitations
and what additional authorities might benefit the FHA in its
efforts to avoid a draw on the Treasury?
Mr. Donovan. Well, first of all, I would just say this
Committee has been very helpful, has given us in the past few
years greater statutory authority to raise our premiums. We are
using that authority here.
But what I would also say is while we are focused on
premiums for new loans, it is very, very important that we
continue to take steps to make sure that prior loans that were
made that did not meet our standards can be held to account and
that we are enforcing effectively. We have dramatically
increased our enforcement. In fact, the settlement is the
single biggest recovery the FHA Fund has ever made from our
enforcement.
But there are additional steps. For example, we have
limited authority to go after lenders on a national basis. We
are required to go after them on a sort of region by region
basis, which we do not think is as efficient. We have
legislation that is, in fact, reflected in the House bill right
now that we would like to continue to work with the Committee
to get done this year that would increase our enforcement
authorities on that issue and on a number of others, as well.
Senator Hagan. Thank you. Last year, the FHA was seeing
improvements in mortgage delinquency rates in early period
delinquencies. What is the FHA seeing in delinquency rates
today and are those rates improving?
Mr. Donovan. Yes. So what we are seeing on the sort of
early delinquencies, 30-day, 60-day, continues to improve and
really tracks what is happening, probably most of all, in the
jobs market and the improvement we have seen there.
We have seen our serious delinquencies and in foreclosure
tick up somewhat and that is really due to two factors. One is
that because of the problems that we found in servicing our
loans with a number of the institutions, some of them have held
off on foreclosing and presenting claims to us, and so that has
kept those loans in the foreclosure process longer. And so
instead of having--it has also made our claims go down, which
is a good thing, but it has increased the number that are in
the foreclosure process and seriously delinquent. And so that
has sort of had them tick up.
The other thing, frankly, is just simply that we have had
very large books of business in the last couple years. There is
a natural sort of seasoning process that happens with loans and
you do not generally see them start to have delinquencies or
defaults until they are typically kind of 2 years old. And so
these very large books are--the delinquencies are increasing
for those. But, frankly, we looked very carefully at how those
loans are performing relative to past years. We are still very
confident that those new loans are performing extremely well.
But as an average, it has kind of driven the delinquency rates
up somewhat because they are just so much larger, those books,
than the prior years, which were much worse loans.
Senator Hagan. The FHA announced the discretionary up front
premium increases and changes to annual premiums that were
mandated by law in December. Can you discuss how these changes
will impact the borrowers who will be refinancing under FHA?
Mr. Donovan. So in the budget was reflected a ten basis
point increase across the board for these loans, for all FHA
single-family loans. What we also did, though, which I think is
important, we implemented or are implementing a higher premium
increase for larger loans. We want to make sure that the higher
loan limits that FHA has are seen as temporary and that we are
encouraging private capital to come back into the market more
broadly, but particularly in those larger loans, so that as we
transition back to our lower loan limits, private capital is
already filling that space.
Yesterday, we announced an additional 75 basis point
increase on the up front premium that complements the other
changes that were in the budget. In total, if you combine the
ten basis point annual premium and the 75, for our typical
loan, you are going to see an increase that is about $15 a
month for the average homeowner. So that is when you combine
them. The annual premium is close to $10 a month. The up-front
will add about $5 a month. So that is the impact. And we think
given where interest rates are, we have tried to balance the
health of the fund with making sure that we do not impede the
recovery of the housing market.
Senator Hagan. Thank you.
Mr. Chairman, I did want to state that North Carolina's
Commissioner of Banks, Joe Smith, I am pleased to see that he
has been named--I cannot remember his exact title----
Mr. Donovan. He is the monitor for this----
Senator Hagan. ----the monitor for the fund, so----
Mr. Donovan. He will do a terrific job.
Senator Hagan. ----we have an excellent individual in that
position. Thank you.
Mr. Donovan. Thank you.
Chairman Johnson. I would like to thank Secretary Donovan
for his testimony and for being here with us today. We
appreciate your testimony, Mr. Secretary.
With that, I would like to call forward the second panel
for this hearing.
[Pause.]
Chairman Johnson. The second panel of witnesses that we
have here today are no strangers before this Committee and need
very little introduction.
Governor Elizabeth Duke is a member of the Board of
Governors of the Federal Reserve System. She has served in this
position since June of 2008.
Mr. Edward DeMarco is the Acting Director of the Federal
Housing Finance Agency. He has held this position since
September of 2009.
Governor Duke, you may proceed with your testimony.
STATEMENT OF ELIZABETH A. DUKE, GOVERNOR, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Ms. Duke. Thank you. Chairman Johnson, Ranking Member
Shelby, Members of the Committee, thank you for inviting me to
talk about the current situation in housing markets.
The Federal Reserve has a keen interest in the state of
housing and has been actively engaged in analyzing issues in
the housing and mortgage markets. Issues related to the housing
market and housing finance are important factors in the Federal
Reserve's various roles in formulating monetary policy,
regulating banks, and protecting consumers of financial
services.
In particular, the failure of the housing market to respond
to lower interest rates as vigorously as it has in the past
indicates that factors other than financial conditions may be
restraining improvement in mortgage, credit, and housing market
conditions and, thus, impeding the economic recovery.
Federal Reserve staff have been actively working to
understand the reasons behind the impairment in housing and
mortgage markets and the tradeoffs involved in designing
policies that would remove obstacles to normal market
functioning.
On January 4, 2012, the Federal Reserve released a staff
paper titled, ``The U.S. Housing Market: Current Conditions and
Policy Considerations,'' which is attached at the end of my
written statement. The paper provides information on current
conditions in the housing market and analytic background on
some housing market issues. Although the paper does not include
recommendations for any specific policy actions, it does lay
out a framework for discussion, outlining some options and
tradeoffs for policy makers to consider. My testimony today
will be drawn from this paper.
Six years after aggregate house prices first began to
decline and more than 2 years after the start of the economic
recovery, the housing market remains a significant drag on the
U.S. economy. In a typical economic cycle, as the economy turns
down, households postpone purchases of durable goods such as
housing. Once the cycle bottoms out, improving economic
prospects and diminishing uncertainty usually help unleash this
pent-up demand. This upward demand pressure is often augmented
by lower interest rates, to which housing demand is typically
quite responsive.
The current economic recovery has not followed this script,
in part because the problems in the housing market are a cause
of the downturn as well as a consequence of it. The
extraordinary fall in national house prices has resulted in $7
trillion in lost home equity, more than half the amount that
prevailed in early 2006. The substantial blow to household
wealth has significantly weakened household spending and
consumer confidence.
Another result of the fall in house prices is that around
12 billion households are now underwater on their mortgages.
That is, they owe more on their mortgages than their homes are
worth. Without equity in their homes, many households who have
experienced hardships, such as unemployment and unexpected
illness, have been unable to resolve mortgage payment problems
through refinancing their mortgages or selling their homes. The
resulting mortgage delinquencies have ended in all too many
cases in foreclosure, dislocation, and personal adversity.
Neighborhoods and communities have also suffered profoundly
from the onslaught of foreclosures as the neglect and
deterioration that may accompany vacant properties makes
neighborhoods less desirable places to live and may put further
downward pressure on home prices.
An ongoing imbalance between supply and demand exacerbates
these problems in the housing market. For the past few years,
the actual and potential supply of single-family homes for
purchase has greatly exceeded the effective demand, in part
because of the large number of homes that have come back onto
the market after moving through the foreclosure process. The
elevated pace of foreclosures, unfortunately, is likely to be
sustained for quite a while and, therefore, will continue to
put downward pressure on home prices.
At the same time, a host of factors have been weighing on
housing demand. Many households have been reluctant or unable
to purchase homes because of concerns about their income,
employment prospects, or the future path of home prices. Tight
mortgage credit conditions have also prevented many households
from purchasing homes. Although some retrenchment in lending
standards was necessary and appropriate given the lax standards
that prevailed before the crisis, current lending practices
appear to be limiting or preventing lending even to
creditworthy households.
In the paper, we discuss the benefits and costs of a
variety of policy options that have been proposed to respond to
difficult housing issues, including increasing credit
availability for households seeking to purchase a home or to
refinance an existing mortgage; exploring the scope for further
mortgage modifications, including encouraging short sales and
deeds in lieu of foreclosure in cases where foreclosure cannot
be avoided; and expanding the options available for holders of
foreclosed property to dispose of their inventory responsibly.
Any policy proposals, though, will require wrestling with
difficult choices and tradeoffs as initiatives to benefit the
housing market will likely involve shifting some of the burden
of adjustment from some parties to others.
I greatly appreciate the leadership that the Senate Banking
Committee has shown on the profound challenges facing the
housing market. For its part, the Federal Reserve will continue
to use its policy tools to support the economic recovery and
carry out its dual mandate to foster maximum employment in the
context of price stability. In its supervisory capacity, the
Federal Reserve will continue to encourage lenders to find ways
to maintain prudent lending standards while serving
creditworthy borrowers.
Thank you again for inviting me to appear before you today.
I would be happy to answer any questions you may have.
Chairman Johnson. Thank you, Governor Duke.
Mr. DeMarco, you may proceed with your testimony.
STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, FEDERAL
HOUSING FINANCE AGENCY
Mr. DeMarco. Thank you, Mr. Chairman. Chairman Johnson,
Ranking Member Shelby, Members of the Committee, I am pleased
to be invited here today to discuss the actions FHFA is taking
in our role as conservator for Fannie Mae and Freddie Mac to
aid recovery of the U.S. housing market.
My written statement responds to the Committee's request
for a description of FHFA's work as conservator of Fannie and
Freddie, or the Enterprises, as I will refer to them, to
address barriers to housing recovery, including preventing
foreclosures through loss mitigation, facilitating refinancing
at today's low interest rates, and initiating an REO sales
program. My written statement also summarizes the recent
strategic plan for conservatorship that I submitted to you last
week.
In contrast to how they are sometimes portrayed, the
Enterprises are playing a leading role in providing assistance
to homeowners seeking to avoid foreclosures. On a nationwide
basis, Fannie Mae and Freddie Mac own or guarantee 60 percent
of the mortgages outstanding, but they account for a much lower
proportion, 29 percent, of seriously delinquent loans. And let
me add here, there was a little discussion in the prior panel
regarding market share. During the period 2005 to 2007, the
Enterprises' market share was actually generally declining.
More of this was--more mortgage activity was being financed
through the private label market, which is, of course, where a
good bit of our difficulties today are and where a lot of
troubled loans reside.
Even though the Enterprises have a smaller share of
seriously delinquent loans than other market participants, they
account for about half of all HAMP modifications. Between HAMP
modifications and their own proprietary loan modifications,
Fannie and Freddie have completed over one million loan
modifications since the fourth quarter of 2008.
We have also made great strides in improving mortgage
servicing standards. The Servicing Alignment Initiative, which
FHFA announced last year, focuses servicers' resources and
attention on moving all borrowers in trouble into alternatives
to foreclosure and to do so quickly, efficiently, and
aggressively. The Servicing Alignment Initiative aligned the
requirements of the Enterprises to remove inconsistencies that
could cause servicer confusion and delay.
Fannie and Freddie are also at the forefront of refinance
activity for current borrowers. Since April 1 of 2009, the
Enterprises have completed more than ten million mortgage
refinances. The Home Affordable Refinance Program, or HARP,
provides refinancing opportunities to borrowers that might
otherwise be unable to refinance due to house price declines.
Changes to this program that we announced last October are
still being implemented, but early indications are promising.
Just yesterday, we announced the first transaction in our
Real Estate Owned, or REO, Initiative Pilot Program. This
transaction includes approximately 2,500 properties divided
into eight subpools by geographic area. We also want to enhance
the opportunity for smaller-scale investors to bid on
properties and obtain financing should initial efforts to
market these properties to owner-occupants fail.
Now, at FHFA, we are faced with a fundamental task of
directing the operations of two companies that account for
roughly three-quarters of current mortgage originations and
have approximately $5 trillion in outstanding obligations and
credit guarantees. To the question from the earlier panel, that
is the answer. Five trillion dollars is what the American
taxpayer is standing behind through the Treasury Department's
Senior Preferred Stock Purchase Agreement. Our task in
overseeing this is complicated by the very uncertain future of
the Enterprises.
Now, last week, I submitted to Congress a strategic plan
for the next chapter of conservatorship. The plan sets forth
three strategic goals. Build--build a new infrastructure for
the secondary mortgage market. Contract--gradually contract the
Enterprises' dominant presence in the marketplace while
simplifying and shrinking their operations. And maintain--
maintain foreclosure prevention activities and credit
availability for both new and refinanced mortgages.
Achieving these strategic goals will fulfill the statutory
responsibilities Congress assigned to FHFA as conservator and
also prepare the foundation for a new, stronger housing finance
system. Although that future may not include Fannie and
Freddie, at least as they are known today, this important work
in conservatorship can be a lasting positive legacy for the
country and its housing system. Properly implemented, we
believe this strategic plan should benefit homeowners by
ensuring continued emphasis on foreclosure prevention and
credit availability, taxpayers by furthering efforts to limit
losses from past activities while simplifying risk management
and reducing future risk exposure, market participants by
creating a path by which the Enterprises' role in the mortgage
market is gradually reduced while maintaining market stability
and liquidity, and finally for lawmakers by building a
foundation on which you may develop new legal frameworks and
institutional arrangements for a sound and resilient secondary
mortgage market of the future.
Thank you again for the opportunity to be here and I would
be happy to answer any questions you may have about my
testimony or about our strategic plan.
Chairman Johnson. Thank you, Mr. DeMarco.
Governor Duke, we have heard arguments that the market
should be left to hit bottom. The Fed's white paper seems to
indicate that there are barriers or frictions to the market
healing itself. Governor Duke, can you discuss some of the
barriers your staff has identified. Are there any risks to
permitting housing prices to fall further?
Ms. Duke. Thank you. Yes. The bulk of our work was on
trying to identify barriers for the market to seek its own
level. One of the most obvious signals is the difference in the
rental market and the owner occupied market. Right now, you
have prices falling and vacancies falling in the owner occupied
market, and then you have lower vacancies and higher prices in
the rental market, which indicates that the market wants to
move housing from owner occupied to rental.
Some of the frictions that are involved in this are
difficulties in aggregating the properties together in getting
the properties for rental, financing for these properties, and
in some cases, regulatory barriers to facilitating a movement
to rental in these properties. So that is why there is a strong
discussion of REO to rental.
Other barriers that we identified were barriers to
refinancing, primarily loans that were underwater, high loan-
to-value loans, and so we discuss some of the changes that
might be made in order to facilitate refinancing of those
loans.
Chairman Johnson. Mr. DeMarco, at our last housing hearing,
Democrats, Republicans, and experts stated that there is more
FHFA can do and should be doing to expand refinancing
opportunities. Yes or no, will you act without delay to take
additional steps to provide more Americans with the opportunity
to refinance at historically low market rates? If so, what
steps will you take?
Mr. DeMarco. Mr. Chairman, I believe we have already taken
those steps through the changes we announced to the HARP
program in October. The program actually became effective in
December and we are seeing just the first fruits of that. So if
there are additional changes to the HARP program that anyone
would like to suggest to us, I would be quite pleased to
immediately take a look at it and see if we can implement them,
if that is going to help further this process along. But I
believe the steps we took in creating the HARP 2.0 program, if
you will, was a very responsive and responsible set of actions
and I am very encouraged by the early indications from the
marketplace regarding this program.
Chairman Johnson. Mr. DeMarco, your plan is currently a
high-level document without much detail. You have indicated
that you will be conducting additional analysis to implement
the plan to contract the role of the GSEs. What is your time
line for doing so? In this analysis, how will you account for
factors that are important to the operations of a healthy
secondary market?
Mr. DeMarco. So, Mr. Chairman, you are right. What we sent
up here was a strategic plan. It is meant to set the broad
goals, the things that we want to achieve in this next period
of conservatorship. Now that we have established those goals,
the next step is to develop specific operating plans, to
examine particular options for how we go about achieving those
goals, and it is in that process that we will develop specific
time lines with regard to particular actions.
But I will say this, Mr. Chairman. You asked with regard to
the second goal, the contracting. There are several things
there that I would fully expect that during this calendar year,
you are going to see activity from Fannie and Freddie in that
regard. We have already begun with one, and that is raising
guarantee fees. We have already had our first announcement of
that, actually, the end of December, based upon the legislation
Congress enacted. But we are also proceeding with both loss
sharing as well as additional guarantee fee increases and
looking to see if we cannot get some additional transactions in
which private mortgage insurance companies start undertaking
additional credit risks to the extent they have got the
capacity to do so. I would like to see all of that begin this
year.
Chairman Johnson. Mr. DeMarco and Governor Duke--Mr.
DeMarco, you have stated in your testimony that the secondary
market for mortgages would not exist if not for the
Enterprises. Could you state what might happen if the
Enterprises' activities were to be terminated immediately?
Governor Duke, could you also comment on this?
Mr. DeMarco. Well, Secretary Donovan would certainly be a
busy man.
Chairman Johnson. Yes.
Mr. DeMarco. In the absence of Fannie and Freddie, if we
literally, Mr. Chairman, to your question, simply turned off
the lights tonight and did not startup again, there is no
immediate infrastructure for secondary market transactions
outside of FHA and Ginnie Mae securitization. So it would take
market participants a while to be able to step in and redo
this. Certainly, some lending would go on. Banks would book
some of this in portfolio. But I think the near-term impact
would clearly be to constrain mortgage credit.
Chairman Johnson. Governor Duke, could you also comment on
this scenario?
Ms. Duke. Well, first of all, I would agree with Mr.
DeMarco. There would be much, much less lending going on. But I
think for the private market to come in and take up that slack,
to begin to do that lending, it is going to take a couple of
things. It is going to take some certainty, some visibility as
to what is going to happen to the mortgage market in the
future, so some idea of what is going to happen ultimately to
the GSEs because the investments in the infrastructure to do
securitization, to do servicing, to do all the parts of the
mortgage market are so large that it takes an understanding of
what the future is going to be before anybody is going to be
able to make those kinds of investments.
Mr. DeMarco. If I might add, Mr. Chairman, I would strongly
endorse that. I think that while--if I may go back to the
previous question you asked me about contracting--these are
things we can do at the margin to shift some amount of mortgage
credit risk off of the balance sheet of Fannie and Freddie and,
hence, away from the taxpayer. But fundamentally, Governor Duke
is quite right. Market participants, if they are going to make
a permanent and lasting investment in bearing mortgage credit
risk, they are going to need much more long-term certainty
about the role of the Government and what the institutional and
legal arrangements are going to be. I very much agree with
that.
Chairman Johnson. Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman.
Director DeMarco, your strategic plan, as I understand it,
would shrink Fannie and Freddie's footprints in the marketplace
and seek to establish a unified securitization platform. And it
is my understanding that the actions would be designed to set
the stage for broader housing finance reform.
Mr. DeMarco. That is correct, Senator.
Senator Shelby. Are there legal limits on how much the
Federal Housing Finance Administration can reform the GSEs
without further Congressional action? In other words, Congress
has got to step in here, have they not?
Mr. DeMarco. Yes, Senator Shelby, that is quite correct. We
have no authority to alter the charters of Fannie Mae and
Freddie Mac, nor do we actually have the authority to abolish
those charters.
Senator Shelby. Could you describe the legal limitations in
this regard that Congress placed on the Director of the Federal
Housing Finance Administration, which is you, relating to the
approval of any business activity, such as principal write-
downs, so long as these institutions remain in conservatorship.
Mr. DeMarco. So the way we interpret this is that Congress
has given us a responsibility as conservator to preserve and
conserve the assets of the company for the benefit of the
company owners----
Senator Shelby. To protect the taxpayer, right?
Mr. DeMarco. Protect the taxpayers, yes, Senator, and that
is what we are trying to do.
Senator Shelby. If Congress enacts housing finance reform,
which we desperately need, could such an action perhaps help
the housing market recover by providing the legal certainty
needed to attract private capital, which they are going to
need? And if Congress continues to delay the needed reform,
could this not continue to undermine the recovery of our
housing market? How do you see that?
Mr. DeMarco. I would concur with that view.
Senator Shelby. That the sooner we do a comprehensive
reform of Freddie and Fannie, the better off the taxpayer is
going to be and the better off the housing market is going to
be, is that----
Mr. DeMarco. Yes, Senator.
Senator Shelby. Thank you. In your running the Federal
Housing Finance Administration, describe the risk and what it
could ultimately mean to the taxpayers regarding human capital.
In other words, how do you keep the human capital, the
executives, the knowledgeable people that know these markets
that help you preserve these entities and the taxpayers' risk
here.
Mr. DeMarco. Yes, Senator. This is actually, I believe, one
of the key risks that FHFA faces as conservator, because what
we have here is we have got two large, complex financial
institutions, but they are operating with a great deal of
uncertainty regarding their future. The Administration has made
clear they want----
Senator Shelby. What does that mean to personnel?
Mr. DeMarco. It means that these folks do not know if the--
--
Senator Shelby. I mean, you are in the market for high-
quality personnel, are you not?
Mr. DeMarco. Yes, Senator, we certainly are, and the people
working at these companies today do not know if that company is
going to be there 2 years from now, 3 years from now, and so
what is it that induces them to stay given that uncertainty?
Certainly, as financial markets more generally recover, we are
seeing pick-up in the labor market for this kind of talent, and
so their opportunity to go work elsewhere continues to get
better.
Senator Shelby. Governor Duke, in your written testimony,
you refer to the Fed's white paper on housing, quote, as a
``staff paper,'' end quote. You also state that the paper, and
I will quote you again, ``does not include recommendations for
any specific policy actions.'' To be clear here in the
Committee, it seems that the Fed is not making policy
recommendations to Congress in its housing white paper, is that
correct?
Ms. Duke. That is correct.
Senator Shelby. Did all the members of the Board of
Governors, on which you serve as a Governor, approve the white
paper, and if not, who did and who did not? Is that an internal
matter or is that something you can supply to the Committee?
Ms. Duke. I want to make sure I am correct, but I think
that the members of the Board of Governors saw the white paper
but did not vote on the white paper.
Senator Shelby. OK. The Fed's white paper, among other
things, discusses several ways to address the inventory of Real
Estate Owned properties, REOs, and lays out options for the REO
to rental program. Governor Duke, if the REO rental, Real
Estate Owned, policies outlined in the white paper were to be
adopted, how much faster will housing markets recover, in your
judgment, and how long will it take them to recover in the
absence of such policies? In other words, it seems like you
have got to do something to move the market.
Ms. Duke. I wish I could estimate the exact amount of time
that it would take or how much difference this would make. We
are beginning to see multifamily housing construction pick up
in response to these market requests, so----
Senator Shelby. Excuse me a moment. Now, we do not have
many foreclosures, do we, with multifamily housing?
Ms. Duke. I do not know how many foreclosures there are----
Senator Shelby. We have had testimony here before this
Committee that it was less than one-half of 1 percent. I do not
know if that is correct. Mr. DeMarco might want to comment on
it.
Mr. DeMarco. That may be, Senator. Yes. It is certainly not
anywhere near the proportion we are having with single family.
Senator Shelby. But in multifamily housing, as a rule,
people have to put more skin in the game, do they not, Mr.
DeMarco? They have to pay down----
Mr. DeMarco. Yes, Senator.
Senator Shelby. ----with your loans. They have to put some
money into the game, is that correct?
Mr. DeMarco. Yes, Senator.
Ms. Duke. But Senator, if I could----
Senator Shelby. Governor Duke.
Ms. Duke. My point was that an alternative to multifamily
housing are portfolios of single-family housing that are
offered for rental. But the difficulty there is that there has
not historically been large-scale rental of single-family
houses. So you do not have an infrastructure that is developed
to manage them. You do not have the infrastructure for
financing----
Senator Shelby. Explain what you mean. Give us some
examples here.
Ms. Duke. Let us say you had a 100-unit apartment building
or you had 100 single-family units that you were going to rent
in a market area.
Senator Shelby. You have got two different games there.
Ms. Duke. Two different games. There is financing
experience with the multifamily. There is not financing
experience with the large number of single-family houses.
Senator Shelby. So just to put foreclosed properties or
inventoried properties out there, single houses, is a lot more
difficult than it would be with somebody experienced in
multifamily housing----
Ms. Duke. Right. If somebody wanted to build a 100-unit
apartment building, they could build it----
Senator Shelby. Right----
Ms. Duke. ----but if somebody wanted to acquire 100
properties, one at a time, it gets very difficult. Now, the
unfortunate truth is that there are a number of properties that
exist that have been acquired within the GSEs, FHA, on bank
books, with servicers, so those properties are already on the
books of various entities, and so a mechanism where those
properties can be acquired by investors would seem to be an
alternative to multifamily housing.
Senator Shelby. Has the Fed done an inventory on their
portfolio, their securities and how many houses there are at
risk?
Ms. Duke. The Fed does not have a----
Senator Shelby. And if not, why not?
Ms. Duke. The Fed certainly does not have a large portfolio
because we do not foreclose on houses. The securities that we
own are agency securities, and so the houses that would be
foreclosed on in those loans would be on the books of the GSEs,
not on our books.
Senator Shelby. They would have to handle it.
Ms. Duke. Right.
Senator Shelby. OK. Thank you, Mr. Chairman.
Chairman Johnson. Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman, and
thank you, Governor Duke and Director DeMarco.
Director DeMarco, in response to a question I posed to your
IG, he indicated that FHFA, in his words, quote, ``has too few
examiners to ensure the efficiency and the effectiveness of its
GSE oversight programs.'' You have repeatedly told us that your
responsibility is to minimize losses to taxpayers, but if,
according to your IG, you cannot ensure the effectiveness of
your oversight program, how can you assure us that you are
carrying out this duty to minimize taxpayer losses?
Mr. DeMarco. The IG's report also points out that we have
been undertaking a number of steps regarding both restructuring
our organization regarding safety and soundness oversight and
reallocating resources toward it and his report also commends
us for those actions.
I would point out that we recently hired a new head of
Enterprise Regulation. It is actually a statutorily stipulated
position at the agency. It is an individual that actually spent
most of his career at the Federal Reserve System as a Senior
Examiner and one of the most senior executives in supervision
at the Fed. And we are continuing in the process of not just
increasing our staffing levels with regard to supervision, but
under this new Deputy Director's leadership, we are
restructuring, reorganizing the deployment of those resources
to be more effective in our supervisory oversight.
Senator Reed. And how long has it taken to hire the
individual and to begin to bulk up your resources?
Mr. DeMarco. It took a fair amount of time to find the
right person for this position, Senator, but he is on board now
and we have hired--since the IG's report came out, we have
hired over a dozen new examiners and that hiring process
continues.
Senator Reed. The IG also pointed out, in response to my
question, that the FHFA, quote, ``trend of deference to the
Enterprises, including a reliance on the determination of the
Enterprises without independently testing and validating them.
This largely hands-off approach to the conservatorships
exacerbates FHFA's challenges in anticipating problems.'' Given
your deferential approach, it appears from the IG, is it just
business as usual back at Fannie and Freddie? And given the
fact that until very recently you have not had a significant
number of staff at a significantly high level to overtake your
responsibilities, that you have not been able fully to
guarantee that the taxpayer loss is being minimized?
Mr. DeMarco. I do not believe that to be the case, Senator.
We have over 500 very hard working people at the Federal
Housing Finance Agency. I believe the IG and I have a somewhat
different perspective on the degree of involvement FHFA shall
have in the day-to-day business operations of Fannie Mae and
Freddie Mac. Long before I became Acting Director, at the time
the conservatorships were established, FHFA made clear that it
was delegating day-to-day business operation decision making
back to the companies with a set of stipulated goals and things
that the Enterprises were supposed to accomplish in
conservatorship. We have reconstituted new Boards of Directors
in order to assist FHFA in ensuring that these companies
operated with proper internal controls and governance
processes. That, to me, is part of conserving the value in
these entities for lawmakers to ultimately dispose of.
But I believe that in all critical matters where there is a
question about the appropriateness of an action or a decision
for the conservatorships, I am in close communication and
discussions with the companies regarding such matters.
Senator Reed. Have you directed Fannie or Freddie or both
to independently conduct an evaluation of the pros and cons of
principal reduction as a way to, hopefully, in the long run,
enhance the value of their franchises?
Mr. DeMarco. Both companies have been reviewing principal
forgiveness alternatives. Both have advised me that they do not
believe it is in the best interest of the companies to do so.
But as you know, Senator, FHFA has done a great deal of
independent review itself of this important matter because I
believe that assuring that we are taking appropriate steps to
provide assistance to troubled borrowers is very much at the
heart of what we are trying to do, but we need to do so in a
way in which we are meeting our mandate to protect the
taxpayers.
Senator Reed. Have you personally reviewed the independent
analysis that Fannie and Freddie have done?
Mr. DeMarco. I have met with and been briefed by both
companies on this and I have certainly reviewed all the work
that my staff has done on multiple occasions, which I have
shared with the Congress.
Senator Reed. Do you review the SEC filings that Fannie and
Freddie make?
Mr. DeMarco. Senator, I have drafts of them before they go
up, so I have an opportunity to see them, yes. But those
filings are the responsibility of the companies.
Senator Reed. But you are the conservator. You are
representing the Federal Government in everything that they do
or fail to do. And again, you simply allow deference to what
they decide? You review the drafts and--have you ever made any
comments or changes in their SEC filings?
Mr. DeMarco. We have made some observations to them about
their SEC filings. But even in conservatorship, Senator, these
companies remain private companies with responsibilities under
the securities laws for the filings that are submitted, and the
individual executives at those companies that have to sign
those filings are subject to all of the legal responsibilities
and potential penalties that other private firms are when they
do securities filings, Senator.
Senator Reed. But----
Mr. DeMarco. That is part of being in conservatorship.
Senator Reed. As conservator, you feel no responsibility
similarly?
Mr. DeMarco. Senator, I do not share the responsibility
under the Sarbanes-Oxley Act for the filing of those documents.
The executives of the companies do.
Senator Reed. Can you assure us that you believe there are
no material misstatements or material omissions in those
statements?
Mr. DeMarco. We would certainly be concerned about such
things, Senator, and we would have responsibilities both as
conservator and as regulator for that and would execute that
appropriately both in terms of our oversight of the companies
and in terms of our interactions with the Securities and
Exchange Commission.
Senator Reed. So the answer is you have no concerns.
Mr. DeMarco. That is correct, Senator. I have not raised
any concern with the filings that have been done while they
have been in conservatorship.
Senator Reed. Thank you.
Chairman Johnson. Senator Corker.
Senator Corker. Thank you, Mr. Chairman.
Governor Duke, I appreciate your testimony, talking about
the fact that the lack of knowledge about what is going to
happen, whether GSEs continue to keep the private market off
balance and not knowing what to do. Let me ask you, the $25
billion settlement that just occurred where--I think a lot of
people think this is coming out of the hides of the servicers,
but actually, they can cram down mortgage investors and get
credit for that, which is pretty unique and I do not think most
Americans understand that is what is really happening, but let
me just ask you this. Would that also potentially create some
lack of consistency and concern about the private sector being
involved in buying mortgages when these types of things can
happen and the mortgage investor had nothing whatsoever to do
with what happened but was just trying to play a role in
financing housing with no underwriting themselves?
Ms. Duke. I think mortgage investors are certainly going to
be interested in all the ways that they can recover the money
that they have loaned and ways that they would not recover that
money. One thing, though, that the settlement does do is remove
an uncertainty, and it is these various uncertainties that are
out there about what is going to happen in the mortgage
servicing settlement and what is happening with mortgage
servicing standards. And so with that information, then various
market participants will decide either to invest in mortgages,
to invest in servicing and origination platforms, and what they
are going to do in that market.
Senator Corker. But it just continues the lack of knowledge
of knowing that settlements can occur that affect them that
they had nothing to do with. We just continue down this path of
Government getting involved in areas, breaking rationality and
creating issues. I appreciate you saying what you just said.
I would ask--and I am going to move on to Mr. DeMarco--I
know you wrote a white paper on housing and I know it met with
a degree of criticism. But I would appreciate if you guys would
write a white paper on financial reform as it is taking place
and share with us the pros and negatives that you are seeing
there. I would ask for you to commit to that and maybe send
something up to us, giving some editorial comments about
something that is actually in your central core area. That
would be great to hear.
Ms. Duke. I think as financial reform gets implemented, one
of the things we will be following very closely is what are the
effects of that financial reform, and as we get that
information, yes, we would be happy to share it with you.
Senator Corker. So you do not have input now?
Ms. Duke. We have input now, but we are still developing
the regulations, and so we are trying--as we develop the
regulations, we are absolutely looking at ways that they will
impact the market and ways that they will impact the financial
system. But I think, further, after all of the regulations are
implemented, it is going to be important to then test the
assumptions of what you expected to happen and----
Senator Corker. If you could do those on an interim basis
before this is all done over the next 3 years, it would be
helpful. But again, I appreciate your testimony about the lack
of consistency out there in the private side.
Mr. DeMarco, I just want to tell you, you guys have to go
back and just laugh. Here you have tried to lay something out
to begin the process of doing something with GSEs, lay out a
strategic paper that I think has been met widely as a good
step, and here Congress up here has not done a single thing, is
totally feckless--feckless--as it relates to these issues. The
Administration has done nothing except sending a multiple
choice plan up here that, you know, you can choose, each of
which is very different than the other.
What is it like to be out there, a person who basically is
there to serve the taxpayers, has done a good job at doing
that, is trying to move things ahead, and to have people up
here criticize you when they themselves do not have the
courage, the will, the desire to address these issues?
Mr. DeMarco. There is a lot of conflict in this job and a
lot of balancing, and you are quite right, Senator. There
appears to be a lot of criticism.
Senator Corker. So what do you think it is? I mean, I think
most Americans would love to see us deal with the GSEs. I think
if you did a poll nationally, people would really love to see
us move back to the private sector being more involved. What is
it about Congress, do you think, that likes to instead have an
entity like this that they can play with and have principal
reductions and serve the social purposes that they would like
to see that are really outside the norms of the housing
industry? What is it about a body like ours, do you think, that
causes us to want to do that?
Mr. DeMarco. Well, there is something about the structure
of Congress chartering companies like this, giving it certain
benefits unavailable to other market participants, that
certainly Congress is then going to want something in return
for all those favors. And that goes back well before
conservatorship, Senator. For many, many years, Fannie Mae and
Freddie Mac operated in a very unique place in our financial
system and were viewed very uniquely by Congress and it
affected in an adverse way the ability to have appropriate
oversight of them, and it certainly has politicized housing and
housing finance to a very troubling degree.
Senator Corker. I know that you have to be diplomatic in
your approach, and I appreciate the way you handle yourself and
I certainly appreciate you taking the first steps, but I will
tell you, if I were in your position and I had any criticism
whatsoever from Congress about what you were doing, I would ask
them to lay out their plan. And obviously, we have no plan. We
like to criticize. I thank you for your leadership. I hope at
some point Congress will do its job and reform these entities
that I think every American--most every American, except for
those who serve in Congress--would like to see reformed. I
thank you for your service.
Mr. DeMarco. Thank you, Senator. When the Congress is
ready, we are sure ready to work with them.
Senator Corker. Thank you.
Chairman Johnson. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Well, let us see if we can get some things that Congress
and you can agree on. For starters, would you agree that if we
have a foreclosure, on average--I know there is a Freddie Mac
study, but maybe you have a different study--that says the loss
in foreclosure is, on average, about $60,000?
Mr. DeMarco. That sounds ballpark.
Senator Menendez. OK. So if we can either conserve the--as
I look at the law and think about how do we preserve and
conserve FHFA to minimize losses on behalf of taxpayers, we can
either preserve that loss either by proceeding to foreclosure,
which has a $60,000 loss, or we might very well be able to look
at principal reduction at the end of the day if it is somewhere
at least in that ballpark.
And so it seems to me that what we get, however, in
principal reduction is a homeowner who continues to stay in
that home instead of become a vacant property, a homeowner who
can under that guise be a responsible borrower, a homeowner who
is paying taxes on a ratable base and not creating a ripple
effect on the community in which multiple foreclosed homes
create depressed values for the community in general, and the
savings that takes place in not having to take that property
and go through our present challenges on the REO to move it so
that we can get this housing market to move.
If that is the case, then why is it that you have taken the
view that principal reduction is not within the domain of the
possibility of what you can do under the law, because it would
preserve and conserve just as well, certainly in that universe,
as a foreclosure, and it would also meet under the Emergency
Economic Stabilization Act the other goal that you have, which
is a responsibility to implement a plan that seeks to maximize
assistance for homeowners.
Mr. DeMarco. So, Senator, I have not said that we do not
have the legal authority to reduce principal. And in the spirit
of your question, which is let us find things we can agree on,
there is much that we do agree on here, Senator. We agree that
foreclosure----
Senator Menendez. Well, I was listening to Senator Corker
and you and I thought there was nothing we agreed on, so that
is why I wanted to----
Mr. DeMarco. Well, I will be happy to clear that up----
Senator Menendez. OK.
Mr. DeMarco. ----because, Senator, there is much that we
agree on, specifically in the context of your question.
Foreclosure is the worst possible outcome in almost all
instances. It is the most costly. It is the most devastating to
the family. It is most devastating to the neighborhood and
surrounding community. And we have a responsibility to make all
prudent actions to find a remedy to a troubled borrower short
of foreclosure because of these costs. So we agree there.
We also agree that if a borrower is committed to their home
and perhaps has had a change in circumstances where they have
more limited ability to make their mortgage payment, that as
one of the approaches to trying to avoid foreclosure, this
borrower should be offered an opportunity to have their loan
restructured in a way that is affordable to them. And we have
taken a great leadership role at FHFA and through Fannie and
Freddie to ensure that borrowers get this opportunity.
And I would like to expand on this, because this is very
important for everybody to understand. What we did in the
Servicing Alignment Initiative is we made clear in terms of
aligning Fannie and Freddie's instructions to mortgage
servicers that as soon as a borrower goes delinquent, that is
the time to get a hold of the borrower, find out what the
problem is, and develop quickly an appropriate response to that
borrower's condition. If it is just a very limited short-term
thing, then it is a pretty simple thing to handle. If it has
been a permanent decline in the financial circumstances of the
family, then it might require something different, like a loan
modification.
But we are doing that, Senator, and we are doing that
aggressively. We are outpacing the market, as my testimony
shows, with regard to the amount of that activity that we are
doing----
Senator Menendez. I do not want to cut you short, but my
time is going to expire----
Mr. DeMarco. You have asked about----
Senator Menendez. Can you get to the point about principal
reduction for me----
Mr. DeMarco. Yes----
Senator Menendez. ----and then I have one other quick
question.
Mr. DeMarco. Yes, I will, Senator. So to understand
principal reduction, here is how this works, because there has
certainly been a lot of attention focused on us on this issue.
Principal reduction alternative in the HAMP modification
program is the fourth tool for how to provide assistance to a
troubled borrower to make good on their mortgage. HAMP gets--in
all of these HAMP modifications, the objective is to get
something to--get the borrower to an affordable payment, and it
defines affordable payment as 31 percent of their monthly
income would go to their mortgage. That is the target when you
are doing a loan modification in HAMP, is to get to a 31
percent payment. That can be done by reducing the interest
rate. It can be done by extending the term of the loan. It can
be done by forbearing on the underwater portion of principal.
Or it can be done by principal forgiveness. So these are four
tools, using Secretary Donovan's description, in the tool kit
for loan modifications.
What FHFA has consistently found in its analysis is that
the first three of those tools work better than the fourth one
with regard to our fundamental mandate of preserving and
conserving, and I think it would be helpful to understand
principal forbearance and why that is the case, because it
actually----
Senator Menendez. No, I understand what principal
forbearance is----
Mr. DeMarco. But, Senator----
Senator Menendez. You put it at the back end of the loans--
--
Mr. DeMarco. Well, but it works very much in accord with
the spirit of your proposal, Senator, about shared
appreciation, because it takes that underwater--it takes the
underwater portion of the principal, sets it aside and says, we
are not going to focus on that. We are going to focus on
getting you, the borrower, into an affordable payment. You pay
that and this underwater portion is going to sit over here to
the side, and if you are successful, then we are all going to
share in your success.
Senator Menendez. Well, let me ask you this question and
then I will yield. We have a disagreement, obviously, in that
respect.
Mr. DeMarco. Mm-hmm.
Senator Menendez. I think there is a fundamental difference
that when the marketplace on the private sector is looking at
20 percent of its portfolios and saying it makes sense for us
in the marketplace to do so, and they certainly want to
preserve their assets as much as possible as you do as a
conservator, but I get concerned about this issues on principal
reduction, looking at these other issues, because I look at the
stories that came out about Freddie making investments that
paid off in the event that homeowners are kept in higher-cost
loans. And I would assume that they would not make those bets
if at the end of the day they were not hopeful that the bet
would pay off.
And so it seems to me, is that leading--do you believe that
that has influenced Freddie's policies that discourage
refinancing for homeowners, because if your bet is that you are
going to keep homeowners in the higher rate, then, in fact, why
would you make that bet when you can--you would hope to win
that bet, and when you can influence that bet at the end of the
day by not permitting refinancing, principal reduction, and
other elements to take place.
Mr. DeMarco. Senator, there is no betting going on here.
When someone makes a mortgage to a borrower, right, let us say
that mortgage is made at 6 percent. If the mortgage rates then
subsequently go down to 4 percent, then the holder of that
mortgage knows that they have got the risk the borrower is
going to exercise their right to refinance that mortgage and,
hence, they are going to get their money back faster than they
expected and then they are going to have to reinvest it, if
they are going to stay in mortgages, they are going to have to
reinvest it at lower mortgage rates. If interest rates go from
6 percent to 8 percent, right, then the borrower--the investors
holding this 6 percent----
Senator Menendez. Are you telling me Freddie did not make
investments----
Mr. DeMarco. I am saying----
Senator Menendez. ----I called them bets, but they made
investments in saying that the consumers would--that it would
pay off in the event that homeowners were kept in higher-cost
loans. Why would they do that?
Mr. DeMarco. I am saying, Senator, anybody that is holding
a premium mortgage in this mortgage environment has an
investment----
Senator Menendez. Your staff is shaking their head behind
you. Maybe you can explain what she is shaking her head about.
Mr. DeMarco. Do I need to consult--all right. So anyone
that is holding a 6-percent mortgage in a 4-percent mortgage
environment, Senator, is holding an investment by which if the
borrower refinances, they are going to get their money back and
have to reinvest at a lower rate. This is not a bet against the
homeowner.
Senator Menendez. I do not think Freddie would take its
money and make investment decisions and say, let me invest to
ensure that at the end of the day, I am going to have a
positive result in my investment, and the only way I have a
positive result in my investment is if the mortgage borrower is
kept in a higher rate. I just find that ethically troubling, to
say the least.
Chairman Johnson. Senator Toomey.
Senator Toomey. Thanks, Mr. Chairman. I would like to thank
our witnesses for joining us today.
I just want to briefly follow up on a comment or line of
questioning that Senator Corker raised, which, I guess from my
point of view, had to do with the impact on the private
market's ability to provide mortgage financing, especially
after this settlement has demonstrated the fact that the
Government can come along and change the value of a contract
that you have pretty much as it sees fit. Frankly, I worry
about how much more it is going to cost homeowners to be able
to finance their mortgages in light of that. But that is not
what I actually wanted to talk to you about, and I would like
to direct my questions to Mr. DeMarco.
First, I have a copy here of a cover letter that you sent
to Representative Elijah Cummings, and it is dated January 20.
And in it, you stated that the FHFA has essentially three
principal mandates, the first of which is a statutory
responsibility as conservator to preserve and conserve the
assets and property of the regulated entities. Is this not a
way of saying to protect taxpayers? Is that not----
Mr. DeMarco. Yes, Senator.
Senator Toomey. You go on--now, you mentioned the other two
mandates, and then you have a discussion in the next paragraph
that--and you state right here, you did not conclude that
principal reduction never serves the long-term interests of the
taxpayer when compared to forbearance. But you did compare, as
I understand it from your letter, the relative cost to
taxpayers, and your conclusion, as I read it here, is that by
avoiding the principal forgiveness, the net effect is a smaller
loss to taxpayers. Is that a fair way to characterize this?
Mr. DeMarco. Yes, Senator.
Senator Toomey. You go on to then quantify what it would
cost in this letter if the FHA set out to actually provide the
principal forgiveness that would be enough to diminish the
value of mortgages to make them equivalent to the value of
homes, and you estimate that that would cost almost $100
billion and that that would and this is your language--you say,
this would be in addition to the credit losses both Enterprises
are currently experiencing. So that is a lot of additional cost
to taxpayers, right?
Mr. DeMarco. Yes, Senator.
Senator Toomey. And then, last, you have a discussion about
this fact that I do not think has been discussed as much as it
ought to be, namely that nearly 80 percent of Enterprise
underwater borrowers are current on their mortgage. And, in
fact, those who have a loan-to-value ratio above 115 percent
are 74 percent current, which seems to me to present a real
dilemma of how you would go about doing this.
For instance, if you provided principal forgiveness for
everybody who was underwater, you would be asking taxpayers to
pick up the tab for people who are actually clearly
demonstrating that they are capable of making the payments for
the loan that they chose to take. If you did not and you said,
no, it is only the people who are not making payments, why,
then how fair would that be to the people who are making
payments, and would that not create an incentive for people who
are currently making payments to stop? Is that not a pretty
tough dilemma?
Mr. DeMarco. I think that says it quite well, Senator. I
think that one of the under-reported things here is that while
this country has many borrowers with mortgages that are
underwater, the vast majority of them are making their payment
every month, and they must wonder about some of these
discussions we are having.
Senator Toomey. And then I will conclude on this, Mr.
Chairman. In the next paragraph, you say, ``given that any
money spent on this endeavor,'' and by that you are referring
to principal reductions, ``would ultimately come from
taxpayers, and given that our analysis does not indicate a
preservation of assets for Fannie and Freddie substantial
enough to offset the costs, an expenditure of this nature would
at this time, in my judgment''--that is you talking--``require
Congressional action.''
I just want to say I share that view. I commend you for
taking that view and I want to recognize that you have been
under a lot of pressure to change that view and I hope you will
not change it. I hope you will stick to that view because I
think that is the correct view.
Mr. DeMarco. Thank you, Senator.
Chairman Johnson. Senator Merkley.
Senator Merkley. Thank you, Mr. Chair, and thank you to the
panel for your testimony.
One of the things that I found very interesting recently
was the article in American Banker, ``Why FHFA is Wrong On
Principal Forgiveness,'' and I am sure you have had a chance to
read that article as it has been widely discussed. And
essentially, the author, Kevin Wack, says that in the third
quarter of 2011, I believe it was 18 percent of bank
modifications involved principal reduction and he raises the
question why it is that for-profit institutions are doing
nearly a fifth of their loans with principal reduction and
finding that that is the most cost effective way to their
profits but you have not found any similar results. And I do
want you to give brief responses so that we can actually have a
bit of a dialog over several issues.
Mr. DeMarco. A number of these institutions have purchased
these mortgages at a discount. They have bought them at a price
at which doing the principal forgiveness was not something
where they were taking a loss by doing so.
Senator Merkley. Well, fair enough, but no matter what you
paid for it, the alternative of the strategies that you use
with the individual would still be the same range of options
that you have if you had paid a lot more for the loan. So in
that context, your logic does not hold, and do you want to
further try some other argument?
Mr. DeMarco. No. I am comfortable with where I have left
it.
Senator Merkley. OK. You provided the six-page report to
the House, and I believe Representative Cummings has said,
really, on such a major issue, you ought to provide the full
analysis and they have asked you to do so by February 29. Do
you intend to make public the full analysis?
Mr. DeMarco. I provided Representative Cummings and others
with the full three different analyses that we had done on this
issue and he has come back with some follow-up questions and
asked for yet additional information and we are working on
that.
Senator Merkley. So does that meet his request for the
February 29, or----
Mr. DeMarco. I will not have additional information
tomorrow for him.
Senator Merkley. One of the notes has been that your
analysis did not make one of the most fundamental distinctions,
that is, between folks who have mortgage insurance and people
who do not have mortgage insurance. Obviously, that has a huge
bearing on the net present value impact. Why was such a
fundamental distinction not analyzed or not laid out, at least
in what you presented to Congress?
Mr. DeMarco. Because we were able to reach the conclusion
about principal forgiveness without going to that point. But if
we want to go there, that is quite right. Another issue with
principal forgiveness is that I am then putting the taxpayer,
jumping them ahead of the mortgage insurance company who is in
the first loss position on this mortgage. I would say the same
thing holds for any second liens that might exist on this
mortgage. So this is reorienting the priority of loss
absorption that is part of the structure that is in place
today. But we have not had to go to that issue with regard to
the analysis that we have done.
Senator Merkley. Other observers have noted that in your
analysis, you did not look at the shared appreciation model,
which actually is forgiveness plus funds that come back to the
originator which changes the net present value calculation. So
you gain the advantages of people having lower monthly
payments, therefore, less likely to strategically default, less
likely to financially default, and yet there is a back-end
funds that return. Do you intend to--you actually mentioned
shared appreciation earlier. Do you intend to do an analysis of
that, and if you have not already done it, why not?
Mr. DeMarco. Shared appreciation mortgages are complex
instruments that are not widely articulated in the marketplace.
What I was trying to convey to Senator Menendez is that
principal forbearance modifications, which we are doing and we
are doing a lot of them, are effectively principal forgiveness
with a shared appreciation on the mortgage attached to it. It
is economically approximately the same thing. So we are, in
fact, doing that now, Senator.
Senator Merkley. OK. I did not see that in the analysis you
presented to Congress. Do you intend to provide that analysis
to us?
Mr. DeMarco. I believe I will try to articulate this more
clearly in our next round of discussions regarding principal
forgiveness.
Senator Merkley. OK. One of the things that was disturbing
to folks across the country is when you said in October you had
not met any homeowner who has suffered a foreclosure. Have you
had a chance to actually talk to homeowners in the real
marketplace since October?
Mr. DeMarco. You know, Senator, I do know families that
have suffered foreclosures and I believe that my--people I know
personally, things in my personal life really are not relevant
to the realm of this because I believe my responsibility goes
to analyzing the law, analyzing the options that are available
to us, and proceeding.
I will say something I have done since that time, Senator,
that you may find meaningful in this regard. In December, I
went up to the city of Baltimore and I met with people from the
Baltimore City Housing, the Maryland State Housing Finance
Agency, and a local community bank there as well as some
community activists and had a lengthy discussion about the
impact of the housing crisis in Baltimore. We took a tour of
several neighborhoods, some of which one might call--for which
this housing crisis has been very damaging. And we have talked
about what happened. We have talked about demographic issues.
We talked about alternatives for trying to generate recovery in
those neighborhoods.
I take this seriously, Senator, that we have communities
and families across the country that have been greatly harmed
by this, and FHFA is trying very hard to be part of bringing
some solutions and stability back to this. But I will do so in
a disciplined way following the mandate that I believe Congress
has given us.
Senator Merkley. I believe what you just said is that you
are correcting the record from your October statement, or were
you misquoted in October?
Mr. DeMarco. I was not misquoted. That is what I had told
the Congresswoman. I thought she meant it in the form of as
part of my work effort, had I been going out and meeting with
foreclosed homeowners.
Senator Merkley. Well, I applaud what you did in Baltimore
because I think actually seeing communities on the ground gives
one an understanding that analysis and ivory towers do not
gain. I think you would be hard pressed to find a street in a
working class community like the one I live in that does not
have one or two families on it that are foreclosed on. I mean,
the impact is very real, very evident, the destruction of
families' dreams, the destruction of their finances. I applaud
you for going to Baltimore and doing what you can to kind of
see the real impact on the ground. Thank you.
Chairman Johnson. I would like to thank Governor Duke and
Mr. DeMarco as well as Secretary Donovan for being here with us
today.
This hearing has provided this Committee important insight
toward achieving realistic solutions to many of the problems
confronting the housing market. Stabilizing this market remains
a top priority of this Committee and I will continue to work to
find bipartisan consensus to achieve it.
This hearing is adjourned.
[Whereupon, at 12:34 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON
I thank our witnesses for joining us. Today's hearing is part two
of our examination of the state of the housing market and steps that
can be taken in the near term to remove housing market barriers to
economic recovery.
This Committee has undertaken a bipartisan, in-depth look at long-
term housing finance reform. I hope to continue this effort with
additional hearings and by working with Ranking Member Shelby and
Committee Members to seek bipartisan consensus. In today's hearing, we
will focus on the immediate problems confronting the housing market and
the larger economy, which is a critical first step in finding a long-
term solution.
In January, the Federal Reserve released a white paper entitled
``The U.S. Housing Market: Current Conditions and Policy
Considerations.'' In this paper, the Fed stated that ``continued
weakness in the housing market poses a significant barrier to a more
vigorous economic recovery.''
As I stated during our February 9th hearing on this topic, I share
the concern that ongoing challenges in the housing market are acting as
a drag on economic recovery. I want to find practical solutions to help
overcome them.
Today's hearing provides a good opportunity to discuss the current
housing market environment with regulators and the Administration's top
housing official. I would like to hear from our witnesses about
potential solutions, both legislative and administrative.
In addition to the Federal Reserve's recent white paper, other
analysts, regulators, and the Administration have offered up options
and proposals to address barriers to housing and economic recovery.
Earlier this month, the Administration outlined a new Housing Plan to
give more families the opportunity to refinance at today's low rates.
Just yesterday, the Federal Housing Finance Agency announced its first
pilot sale in an Initiative to address the large volume of Real Estate
Owned properties held by the Government-Sponsored Enterprises.
At our February 9th hearing, the witnesses and a number of
Committee Members on both sides of the aisle cited helping families
refinance at today's low interest rates as a powerful example of an
action that would help bolster the housing market and stabilize housing
prices. This is particularly true for mortgages held by the GSEs. I
would like to see the FHFA take additional steps to facilitate
refinancing for families currently stuck in higher-interest mortgages
held by Fannie and Freddie. I look forward to hearing more from Acting
Director DeMarco on steps that FHFA is planning to take to speed these
refinancings.
Without a robust housing market recovery, our economy will continue
to drag and millions of Americans will continue to struggle to make
ends meet. I look forward to continuing to work with our witnesses and
Members of the Committee to find workable solutions to improve the
housing market and lead us further down the road to prosperity.
______
PREPARED STATEMENT OF SHAUN DONOVAN
Secretary, Department of Housing and Urban Development
February 28, 2012
Chairman Johnson, Ranking Member Shelby, and Members of the
Committee, thank you for this opportunity to testify about how the
Administration's housing initiatives are helping remove barriers to
economic recovery. This hearing comes at an important moment--a moment
President Obama described in his State of the Union as ``a make or
break moment for the middle class and those trying to reach it.'' In
that address, he said that what's at stake is the survival of the basic
American promise--the idea that if you work hard, you can do well
enough to raise a family, own a home, and put a little away for
retirement.
Mr. Chairman, I couldn't agree more. As the President said, the
defining issue of our time is how to keep that promise alive--to build
a Nation where everyone gets a fair shot, everyone does their fair
share, and everyone plays by the same rules. And nowhere is that
challenge clearer than in the homes where we live--from when we buy a
home--and make the biggest financial decision of our lifetimes--to our
ability to refinance that loan, to the way banks treat us as customers
should we ever lose a job or experience a medical crisis that puts our
homes at risk.
Indeed, as this Committee knows well, too often in the years
leading up to the crisis, mortgages were sold to people who couldn't
afford or understand them. Banks made huge bets and bonuses with other
people's money. The resulting recession cost more than 8 million jobs
and our economy and the world plunged into a crisis from which we are
still recovering.
Thanks in part to the partnership of this Committee, today we face
a very different environment than the one we faced when President Obama
took office. Back in January 2009, America's economy was shed 818,000
jobs alone. Housing prices had fallen for thirty straight months. And
foreclosures were surging to record levels month after month after
month.
Today, because the Obama administration moved to keep interest
rates low and restore confidence in Fannie Mae, Freddie Mac, and the
Federal Housing Administration, more than 13 million homeowners have
refinanced their mortgages since April 2009--putting nearly $22 billion
a year in real savings into the hands of American families and into our
economy.
Today, because we provided a range of solutions to responsible
families fighting to hold on to their homes, more than 5.6 million
families have been able to reduce their payments and modify their loans
to more sustainable terms and foreclosure notices are down nearly 50
percent since early 2009. Because we provided resources for communities
struggling with concentrated foreclosures, today we are on track to
help them fund better uses for almost 100,000 vacant and abandoned
properties through our Neighborhood Stabilization Program. Most
important of all, because of our commitment to economic growth and
recover, our economy has added private sector jobs for 23 straight
months, totaling 3.7 million jobs.
Mr. Chairman, this represents important progress. But we know there
is much more to be done. Three key barriers prevent our housing
market--and our economy--from fully recovering.
While the number of homeowners at risk of losing their home is down
significantly, there are still too many families that face hardships
and are underwater--and their unaffordable monthly payments put them at
an increased risk of default, dragging down markets, reducing labor
mobility and consumer spending alike.
While targeted support to markets struggling with foreclosures,
blight and abandonment has reduced vacancy rates, increased home prices
and shrunk the inventory of homes for sale, an overhang of properties
at risk of or in foreclosure continues to drag down property values and
harm the hardest-hit communities.
While we put an end to the worst abuses that caused this crisis and
stabilized the market, it is too difficult to get a mortgage today--
largely because of uncertainty over making loans attributable to lack
of clarity around mortgage servicing, and continued market volatility.
And so today, I want to talk about the new tools we are providing
to overcome these three key barriers--keeping people in their homes,
the shadow inventory and access to credit--and the steps we still need
to take to move forward.
Relief for Responsible Homeowners, Keeping People in Their Homes
First and foremost, we needed to ramp up our efforts to keep people
in their homes and provide relief for homeowners who've done the
responsible thing time every month when that mortgage bill arrives in
their mailbox.
Mr. Chairman, millions of responsible homeowners who are current on
their mortgages and could benefit from today's low interest rates face
substantial barriers to refinancing through no fault of their own.
Sometimes homeowners with good credit and clean payment histories are
rejected because their mortgages are underwater. In the end, these
responsible homeowners are stuck paying higher interest rates, costing
them thousands of dollars a year.
Indeed, as economist Mark Zandi said, ``There is no better way to
quickly buoy hard-pressed homeowners than helping them take advantage
of the currently record low fixed mortgage rates and significantly
reduce their monthly mortgage payments.''
That's why, on February 1st, President Obama announced a package of
administrative actions and legislative proposals to help responsible
homeowners save thousands of dollars through refinancing. Under his
proposal, borrowers with loans insured by Fannie Mae or Freddie Mac
(GSE-insured loans) would have access to streamlined refinancing
through the GSEs. Borrowers with FHA insured loans will be able to take
advantage of an enhanced FHA streamline refinance program. And
borrowers whose loans are held by private banks or are securitized in
private label securities would have access to refinancing through a
new, low-cost, streamlined refinance program that would be facilitated
by the FHA.
Allow me to explain each of these efforts in detail.
Refinance Assistance for Borrowers With GSE Loans--HARP 2.0
In his jobs speech to Congress last September, President Obama
charged HUD and Treasury to work with the Federal Housing Finance
Agency to lower barriers to refinancing. Following weeks of intensive
discussions with lenders, mortgage insurers, regulators, and investors,
FHFA announced changes to help borrowers whose loans were purchased or
guaranteed by Fannie Mae or Freddie Mac and who are located in areas
suffering from house price declines.
With the Administration's Home Affordable Refinancing Program
previously limiting refinancing to borrowers with high loan-to-value
ratios (LTVs) of 125 percent and responsible for less than a million
refinances, the need to pick up the pace was clear. Announced in
October 2011, HARP 2.0 eliminates the LTV ceiling, reduces certain
risk-based loan-level guarantee fees (also referred to as loan level
pricing adjustments, or LLPAs), extends the program's end date to
December 2013, streamlines automated valuation model (AVM) coverage and
foregoes appraisal requirement when AVM is available, and provides
representations and warranties relief.
Eliminating the LTV cap will allow those GSE borrowers who have
been responsible in paying their mortgage, but happen to be deeply
underwater, the opportunity to take advantage of unprecedented mortgage
interest rates. The extension of the program for 2 years will allow
lenders to hire staff and upgrade systems to assure all eligible
borrowers will have the opportunity to take advantage of the HARP
program. It will minimize the amount of funds borrowers would be
required to obtain for a refinance because the GSEs reduce the fees
that borrowers have to pay on 30-year fixed rate loans with an LTV over
80 percent from 2 percent to .75 percent of the loan amount. And by
ensuring that the GSEs do not require the HARP originator to take
responsibility for the quality of the loan that is being refinanced, it
will expand the universe of responsible borrowers to whom they offer
the refinancing option.
In addition to these changes, the Administration continues to work
with FHFA on ways to increase uptake. Specifically, the Administration
is evaluating automated valuation models as approval alternatives to
manual appraisals, removing operational barriers that preclude or
hinder cross-servicer refinances, and seeking to extend HARP 2.0 to
those borrowers with LTVs under 80 percent so that more responsible,
current homeowners have the opportunity to refinance.
We expect most lenders will have their HARP 2.0 operations fully up
and running by the end of March. These changes have met with a very
positive response from homeowners. Already, according to an informal
survey almost 300,000 families have filed applications for refinancing
and stand to save on average $2,500 per year--the equivalent of a
pretty good-sized tax cut--speeding our efforts to help responsible
families stay in their homes and start to rebuild the wealth they lost
in the economic crisis.
We look forward to working with Congress to further reduce the
barriers to refinancing under HARP 2.0, including easing costs
associated with mortgages that have greater equity than 80 percent,
easing underwriting standards, and easing appraisal requirements.
Refinance Assistance for FHA Borrowers--FHA Streamlined Refinance
FHA Streamline Refinances allow borrowers with loans insured by the
Federal Housing Administration who are current on their mortgage to
refinance into a new FHA-insured loan at today's low interest rates
without requiring additional underwriting, allowing these borrowers to
reduce their mortgage payments in a low-cost, simple manner. This
program benefits current FHA borrowers--particularly those whose loan
to value may exceed the current value of their home. This both lower's
a borrower's payment and reduces risk to FHA. As part of our efforts to
help responsible homeowners who are current on their mortgages and
because we see potential for more widespread use of this product, FHA
will make changes to the way in which streamline refinance loans are
displayed in the Neighborhood Watch Early Warning System (Neighborhood
Watch), so that these lenders are not on the hook for loans they did
not originate and thus will be more willing to provide the refinancing.
In addition to taking steps to make these refinance loans more
widely available, FHA is working on adjusting the premium structure for
all Streamline Refinance transactions that are refinancing FHA loans
endorsed on or before May 31, 2009, to further incentivize refinance
activity. These changes will ensure that borrowers benefit from a net
reduction in their overall mortgage payment while still ensuring FHA
has the resources to pay any necessary claims.
Broad Based Refinancing for Non-GSE, Non-FHA Borrowers
Lastly, the President has called on Congress to open up
opportunities to refinancing for responsible borrowers who are current
on their bills and paying their mortgage but whose loans aren't GSE or
FHA-insured. Under the proposal, borrowers with standard non-GSE, non-
FHA loans will have access to refinancing through a new program run
through the FHA. For these responsible borrowers, there will be no more
barriers and no more excuses.
Key components of this plan include:
Providing Non-GSE, Non-FHA Borrowers Access to Simple, Low-Cost
Refinancing: The program will be simple and straightforward. Any
borrower with a loan that is not currently guaranteed by the GSEs or
insured by FHA can qualify if they meet the following criteria--each of
which is designed to help reduce risk to the taxpayer:
They are current on their mortgage: Borrowers will need to
have been current on their loan for the past 6 months and have
missed no more than one payment in the 6 months prior.
They meet a minimum credit score. Borrowers must have a
current FICO score of 580 to be eligible. Approximately 9 in 10
borrowers have a credit score adequate to meet that
requirement.
They have a loan that is no larger than the current FHA
loan limits in their area: Currently, FHA limits vary
geographically with the median area home price--set at $271,050
in the lowest cost areas and as high as $729,750 in the highest
cost areas.
The loan they are refinancing is for a single family,
owner-occupied principal residence. This will ensure that the
program is focused on responsible homeowners trying to stay in
their homes.
They are currently employed. To determine a borrower's
eligibility, a lender need only confirm that the borrower is
employed.
Borrowers will apply through a streamlined process designed to make
it simpler and less expensive for both the borrower and the lender. The
President's plan includes additional steps to reduce program costs,
including:
Establishing loan-to-value limits for these loans. The
Administration will work with Congress to establish risk-
mitigation measures which could include requiring lenders
interested in refinancing deeply underwater loans (e.g.,
greater than 140 LTV) to write down the balance of these loans
before they qualify. This would reduce the risk associated with
the program and relieve the strain of negative equity on the
borrower.
Creating a separate fund for new streamlined refinancing
program. This will help the FHA better track and manage the
risk involved and ensure that it has no effect on the operation
of the existing Mutual Mortgage Insurance (MMI) Fund, which is
FHA's already established insurance fund.
Cost-Savings to the Borrowers who Participate in This New Program:
Given today's record low interest rates, we estimate that on average,
borrowers who participate in this program would reduce their monthly
payments by between $400 and $500 a month.
Option To Rebuild Equity in Their Homes Through This Program: All
underwater borrowers who decide to participate in this refinancing
program through the FHA outlined above will have a choice: they can
take the benefit of the reduced interest rate in the form of lower
monthly payments, or they can apply that savings to rebuilding equity
in their homes. The latter course, when combined with a shorter loan
term of 20 years, will give the majority of underwater borrowers the
chance to get back above water within 5 years, or less.
To encourage borrowers to make the decision to rebuild equity in
their homes, we are proposing that the legislation provide for the
closing costs of borrowers who chose this option--a value averaging
about $3,000. To be eligible, a participant in this option must agree
to refinance into a loan with a term of no more than 20 years and with
monthly payments roughly equal to those they make under their current
loan. For those who agree to these terms, their lender will receive
payment for all closing costs directly from the FHA or another entity
involved.
A Separate FHA Fund: The broad based refinance program will have a
separate fund that is funded through premiums established and direct
funding provided under this program with its net cost offset by the
financial crisis fee. The program's premium structure will be designed
in a way to ensure that homeowners have the incentive for lower monthly
payments through the program. By maintaining a separate fund and
funding source for this program the broad-based refinance will not be
contingent on appropriations action and will have no impact on FHA's
MMI Fund which, as the Committee knows, has been strained in recent
years.
We look forward to working with Members of this Committee to craft
legislation to accomplish these goals and offset the costs associated
with establishing a broad-based refinance program.
Further easing refinancing through HARP 2.0, the FHA streamlined
refinance, and expanding refinance options for homeowners with non-GSE
and non FHA loans finally ties together a critical patchwork of
refinance programs. By working together with Congress, we can ensure
that every family can have the opportunity to take advantage of today's
historically low interest rates. This will save homeowners thousands of
dollars a year, and as a result provide much needed payment relief and
further strengthen the economy.
HAMP Changes and Extension
In February 2009, the Obama administration introduced the Making
Home Affordable Program and the Home Affordable Modification Program
(HAMP) to stabilize the housing market and to help struggling
homeowners get relief and avoid foreclosure.
As I noted at the beginning of my testimony, since that time more
than 5.6 million families have received mortgage modifications with
affordable monthly payments--which include more than 1.7 million HAMP
trial modification starts. HAMP is managed primarily by Treasury.
There is no question that HAMP has had a positive impact on the
private market. Before President Obama took office, as many of you
know, many mortgage modifications actually increased costs for
borrowers. HAMP has not only helped keep families in their homes--it's
also helped set a standard for affordability in the private market,
where families today save an average of $333 per month.
And we've made changes to respond to evolving challenges. For
instance, when foreclosures began to migrate from the subprime to the
prime market because of unemployment, we expanded our focus to offer
more help for unemployed homeowners--requiring servicers participating
HAMP to give borrowers a minimum of 12 months to catch up on payments
while they are looking for work.
In addition, last month, the Administration took a series of steps
to expand the eligibility for HAMP and maximize its impact.
Expanded Eligibility: To ensure HAMP reaches a broader pool of
distressed homeowners, we opened the program up to those who struggle
with secondary debt, such as second liens, medical bills, and credit
cards.
In particular, the Administration has created a second tier that
would provide modification relief to borrowers not currently eligible.
This tier would include:
Mortgages secured by properties that are currently tenant
occupied or properties that are vacant but which the borrower
certifies intention to rent.
Borrowers failing to satisfy the 31 percent debt-to-income
(DTI) test, unable to achieve the target monthly mortgage
payment ratio without excessive forbearance or who have
received a negative net present value (NPV) test due to other
factors.
These changes will not only not only help homeowners, but also
stabilize neighborhoods struggling with foreclosures by helping
hundreds of thousands of owners who rent their properties avoid
foreclosure--in turn, keeping more families in their homes.
Principal Reduction: Still, it's not enough to lower the barriers
to participation in HAMP--we also need to increase its impact. HAMP has
made a real difference for the families who have received a
modification--saving an average of more than $500 per month. But to
rebuild the equity these families have lost, lowering payments isn't
enough.
That's why we are also increasing incentives for cost-effective
mortgage modifications that include a write-down of the borrower's
principal balance through HAMP.
With these changes to the Principal Reduction Alternative (PRA),
whereby investors are eligible for financial compensation incentives
whenever the servicer provides a borrower with a permanent modification
that reduces mortgage principal, we are tripling the incentives
provided to encourage modifications that rebuild equity.
Specifically, with respect to loans which were less than or equal
to 6 months past due at all times during the 12-month period prior to
the NPV evaluation date, investors will be entitled to receive,
effective in May 2012:
$0.63 per dollar of principal reduction equal to or greater
than 105 percent and less than 115 percent mark-to-market LTV
(MTM) ratio;
$0.45 per dollar of principal reduction equal to or greater
than 115 percent and less than or equal to 140 percent MTMLTV
ratio; and
$0.30 per dollar of principal reduction in excess of 140
percent MTMLTV ratio
With respect to loans which were more than 6 months past due at any
time during the 12-month period prior to the NPV evaluation date,
irrespective of MTMLTV (mark-to-market loan-to-value) ratio range,
investors will be paid $0.18 per dollar of principal reduction and will
not be eligible for incentives in the above extinguishment schedule.
These improvements to HAMP augment incentives in a meaningful way for
investors to allow for a greater degree of principal reduction of loans
underlying the securities they own, thus keeping more people in their
homes with mortgages they can afford.
To further increase the amount of principal reduction provided to
borrowers, we are also working to expand it to those with loans
guaranteed by the GSEs. Borrowers with GSE loans have been unable to
benefit from the PRA modification due to FHFA restrictions on the use
of principal reduction in modifications. So homeowners couldn't benefit
solely because they had a GSE loan. In order to ensure consistency
throughout the HAMP program, and to ensure that homeowners can be
considered for rebuilding equity modifications, we have notified FHFA
that Treasury will pay these incentives to the GSEs if they participate
in the program.
Sunset Extension: Lastly, we have extended HAMP's sunset deadline.
Originally slated to sunset at the end of 2012, HAMP has been extended
to December 31, 2013, which conforms to the recently extended deadline
for HARP and provides an expanded window of time for homeowners to gain
relief which investors provide while preserving their investments.
Strengthening FHA's Mutual Mortgage Insurance Fund
The books of business in the few years before 2009 have largely
driven the high number of claims to the MMI Fund. This was driven by
overall economic and unemployment trends as well as by the combined
effects of poor underwriting, unscrupulous and noncompliant practices
on the part of lenders, and a seller-funded downpayment assistance
program that allowed many borrowers to obtain mortgages that they
shouldn't have or without a meaningful down payment. As a result, the
books of business FHA insured prior to the start of this Administration
have severely impacted the health of FHA's MMI Fund. But thanks to our
efforts, I can say confidently that FHA is moving in another direction,
and that the long term outlook for FHA and the Fund are now much better
than they were in 2009. Through systematic tightening of risk controls,
increased premiums to stabilize near-term finances and expanded usage
of loss mitigation workout assistance to avoid unnecessary claims, the
efforts of this Administration have led to the highest quality of loans
FHA has seen in its history.
And still, we continue to take steps to further strengthen the
Fund. In the FY2013 Budget submission we included 10 bps annual premium
increase passed late last year by Congress on all FHA insured loans
mandated by law in December, as well as an additional 25 bps annual
premium increase on ``jumbo'' loans making the total increase for these
larger loans 35 bps. And, just last yesterday, we announced a series of
premium changes that will further increase receipts to FHA by $1
billion in fiscal years 2012 and 2013, beyond the receipts already
included in the President's budget submission. In addition, we have
also taken significant additional steps to increase accountability for
FHA lenders discussed in more detail below.
Yet, despite the unprecedented efforts of the Administration to
alter the trajectory of FHA, considerable risks remain. The FHA Mutual
Mortgage Insurance (MMI) Fund has two components: the Financing
Account, which holds enough money to accommodate expected 30-year
losses on FHA's insured portfolio as of the end of the current fiscal
year; and the Capital Reserve Account, which is required to hold an
additional amount equal to 2 percent of the insurance in force. Since
2009, the Fund's capital reserve ratio has been below that 2 percent
level.
Annually, the President's Budget includes estimates regarding the
status of the capital reserve at the end of the current fiscal year.
This prediction is based on estimates and projections of future
economic conditions, including house prices and other economic factors.
The 2013 Budget estimate for the FHA Capital Reserve account in fiscal
year 2012 did not include the added revenue from the further increased
premiums and the proceeds from the recently announced settlements with
FHA-approved lenders. With these additional revenues accounted for, the
Capital Reserve is estimated to have sufficient balances to cover all
future projected losses without triggering a mandatory appropriation
under the Federal Credit Reform Act. What's more, the Budget estimates,
FHA will add an additional $8 billion to the Capital Reserve Account in
2013, and will return to the congressionally mandated capital reserve
ratio of 2 percent by 2015.
As we undertake efforts to strengthen FHA and lay the foundations
for the return of private capital, it is important to recognize the
critical role that FHA has and continues to play in times of stress on
the housing market. One of the critical purposes of the FHA is to stand
as a bulwark of liquidity in a time when capital has fled the market,
and in such times the FHA will inevitably grow beyond the size that we
would be comfortable with, taking on more risk that we would normally
be comfortable with. We are in such a time now. So while we will
continue to take the steps needed to ensure an FHA that is as strong as
we can make it, and we will gradually take the steps needed to pull the
FHA back from the market to crowd in more private capital, we must not
forget that it is playing an absolutely critical role today, ensuring
access to capital in an environment when capital is extremely difficult
to come by. As we discuss and consider ways to strengthen FHA and to
create an environment for the return of private capital, we must be
mindful of its continued critical role inherent in its mission--
providing home ownership opportunities to families that do not have
access to traditional financing, and to serve as vital source of
credit, when the broader market undergoes stress.
Reducing the Overhang and Shadow Inventory
At the same time we provide relief to responsible homeowners and
keep families in their homes, we also need to attack the second barrier
to our housing recovery: the shadow inventory--the overhang of
properties that are at risk of or already in foreclosure.
REO to Rental
With the rental market recovering faster, we need to think
creatively about ways we can dispose of this shadow inventory.
With the purchase market continuing to be dragged down by the glut
of vacant foreclosed properties and rental rates rising as those who
lose their homes to foreclosure seek rental housing, there is an
unprecedented imbalance of supply and demand between the purchase and
rental markets.
When there are vacant and foreclosed homes in neighborhoods, it
undermines home prices and stalls the housing recovery. As part of the
Administration's effort to help lay the foundation for a stronger
housing recovery, the Department of Treasury and HUD have been working
with the FHFA on a strategy to transition REO properties into rental
housing. Repurposing foreclosed and vacant homes will reduce the
inventory of unsold homes, help stabilize housing prices, support
neighborhoods, and provide sustainable rental housing for American
families.
With about a quarter-of-a-million foreclosed properties owned by
HUD and the GSEs, this August, HUD joined with FHFA and Treasury to
issue a ``Request for Information'' to generate new ideas for absorbing
excess inventory and stabilizing prices. In all, about 4,000
submissions were received.
Over the past several months, the interagency task force has been
reviewing the submissions and formulating strategies based on the best
practices gathered from the RFI. Throughout this process, the task
force has continuously met with industry members, community groups and
other key stakeholders to make sure they are heard in the strategy
development process.
We expect a range of strategies to emerge; however the most
commonly discussed centers around selling REO properties to buyers who
will convert and market them as rental units.
Recently, the FHFA, in conjunction with Treasury and HUD, announced
that investors may prequalify for the first major pilot sale of
foreclosed properties repurposed into rental housing. This marks the
first of a series of steps that the FHFA and the Administration are
taking to develop a smart national program to help manage REO
properties, and ease the pressure of these distressed properties on
communities and the housing market.
We plan to learn and leverage all we can from this initial pilot as
we work towards conducting a series of additional pilots throughout the
rest of the year.
Project Rebuild
While expanding REO-to-Rental is a critical tool, in the hardest-
hit markets, where prices have dropped most and the most vacant and
abandoned buildings are found, more needs to be done to jumpstart
construction and reduce vacancy rates.
As I mentioned earlier, the Neighborhood Stabilization Program
(NSP) has helped improved sale prices and vacancy rates in areas with
concentrated investments. In fact, three-quarters of communities across
the country with targeted neighborhood stabilization investments have
seen vacancy rates go down--and two-thirds have seen home prices go up
compared to surrounding communities. Further, the $7 billion that has
been allocated under the three phases of NSP will support an estimated
88,000 jobs by the time the funding is fully spent. These jobs are
created in a variety of fields including housing construction,
infrastructure construction, maintenance and repair, management,
technical consulting services, real estate, State and local Government.
In Hernando County, Florida, our NSP investments have helped
families move in to once-foreclosed homes in hard-hit places. Just as
importantly, they've helped keep construction workers on the job and
given real estate agents the opportunity to show and sell homes once
again. Indeed, in the La Puente community, a predominately Hispanic
suburb outside Los Angeles, these efforts have helped increase home
prices by nearly 15 percent.
However, even in these NSP investment clusters, NSP has been able
to reach only 46 percent of the census tracts in the United States that
are hardest hit by the foreclosure and unemployment crisis. That is why
President Obama has proposed Project Rebuild to further stabilize
neighborhoods and communities, an initiative which would create 200,000
jobs in the places that need them most.
Nearly two thirds of the $15 billion Project Rebuild funding will
be provided to States and local governments by formula as specified in
the American Jobs Act. The remaining third will be allocated by
competition--which is open to State and local governments, nonprofits,
and for profit entities and consortia of these parties. Project Rebuild
proposes important modifications to the NSP model to extend the
benefits of the program beyond affordable housing, enabling greater job
creation, and a broader positive impact on neighborhoods.
Recognizing that it's not just abandoned homes that can drag down
an entire neighborhood, but also vacant commercial properties, Project
Rebuild broadens eligible uses to allow commercial projects and other
direct job creating activities, capped at 30 percent of funds. Up to 10
percent of formula grants may be used for establishing and operating
jobs programs to maintain eligible neighborhood properties. Formula
funding will go directly to States and entitlement communities across
the country. Competitive funds will be available to States, local
governments, for-profit entities, nonprofit entities and consortia of
these entities.
Each State will receive a minimum of $20 million of the $10 billion
in formula funds. Funds will be targeted to areas with home
foreclosures, homes in default or delinquency, and other factors, such
as unemployment, commercial foreclosures, and other economic
conditions. Project Rebuild also will expand the ability of the private
sector to participate with localities--ensuring there is the expertise
and capacity to bring these neighborhoods back in a targeted way. I
urge the Committee to join with the Administration in working toward
the enactment of this proposal.
Reducing Uncertainty, Improving Access to Credit
Of course, underlying many of the issues in our housing market is a
lack of certainty--of a clear understanding of the rules of the road
lenders need to do business and our housing market needs to recover.
And one way to reduce uncertainty is to clear away barriers to
recovery--to resolve these matters in a way that holds those
responsible accountable, but moves us forward by creating conditions
more conducive for lending.
Lender Indemnification
As part of FHA's continued efforts to protect and strengthen the
MMI Fund, facilitate access to mortgage credit for qualified borrowers
and provide clarity to our lending partners, last month FHA issued
final rule governing the process for receiving and maintaining approval
to participate in the Lender Insurance (LI) process. These new
regulations will provide greater clarity regarding our expectations for
our LI lending partners, as well as the actions we will take to prevent
losses when those standards are not met.
The regulations reiterate FHA's commitment to ongoing quality
assurance reviews of lenders with LI authority. In addition, the rule
sets a standard for what constitutes a ``serious and material
violation'' of FHA origination requirements. Serious and material
violations, as well as instances of fraud or misrepresentation, will
require indemnification by LI mortgagees. In providing a standard for
these violations, along with a clear process by which FHA will require
indemnifications for loans that do not meet these standards, FHA is
providing a level of certainty to our partners with regard to the types
of violations which are actionable under HUD policy.
It is significant, however, that FHA currently has the ability to
exercise this indemnification authority with respect to only one of our
two classes of FHA approved lenders. FHA Direct Endorsement (DE)
Lenders are currently not subject to the same regulations with regard
to indemnification. In order to protect the MMI Fund and ensure the
term viability of the FHA, the Administration continues to pursue
legislation to allow FHA to pursue indemnifications from these DE
lenders.
In addition, we believe it is important for the Federal Housing
Finance Agency to work with Fannie Mae and Freddie Mac to make clear
the rules of the road for GSE lenders with straightforward and well
defined representations and warranties that will further reduce
uncertainty around repurchase risk. Equipping banks with a better
understanding of what mortgages they can be held responsible for can
yield positive externalities with respect to REO inventory overhang and
the damaging impact of foreclosures on house prices.
Homeowner Bill of Rights
Consumers need certainty and clarity most of all. The Homeowners
Bill of Rights recently announced by President Obama would guarantee
consumers access to a simple mortgage disclosure form, so borrowers
understand the loans they are taking out; full disclosure of fees and
penalties; guidelines to prevent conflicts of interest that end up
hurting homeowners; support to keep responsible families in their homes
and out of foreclosure; and, protection for families against
inappropriate foreclosure, including right of appeal.
Tackling All Three Barriers: Mortgage Servicing Settlement
All three of the barriers I have described--keeping people in their
homes, the shadow inventory, and uncertainty--are addressed by the
historic mortgage servicing settlement the Obama administration and a
bipartisan coalition of attorneys general from 49 States reached
providing at least $25 billion on behalf of American homeowners.
The product of 16 months of intensive negotiations between the five
banks and an unprecedented coalition of State attorneys general and
Federal agencies, including the Departments of Justice, Treasury, and
HUD, that spanned partisan lines, the settlement helps families keep
their homes and reduces the shadow inventory by providing relief to
homeowners, in part by forcing banks to reduce the principal balance on
many loans, refinancing loans for ``underwater'' borrowers. In addition
the settlement will pay billions of dollars to States to stabilize
communities and cover the costs associated with the foreclosure crisis
and consumers who have been foreclosed upon.
And it reduces uncertainty by providing clear servicing standards
going forward for these five institutions which currently service over
70 percent of all mortgages--standards that can set the stage for
servicing standards going forward.
Background
In the summer of 2010, HUD initiated a large-scale review of the
FHA's largest servicers, devoting thousands of hours to reviewing
servicing files for thousands of FHA-insured loans. While we began with
a focus on failure to engage in loss mitigation, the scope of this
review encompassed a long list of mortgage servicing issues, such as
lost paperwork, long delays and missed deadlines. As HUD's Office of
the Inspector General found, the country's five largest loan servicers
routinely signed foreclosure related documents without really knowing
whether the facts they contained were even correct.
In effect, many of the very same financial institutions responsible
for selling loans to people who couldn't afford them and then packaging
those mortgages to make profits, effectively fueling the housing
crisis, were actually making it worse--harming families, neighborhoods
and our economy.
Following revelations of widespread use of ``robo-signed''
affidavits in foreclosure proceedings across the country, the Federal-
State working group launched an investigation into the problem and
confronted the 5 largest servicers, representing more than 80 percent
of the loans serviced, about these problems. These banks soon
acknowledged that individuals had been signing thousands of foreclosure
affidavits without reviewing the validity or accuracy of the sworn
statements. Several national banks then agreed to stop their
foreclosure filings and sales until corrective action could be taken.
Other servicer-related problems were identified as well, including
deceptive practices in the offering of loan modifications (for example,
telling consumers that a loan modification was imminent while
simultaneously foreclosing). These performance failures resulted in
more than just poor customer service. Unnecessary foreclosures occurred
due to failure to process homeowners' requests for modified payment
plans. And where foreclosures should have been concluded, shoddy
documentation led to protracted delays. This misconduct not only harmed
homeowners--but communities, our housing market and economy.
Relief for Homeowners
The settlement imposes monetary sanctions on the banks while
providing immediate and continuing relief to homeowners. The single
largest Federal-State civil settlement ever agreed to--and the largest
financial recovery from the banks during this crisis--the accord will
enable hundreds of thousands of distressed homeowners to stay in their
homes through enhanced loan modifications. It will also fund payments
to victims of unfair foreclosure practices and provide support for
housing counseling and State-level foreclosure prevention programs.
One of the most important features of the settlement is the $17
billion in consumer relief options that will offer homeowners a variety
of home retention and home disposition alternatives. Because the banks
will receive credit for employing these options at specified credit
rates (e.g., a deficiency waiver carries a 10 percent credit, so for
every dollar supplied by the bank, it would only count 10 cents), this
$17 billion has the potential to provide as much as $32 billion in
relief.
Much of this relief will come in the form of principal reduction
for distressed homeowners. Enabling these families to restructure their
debt and start building equity again not only improves their
prospects--but also those of their neighbors who have watched property
values plummet by $5,000-10,000 simply because there are foreclosures
on their block.
In addition, it provides:
$3 billion for refinances for current homeowners who,
because their home values are underwater, would not be able to
refinance their mortgages into lower interest rate loans.
Approximately $2.6 billion to States which can choose to
apply funds to repay public funds lost as a result of servicer
misconduct, fund housing counselors, legal aid, and other
similar purposes determined by State attorneys generals.
A $1.5 billion Borrower Payment Fund for borrowers who were
foreclosed upon on or after January 1, 2008. Banks must notify
those borrowers of their right to file a claim. Payout is
anticipated to be approximately $2,000 per person, depending
upon levels of claim and whether they meet some relatively
basic criteria. Borrowers receiving claims will not have to
waive any legal rights or claims against the banks, and can
seek additional relief.
With specific regard to the Borrower Payment Fund, as I noted
earlier, when HUD initiated a large-scale review of the FHA's largest
servicers in the summer of 2010, we found that families who should not
have gotten into trouble--and who should have been able to get some
help early on that was both good for them and good for the lender--
didn't get that help--help that in many cases banks were legally
obligated to provide.
These $2,000 payments will be made to families who suffered from
these kinds of errors--where borrowers were charged fees that they
shouldn't have been or had dropped calls or lost paperwork when they
sought help with their mortgages.
For families who suffered much deeper harm--who may have been
improperly foreclosed on and lost their homes and could therefore be
owed hundreds of thousands of dollars in damages--the settlement
preserves their ability to get justice in two key ways:
First, if a borrower can document that they were improperly
foreclosed on, they can receive every cent of the compensation they are
entitled to through a process established by Federal banking
regulators. The agreement also preserves the right of homeowners to
take their servicer to court. Indeed, if banks or other financial
institutions broke the law or treated the families they served
unfairly, they should pay the price--and with this settlement they
will.
I would note that these funds are paid entirely by the banks. The
taxpayer doesn't pay a dime.
And homeowners aren't the only ones who will see the benefits of
this settlement. So, too, will the taxpayer who has paid a steep price
for financial institutions' failure to follow the law when it came to
families who had FHA-insured loans. In addition to the steps I
mentioned earlier that FHA is taking to protect its MMI fund,
approximately $900 million from this settlement will help shore up the
FHA's finances, preserving this critical resource for the future and
protecting taxpayers' investment.
Residential Mortgage Backed Security Group
While this historic settlement will offer significant help to those
who suffered the most harm and provide a path toward stability for our
housing market and our broader economy, it isn't designed to address
all the issues of the housing crisis. While it resolves certain
violations of civil law based on the banks' mortgage loan servicing
activities, the United States and the State attorneys general preserved
the right to pursue claims in a number of important areas, including
criminal authorities, securities claims, and loan origination claims.
Indeed, in some ways, just as important as what this settlement
accomplishes is what it does not do. It will not prevent State
attorneys general or regulators from pursuing criminal cases or
conducting investigations that get to the bottom of the crisis. Last
month, Attorney General Holder and I joined New York Attorney General
Schneiderman and several other State attorneys general in announcing a
working group comprised of representatives from DOJ, HUD, SEC, and the
State AGs focused on investigating the conduct of financial servicers
that broke the law and contributed to the crash of the housing market,
including securities- and origination-related cases.
New Customer Service Standards
That's why this agreement forces the banks that service nearly 2
out of every 3 mortgages to take action to address the problems
uncovered during our investigations.
In particular, these standards prohibit robo-signing, improper
documentation and lost paperwork; clarify what servicers have to do on
foreclosures and modifications, including requiring strict oversight of
foreclosure processing, including of third-party vendors; make
foreclosures a last resort by requiring servicers to evaluate
homeowners for other loan mitigation options first; restrict banks from
foreclosing while the homeowner is being considered for a loan
modification; and establish procedures and timelines for reviewing loan
modification applications, and give homeowners the right to appeal
denials. Having to satisfy these requirements, banks are also more
certain of the costs associated with them.
These standards will set the stage for clear, national servicing
rules for all servicers which the new Consumer Financial Protection
Bureau, under the leadership of Director Richard Cordray, and along
with an interagency team comprised of independent regulators as well as
Treasury and HUD, are working to craft These national standards are an
aggressive and critical first step in a broader Administration effort
to provide a single, straightforward set of commonsense rules that are
in keeping with Homeowner Bill of Rights that families can count on
when they're buying a home and paying their mortgage. The standards in
this settlement will serve as benchmark for the development of these
uniform rules, giving people the confidence that lenders and servicers
are following a long list of rights should they ever lose a job or have
a medical emergency that puts their home at risk.
Lastly, the settlement's release of limited origination claims with
both Bank of America and Citibank which, coupled with the Lender
Insurance indemnification rule discussed earlier, provides clarity for
lenders on when the FHA will take action, reducing concerns over
lawsuits and additional reputational risk. In the same way, clarifying
representations and warranties at the GSE level will help to achieve a
well-defined and well understood buyback policy that fosters a degree
of uniformity and certainty across the Government-backed space.
An Economy Built to Last
And so, Mr. Chairman, as you can see, we have made very important,
significant progress in recent months to get our housing market back on
track--helping tens of thousands of additional families refinance,
putting in place the most significant principal reduction effort in
history and establishing critical consumer protections that hold
powerful institutions accountable for their actions, help our housing
market recover and give every homeowner the dignity, respect and fair
treatment they deserve.
But for all this progress, we can't declare victory and go home. We
still need Congress to act to ensure that every responsible family in
America, regardless of who services their loan, has the opportunity to
refinance.
We still need to continue our work together to create a robust
private system of housing finance and protect the FHA fund for the
future.
And we still need a balanced national housing policy that ensures
Americans have access to credit for those in a position for sustainable
home ownership, assistance for those who feel the strain of high
housing costs, rental options near good schools and good jobs, and
above all--choices in housing that make sense for them and for their
families.
That is the goal of all this work--and it is fundamental to
creating an economy built to last. And I look forward to working with
Congress to make it possible. Thank you.
______
PREPARED STATEMENT OF ELIZABETH A. DUKE
Governor, Board of Governors of the Federal Reserve System
February 28, 2012
Chairman Johnson, Ranking Member Shelby, and Members of the
Committee, thank you for inviting me to talk about the current
situation in housing markets.
The Federal Reserve has a keen interest in the state of housing and
has been actively engaged in analyzing issues in the housing and
mortgage markets. Issues related to the housing market and housing
finance are important factors in the Federal Reserve's various roles in
formulating monetary policy, regulating banks, and protecting consumers
of financial services. In particular, the failure of the housing market
to respond to lower interest rates as vigorously as it has in the past
indicates that factors other than financial conditions may be
restraining improvement in mortgage credit and housing market
conditions and thus impeding the economic recovery. Federal Reserve
staff have been actively working to understand the reasons behind the
impairment in housing and mortgage markets and the tradeoffs involved
in designing policies that would remove obstacles to normal market
functioning.
On January 4, 2012, the Federal Reserve released a staff paper
titled ``The U.S. Housing Market: Current Conditions and Policy
Considerations'', which is attached at the end of my written statement.
The paper provides information on current conditions in the housing
market and analytic background on some housing market issues. Although
the paper does not include recommendations for any specific policy
actions, it does lay out a framework for discussion by outlining some
options and tradeoffs for policy makers to consider. My testimony today
will be drawn from this paper.
Six years after aggregate house prices first began to decline, and
more than 2 years after the start of the economic recovery, the housing
market remains a significant drag on the U.S. economy. In a typical
economic cycle, as the economy turns down households postpone purchases
of durable goods such as housing. Once the cycle bottoms out, improving
economic prospects and diminishing uncertainty usually help unleash
this pent-up demand. This upward demand pressure is often augmented by
lower interest rates, to which housing demand is typically quite
responsive.
The current economic recovery has not followed this script, in part
because the problems in the housing market are a cause of the downturn
as well as a consequence of it. The extraordinary fall in national
house prices has resulted in $7 trillion in lost home equity, more than
half the amount that prevailed in early 2006. This substantial blow to
household wealth has significantly weakened household spending and
consumer confidence. Another result of the fall in house prices is that
around 12 million households are now underwater on their mortgages--
that is, they owe more on their mortgages than their homes are worth.
Without equity in their homes, many households who have experienced
hardships, such as unemployment or unexpected illness, have been unable
to resolve mortgage payment problems through refinancing their
mortgages or selling their homes. The resulting mortgage delinquencies
have ended in all too many cases in foreclosure, dislocation, and
personal adversity. Neighborhoods and communities have also suffered
profoundly from the onslaught of foreclosures, as the neglect and
deterioration that may accompany vacant properties makes neighborhoods
less desirable places to live and may put further downward pressure on
house prices.
An ongoing imbalance between supply and demand exacerbates these
problems in the housing market. For the past few years, the actual and
potential supply of single-family homes for purchase has greatly
exceeded the effective demand, in part because of the large number of
homes that have come back onto the market after moving through the
foreclosure process. The elevated pace of foreclosures, unfortunately,
is likely to be sustained for quite a while and therefore will continue
to put downward pressure on home prices.
At the same time, a host of factors have been weighing on housing
demand. Many households have been reluctant or unable to purchase homes
because of concerns about their income, employment prospects, and the
future path of home prices. Tight mortgage credit conditions have also
prevented many households from purchasing homes. Although some
retrenchment in lending standards was necessary and appropriate given
the lax standards that prevailed before the crisis, current lending
practices appear to be limiting or preventing lending even to
creditworthy households.
In the paper, we discussed the benefits and costs of a variety of
policy options that have been proposed to respond to these difficult
housing issues, including increasing credit availability for households
seeking to purchase a home or to refinance an existing mortgage;
exploring the scope for further mortgage modifications, including
encouraging short sales and deeds-in-lieu of foreclosure in cases where
foreclosure cannot be avoided; and expanding the options available for
holders of foreclosed properties to dispose of their inventory
responsibly. Any policy proposals, though, will require wrestling with
difficult choices and tradeoffs, as initiatives to benefit the housing
market will likely involve shifting some of the burden of adjustment
from some parties to others.
I greatly appreciate the leadership that the Senate Banking
Committee has shown on the profound challenges facing the housing
market. For its part, the Federal Reserve will continue to use its
policy tools to support the economic recovery and carry out its dual
mandate to foster maximum employment in the context of price stability.
In its supervisory capacity, the Federal Reserve will continue to
encourage lenders to find ways to maintain prudent lending standards
while serving creditworthy borrowers.
Thank you again for inviting me to appear before you today. I would
be happy to answer any questions you may have.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF EDWARD J. DeMARCO
Acting Director, Federal Housing Finance Agency
February 28, 2012
Chairman Johnson, Ranking Member Shelby, and Members of the
Committee, I am pleased to be invited here today to discuss the actions
the Federal Housing Finance Agency (FHFA) has taken or will take in our
role as Conservator for Fannie Mae and Freddie Mac (the Enterprises) to
aid recovery of the U.S. housing market.
In my testimony, I will respond to the Committee's request for a
description of FHFA's work as Conservator of the Enterprises to address
barriers to housing recovery, including our leadership role in
preventing foreclosures through loss mitigation, facilitating
refinancing at today's low interest rates, and initiating a real estate
owned (REO) program to address the supply of foreclosed homes.
Current Activities
Let me start by describing some of the key activities that FHFA and
the Enterprises have undertaken to address problems in the mortgage
market. In contrast to how they are sometimes portrayed, the
Enterprises are playing a leading role in providing assistance to
homeowners and seeking to avoid foreclosures. As I have stated before,
these activities are based on FHFA's statutory responsibilities as
Conservator, and the Enterprises' historic statutory missions.
Enterprise Loss Mitigation Activities
The Enterprises have been leading the effort on foreclosure
prevention since they entered conservatorship. On a nationwide basis,
Fannie Mae and Freddie Mac own or guarantee 60 percent of the mortgages
outstanding, but they account for a much lower proportion, 29 percent
of seriously delinquent loans. These are loans that have been
delinquent for 3 or more months or are in the process of foreclosure.
However, the housing crisis is concentrated in a handful of States. Ten
States account for approximately half of loans serviced and 60 percent
of the country's seriously delinquent loans. Similar to the nationwide
proportions, the Enterprises hold approximately 59 percent of the loans
in those States but account for 29 percent of seriously delinquent
loans in those States. As such, while the Enterprises are taking a
leadership role in solving the crisis, similar actions from the holders
of the other 70 percent of seriously delinquent loans are crucial to a
successful outcome.
Even though the Enterprises have a smaller share of seriously
delinquent loans than other market participants, they account for about
half of all Home Affordable Modification Program (HAMP) permanent
modifications. Similarly, data from the Office of the Comptroller of
the Currency (OCC) show that in the 2 years ending in the third quarter
of 2011, modifications on Fannie Mae and Freddie Mac loans accounted
for 40 percent of all loan modifications. Between HAMP modifications
and their own proprietary loan modifications, Fannie Mae and Freddie
Mac have completed over one million loan modifications since the fourth
quarter of 2008. These modifications typically lowered borrowers'
payments by substantial amounts and have yielded positive results.
The performance of Enterprise modified loans has improved relative
to Enterprise loan modifications from before HAMP was fully
implemented, and it is better relative to contemporaneous modifications
on Federal Housing Administration (FHA) or Veterans' Administration
(VA) loans and loans held by private investors. For Enterprise loans
modified throughout 2010, fewer than 20 percent of the loans had missed
two or more payments after 9 months. Comparable redefault rates are
down from the 40 percent range for their loans modified in 2008 and
most of 2009.
Some observers have cited declines in the number of loan
modifications completed by Fannie Mae and Freddie Mac over the past
year or so as evidence of a lack of support for foreclosure prevention.
In fact, this trend is applicable to all investors in mortgages as
illustrated by the OCC's report. The quarterly number of loan
modifications peaked in the second and third quarters of 2010 for all
investors in mortgages (i.e., the GSEs, FHA, VA, portfolio investors,
and private investors). A contributing factor to this trend may be that
the initial backlog of eligible borrowers in 2009 has been addressed to
some extent.
The continued leadership and improvements in the Enterprises'
foreclosure prevention efforts is based on continued program
evaluations and efforts to make these programs work better. In
particular, the Servicing Alignment Initiative (SAI) established new
borrower communication requirements for servicers to ensure that
borrower outreach occurs at the earliest stage of delinquency, when
foreclosure prevention measures are most effective. Furthermore, under
SAI, Fannie Mae and Freddie Mac made clear that servicers are expected
to evaluate borrowers for the full range of loss mitigation options
simultaneously. This allows the borrower and servicer to pursue and
lock in an alternative to foreclosure as quickly as possible. Servicers
are obligated to collect information from borrowers and assess their
eligibility for a modification well before a loan is referred for
foreclosure and such referrals may only occur after an independent
review of the case to ensure that the borrower was, in fact, considered
for an alternative to foreclosure.
To encourage loan modifications, the Enterprises offer substantial
incentive payments to servicers to motivate them to meet the aggressive
timelines for offering loan modifications, be they HAMP or Enterprise
standard modifications. The payments should cover the servicers' costs
for engaging in more borrower outreach, such as ``door-knocking'' and
other face-to-face techniques.
The SAI improvements represent a highly targeted approach, the goal
of which is to refocus the servicers' resources and attention on moving
all borrowers into alternatives to foreclosure, quickly, efficiently,
and aggressively. The SAI aligned the requirements of the Enterprises
to remove inconsistencies that could cause servicers confusion and
delay.
Furthermore, under the SAI the Fannie Mae standard modification
program was adopted by Freddie Mac, again, to ensure that borrowers had
easy access to a simple and straightforward modification option. I am
pleased to see that the Treasury Department has acknowledged the
benefit of this program, creating a Tier 2 program under the HAMP that
is modeled on the Enterprise program. As the data show, more borrowers
have benefited from the Enterprise modification programs than from
HAMP, so I think that this program change will help more households
access a modification.
The Home Affordable Refinance Program
Fannie Mae and Freddie Mac are at the forefront of refinance
activity for current borrowers. Since April 1, 2009, the Enterprises
have completed more than 10 million refinances, accounting for 63
percent of refinance originations over that period. With respect to
underwater borrowers, Fannie Mae and Freddie Mac account for less than
half of underwater borrowers compared to their 60 percent share of
total mortgages serviced. However, Fannie Mae and Freddie Mac are the
only institutions that currently operate a large-scale refinancing
program for underwater borrowers. Since the inception of the Home
Affordable Refinance Program (HARP), the Enterprises have completed
over one million HARP refinances. Furthermore, since the inception of
HARP, Fannie Mae and Freddie Mac have completed 1.9 million streamlined
refinances that expedited the refinance process for borrowers.
HARP was designed in 2009 to allow borrowers with loans backed by
Fannie Mae and Freddie Mac, whose loan-to-value (LTV) ratios had
increased as a result of declining home values, a refinancing option
that did not require new or additional mortgage insurance coverage. In
October 2011, FHFA announced a set of changes to HARP meant to enhance
access to the program.
The program allows lenders to qualify borrowers using a very
streamlined underwriting process, relying on the borrower's payment
history as an indication of capacity and willingness to repay the new
loan. While this streamlined underwriting approach is available for
most borrowers with loans backed by Fannie Mae and Freddie Mac, those
with the highest LTV ratios stand to benefit most because they have
fewer or no other refinance options available to them. HARP is intended
to serve these borrowers, whose LTV ratios are greater than 80 percent.
FHFA and the Enterprises have been closely tracking program
participation and performance since the program's inception in 2009.
The eligible population for the program is fairly limited, but the
data, reported monthly in the FHFA Foreclosure Prevention and Refinance
Report, suggested that some borrowers were not being reached or were
not taking advantage of the program.
To better understand why eligible borrowers were not accessing the
program, FHFA and the Enterprises established a task force to work with
the industry to assess and streamline program operations. The research
showed that increasing access to the program would not be driven by
addressing any single or obviously restrictive program feature. Rather,
a variety of operational constraints and risk mitigation measures put
in place by program participants, to control for and limit a transfer
of risk from one party to another required revision. By working through
the broad set of issues with a cross-section of market participants,
FHFA and the Enterprises were able to create an environment where all
parties were willing to accept some degree of risk and to streamline
program requirements and operations in a way that was mutually
beneficial.
In the end, the set of policy changes announced by FHFA were fairly
simple--(a) extend the program sunset date to December 31, 2013, to
provide lenders with more time to execute against the more liberal
program terms; (b) provide lenders with additional relief from
representations and warranties, to provide comfort that the Enterprises
would not pursue repurchases for defects in original loan files; (c)
transmit property value data to lenders to use when originating the new
loans, limiting the need for appraisals; (d) reduce the loan-level
pricing adjustments for all borrowers and eliminate them altogether for
borrowers who choose mortgage terms of 20 years or less, a product
option that reduces risk to the Enterprises and helps a borrower build
equity faster; and (e) remove the loan-to-value cap, previously set at
125 percent. The program modifications took effect on December 1, 2011,
for those lenders who were able to update and implement quickly; for
most in the industry, including the Enterprises, implementation will
continue through the next few months.
In exchange for these program changes, lenders and mortgage
insurance companies agreed to remove their own restrictions and
overlays, to offer the program in a manner that is consistent with the
parameters set out by the Enterprises. This agreement across the
industry was unprecedented and the participation and support of the
industry is to be commended. Already many of the largest lenders are
seeing tremendous borrower interest and we expect to see an increase in
HARP volume in the upcoming reports.
Some have suggested that the program changes made to HARP ought to
be carried over to the rest of the book of business at Fannie Mae and
Freddie Mac. In fact, both companies do have streamlined refinance
programs available today. The data suggests that borrowers are not
having any excessive difficulty accessing these and other refinance
programs as over 10 million households have refinanced with Enterprise-
backed loans over the last 3 years.
Real Estate Owned Initiative
The Enterprises are also in the process of evaluating alternative
methods for selling Real Estate Owned (REO) in ways that produce value
for taxpayers and contribute to improved housing market stability.
Yesterday we announced the first transaction in our REO Initiative
pilot program. This transaction includes approximately 2,500
properties, divided into 8 subpools by geographic area. Information on
the number of properties in each location is available on FHFA's Web
site, but let me say here that the targeted Metropolitan Statistical
Areas are likely no surprise to you because they represent hard-hit
parts of the country: Las Vegas, Nevada; Phoenix, Arizona; various
communities in Florida; Chicago, Illinois; Riverside and Los Angeles,
California; and Atlanta, Georgia.
With this next step, prequalified investors will be able to submit
applications to demonstrate their financial capacity, relevant market
experience, and specific plans for purchasing pools of foreclosed
properties with the requirement to rent the purchased properties for a
specified number of years.
Future transactions will also be targeted to these types of
markets, where the supply of homes for sale is greater than the demand
from homebuyers and where demand for rental housing is strong. The
pilot is not intended to be a national bulk sale program, where the
entire existing inventory is pooled for sale to investors; we are
engaged in a targeted effort that is focused on markets with a large
number of foreclosed properties and where local market conditions
suggest a possible benefit from this approach.
The number of properties available for sale by Fannie Mae and
Freddie Mac represents only a fraction of the total supply that is
depressing home values in certain affected markets. The existing retail
sales strategy at both companies works well for moving properties into
the hands of new owner-occupants at close to market values. However,
through FHFA's REO Initiative, we are testing to see if FHFA can help
address the broader set of market conditions with pilot programs that
could serve as models to be replicated by other market players and in
differing market situations.
In addition to this pilot work, which is focused on moving
properties in bulk, both companies are looking for ways to enhance
their existing retail sales strategies, reexamining the programs
available for homebuyers and for small investors. The Enterprises'
retail execution has been very successful to date. Our primary goal
will continue to be selling properties first to homebuyers who will use
them as their primary residences or nonprofits that include homes in
mission-oriented activities. We also want to enhance the opportunity
for smaller-scale investors to bid on properties, and obtain financing,
should initial efforts to market the properties to owner-occupants
fail.
Strategic Plan
At FHFA we are faced with a fundamental task of directing the
operations of two companies that account for roughly three-quarters of
current mortgage originations and have approximately $5 trillion in
outstanding obligations and credit guarantees. FHFA's task is
complicated by the uncertain future of the Enterprises and increasing
dissatisfaction with various aspects of their business operations.
Conflicting opinions abound about what our responsibilities should be.
Some think FHFA should be doing more to help housing recover, others
think that FHFA should be winding down the Enterprises' operations more
quickly, others think that FHFA should be making all the business
decisions at the Enterprises, and others think that the Enterprises are
part of the Federal Government.
To address these issues, what FHFA has done since conservatorship
is to be clear about how we view our legal responsibilities as
Conservator, and what actions we are going to take to fulfill those
responsibilities.
Two years ago, FHFA sent a letter to Congress that set forth the
agency's understanding of its conservatorship obligations and what
actions we intended to take to fulfill those obligations. In that
letter, we focused on four main areas, including: Enterprise focus on
loan modifications and mitigating credit losses; reduction in the
Enterprises' retained portfolios; no new product deployments by the
Enterprises; and meeting the Enterprises' affordable housing goals.
It is time to update and extend that plan in view of where the
Enterprises and the country's housing system are today. In particular,
with the conservatorships operating for over 3 years and no near-term
resolution in sight, it is time to assess the goals and directions of
conservatorship.
The strategic plan FHFA released last week, which is attached to
this testimony, outlines the steps FHFA has taken and will be taking to
address these challenges. The plan sets forth three strategic goals for
the next phase of conservatorship:
1. Build. Build a new infrastructure for the secondary mortgage
market.
2. Contract. Gradually contract the Enterprises' dominant presence
in the marketplace while simplifying and shrinking their
operations.
3. Maintain. Maintain foreclosure prevention activities and credit
availability for new and refinanced mortgages.
The first goal--building a new infrastructure--recognizes that the
country would be without a secondary market for non- Government-insured
mortgages without the Enterprises. No private sector infrastructure
exists today that is capable of securitizing the $100 billion per month
in new mortgages being originated. This goal establishes the steps FHFA
and the Enterprises will take to create that necessary infrastructure
and upon which Congress and market participants may use to develop the
mortgage market of the future.
The ``Build'' component includes the following activities, some
that FHFA has already been working on over the last year:
New securitization platform
Standardized pooling and servicing agreements, including
transparent servicing requirements
Servicing compensation structure that promotes competition
Enhanced loan-level data for investors
An efficient system for document custody and record keeping
The second goal--contracting Enterprise operations--describes steps
that FHFA plans to take to gradually shift mortgage credit risk from
the Enterprises to private investors and eliminate the direct funding
of mortgages by the Enterprises. This goal is consistent with the
fundamental goals of the conservatorship, of the Enterprises operating
in a sound and solvent condition, and of limiting future risk exposure
in the face of uncertainty.
The ``Contract'' component includes the following activities:
Single-Family Credit Guarantees
Increase guarantee fee pricing
Develop loss-sharing arrangements
Expand ways of using mortgage insurance
Multifamily Credit Guarantees
Market analysis of the viability of the Enterprises'
multifamily operations
Capital Markets
Portfolio already on a steady path of reduction
The third goal--maintaining foreclosure prevention efforts and
credit availability--recognizes that the work begun 3 years ago is not
finished. Programs and strategies to ensure ongoing mortgage credit
availability, assist troubled homeowners, and minimize taxpayer losses
while restoring stability to housing markets continue to require
energy, focus, and resources.
The ``Maintain'' component includes the following activities:
Implementation of recent HARP changes
Continued implementation of SAI and loss mitigation
activities
Further implementation of REO disposition initiative
Renewed focus on short sales, deeds-in-lieu, and deeds-for-
lease foreclosure prevention options
Alignment and greater transparency on Enterprise
representation and warranty policies
Achieving these strategic goals will fulfill the statutory
responsibilities Congress assigned FHFA as Conservator and also prepare
the foundation for a new, stronger housing finance system in the
future. Although that future may not include Fannie Mae and Freddie
Mac, at least as they are known today, this important work in
conservatorship can be a lasting, positive legacy for the country and
its housing system.
Properly implemented, this strategic plan should benefit:
Homeowners, by ensuring continued emphasis on foreclosure
prevention and credit availability;
Taxpayers, by furthering efforts to limit losses from past
activities while simplifying risk management and reducing
future risk exposure;
Market participants, by creating a path by which the
Enterprises' role in the mortgage market is gradually reduced
while maintaining market stability and liquidity; and
Lawmakers, by building a foundation on which they may
develop new legal frameworks and institutional arrangements for
a sound and resilient secondary mortgage market of the future.
The public interest is best served by ensuring that Fannie Mae and
Freddie Mac have the best available corporate leaders and business
professionals to carry out the work necessary to meet the critical
goals set forth here. The managers and staff at each company also have
critical roles to play since the numerous activities and changes
necessary to accomplish the strategic goals will require substantial
effort by many people at Fannie Mae and Freddie Mac.
Conclusion
The strategic plan provides an outline for the next chapter of
conservatorship, one that focuses in earnest on building a secondary
mortgage market infrastructure that will live beyond the Enterprises.
The steps envisioned in the strategic plan are consistent with various
approaches to housing finance reform.
The final chapter, though, remains the province of lawmakers.
Fannie Mae and Freddie Mac were chartered by Congress and by law, only
Congress can abolish or modify those charters and set forth a vision
for a new secondary market structure. This plan envisions actions by
the Enterprises that will help establish a new secondary mortgage
market, while leaving open all options for Congress and the
Administration regarding the resolution of the conservatorships and the
degree of Government involvement in supporting the secondary mortgage
market in the future.
I would be happy to answer any questions you may have about my
testimony or FHFA's new strategic plan.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM SHAUN DONOVAN
Q.1. Secretary Donovan, in your testimony before the Committee,
you stated that the non-GSE loans that would be eligible for
refinancing through the Federal Housing Administration as part
of the President's recently announced housing plan are
``already low-risk loans.'' The President's plan, however,
appears to include loans that do not fall into this category.
For example, it specifies that the refinancing program would be
open to borrowers with a low FICO score of 580 as well as
borrowers with ``deeply underwater loans.''
How do you define ``low-risk loans?''
A.1. Although the plan calls for loans with FICOs as low as
580, the plan explicitly states that the loan must be current
at the time of the refinancing. Furthermore, the borrower must
have exhibited a strong track record of on-time payments, with
no late payments in the 6 months prior to the refinancing and
no more than one 30 day late in the 6 months prior to that. The
borrower may have suffered one or more hardships in the past
which may be the reason the credit score is low, however, the
borrower has reestablished the ability to pay and has proven
responsibility with the strong 12-month payment history.
Q.2. Specifically, what are the expected default rates for
borrowers eligible for this program? What is the expected
participation rate, and how many foreclosures do you expect
this program would prevent? What is the projected subsidy for
this program, and how would it be offset?
A.2. We expect that that with homeowners experiencing lower
interest rates, the likelihood of default would be decreased.
However, at this time we do not have official estimates of
default rates, participation rates, or other performance
parameters.
It is estimated, based on the current program guidelines
that roughly three million borrowers would be eligible to
participate. We cannot estimate exactly how many homeowners
will participate in this program, as the decision to refinance
is contingent on many personal factors, such as expected time
in a residence, employment, etc.
This is not an explicitly targeted foreclosure prevention
program like HAMP, but we do expect that home ownership
sustainability will improve when homeowners can refinance to
lower rates. This in turn improves neighborhood stability and
reduces the likelihood of default in the long run.
We are working with members of the Senate to develop
program parameters and identifying sources of funding to serve
as a backstop to the premiums that would be collected through
the program to absorb unexpected large losses.