[Senate Hearing 112-666]
[From the U.S. Government Publishing Office]
S. Hrg. 112-666
HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THROUGH REFINANCING
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HEARING
before the
SUBCOMMITTEE ON
HOUSING, TRANSPORTATION, AND COMMUNITY DEVELOPMENT
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
ON
EXAMINING WAYS TO HELP HOMEOWNERS SAVE MONEY THROUGH REFINANCING
__________
APRIL 25, 2012
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Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.fdsys.gov /
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia MARK KIRK, Illinois
JEFF MERKLEY, Oregon JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina
Dwight Fettig, Staff Director
William D. Duhnke, Republican Staff Director
Dawn Ratliff, Chief Clerk
Anu Kasarabada, Deputy Clerk
Riker Vermilye, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Housing, Transportation, and Community Development
ROBERT MENENDEZ, New Jersey, Chairman
JIM DeMINT, South Carolina, Ranking Republican Member
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii PATRICK J. TOOMEY, Pennsylvania
SHERROD BROWN, Ohio MARK KIRK, Illinois
JON TESTER, Montana JERRY MORAN, Kansas
HERB KOHL, Wisconsin ROGER F. WICKER, Mississippi
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Michael Passante, Subcommittee Staff Director
Jeff R. Murray, Republican Subcommittee Staff Director
(ii)
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C O N T E N T S
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WEDNESDAY, APRIL 25, 2012
Page
Opening statement of Chairman Menendez........................... 1
WITNESSES
Christopher J. Mayer, Professor of Real Estate, Finance and
Economics,
Columbia Business School....................................... 3
Prepared statement........................................... 27
Debra Still, Chairman-Elect, Mortgage Bankers Association........ 5
Prepared statement........................................... 32
Laurie S. Goodman, Senior Managing Director, Amherst Securities.. 6
Prepared statement........................................... 40
Anthony B. Sanders, Professor of Finance, George Mason University
School of Management........................................... 8
Prepared statement........................................... 48
Michael Calhoun, President, Center for Responsible Lending....... 10
Prepared statement........................................... 53
Additional Material Supplied for the Record
Written statement submitted by Bill Emerson, Chief Executive
Officer,
Quicken Loans.................................................. 57
Written statement submitted by National Association of
REALTORS'........................................... 60
Letter submitted by Maurice Veissi, President, National
Association of
REALTORS'........................................... 62
Letter submitted by James W. Tobin III, Senior Vice President and
Chief Lobbyist, National Association of Home Builders.......... 63
(iii)
HELPING RESPONSIBLE HOMEOWNERS SAVE MONEY THROUGH REFINANCING
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WEDNESDAY, APRIL 25, 2012
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Housing, Transportation, and Community
Development
Washington, DC.
The Subcommittee met at 10:06 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Robert Menendez, Chairman of
the Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN ROBERT MENENDEZ
Chairman Menendez. Good morning. This hearing will come to
order. Thank you for being here today.
This hearing of the Banking Subcommittee on Housing,
Transportation, and Community Development will focus on helping
responsible homeowners save money through refinancing.
As I have said many times, we need to fix the housing
market now to get the broader economy moving again and create
jobs. And an important part of fixing the housing market is to
remove barriers, some of them Government created, to homeowners
refinancing. Allowing a homeowner to refinance from a loan at 6
percent interest to a loan that is 4 percent interest, for
example, would save them hundreds of dollars a month, putting
more money in their pockets and reducing defaults and
foreclosures.
We are going to hear testimony today that there are 17.5
million loans guaranteed by Fannie Mae and Freddie Mac, paying
interest above 5 percent, that could benefit from a refinance,
and millions of these homeowners are trapped in higher interest
rate loans because of barriers to refinancing. Some, but not
all, of these barriers were addressed in FHFA's Home Affordable
Refinance Program, or HARP, and its expansion called HARP 2.
For example, HARP 2 removed loan-to-value caps for
underwater homeowners but does not apply to borrowers under 80
percent loan-to-value ratio who, theoretically, should be able
to refinance but, in practice, sometimes cannot.
FHFA scaled back lender liability for representations and
warranties, which lenders cite as an obstacle to encouraging
them to extend refinance loans for same servicer refinances in
HARP 2, but FHFA did not scale back representations and
warranties liability for cases when server was refinancing a
loan, which has led to a lack of competition among lenders that
has resulted in much higher interest rates for borrowers. We
need to inject competition and market forces into this market
where servicers have an unfair monopoly on refinancing certain
borrowers who effectively have no choice but to use their
original lender.
Another obstacle is that the second mortgage holders and
mortgage insurers do not always allow their interest to be
transferred to a new refinanced loan even though they are
generally better off when the first mortgage refinances to a
lower payment since that makes the loan less likely to default
and the homeowner more likely to be able to pay the second
mortgage as well.
Another obstacle is up-front fees and appraisal costs that
homeowners without savings cannot afford, keeping them trapped
in high interest loans.
Another barrier is verification of income tax returns and
other paperwork, which is needed for new loans but not
necessary for refinanced loans where the borrower is already
making payments on time.
The important thing to keep in mind here is that for these
Fannie and Freddie loans, taxpayers already own the risk of
these homeowners' default, regardless of whether we allow the
homeowner to refinance or not. So stopping homeowners from
refinancing into lower cost loans, where they are less likely
to default, harms both homeowners, taxpayers, and is crazy in
my view as a policy. FHFA needs to change this.
Other challenges also remain such as how to increase
homeowner awareness of refinance actions.
I have been working with Senator Barbara Boxer on a
discussion draft bill that I have asked witnesses at these
hearings today to comment on. I would like to thank her for her
great work on behalf of the people of California as well as
everyone in this country. The Senator has shown some great
interest in this.
I appreciate summaries of the Menendez-Boxer discussion
draft are available for the press in the back of the room.
I would also like to thank Senator Al Franken for working
with me on the put-back risk provision of the discussion draft,
which is similar to a provision he introduced in another bill.
I am going to look forward to hearing from the witnesses.
And there are several colleagues on the Committee who have
been very much engaged in refinancing, and I would be happy to
recognize any of them at this time if they wish to be
recognized.
If not, let me introduce the witnesses.
Dr. Chris Mayer is the Paul Milstein Professor of Real
Estate, Finance and Economics and Co-Director of the Richard
Paul Richman Center for Business Law and Public Policy at
Columbia Business School. His research explores a variety of
topics in real estate and financial markets, especially
refinancing. And he has appeared before Congress, and certainly
this Committee, several times. We welcome him back.
Ms. Debra Still is the President and Chief Executive
Officer of Pulte Mortgage which is located in Englewood,
Colorado, and she is the Chairwoman-Elect of the Mortgage
Bankers Association. Congratulations. She has been an active
MBA member for over 10 years, has more than 3 decades of
experience in the mortgage industry.
And so, we thank you for traveling all the way from
Washington State today.
Dr. Laurie Goodman is a Senior Managing Director of Amherst
Securities, responsible for research and business development.
Before joining the firm, she was the head of Global Fixed
Income Research and Manager of U.S. Securitized Products
Research at UBS and their predecessor firm. She has appeared
before our Subcommittee numerous times before, and her
tremendous knowledge of the market and investors is always
welcome.
So, welcome back.
Dr. Anthony Sanders is a Professor of Finance in the School
of Management at George Mason University. He has a long history
of academic research into financial institutions, capital
markets, real estate finance and investments. He has testified
before the Subcommittee numerous times.
You must all be good because we keep bringing you back. And
as a Garden State native, he is always welcome here.
Mr. Michael Calhoun is President of the Center for
Responsible Lending, which is a nonprofit, nonpartisan research
and policy organization dedicated to protecting home ownership
and family wealth by promoting access to fair terms of credit
for low income families. He has testified also numerous times
before the Congress and currently serves as the Chair of the
Federal Reserve Board's Consumer Advisory Council.
Thank you all for agreeing to come and share your expertise
on this subject. I would ask you to summarize your statements
in about 5 minutes. All of your full statements will be
included in the record.
And with that, we will start with you, Dr. Mayer.
STATEMENT OF CHRISTOPHER J. MAYER, PROFESSOR OF REAL ESTATE,
FINANCE AND ECONOMICS, COLUMBIA BUSINESS SCHOOL
Mr. Mayer. Thank you, Senator Menendez and fellow Senators.
Good afternoon. Thank you for the opportunity to be here
today.
My name is Chris Mayer. I am the Milstein Professor of Real
Estate at Columbia Business School.
This is the sixth time I have been called to testify,
equally called by both Democrats and Republicans. Each time, I
have advocated for what is seemingly straightforward and simple
policy: Allow millions of Americans to refinance their GSE
mortgages at low current rates.
The failure to do so over the last 3 years has resulted in
at least 300,000 unnecessary defaults, $10 billion in higher
taxpayer costs from excess foreclosures and a less stable
housing market. Bond holders have received $60 billion over the
last 3 years in excess mortgage payments from homeowners
trapped in high interest rate loans.
Last year, the FHFA announced changes to HARP with the
stated goal of increasing eligibility for streamlined
refinancing. Yet, these changes are inadequate.
The most serious problem under HARP 2 is the lack of
competition, as I know some of our other witnesses will testify
to. Lenders are strongly discouraged from refinancing a
mortgage they did not originate because they must take on legal
liability for the original mortgage.
Existing servicers are taking full advantage of the
situation, earning profits of $7,000 to $13,000 when an
underwater borrower with a $200,000 mortgage wants to
refinance. This is an unprecedented and inexplicable profit.
Some servicers, such as MetLife, do not even originate new
mortgages, leaving their borrowers locked out altogether.
Freddie Mac, the target of an NPR-ProPublica investigation
for supposedly betting against household refinancing, continues
to implement further additional hurdles to refinancing relative
to Fannie Mae.
Under the law, the FHFA must preserve and conserve the GSE
assets, ensure liquid, efficient and competitive mortgage
markets, minimize foreclosures and operate the GSEs in a manner
consistent with the public interest. Yet, the activities I
described appear to directly violate these congressional
mandates.
Giving existing servicers preferential legal treatment
reduces competition. Imposing unnecessary and opaque credit
restrictions makes the market less transparent and efficient.
Limiting access to a program that lowers borrowing costs
results in more foreclosures and is seemingly against the
public interest.
Some argue that restricting refinancing is justified to
protect the value of the GSEs' investment portfolio. Of course,
Acting Director DeMarco has stated that there is no conflict
because the GSEs were not supposed to consider their portfolio
in implementing HARP 2. But if not protecting their portfolios,
why else impose onerous refinancing restrictions?
I was asked to assess the economic impact of the Menendez-
Boxer discussion draft legislation, which would remove key
barriers to refinancing. My research with co-authors, including
Glenn Hubbard, James Witkin, and Alan Boyce, suggests the bill
might result in as many as 11.6 million new refinancings and
prevent 400,000 unnecessary defaults based on current interest
rates.
A recent CBO working paper suggests that a refinancing
program would earn the GSEs about $700 million, even taking
into account portfolio losses, because more refinancings lead
to fewer defaults and lower insurance costs.
Even if the CBO is wrong and refinancing does impose net
portfolio costs, or the GSEs must somehow give up valuable
legal rights, the GSEs could charge a slightly higher annual
refinancing fee. Our analysis suggests that adding a seven
basis point annual fee to the insurance premium plus covering
the existing costs, a total premium of about 29 basis points
would lead to a profit for the GSEs of more than $23.6 billion.
Even considering portfolio losses to the Federal Reserve,
this program is profitable for taxpayers on a standalone basis.
The FHFA should be held accountable for failure to implement a
program that would save taxpayers billions of dollars in lower
bailout costs.
I believe the Congress should act as called for by the
President, as proposed under this existing legislation.
Although obviously this bill is very different than that
proposed by the President, I think the draft bill is very, very
close to what we have been proposing for over 3 years. So I
think it is a wonderful piece of legislation.
Two enhancements that I would suggest: One, all current GSE
mortgages should be eligible for any refinancing program
regardless of origination date, and two, the legislation should
mandate that an independent trustee be appointed to wind down
the GSEs' maintained, retained portfolio of MBS.
Conservatorship, as it stands now, is laden with conflicts of
interest and holds back the reintroduction of private capital.
Removing barriers to refinancing will help the
effectiveness of monetary policy, allowing the Federal Reserve
to more quickly reduce its efforts in quantitative easing.
These steps can occur now even without a consensus on what the
future of the U.S. housing finance system would look like.
Thank you very much for inviting me.
Chairman Menendez. Thank you.
Ms. Still.
STATEMENT OF DEBRA STILL, CHAIRMAN-ELECT, MORTGAGE BANKERS
ASSOCIATION
Ms. Still. Thank you, Chairman Menendez and other Members
of the Subcommittee, for the opportunity to testify today. As
the President and CEO of Pulte Mortgage and the Chairman-Elect
of the Mortgage Bankers Association, I am pleased to offer
MBA's perspective on the Responsible Homeowner Refinancing Act
of 2012 as currently being drafted by you, Mr. Chairman, and
Senator Boxer.
As we work toward a recovery for housing, MBA appreciates
all efforts directed at helping homeowners and making sure that
qualified, deserving borrowers have access to mortgage credit.
We believe this bill aims to address these goals, and we agree
with the intent and objectives of this draft legislation.
The MBA believes that a number of provisions contained
within the bill will help overcome certain remaining barriers
that have prevented responsible homeowners, who have remained
current on their mortgages, from reaping the benefits of
historically low interest rates and existing mortgage
assistance programs.
MBA particularly appreciates the provisions that would
standardize and therefore simplify Fannie Mae and Freddie Mac's
borrower eligibility requirements.
We also support the bill's provision to lower borrowing
costs by prohibiting the GSEs from establishing pricing
differences based on loan-to-value ratios, borrower income or
employment status.
We appreciate that all lenders, not just the existing
servicer, can participate in the program's streamlined
underwriting program.
These provisions are all improvements to the current
version of HARP. It is in the best interest of borrowers, the
GSEs and taxpayers to incorporate these concepts for loans held
by the GSEs since both agencies already hold that risk.
For lenders interested in helping borrowers refinance, MBA
is pleased that the bill addresses the exposure of a new
lender's representation in warranty obligations to Fannie and
Freddie. Lenders have faced an unprecedented volume of
repurchase demands and are understandably hesitant to take
further incremental risk on streamlined refinances. Therefore,
by clarifying their rep and warrant obligations, many more
lenders can help existing homeowners while interest rates are
low.
While MBA supports the concept I have just discussed, we
would like to offer commentary on a few of the provisions that
we believe need enhancement.
The bill addresses two important and complex pieces of the
refinancing process, but MBA would offer a different approach
to both subordination of second liens and mortgage insurance.
MBA believes the penalties proposed for subordinate lien
holders and mortgage insurers are severe and unnecessary. While
some second lien holders may have originally been slow to
respond to subordination requests, the industry has seen
significant traction in this area. In regards to mortgage
insurance, as evidenced by the existing HARP program, most
mortgage insurance companies have already agreed to
participate.
It is imperative we support market liquidity for consumers.
Limiting competition amongst lenders and insurers is contrary
to the goals and objectives of this legislation. We find these
provisions prohibitive and would be glad to work with you on
alternative solutions.
Finally, we recommend that the bill be modified to expand
the types of loans eligible for refinancing under the HARP 2
program. In particular, loans owned by the GSEs that exceed the
current loan limit should be eligible for refinancing under the
program.
It is critical that future housing policy be developed with
thoughtful, well balanced, incremental steps that progressively
eliminate the current uncertainties faced by our industry and
by homeowners. We appreciate that the bill is meant to build
upon the momentum we have seen in the HARP 2 program, and we
are convinced it addresses the appropriate enhancements to the
existing program. It is simple, easy to understand and mirrors
the parallel FHA streamlined refinance program that has been in
existence for 30 years.
We have reason to be optimistic about the Nation's housing
markets, beginning with record home affordability, some signs
of job growth and a recovering stock market. In my business, I
have personally witnessed green shoots appearing in many
markets around the country, where we are seeing the first
notable spring buying season in several years and our borrowers
appear to be more confident in their buying decisions.
More needs to be done, however, to continue the housing
recovery, including for borrowers who are locked into higher
rate mortgages, and your legislation builds upon that effort.
MBA stands ready to work with you to refine this legislation
and achieve our common goal.
Thank you very much. I would be happy to take questions at
the appropriate time.
Chairman Menendez. Thank you.
Dr. Goodman.
STATEMENT OF LAURIE S. GOODMAN, SENIOR MANAGING DIRECTOR,
AMHERST SECURITIES
Ms. Goodman. Chairman Menendez and Members of the
Subcommittee, I thank you for the opportunity to testify today.
My name is Laurie Goodman, and I am a Senior Managing
Director of Amherst Securities Group, a leading broker-dealer
specializing in the trading of residential and commercial
mortgage-backed securities. We are a market maker in these
securities, dealing with an institutional account base--
financial institutions, money managers, insurance companies and
hedge funds.
In my testimony today, I will discuss actions that can be
taken to help responsible homeowners save money through
refinancing without disrupting the very well functioning agency
mortgage market. I will limit my comments to the refinancing of
GSE mortgages.
My number one suggestion would be to allow for competition
by permitting a different servicer to refinance a borrower on
the same terms as the current servicer. This will result in a
much better rate to borrowers and much more refinancing of the
targeted HARP population.
The HARP program, applicable to borrowers with a current
LTV ratio of greater than 80 and an origination date of the old
loan prior to June 1, 2009, was rolled out in April of 2009.
The program was expected to help four to five million
borrowers. Since the program has been in existence, it has
helped 1.12 million borrowers. Other streamlined programs using
the HARP infrastructure have helped another two million
borrowers. It is important to realize that over this period
there have been 10.7 million refinancings. Thus, 71 percent of
the refinancings over this period was neither HARPed nor
streamlined.
In assessing what should be done to HARP going forward,
there are two separable issues: What can be done to increase
the penetration of the HARP borrower base, and what can be done
to increase the scope of the HARP program?
We believe that a series of definitive steps can be taken
to increase the penetration of the existing HARP universe.
There are 3.3 million borrowers who have loans taken out before
the cutoff date, have an ability to take advantage of HARP as
measured by pay history, have an incentive to refinance and
have LTVs of 80 to 125. There are another 700,000 borrowers who
are over 125 LTV. These four million borrowers are the ones
that create the most risk for the GSEs, and a refinancing would
benefit both the affected individuals and the taxpayers the
most.
In addition, there are 10.9 million borrowers who are
eligible for HARP-like refinance programs. We have more mixed
feelings on increasing the scope of the HARP program in a
capacity-constrained environment.
Currently, on a same-servicer refi, the servicer need only
prove that the borrower has no delinquencies in the past 6
months and no more than one in the past year, has a source of
income and is aided by the refinance. If the refinance meets
these conditions, the servicer is released from the rep and
warrant risk on the old loan and the new loan. If the borrower
goes to a different servicer, that servicer must collect more
information about the borrower and has the rep and warrant risk
on the new loan; different servicers are not eager to take rep
and warrant risk on higher LTV loans.
Thus, the current servicer, which is one of the three
largest banks well over 50 percent of the time, has a huge
advantage and tends to charge the borrower more for these
loans. In many cases, the lender-servicer is making 7 to 8
points on the refinancing, or about $15,000 on a $200,000
mortgage versus an average of 1 to 2 percent or $3,000 on
refinancings over the past decade.
This problem can be elegantly eliminated by allowing
different servicers to do the refinance on the same terms as
the current servicer, most importantly, including the
elimination of the rep and warrant risk on the new loan. The
Menendez-Boxer discussion draft does exactly this, and we
endorse it.
Loan level pricing adjustments and appraisal costs should
be eliminated, but they are small, less than 1.5 percent of the
loan amount on a $200,000 loan, and are dwarfed by the monopoly
profits being earned by the largest banks.
Similarly, requiring resubordination of second liens and
portability of all insurance policies are nice features but
will only help at the margin. It is in the economic interest of
second lien holders to resubordinate, and as Debbie pointed
out, most mortgage insurers have agreed to full portability.
We are very much in favor of a consistent set of guidelines
for Fannie and Freddie in order to ease lender compliance. In
particular, we would like to see pre-cutoff Freddie loans with
LTVs less than 80 receive rep and warrant risk consistent with
pre-cutoff higher LTV Freddie loans and all pre-cutoff Fannie
loans.
We would also like to see consistency on the financing of
closing costs.
We believe the first goal of the refinancing initiatives
should be better penetration of the existing HARP-eligible
borrower base. This is best done by promoting competition and
making borrowers more aware of their refinancing options. In a
capacity-constrained environment, these actions should be taken
before expanding eligibility by moving the cutoff date forward
1 year.
If the cutoff date were to be changed, it can be most
easily done for borrowers with LTVs less 80 as there is never a
covenant with investors on these loans. If it is to be done on
HARP loans, we would suggest doing it only on purchase loans.
Allowing re-HARPing would be very detrimental to the well
functioning agency mortgage market.
Thank you very much for the opportunity to testify on this
important set of issues.
Chairman Menendez. Thank you.
Dr. Sanders.
STATEMENT OF ANTHONY B. SANDERS, PROFESSOR OF FINANCE, GEORGE
MASON UNIVERSITY SCHOOL OF MANAGEMENT
Mr. Sanders. Chairman Menendez and distinguished Members of
the Committee, my name is Dr. Anthony B. Sanders, and I am
Distinguished Professor of Finance at George Mason University
and a Senior Scholar at the Mercatus Center. It is an honor to
testify before the Committee today.
The proposal to be discussed at this hearing is the
expansion of the affordable refinancing of mortgages held by
Fannie Mae and Freddie Mac.
It can be argued that Fannie Mae and Freddie Mac are
resisting loan modifications to protect their retained
portfolios. Hence, fewer borrowers are able to refinance their
mortgages. This proposal would remove the safeguards from HARP
and encourage more refinancing by borrowers.
Even so, I would encourage a detailed examination of the
projected benefits to the consumers and costs to the American
taxpayers of these proposed changes by FHFA, the Congressional
Budget Office and the Federal Reserve Board before you proceed.
Administrations and Congress have undertaken large policy
changes in housing and housing finance, particularly since
1995, and these changes have had unintended consequences.
Removing the safeguards may be appropriate, but we need
detailed studies of the 14 Federal Government loan modification
programs and how they interact with each other and the Federal
Reserve's monetary easing strategy.
Now the U.S. Department of Treasury provides us with a
limited summary of the magnitude and effectiveness of HAMP and
other programs, but the number that stands out is approximately
25 percent of modified mortgages to into redefault after 1
year. True, that data are from 2010, but the trend for the most
recent modifications shows the same daunting trend.
According to the Mortgage Bankers Association Refinancing
Index, we have seen refinancing applications expanding since
the beginning of 2011. Bank of America, for example, has
received 30,000 HARP 2 applications since mid-January, and they
have added nearly 1,000 new fulfillment associates in order to
add capacity to handle the strong volume.
But with historically low interest rates, unprecedented
intervention by the Federal Reserve and the continued European
debt crisis that is driving investors into the U.S. Treasury
market, we must be careful. We are in uncharted territory in
intervention and mortgage rates, and we have to be careful not
to create more unintended consequences that could devastate
American taxpayers.
Now Section 4 requires that Freddie Mac and Fannie Mae
contact borrowers directly about the possibility of benefits of
a mortgage modification. In addition, Fannie Mae and Freddie
Mac must post relevant refinancing information on the Web. Of
course, this is an unprecedented change from current
procedures.
Given the plethora of media and links on bank Web sites--
which I document in my appendix--and Government Web sites
concerning loan modifications, I cannot say how any borrower
interested in loan modifications could possibly be unaware of
the possibilities.
And again, bear in mind large changes in Government policy
can produce unintended effects, particularly when we consider
the alternative of programs on principal reductions that are
being considered by the Administration and Congress and, again,
how HARP 2 changes may impact everything.
So I am on record about saying a careful analysis of the
joint impact of all 14 programs should be undertaken before any
other changes should be made.
So my answer is at least no, at this point, until
appropriate studies are performed. In fact, I would recommend
Debbie Lucas work with the CBO and score this as soon as
possible.
At some point, the collective impact of these programs
could drive our banks into bankruptcy. The possibility of this
also must be included in analysis of any further steps taken.
Another reason I am opposed to removing the loan
modification safeguards is the banks and investors are private
market concerns, not private market concerns in
conservatorship. So, in other words, these are private firms,
and I am not really very approving of interfering in the
private sector. Once again, this could be a Jurassic Park
moment where we signal to the world that the U.S. will pass
laws to alter contracts and dramatically change investor
expectations.
In summary, I encourage the Senate to request detailed
studies of the impact of the legislation. I strongly suggest:
One, the cost of each proposed change to taxpayers and the
expected decline in default and redefault rates;
Two, how these changes will interact with the 14 existing
programs from the Federal Government and the proposed principal
write-downs for Freddie Mac and Fannie Mae;
And three, ignore private market estimates of the costs and
benefits of the analysis if it comes from any firms or
organization that benefits from proposed changes or has ties to
the Federal Government.
Let us be wary of another major policy change that might
have untended consequences. Again, we are in unchartered water
for housing finance and Federal Reserve policies, and any
further changes should be enacted with extreme caution.
Thank you for the opportunity to testify.
Chairman Menendez. Thank you.
Mr. Calhoun.
STATEMENT OF MICHAEL CALHOUN, PRESIDENT, CENTER FOR RESPONSIBLE
LENDING
Mr. Calhoun. Thank you, Chairman Menendez, Senator Corker
and Senator Merkley.
I am Mike Calhoun, the President of the Center for
Responsible Lending, which is the policy affiliate of Self-
Help, which is the Nation's largest community development
lender. In the nonprofit sphere, we have provided over 6
billion of financing for American home families.
The topic of today's hearing addresses one of the most
critical challenges our country faces, and that is how to
strengthen the housing market that remains perhaps the largest
drag on our recovering economy.
The HARP program, including the reforms that were
implemented last fall and the additional administrative and
legislative reforms that are the topic of this hearing, can
significantly aid homeowners and the overall housing market. We
urge the regulatory agencies and the Congress to immediately
enact these further improvements of the HARP program.
The current housing crisis is actually the third major
national housing price correction of the last 30 years. Several
factors, though, set it apart from the previous downturns.
First, reckless lending sustained and enabled this housing
bubble to expand far beyond the price appreciation of the
previous bubbles to over 80 percent in real price appreciation
that we saw in the last decade, and that compares to previous
appreciation bubbles in the 80s and 90s of the mid-teens.
Second, the leverage of securitization and derivatives
greatly magnified the resulting losses when the bubble crashed
and triggered a deep, general economic decline.
And third, and most important for today's hearing, this
bubble left many homeowners underwater while in the previous
bubbles the real value of houses declined but this was hidden
by inflation so that nominal values, while failing to keep up
with inflation, did not actually decline and did not lead
borrowers underwater so that they were unable to refinance.
These circumstances today make a housing recovery more
important, and it makes it critical to assist underwater
borrowers to aid this recovery. One of the most important tools
in this are the historically low mortgage credit rates so that
refinancing can save borrowers hundreds of dollars a month on
their mortgages.
While HARP does not assist underwater borrowers who, due to
the economic crisis, are not current on the mortgage. There is
testimony today that millions of other underwater borrowers can
be helped.
In addition, as set out in our testimony, it is important
to remember that there was widespread steering during this
housing bubble of overpriced credit to African American and
Hispanic households. And furthermore, the data show that these
households are having the most trouble refinancing and are the
most likely to be trapped in higher interest mortgages.
The HARP reforms implemented last fall removed significant
frictions in the program, and early reports indicate increasing
numbers of underwater borrowers are now benefiting from the
program.
We support the additional reforms that are set out in both
the Menendez-Boxer draft and further reforms set out by the
Administration. Included in these are the limits on LTVs should
be removed so that borrowers who are below 80 percent can
benefit from the relief from the reps and warranties issues
that have been discussed today. In addition, the additional
incentives for second lien subordination in the Menendez-Boxer
draft would speed refinancings, especially those with smaller
lenders who have not joined the consortium who are facilitating
subordination of second liens; those are largely the major
lenders.
Additional outreach is needed. FHFA has conducted some
outreach, but more outreach conducted and coordinated with
other agencies would help because many borrowers have tried to
refinance and been rebuffed and should now be made aware of
these improvements in the programs.
Finally, Congress should enact the proposals for
refinancing of non-GSE mortgages through FHA, as proposed by
the Administration, to assist those homeowners and provide
equal treatment to all homeowners so one program is not
available for GSE borrowers while others are shut out simply
based on who happened to purchase their loans.
And we also support the assistance for refinancing in the
shorter-term mortgages through support for reducing closing
costs as those put borrowers into equity and reduce credit risk
at the same time.
There are no silver bullets is one of the lessons of this
crisis, and indeed, more efforts beyond those discussed today
are needed. Nonetheless, the reforms proposed today benefit not
only homeowners who find themselves underwater or trapped in
high interest rates; they help all homeowners by stabilizing
home values, by reducing the dilution of home prices that has
been caused by the flood of preventable foreclosures.
In conclusion, most important, these reforms put more
dollars each month into the hands of working families, and they
aid the overall housing market, both of which create jobs and
boost the whole economy and benefit all Americans.
I would be happy to answer any questions that you have
today.
Chairman Menendez. Thank you very much. Thank you all for
your testimony.
Let me start off with a question period with Dr. Mayer.
Your testimony goes through what I think are several compelling
reasons why the discussion draft from myself and Senator Boxer
is in the best interest of the GSEs, but I want to focus on
their financial interest and not just their best interest,
which has been the subject of much debate here in the Congress.
As I get it--and you correct me if I am wrong--by your
calculations, you believe that 11.6 million new refinances
would take place and it would result in GSE profits of as much
as $23.7 billion primarily through preventing defaults, and
your testimony cites a CBO study that every thousand refinances
result in 38 fewer defaults.
And the statistic we have previously used is that
foreclosure brings anywhere between a $50,000 and $65,000 loss
to a lender.
So can you walk us through the calculations because every
time we broach this subject in hearings, and particularly when
we have Mr. DeMarco and others, if at the end of the day the
trustees' job is to obviously preserve largely the corpus, then
it seems that your calculations do a good job of that and
mirror what a lot of the private sector is doing, where over 25
percent of their portfolios are being refinanced?
So there is a reason the private sector does that. It does
it to not lose money, right, Dr. Sanders?
So why don't you try to walk us through that calculation?
Mr. Mayer. Sure. The intuition for this is pretty
straightforward, which is suppose you have somebody sitting
with a 6 percent mortgage and current rates are 4 percent.
The GSEs own some bonds. Let's say they own 10 percent of
the bonds. So you are going to save a homeowner 2 percent a
year in the cost of borrowing on their mortgage.
If the GSEs lose 10 percent of that--let's say that it
costs their portfolio two-tenths of a percent a year--they can
basically just charge a little bit more for the refinancing. So
instead of that refinancing costing 4 percent, maybe it costs
4.2 percent. The homeowner still saves a large amount of money,
and the GSEs have covered whatever their costs are associated
with the program.
So intuitively, given the very large savings associated
with refinancings, there is enough money in there for the GSEs
to actually earn a profit.
And that calculation, by the way, assumes no offset
whatsoever in foreclosures.
Then if you sort of think, well, gee, every time we do 100
of those almost 4 of them prevent a foreclosure, and the
foreclosures cost $60,000 apiece, all of a sudden, you do not
have to charge 2/10ths of a percent more; you only have to
charge a little bit more, in order to do the refinancing and
break even.
So it is sort of the argument that some people have had
that this does not earn a profit really cannot make sense
because you understand every time you lower people's payments
there is some spread there.
Obviously, the losers here are investors, but the investors
have had an enormous windfall associated with this program.
They have had an enormous windfall associated with the Fed
buying $2 trillion of long-dated MBS. It seems the investors--
when we put an explicit guarantee on the GSEs, all of these
things have benefited the investors. I think it is starting to
be time to benefit not only the homeowners but taxpayers who
have had to pay for all of this.
Chairman Menendez. Are you familiar with the CBO study that
said that a widespread refinancing program such as we are
proposing here would result in higher profits for the GSEs?
Mr. Mayer. Yes, I am.
Chairman Menendez. And as you note, in our discussion
draft, the GSEs would be charging additional fees to cover the
cost of the program.
So I am trying to figure out, having had that as the basis,
Dr. Sanders, you made a comment that sort of like struck me,
that my proposal would drive banks into bankruptcy. How do you
figure that out?
Mr. Sanders. I have to reread my testimony because that is
not what I said.
What I was saying was the combined nature of the 14
programs plus the Attorney General settlement plus the big push
from the Administration to have big principal write-downs--all
those together could put the banks, not your legislation in
particular.
Chairman Menendez. Oh, oh, oh, OK. I did not quite hear it
that way.
Mr. Sanders. My theme was the joint effect.
Chairman Menendez. I wanted to make sure because the last
thing I want to do after having to save their backsides in 2008
is to drive them into bankruptcy again. So I do not want to do
that.
Let me ask Ms. Goodman; based on your testimony, you
believe that the current HARP 2 policies, some implemented by
the GSEs and some by the servicers themselves, are severely
reducing competition among banks and ultimately decreasing the
effectiveness of HARP 2 and robbing homeowners' savings through
lower interest rates. Do you think that we address that problem
in our discussion draft?
Ms. Goodman. Yes, I think you do a very good job of that in
your discussion draft.
Chairman Menendez. OK. Let me recognize Senator Corker.
Senator Corker. Thank you, Mr. Chairman, and thanks for
calling the hearing and to all of you for your testimony.
I want to start with, you know, to be in the Senate is to
be inconsistent. That is kind of a definitional thing. And I
know that so many of my friends, who I think do care deeply
about people being able to refinance on one hand, on the other
hand, end up using guaranty fees not to increase sort of the
insurance pool, if you will, for the GSEs; use G-fees to pay
for other programs in the Federal Government.
I am just wondering if there are any of you that think that
is a good policy as it relates to housing finance. If so,
please tell me.
Ms. Still. Well, MBA would certainly not support raising G-
fees for the use of other programs.
I think one of the advantages or components of this
proposal, though, is to pay for the streamlined refinance with
a very targeted G-fee on the consumers that would choose to use
the program. So I think that is well done in this bill,
certainly not though in support of outside of that, say.
Senator Corker. And I understand if anybody objected to
that.
If we were working on some legislation, I guess, to reframe
the GSEs, I assume that all of you would support us having
conditions in there that say they cannot use G-fees to pay for
things other than actual insurance for the GSEs. I assume that
would be unanimous.
One of the other things that are occurring right now in the
financing market is that the Consumer Protection Bureau is
looking at using rebuttable presumption on financings. I assume
that maybe Mr. Calhoun would disagree. I am not sure.
But are there any of you that think that helps future
financing of residential mortgages, and would we not be better
off to have a safe harbor of some kind so that people know if
they did appropriate due diligences and checked all the boxes
that they would be free from future lawsuits by people who are
very aggressive in that regard? Is there anybody that disagrees
with that?
And I assume Mr. Calhoun might disagree.
Mr. Calhoun. Yes, Senator Corker, and I would note for the
record that we submitted a joint comment to the CFPB that was
joined in by the clearinghouse which includes the largest
lenders which originate well in excess of 80 percent of all the
mortgages in the U.S.
And that joint letter called for clear standards for the
QM, but it also called for a rebuttable presumption because
there is a tradeoff between those. If you want to create that
safe harbor, you have to really tighten down the QM standards
to make sure that an abusive loan does not get through, but
doing so really throttles access to credit.
The experience with other litigation in North Carolina--we
have had our predatory lending law on the books for well over a
decade. Without even rebuttable presumption, there has been
near zero litigation because individual cases are very hard to
bring.
The clear standards address the greater risk which we are
talking about today, which is the reps and warranty risk, which
is what is really driving what credit lenders are offering
today.
And so, I would just add that to the record, that there is
a lot of consensus out there that the better approach is
relatively generous standards for the QM, what is a QM loan, so
that you provide broad access to credit and support the overall
economy and use a rebuttable presumption as a backstop for what
should be very rare cases where abusive loans are made.
Senator Corker. Is there any disagreement with that?
Ms. Still. Yes, MBA would strongly support a safe harbor.
We believe the industry desperately needs certainty. Lenders
need certainty and clear guidelines with a brightline safe
harbor, very much in the best interest of consumers and
housing.
As it relates to some of the definition that the
clearinghouse document would otherwise suggest, MBA also
believes that inside of the current QM ruling, where the law
prohibits certain loan types and then requires full
documentation loan, that will limit the market appropriately in
a responsible way.
So inside of that, a broad definition of QM is very
important to consumers. We are very concerned that lenders will
not lend outside the QM box.
Senator Corker. I would like to follow on both of you all.
I mean, I think we would like to get this right. We think
where the CFPB is heading right now is not a good place for the
industry, and I think all of you agree with that, but I think
we would like to figure out the best way going forward.
And Ms. Goodman, I think you disagreed also with other
testimony regarding, I think, Mr. Calhoun talked about the need
to take high leverage loans and put them on the Government's
balance sheet. Many of the refinancings that we have had in the
past programs have been good for homeowners but also good for
the Federal Government because we are not shifting risk this
way.
One of the most recent proposals, I think, coming from the
Administration talks about taking high leverage loans and
shifting them onto FHA. And I think you would think that would
be not a good thing for us to do; is that correct?
Ms. Goodman. I think it is not a good thing. On the GSE
mortgages, clearly, the GSEs already own the risk. So,
refinancing makes a lot of sense.
A broader refinancing plan which allows the transfer of
risk on higher LTV mortgages, where the mortgages are owned by
bank portfolios or investors in the private label securities to
the Government, would basically be a taxpayer bailout for both
bank portfolios and for private label investors and, hence, a
very poor use of taxpayer money.
Senator Corker. Yes, I could not agree more.
Mr. Chairman, I know my time is up. I will say that--and I
say I really enjoy working with the Chairman on so many. We are
actually on numbers of committees together.
I know that Ed DeMarco and the FHFA has been a great
punching bag for all, and people seem to have enjoyed it a
great deal.
I will say that this Subcommittee's jurisdiction would
allow us to actually deal with GSE reform, and instead of maybe
punching DeMarco all the time, what we could actually do is
craft legislation to redesign the GSEs so we do not have these
problems. And I would just say that possibly that is a more
fruitful use of time.
But anyway, I thank you very much.
Chairman Menendez. I thank the Senator.
I take no joy out of what you describe as punching, using
Mr. DeMarco as a punching bag. However, I think that when there
is a different view as to what is the right public policy that
can preserve the corpus and do a better job of it, those of us
who believe that are obviously not only entitled but believe
the responsibility to pursue it.
And that is the way I look at the challenge of trying to
effect policy with Mr. DeMarco in a way that I would just want
him to broaden his view as how does he pursue his fiduciary
duty at the end of the day.
Senator Reed.
Senator Reed. Thank you, Mr. Chairman, and I thank the
witnesses for their excellent testimony.
Dr. Mayer, I am going to commend you for your work with
your colleague, Dr. Hubbard, and others up at Columbia.
One of the things you said in response to the Chairman's
question is that the economics itself sort of argues for the
changes that you have been talking about and the Chairman is
proposing. This is not some kind of esoteric request. This is
that you have looked at the numbers and you think those numbers
make sense to do the type of refinancing of the proposal; that
is correct?
Mr. Mayer. Yes, I do.
Senator Reed. And one of the other factors, it would seem
to me too because from the perspective of a very small
institution it would make sense. But the sheer size, the volume
of the loans that are controlled indirectly and directly by
FHA, Fannie and Freddie basically, is 80 percent of the market.
So there will be a market effect if they do these things.
I mean, there will be an effect beyond just simple
individual portfolios. Is that something you have looked at?
Mr. Mayer. It is. This would involve buying--basically,
paying off--one set of bonds and reissuing another.
The first thing to realize about all refinancing programs
is they do not affect the overall supply of credit into the
market. So the kind of concerns you might have about doing
something that has a really challenging effect would be an
issue.
I think the other real concern might be one--and I think
this is a place where taking a page from the Federal Reserve if
very important. The fact the Federal Reserve owns $1.25
trillion of these bonds and is constantly kind of making a
market in this, so to speak, combined with the real liquidity
in this market in general, significantly diminishes the
concerns that some might have that a program like this would
really roil the markets.
The other thing I would point to is in 2002 and 2003 we
refinanced 25 million mortgages in the United States with no
Government intervention whatsoever, and the credit markets
responded perfectly fine to that. So I think any concerns that
this would somehow cause investors to not buy bonds, that
people would be concerned, I think those are much overstated.
Senator Reed. I am told, just for the record, it is closer
to 60 percent of the market that they directly or indirectly
control.
But also to your point, in 2003 and 2004, because the
housing market was in a much healthier position, refinancing
was available, and I think billions of dollars essentially
flowed to the benefit of households----
Mr. Mayer. Right.
Senator Reed. ----through refinancing without roiling the
credit markets, et cetera.
Our problem is given the value of homes relative to the
loans they cannot access this refinancing market. If they
could, it could be a powerful stimulus for recovery, literally
putting billions of dollars into the households for education,
health care, discretionary spending, et cetera.
There is another issue that comes up perennially, and that
is--and you looked at it closely. Is it your view that the FHFA
has the authority to do all these things right now?
Mr. Mayer. Yes.
Senator Reed. Thank you.
And in fact--I will go to Dr. Goodman--one of the points in
your testimony is that you have seen these frictions and you
have recognized that large banks have been given the
opportunity to extract monopoly profits. And one of the
responsibilities of FHFA statutorily is to provide for
efficient competition. So it would seem that not only do they
have the authority if you follow Dr. Mayer's logic, but they
seem not to be performing one of their obligations, which is to
provide for efficient markets; is that fair?
Ms. Goodman. I think that is very fair. Rates would
certainly be a lot lower to these refinancing borrowers if
there was competition.
Senator Reed. And the other point that I would note to Dr.
Sanders is that looking at some of the most successful private
financial institutions, they seem to be doing very well, and
one of the things is refinancing their own paper. In fact, as I
talked to individual bank companies, the paper that they
control, many times they have already gone through and written
down a sizable portion, not all of it because some of it
clearly cannot be sustained even with lower payments.
And yet, this model seems to be one that the FHFA will not
embrace with Fannie and Freddie. There is a disconnect between
what the private bankers, the folks who are paid by their
shareholders to make money, and what FHFA is telling Fannie and
Freddie to do.
Mr. Sanders. Well, first of all, Senator Reed, let me
comment on two things.
First of all, both Laurie and I have done mortgage
prepayment models and default models for a living, and we are--
maybe Laurie is not, but I was always constantly surprised by
what we thought would make as a perfectly sensible model. And
it turns out the market tricks us. The market has a mind of its
own.
So again, when I see these forecasts of how much this will
save taxpayers and consumers, I kind of take it with a grain of
salt because, again, there are too many conflicting variables
in there. And I do not know if that is what is motivating Mr.
DeMarco from being resistant.
But I think the bigger issue, Senator Reed, is that, as I
said, 14 programs plus the Administration is pushing for
principal write-downs. We have all these things. It is like we
have opened not war, but we are firing everything we have got
at this problem, and we are only looking incrementally at one
bullet.
What happens if they all hit at once and then Europe blows
up further and rates end up dropping another 1 percent?
Supposing we overcook it.
I am not referring to this legislation per se because the
legislation, again, I agree with many parts of it. I am just
saying, can we get a joint assessment? That is it. And even the
banks have not done that one.
Senator Reed. Well, I mean, you could also presume there
would be a cataclysmic hurricane destroying thousands of homes.
I mean, frankly, you can justify doing nothing.
I think you have got to try it. You have got to try these
things. And the idea that if something, the cumulative effect,
was not producing results, that you could not stop doing
things, what we have seen in my impression at least is an
unwillingness to try.
And frankly, in the crisis--and I go back to 2008--the
Federal Reserve particularly tried several different options.
Some worked. Some did not. But if they sat back and said, oh,
jeepers creepers, things could be so terrible if we do this and
this and this--paralysis, I think, is the worst situation at
the moment.
Mr. Sanders. May I follow up on that?
Senator Reed. Let me get to Ms. Still.
Ms. Still. I was going to follow up on the comment as well.
I think if you look at the rationale behind HARP 1, the
rationale behind HARP 2, in my mind, one of the strengths of
the draft bill is the fact that it is not a major sea change.
It is not a new program. It is a very sensible next step to
plug some holes, if you will, or create some opportunity to
help just an incremental set of more buyers. And so, that is
one of the beauties of it is it is very logical and
incremental.
Senator Reed. My time has expired. I do not want to impose,
and I know the Chairman will have a second round. So I think he
will be able to make----
Chairman Menendez. Senator Merkley.
Senator Merkley. Thank you, Mr. Chair and thank you for
holding this hearing. And I appreciate the series of
adjustments that are proposed in the Menendez-Boxer legislation
to try to make HARP 2 work better.
I, quite frankly, was shocked by the numbers that you
presented, that the monopoly strategy in HARP 2 results in the
difference between--I think it was between $15,000 and $4,000
in refinancing. Did I catch those numbers correctly?
Was that--Laurie, was that yours?
Ms. Goodman. The $4,000 was more of a decade average. Even
on non-HARPed loans, it is a little bit more profitable than
that now, but there is a huge difference--it is at least an
$8,000 difference.
Senator Merkley. Yes. So here, we have homeowners who saw
the Government respond vigorously and generously on helping
major financial institutions, and little tweaks in the law
could save a family $8,000. And let's get moving. I really
applaud holding this hearing and thank you all for your
testimony.
Mr. Calhoun, I wanted to turn to a comment in your
testimony where you support the Administration's proposal to
pay the closing costs of borrowers who refinance into shorter-
term mortgages under the theory that shorter-term mortgages
encourage a principal reduction through quicker amortization.
Can you just expand on that a little bit?
Mr. Calhoun. Yes, specifically, two things--that there is
benefit to investors by reduced risk in that you get people
into positive equity more quickly and that that lowers, as we
have heard the testimony today, significantly lowers default
risk. So it is a worthwhile intervention there.
And I would state quickly, more broadly, that I think it is
important for us to remember the context here. We issued a
report at the end of last year. We are less than halfway
through the foreclosure crisis. We are not coming down to the
fourth quarter or the running out of the clock. We have got
more of this to chew on than we have had to digest so far. And
so, the idea that we have been too aggressive at addressing
this problem now 4 years into the crisis seems hard to support
with the data.
Senator Merkley. So, thank you.
By basically paying the closing costs you create--you
eliminate a hurdle to get more people into that financing
stream, and by reducing the foreclosures you then have broader
positive effects for the entire housing market, entire
community.
Mr. Calhoun. Yes, Senator.
Senator Merkley. So one of the things that I have puzzled
over is a situation where you are thinking about whether you
want to encourage someone to keep their payments higher but a
shorter term so that they pay down their principal faster and
get out from underwater faster or whether you really want to
encourage them to keep a longer term and benefit from the lower
interest rates, reducing their monthly payment and, thereby,
making it less likely that they will financially default and
less likely that they will strategically default because the
comparison to rental rates is ameliorated.
So has there been any modeling of those two different
approaches in terms of their impact on risk of foreclosure?
Mr. Calhoun. Well, usually, the borrower has the option
there of how they want to do that tradeoff and normally will
not take the lower payments unless they can afford that.
The risk--they sort of self-select for that. If the risk of
default is highest because they cannot meet their monthly
expenses, they are going to tend to take the lowest monthly
payment. If, for them, the need is to get out of their
underwater situation, they are more likely, I believe, the
shorter term.
Senator Merkley. I see your point. In this case, we are
thinking about whether to subsidize one of those two options,
and so it creates some interesting issues.
I am going to continue with a different question because I
will be running out of time, and that is all of our
conversation here has been about refinancing for folks who have
GSE-backed mortgages, so half the world out there. Folks come
into my casework team, and they say what is possible? And we
say, well, we have got to look and see if your mortgage is a
GSE-backed mortgage or not. And often, it is just luck of the
draw whether it was purchased in part of that GSE pool.
So, any insights or suggestions on how we help the other
half of the home mortgage world that are in non-GSE loans?
Debra, I see you are shaking your head. Do you want to jump
in there?
Ms. Still. Yes. I am not sure that I have recommendations
to offer. MBA's position, though, would be to probably look
holistically at GSE reform as it tried to answer that question
or make recommendations.
I think depending on how large a role you want the Federal
Government in housing in the future would certainly determine
whether or not some of the programs to help the private label
market right now would need to be wrapped up in that
discussion. There is no private label market, and so in all
likelihood help for homeowners in private label mortgages would
need to come from the Government.
Mr. Calhoun. And if I could note----
Senator Merkley. Yes.
Mr. Calhoun. ----Senator, for the record, that the
Administration's proposal is that the costs of that program be
paid for by the banks and other financial entities that
received assistance from the taxpayers in 2008 to keep them
alive. It is not passed on to the general taxpaying population.
Senator Merkley. Yes.
Mr. Mayer. I would point out a couple of things.
One of them is that there are also mortgages in the FHA and
VA. In the FHA, there are barriers there with the FHA program,
including insurance premiums and other things that could be
improved and to further streamline within the FHA. So I think
that is one place to help.
The other is just recognizing how tight credit is even in
the Government sector, for which, again, I can read no mandate
in the law that suggests this. The average rejected application
has been recently reported to have a 719 FICO and about an 18
percent downpayment. So if we opened up credit a little bit
into the markets, to normal standards, the GSEs could do a fair
bit in terms of helping some of these folks without subsidies
or other kinds of things.
There is a group of people who are underwater that would
require additional assistance, but again, I think the GSEs'
just general view that we are going to tighten everything has
really had a negative effect in all parts of the market.
Senator Merkley. Thank you all.
Thank you, Mr. Chairman.
Chairman Menendez. Before I call Senator Warner, I just
want to follow up on that comment on FHA. Those would have been
normal standards for underwriting at a different time, would
they not?
Mr. Mayer. Yes, they would have been.
Chairman Menendez. Senator Warner.
Senator Warner. I think it was a good point, Mr. Chairman.
I also want to thank you for doing this. I have been
intrigued with your legislation and the idea that Dr. Mayer and
Mr. Hubbard have had floated for some time out there.
A couple of general comments, then I am going to try for a
question.
I tend to agree with Mr. Calhoun that we are not through
this crisis yet although I do think--thinking back to when we
first kind of jumped in--for whatever reason it seemed, Mr.
Chairman, that we kind of punted on the housing piece. We dealt
with the financial institutions, we punted, and we kind of went
into a period of at least do no harm.
And we ended up, as I think Mr. Sanders pointed out,
creating a lot of efforts, most of them that missed the mark.
I do wonder whether, Mr. Sanders, you would be more
inclined to be supportive of what the Chair has put forward if
perhaps we limited those 14 programs and got rid of the ones
which just are not working, which are most of them, and got
that down to a more manageable series of options so there would
be more clarity to the market, more clarity to the regulators
and to investors. Would that make some sense?
Mr. Sanders. Well, thank you, Senator Warner, for making my
case for me. I agree with you 100 percent. That is, in fact,
what I was saying.
In fact, again, I have no problems with the proposal that
Senator Menendez has at all, and I agree that unification of
the pricing and some of the other components is exactly right.
My issue, one more time, is that we have so many programs.
And I agree if we could sit here today and say we are going to
exclude 10 of these and we are going to prohibit principal
write-downs, so we would make it more predictable and very
clear, I would back the Menendez proposal sitting right here. I
would raise my hand.
But again, it is just too many moving parts. That is my
only concern.
Senator Warner. I guess I might take one exception with
that. Since we do see our non-GSE institutions using principal
write-down as one of their tools, I am not sure I would--I
share, along with the Chair, the notion that we at least ought
to have Mr. DeMarco and FHFA look at that and do a more
thorough analysis so we can make a policy evaluation. I tend to
think there may be some bucket around principal write-down.
I still have been hearing for a year-plus lots of
conversations about rental programs, rent-to-own, other
variations, lots of capital sitting on the sidelines. That does
not seem to ever kind of get off the sidelines into other than
incremental, small experiments in that way.
And then, I would take this third bucket--I want to give
you another bite, but I want to come to Dr. Mayer first--which
is this kind of more massive general refi.
It seems like those are the three major buckets.
And this would build upon--your proposal, I believe, would
build upon the perhaps less than successful HARP variations,
but at least we have got a couple years of investment in
starting those. Maybe we could wind down a couple of those and
do this more of a major refi approach.
I guess what I would ask Dr. Mayer is that at what point,
understanding, as Mr. Calhoun has said, that we are not through
this. But at some point along the way I think we had the sense
of, at least at first, this notion of do no harm.
We got a lot of indirect counsel: This will pass. This will
pass through the snake. Just do not screw it up anymore,
politicians.
It has not passed through, but at some point this will move
along far enough that perhaps further intervention will do
harm.
Do you have any kind of sense on that, Dr. Mayer? How much
more of a window do we have?
And our concern, which is it sure would make a lot more
sense if we could do this administratively rather than working
through the cumbersome legislative process, but what are our
time lines?
Mr. Mayer. I mean, I think the first thing is as you
pointed out; we have been advocating for this program since
2008, and I think we have lost a lot of ground for not doing
it.
My sort of sense is that the role of Government in a
crisis, first and foremost, is supposed to try and restore
normal operating market conditions, particularly during a
financial crisis. And I think that has been a place where we
could have done a lot more than we have done, and we are still
not doing it.
So my comments earlier about restoring normal credit
standards to the markets, I think the first step is to try and
bring back the credit side, and that is why financial crises
tend to be so painful relative to a normal recession--because
people cannot borrow.
Senator Warner. I have got 12 seconds, and I want to make
sure everybody gets a quick bite. Will you just give me--you
know, do we have--perhaps because, as Mr. Calhoun said, we
still are only halfway through.
Mr. Mayer. Right.
Senator Warner. But if we do not take, whether
administratively or legislatively, some either consolidation or
some action, what is our window because I do not think we can
get to GSE reform in a major way----
Mr. Mayer. Right.
Senator Warner. ----until at least we kind of--as long as
we have got this overhang.
Mr. Mayer. Our window is when rates go up. And we do not
know when that is going to happen, but the window for this
refinancing is when rates start rising.
Senator Warner. Can I hear from everybody?
Again, I do not want--my time is expired, but if everybody
could at least give their two cents.
Mr. Mayer. Sorry.
Senator Warner. Should we be concerned about at some point,
whatever well intentioned proposal, we may have missed the
window?
Ms. Still. Yes, I certainly agree that the window is
between now and when rates would preclude any value to the
consumer.
My comment, though, is the notion that all of this takes
time and we do have programs in place. HARP 2 would be a good
example. We are just now getting statistics to show that the
HARP 2 program is getting some traction. It takes time for
lenders to build their infrastructure. It takes time for them
to train their employees. It takes time for them to solicit
their customers.
And so, I would be very hesitant. It is one of the reasons
why we believe that small, incremental improvements are better
than a major change that could cause more unintended
consequences, particularly since we are seeing some encouraging
signs of stabilization.
Wiping out existing programs or consolidating? I think the
answer would be to more simplify, standardize and make sure
that both lenders and consumers understand how to help the
housing environment.
Senator Warner. Not had a great track record on that so
far.
Ms. Goodman. Let me just make a couple quick comments.
First, one reason we have a lot of programs is that there
is absolutely no silver bullet to help the housing market. It
takes a little bit of this and a little bit of that. And I
think there has to be a realization of that.
Second, I agree with Chris's comment that in trying to sort
of combat some of the loose credit standards that created the
last crisis we are sowing the seeds of another crisis by so
limiting credit availability at this juncture. And QM and QRM,
once they are eventually realized, will probably aggravate the
problem, not help solve it.
Mr. Sanders. And, Senator Warner----
Senator Warner. My time is expired, so if you can----
Mr. Sanders. I am not against principal reductions per se.
What I am just saying is it is sort of the menu at a Chinese
restaurant. We have to calculate the cost of each one and sum
them up. That might be what is driving Mr. DeMarco's fears.
But again--and I do not even disagree with Laurie--I think
all these programs have a place. But we need to have, again,
simplification, which I think, by the way, Senator Menendez's
bill does. It standardizes things across servicers and across
the banks. So I think that is a great idea.
But again, can we get a bigger picture of whether--because
we do not know the Attorney General's settlement costs yet. We
do not know about whether they will actually do--go to Reuters.
They have a mortgage write-down calculator on there.
Take a look at that. It shows you the variation of what
this could be. It could be 2.8 billion, which I think Mr.
DeMarco quoted, but it can go as high as about 333 billion,
depending on how much they open the door.
That is all I am saying.
Mr. Calhoun. Just very quickly, the housing market needed
to correct. It was overpriced. But now what we see is the flood
of foreclosures is causing overcorrection and tremendous
uncertainty.
As I indicated, CRL is an affiliated lender. That is what
90 percent of our folks do. It is just lending. It is very hard
to lend when the housing market is this uncertain, and it will
remain that way with this flood of foreclosures.
So there is going to be a bunch of them that nothing can be
done about, but it makes it essential to prevent the
preventable ones and to process through the other ones so that
we get to that resolution because the uncertainty kills markets
more than almost anything else.
Senator Warner. Thank you, Mr. Chairman.
Chairman Menendez. Let me go through--since I observed the
5-minute time limit on myself and have been liberal with
everybody else, let me go through one last round of questions.
Senator Warner. That is why he is such a great Chairman.
Chairman Menendez. You are such a charmer.
Anyhow, I just want to go. Since this is going to be a very
important foundation for how we move forward here, I want to
get some key questions that I would like to see you answer for
the record.
Given that taxpayers own the risk as it is right now--if we
do nothing, taxpayers own the risk on these loans--do you think
documentation of employment, credit checks, tax returns and
other underwriting requirements that are typically required on
new loans are needed in the refi context, particularly when
what we are looking at is individuals who are timely and
performing?
I need verbal responses.
Mr. Mayer. No, we do not need to verify any of that
information.
Chairman Menendez. Anyone?
Ms. Still. No, we do not. The GSEs already own the risk.
Ms. Goodman. I agree.
Mr. Sanders. I completely disagree with the whole tenet of
the GSEs own the risk, but again, I do not see any real problem
with it.
Mr. Calhoun. I agree. It is a particular friction when
people have nontraditional income. It is not as much a burden
when you just have to call the employer, but when someone, for
example, is a business owner or something like that, it is a
significant hurdle and obstacle to the refinancings. And so,
yes, we should eliminate that requirement.
Chairman Menendez. Ms. Still, lenders cite representation
and warranty liability as obstacles to encouraging them to
extend refinanced loans. FHFA scaled back the liability for
same-servicer refinancing in HARP 2 but not for cases where a
different servicer was refinancing the loan. To me, that is
somewhat of a strange policy that has led to a lack of
competition among lenders that may result in higher interest
rates for borrowers by treating these two types of lenders
differently.
Do you agree that that should be fixed?
Ms. Still. MBA would agree that all lenders should have the
same level playing field and the same servicer-to-servicer
treatment.
And we talked about competition, which is very valid. I
would also add it may be a capacity issue as well. I think you
have many lenders in the industry that would like to help
borrowers refinance, and we can get to our borrowers sooner if
more players can help. So it also solves capacity and time.
Mr. Mayer. I agree with the proposition.
I would also say that increasing every time you verify
anything and every time you require any more paperwork you slow
the capacity problem. So it is not that we cannot do employers
and everything else. Not only is it unnecessary, it actually
harms the process and slows it down appreciably.
Ms. Still. And the same would apply for borrowers at 80
percent loan-to-value or less.
Chairman Menendez. I have a real concern. Years ago, in
this Committee, before we had the housing foreclosure crisis,
we had members of the previous Administration, and I said, we
are on the verge of a tsunami of foreclosures. And I was told
by the witness at the time for the Administration that with all
due respect Senator, that is an exaggeration.
I wish they had been right and I had been wrong.
The problem is I still do not think we have seen the full
crest of that tsunami. And there is an opportunity to stem some
of, not all of it, but a lot of it, and to do it in a way that
not only helps individuals and American families be responsible
borrowers but, at the same time, deal with a major challenge to
our economy.
We have never had an economic recovery in which housing was
not a driver of that recovery. And this is the one part; while
we have focused on the financial institutions, we have really
not succeeded at finding the right set of circumstances for
that housing market.
So that is why I am concerned. And I do think that in some
respects in this regard, as it relates to refinancing, time is
of the essence at the end of the day.
I want to ask two last questions, and then we will wrap up.
Ms. Still, your testimony brings up the good point that
borrower eligibility may be further broadened by allowing
borrowers whose mortgages are greater than the conforming loan
limits to refinance if their loans are already owned by the
GSEs. Do you have any sense of how many additional borrowers
would be captured by that?
Ms. Still. Yes, we do. If we allowed the GSE jumbo loans to
be included, we would add about $70 billion worth of loans to
the opportunity. If you also included Alt-A loans that the GSEs
already own, it would be another $276 billion worth of loans.
And so, you have got about $350 billion worth of loans that
would be incrementally included if you lifted the restrictions
on products and loan-to-value, or loan amount.
Chairman Menendez. Finally, Senator Reed offered me a
question that he would like to have asked had he been able to
stay, and it is to you, Dr. Mayer. If FHFA makes no further
changes and does not act on your refinancing recommendations,
who are the real winners, who are the real losers?
Mr. Mayer. It is very clear that the existing system
benefits the largest servicers, it benefits investors, and it
harms homeowners and taxpayers if we were to leave the existing
structure of HARP 2 in place.
Chairman Menendez. Well, I want to thank all of you for
laying some very good foundation of testimony and thoughts as
we move forward and for sharing your experience. I think that
the testimony here has been very helpful in exploring the
problems that we have and homeowners face in refinancing their
loans and then ways that would save them money, reduce
foreclosures, increase job growth, as well as I believe end
furtherance of responsibility to the taxpayers who are
ultimately on the hook here.
I believe that we can come together to solve some of these
different issues, and I look forward to working with everyone
intended to solve these important problems and help homeowners,
the housing market and our economy.
I would like to submit for the record a statement from the
National Association of Realtors and a statement from the
National Association of Home Builders that has endorsed the
draft, and without objection, it shall be so included.
I will also be submitting other statements in the record
for the coming week.
The record will remain open until 1 week from today if any
Senators wish to submit questions for the record.
And with the thanks of the Subcommittee to all of you, this
hearing is adjourned.
[Whereupon, at 11:24 a.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF CHRISTOPHER J. MAYER
Professor of Real Estate, Finance and Economics, Columbia Business
School
April 25, 2012
Good afternoon Chairman Menendez, Ranking Member DeMint, and
Members of the Subcommittee. Thank you for inviting me to speak today.
It is my honor to be here. My name is Christopher J. Mayer. I am the
Paul Milstein Professor of Real Estate at Columbia Business School. I
have spent the last 19 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.
This is the sixth time I have been called to testify at a
Congressional Committee or Subcommittee hearing, dating back to
November 2008, with three of those at the request of Republicans and
three from Democratic requests. At all six of those hearings I have
advocated for what is a seemingly straightforward and simple policy;
allow millions of Americans who are trapped in high interest rate
mortgages to refinance their mortgages at low current rates. Tens of
millions of American homeowners with mortgages guaranteed by Fannie Mae
or Freddie Mac would have been eligible for such a program. \1\ Had the
Federal Housing Finance Agency (the GSE's regulator) adopted such a
policy at that time, conservative estimates suggest that it likely
would have prevented over 300,000 defaults, saved taxpayers and GSEs
$10 billion in insurance costs from excess foreclosures, helped
stabilize the housing market, and saved homeowners about $20 billion
annually in mortgage payments. (See, Appendix 1 for supporting
calculations.)
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\1\ Numerous other analysts, investors, or policy makers have
called for a widespread refinancing program including, for example,
Alan Boyce, David Greenlaw, Bill Gross, Glenn Hubbard, and Mark Zandi.
The recent Federal Reserve White Paper pointed out the merits of
widespread refinancing, as have Federal Reserve officials and
columnists Ezra Klein, David Wessel, and Allan Sloan, and the New York
Times editorial page.
---------------------------------------------------------------------------
Today the housing market is being hobbled by excessively tight
credit, continuing foreclosures, and lack of consumer confidence, as
described by the recent Federal Reserve White Paper. This is not only
result of the economic downturn; housing is in much worse shape than
the rest of the economy. Auto lending has grown for each of the last 2
years, while new bank card credit is up 30 percent from its trough.
With credit available at more favorable terms than 2 years ago,
consumer spending and auto sales have grown. By comparison, the
National Association of Realtors reports that about 30 percent of
existing homebuyers do not obtain a mortgage. The Mortgage Bankers
Association Index of Applications for Home Purchase is at its 1996
levels. Consumers are forced to pay almost 0.75 percent more in higher
spreads on mortgages relative to before the GSEs were taken over by the
FHFA. In other words, many existing borrowers and potential homebuyers
have been locked out from the benefits of low interest rates.
Excessively tight credit is not just a market outcome; it is a result
of policy choices made by Government regulators at the FHFA. Without
Congressional action, such conditions are likely to continue. As noted
below, tight mortgage credit is hampering the recovery and costing
taxpayers billions of dollars.
It Is Not Too Late To Act!
Policy makers can still take important steps to help struggling
homeowners, while benefiting taxpayers and helping the housing market.
I have been asked to assess the ``Menendez-Boxer Discussion Draft'',
which summarizes legislation that would remove key barriers to
refinancing that continue to exist due to policies perpetuated by the
Government Sponsored Entities (GSEs--Fannie Mae and Freddie Mac) and
their regulator, the Federal Housing Finance Agency (FHFA). This draft
legislation sets conditions similar to those proposed by Boyce,
Hubbard, Mayer, and Witkin. \2\ Under such a program, we estimate that
as many as 11.6 million new refinancings would take place. The GSEs
would earn additional profits of as much as $23.7 billion,
predominantly through preventing 400,000 defaults. \3\ The GSEs can
charge a higher guarantee fee to pay for any losses to their portfolio.
Even considering portfolio losses to the Federal Reserve, we estimate
the program is profitable for taxpayers. Our conclusion that widespread
refinancing earns profits for the GSEs is quite similar to those in the
CBO working paper, although we believe that there will be a much higher
take-up rate than that used in the CBO paper. \4\
---------------------------------------------------------------------------
\2\ See, http://www4.gsb.columbia.edu/realestate/research/
housingcrisis/. One small difference between the draft legislation and
our policy simulations is that we do not exempt any mortgages from a
widespread refinancing program, while the draft legislation limits the
program to mortgages originated prior to June, 2010. This might result
in a reduction of as many as 1-2 million mortgages from our policy
estimates, but the overall conclusion remains unchanged.
\3\ For comparison, the GSEs currently have about 1.1 million
mortgages that are 90 days or more delinquent. We estimate that about
1.2 million borrowers with a GSEs mortgage have lost their home due to
a foreclosure, a short sale, or giving a deed-in-lieu of foreclosure
after 2008. Preventing 400,000 defaults would represent almost 20
percent of all current defaults or homes lost in the crisis with a GSE
mortgage.
\4\ See, D. Lucas, D. Moore, and M. Remy, 2011, ``An Evaluation of
Large-Scale Mortgage Refinancing Programs'', CBO Working Paper 2011-4,
Washington, DC. See also our response: http://www4.gsb.columbia.edu/
null/download?&exclusive=filemgr.download&file_id=7219077.
---------------------------------------------------------------------------
Of course, there are some tradeoffs. The gains in this proposal
come at the partial expense of bondholders, who lose higher interest
payments they would otherwise receive if homeowners remain locked in to
mortgages at above market rates. Of course, the owners of these bonds
knew that mortgage bonds could be prepaid at any time and earned a
healthy financial premium over other Government guaranteed bonds to
accept this prepayment risk. In a normally functioning mortgage market,
most homeowners would have refinanced a long time ago, and bondholders
would not have received an additional financial windfall over the last
several years. Our policy proposal, cited above, discusses the winners
and losers of a widespread refinancing program in much more detail,
with financial estimates of the gains and losses to all major
stakeholders.
HARP 2.0: Some Positives, But Many More Problems
In late October 2011, the FHFA announced changes to the HARP
program with the stated goal of increasing eligibility to allow more
borrowers to benefit from record low mortgage rates. These adjustments
were supposed to be focused on aiding underwater borrowers and
increasing competition between servicers, but the results so far have
failed to live up to this promise. Although the GSEs already own the
default risk on existing mortgages, they continue to put in place
hurdles that limit access to refinancing. Thus only a relatively small
group of borrowers--estimates range between 2-3 million--will be able
to refinance under HARP 2 and even these borrowers are likely to pay
rates well above what a new borrower would pay.
The most serious problem is that existing rules continue to reduce
competition, resulting in higher profit margins for large banks and
scarce options for struggling borrowers. Representations and warranties
risk, the legal obligation for originators to repurchase certain
mortgages that become delinquent, remains a huge constraint. For same-
servicer refinancings, the lender must only verify that the loan will
benefit the borrower, that the borrower has a source of income, and
that there have been no late payments in the past 6 months and no more
than one in the past year. Conversely, cross-servicer refinancings with
either GSE require no payments more than 60 days late in the past year,
as well as more detailed employment and income verification (Fannie Mae
imposes a maximum DTI ratio and Freddie Mac requires a full
underwrite). \5\ The new servicer will then be responsible for the
borrower representation and warranties risk on the mortgage. This
increases the lender's legal risk, discourages competition, and results
in refinancings for only the safest borrowers, yet this does nothing to
help the position of the GSEs, who already guarantee the original
mortgage.
---------------------------------------------------------------------------
\5\ Laurie Goodman, ``Amherst Mortgage Insight: HARP 2.0--And The
Winner Is . . . The Largest Banks'', Amherst Securities Group LP. 21
March 2012.
---------------------------------------------------------------------------
The risk on the property value is waived only if Fannie Mae or
Freddie Mac grants an appraisal waiver on the property. In the presence
of either borrower or property value representations and warranties
risk, up front profits come with uncertain and potentially large future
liabilities. As such, large servicers like Wells Fargo, Citi, and Chase
have implemented much stricter underwriting guidelines for mortgages
they do not already service, capping LTVs at 105 percent (in certain
cases, the maximum LTV is as low as 80 percent). \6\ In other words,
the high LTV borrowers that are supposedly the target of HARP 2 are
often locked out from refinancing from all but their existing servicer.
Other non-LTV restrictions also remain, such as Chase's ``more
stringent FICO, LTV, documentation, debt-to-income (DTI), and payment
history requirements.'' \7\ Effectively, borrowers run into obstacles
and greater costs in obtaining a mortgage from any lender besides their
current servicer.
---------------------------------------------------------------------------
\6\ Paul Muolo, ``Wells Caps HARP LTVs From Third-Party Lenders'',
Origination News. 16 April 2012. http://www.originationnews.com/
nmn_features/wells-caps-harp-ltvs-1029946-1.html
\7\ Wei-Ang Lee and Nicholas Strand, ``Prepayment Commentary:
Speeds Underwhelm'', Barclays. 13 April 2012.
---------------------------------------------------------------------------
It is also difficult for other servicers to identify and solicit
eligible borrowers without knowing who has a GSE loan or the loan's
payment history. The GSEs could address this problem by providing a
list of all borrowers who are eligible for HARP to approved servicers
or notifying borrowers that they are eligible, but have chosen not to.
Of course, existing servicers are taking full advantage of limited
competition. Same-servicer refinancings have been enormously
profitable, with a recent Amherst Securities report finding profit
margins on these refinancings of 3.5 to 6.6 percent, an unheard of
profit margin in this business. \8\ Without competition, borrowers
cannot choose a new servicer if they do not like the quality of service
or the loan offer their existing servicer presents.
---------------------------------------------------------------------------
\8\ See, Goodman, above.
---------------------------------------------------------------------------
Some high LTV borrowers cannot access same-servicer originations at
any price. Citi has a maximum LTV/CLTV/HCLTV of 125 percent for FRMs
and 105 percent for ARMs. \9\ Given the cross-servicer restrictions
mentioned above, a high LTV borrower serviced by Citi is effectively
unable to refinance to take advantage of today's low rates. Even worse,
some large servicers such as MetLife no longer originate new mortgages,
so existing MetLife borrowers have nowhere to go for a same-servicer
refinancing.
---------------------------------------------------------------------------
\9\ Rob Chrisman, ``GMAC `Significantly Scales Back'; Citi's HARP
2.0; Lots of Investor, Agency, MI, and Conference Updates'', Mortgage
News Daily. 14 April 2012. http://www.mortgagenewsdaily.com/channels/
pipelinepress/04142012-citimortgage-harp-2-0.aspx
---------------------------------------------------------------------------
Some Evidence That Freddie Mac Tightens Credit More Than Fannie Mae
Freddie Mac appears to impose greater restrictions on HARP 2
refinancings than Fannie Mae. 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. Freddie Mac has limited HARP 2 refinancings
to borrowers with an LTV above 80 percent and locked out borrowers with
a CLTV over 105 percent, rules not imposed by Fannie Mae.
Even if a borrower appears to meet the rules for a HARP 2
refinancing, the loan approval process may be derailed by additional
underwriting restrictions that are not disclosed. According to reports
from loan officers, `` . . . aside from the current mortgage not having
any late [payment]s within the last 6 months and only one 30 day late
within the last 12 months, according to Freddie Mac any revolving or
installment late within the last 12 months could kill the deal. Lastly,
it is rumored that revolving debt that is over 50 percent of the credit
limit, in spite of good credit scores, will cause Freddie Mac to deny/
decline the application. And considering most equity lines are coded as
revolving accounts and are typically over 50 percent of their credit
limit, most Freddie Mac loans will not be refinanced.'' \10\ HARP's
unclear guidelines and implementations inevitably lead to additional
costs for borrowers: Bridgeview Bank Mortgage Co. reports that just 1
of about 100 borrowers applying for a HARP refinancing have been
approved; elsewhere a borrower was rejected because he had originally
begun applying for a refinancing at a different bank. \11\
---------------------------------------------------------------------------
\10\ See, Lee and Strand, above.
\11\ Mary Ellen Podmolik, ``Freddie Mac To Ease Refinancing
Program's Guidelines for Borrowers'', Chicago Tribune. 15 April 2012.
http://articles.chicagotribune.com/2012-04-15/business/ct-biz-0416-
freddie-harp-20120414_1_freddie-mac-refinancing-program-largest-
servicers
---------------------------------------------------------------------------
Freddie Mac has announced that it would be ``fine-tuning'' its
standards. However, ``specifics of how the automated underwriting
models will be altered aren't being disclosed, even to lenders, but
some homeowners who have been turned down for the program may now
qualify.'' \12\ For a refinancing program to have success, the rules
and eligibility requirements should be fully disclosed to both lenders
and borrowers. This opaqueness serves no clear purpose other than to
give the appearance that Freddie Mac is a reluctant participant in HARP
2 refinancings.
---------------------------------------------------------------------------
\12\ See, Podmolik, above.
---------------------------------------------------------------------------
Finally it is unclear why any existing loans should be ineligible
for HARP 2, which locks out mortgages originated after May of 2009.
Over $880 billion of outstanding GSE MBS has been issued in 2009 or
later with a coupon of 4.5 percent or higher (mortgage rates are
typically roughly 50 basis points above the coupon). \13\ A borrower
receiving a 5.25 percent mortgage in 2010 due to the tightening of
credit and lack of competition in the mortgage market is no better off
than a borrower who obtained an identical loan in 2007.
---------------------------------------------------------------------------
\13\ Data courtesy of Knowledge Decision Services LLC. Based on
pool-level data on Fannie Mae and Freddie Mac MBS. Current as of March
2012.
---------------------------------------------------------------------------
HARP 2 Restrictions Appear To Violate FHFA's Mandate
As I noted in my testimony before the full Committee on February 9,
2012, the FHFA appears to be in violation of its Congressional
mandates. In 2008, Congress passed the Housing and Economic Recovery
Act (HERA). Under HERA, the Director of the FHFA must ensure that the
GSEs meet a number of conditions, including: \14\ ``each regulated
entity operates in a safe and sound manner . . . ''; ``the operations
and activities of each regulated entity foster liquid, efficient,
competitive, and resilient national housing finance markets . . . '';
``the activities of each regulated entity and the manner in which such
regulated entity is operated are consistent with the public interest.''
As well, under conservatorship, the FHFA must ``preserve and conserve
the assets and property of the regulated entities . . . '' Finally, the
Emergency Economic Stabilization Act of 2008 (EESA) specifies that the
FHFA `` . . . has a statutory responsibility to maximize assistance for
homeowners to minimize foreclosures.'' \15\
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\14\ 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.
\15\ See, FHFA letter to Congressman Cummings: http://
www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdf.
---------------------------------------------------------------------------
Many commentators focus on the requirement to preserve and conserve
assets in explaining the GSE's behavior towards refinancing. According
to this line of reasoning, the fact that the FHFA and the GSEs have
taken active steps to restrict refinancing might be justified in order
to protect the value of its retained portfolio of mortgage-backed
securities. Many of these mortgage-backed securities were acquired at a
time when mortgage rates were much higher than today and thus
prepayments due to refinancing could cause appreciable portfolio
losses.
These policies under HARP 2 described above may at first pass seem
consistent with the strategic goal of preserving and conserving assets,
even if the policies violate the mandate to ``foster liquid, efficient,
competitive, and resilient national housing finance markets'' and to
operate in a manner ``consistent with the public interest.'' As noted
above, policies that restrict refinancing include limiting competition
by giving existing servicers preferential legal treatment for ``Reps
and Warranties'' relative to new servicers, imposing opaque credit
restrictions that make the market less transparent (and thus less
efficient), and limiting access to a program that lowers borrowing
costs and reduces foreclosures (seemingly against the public interest).
Each of these restrictions under HARP 2 violates a specific provision
of HERA and/or EESA. Nonetheless, following this line of reasoning, and
in the face of conflicting mandates, the FHFA must choose one mandate
over another.
Of course, Acting Director DeMarco has said that there is no
conflict because the GSEs were not supposed to consider their portfolio
in implementing HARP 2. When responding the NPR/ProPublica report
listed above, the FHFA stated, ``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.'' \16\
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\16\ Federal Housing Finance Agency, ``FHFA Statement on Freddie
Mac Refinance Story'', 30 January 2012. www.fhfa.gov/webfiles/23178/
ProPublicaNPRFHFAStmt13012.pdf
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Absent such conflicts, independent analysis by the Congressional
Budget Office undermines the argument that refinancing restrictions
serve even the single goal of conserving assets. According to the CBO
Working Paper, cited above, a widespread refinancing program would
result in higher profits for the GSEs, even taking into account
portfolio losses, because more refinancings lead to fewer defaults and
lower insurance costs. The CBO estimates a $2.5 billion ``reduction in
subsidy cost on GSE guarantees'' and $1.8 billion ``lost portfolio
value to GSEs'' for a net impact of $0.7 billion in profit for the
GSEs.
My own analysis with co-authors, also cited above, takes the CBO
case one step further. Suppose that refinancing did impose net
portfolio costs, or suppose that the GSEs must give up valuable legal
rights to sue for reps and warranties violations (a case that most
independent analysts doubt); in either circumstance, the GSEs could
just charge a slightly higher annual fee to pay for any incremental
costs. Our analysis suggests that a streamlined proposal could achieve
healthy profitability for the GSEs simply by increasing the annual
guarantee fee by 15 basis points and adding a 7 basis point annual fee
to cover losses from waived representations and warranty liabilities.
In their analysis, the CBO found that ``potential recoveries from put-
backs on mortgages refinanced under the program that would not have
been refinanced without the program appear to be relatively small,''
suggesting that our 7 basis point annuity will be more than sufficient
to compensate the GSEs for relieving lenders of this risk. In net, we
find that our proposed program would lead to a profit for the GSEs of
more than $23.6 billion. Thus there really is no trade-off between
conserving assets and supporting a competitive and efficient mortgage
market.
Finally, it is possible that a widespread refinancing program might
lower the price of mortgage bonds in the future because investors would
require a large premium to cover refinancing risk. The fact that
managers at Pimco, Morgan Stanley, and Moody's Analytics have argued in
favor of widespread refinancing makes it less likely that a revolt by
bond buyers is a serious concern. Counter to such a suggestion,
securities backed by these refinancings have turned out to be quite
appealing to investors given their low prepayment risk. An article
examining MBS backed by HARP 2.0 refinancings found that ``recent
trades show that demand for the >125 percent LTV pools is strong . . .
Investors are apparently willing to accept the reduced liquidity of the
securities and still pay through the TBA market for glacial prepayment
speeds and the resulting boost in carry.'' \17\ As well, about 25
million borrowers refinanced their mortgages in 2002 and 2003, much
larger than is envisioned by even the most optimistic projections. So a
high rate of refinancing is far from unprecedented.
---------------------------------------------------------------------------
\17\ Bill Berliner, ``Trading in MBS Pools Backed by HARP Loans'',
Mortgage News Daily. 18 April 2012. http://www.mortgagenewsdaily.com/
channels/secondary_markets/04182012-trading-pools-harp-loans.aspx
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Conclusion
It is not too late to achieve a win-win scenario. The FHFA has the
authority to pursue a widespread refinancing plan, and such a program
seems to be called for by existing mandates. However, the FHFA has
chosen not to do so and appears unlikely to change course without
outside intervention. As a result, Congress should act to reinforce the
mandate of conservatorship with regard to refinancing and credit
availability. The ``Menendez-Boxer Discussion Draft'' addresses the key
problems listed above.
Nonetheless, I have two additional suggestions. First, all
mortgages originated prior to the date of passage should be eligible
for the refinancing program as long as they are current at the time of
application. Existing FHFA rules have limited competition, so most
borrowers are paying higher mortgage rates than would prevail in a more
competitive mortgage market as envisioned under this draft legislation.
All of these borrowers deserve relief. Second, I believe that
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.
Finally, I would make one other argument in favor of a legislative
solution. The Federal Reserve has often pointed to the housing market
as a key justification for its controversial policy of quantitative
easing. Yet low interest rates benefit relatively few borrowers under
existing FHFA policies. Repairing large flaws in the mortgage market
will help ease pressure on the housing market. Under these
circumstances, the Federal Reserve may feel comfortable reducing the
amount of quantitative easing, leaving it room to exit more quickly
from existing bond holdings.
Until we fix the housing market, it will be hard for the economy to
fully recover. 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.
Appendix 1: Estimating Losses From Failing To Adopt a Widespread
Refinancing Plan
Below I present simple calculations to get an order of magnitude of
losses from the failure to adopt a widespread refinancing program.
These estimates are intended to be a conservative, but reflect rough
calculations and not a detailed study.
In an earlier analysis, Boyce, Hubbard, and Mayer summarize various
studies of the take-up of an appropriately structured widespread
refinancing program. \18\ Moody's Analytics and Morgan Stanley
estimates from 2010 suggest that such a program would have resulted in
about 18 million mortgages that would be refinanced, saving homeowners
$46-56 billion annually in lower mortgage payments. These estimates
include FHA and VA loans, which at the time represented a distinct
minority of all outstanding mortgages. For these calculations, I assume
that about 14 million of the 18 million refinancings would be for GSE
mortgages.
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\18\ http://www4.gsb.columbia.edu/null/
download?&exclusive=filemgr.download&file_id=7219077
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Instead, the GSEs accomplished about 10 million refinancings, of
which a significant share are either multiple refinancings for the same
borrowers or refinancings of mortgages originated after April 1, 2009.
Assuming about 40 percent of the refinancings are for mortgages that
were originated after 4/1/2009 or to borrowers that refinanced more
than once, this suggests that about 6 million legacy mortgages were
refinanced instead of 14 million as might have happened with a
widespread refinancing program. So, policy resulted in about 8 million
``lost'' refinancings.
Next, I compute the economic outcomes associated with the lack of
appropriate refinancing activity. According to a Congressional Budget
Office study, \19\ every 1,000 refinancings result in 38 fewer defaults
(3.8 percent). So 8 million ``lost'' refinancings resulted in about
304,000 unnecessary defaults. Using CBO estimates of the cost per
default, these additional defaults have cost taxpayers about $10.75
billion in higher insurance costs for the GSEs. As well, Moody's
Analytics, Morgan Stanley, and the CBO estimate that each refinancing
saves homeowners between $2,500 and $3,000 per year. Using $2,600 from
the CBO, these lost refinancings ``cost'' homeowners an additional
$20.8 billion annually in higher mortgage costs.
---------------------------------------------------------------------------
\19\ D. Lucas, D. Moore, and M. Remy, 2011, ``An Evaluation of
Large-Scale Mortgage Refinancing Programs'', CBO Working Paper 2011-4,
Washington, DC.
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I believe these estimates are quite conservative. By comparison,
Boyce, Hubbard, Mayer, and Witkin currently believe that about 11.6
million new borrowers would take-up an appropriately structured
refinancing program today. \20\ Assuming the GSEs charge a higher
annual guarantee fee, they can earn a profit for taxpayers of about $23
billion, taking into account an estimate of losses to their portfolio
of mortgage-backed securities as well as savings from fewer defaults.
These refinancings would save homeowners about $123 billion over 10
years and prevent about 440,800 defaults.
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\20\ See, http://www4.gsb.columbia.edu/realestate/research/
housingcrisis/.
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______
PREPARED STATEMENT OF DEBRA STILL
Chairman-Elect, Mortgage Bankers Association
April 25, 2012
Introduction
Chairman Menendez, Ranking Member DeMint and Members of the Senate
Subcommittee on Housing, Transportation and Community Development, I
appreciate the opportunity to offer remarks on behalf of the Mortgage
Bankers Association \1\ (MBA) at this hearing on ``Helping Homeowners
Save Money Through Refinancing.'' My name is Debra Still and I am
Chair-Elect of MBA. My remarks will focus on the ``Responsible
Homeowner Refinancing Act of 2012'' currently being drafted by Chairman
Menendez and Senator Boxer.
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\1\ The Mortgage Bankers Association (MBA) is the national
association representing the real estate finance industry, an industry
that employs more than 280,000 people in virtually every community in
the country. Headquartered in Washington, DC, the association works to
ensure the continued strength of the Nation's residential and
commercial real estate markets; to expand home ownership and extend
access to affordable housing to all Americans. MBA promotes fair and
ethical lending practices and fosters professional excellence among
real estate finance employees through a wide range of educational
programs and a variety of publications. Its membership of over 2,200
companies includes all elements of real estate finance: mortgage
companies, mortgage brokers, commercial banks, thrifts, Wall Street
conduits, life insurance companies and others in the mortgage lending
field. For additional information, visit MBA's Web site:
www.mortgagebankers.org.
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At the outset, let me state that MBA strongly supports the intent
and major objectives of this legislation: to address obstacles that
have prevented borrowers who have conscientiously made their mortgage
payments from reaping the benefits of historically low interest rates
and other assistance programs. We are particularly intrigued by the
sections of the bill that would remove existing restrictions of the
Home Affordable Refinance Program (HARP) based on arbitrary
requirements such as who services the loan, whether the borrower's
loan-to-value ratio is above or below 80 percent, and which Government-
sponsored enterprise owns the current loan. Such features only serve to
increase borrower and lender confusion, and reduce the number of
qualified borrowers who could benefit from the program. MBA looks
forward to working with the authors of this draft legislation, Members
of this Subcommittee, the Administration, and other key stakeholders as
a resource to help resolve whatever issues or differences may arise as
a result of this dialogue.
Before addressing specific aspects of the bill, I believe it would
help to provide some analytics regarding the housing market's recovery
thus far, and the policy considerations MBA used to assess the merits
of the bill.
Economic Context
Notwithstanding this widespread uncertainty, we are starting to see
signs of recovery and growth. Optimism is beginning to emerge with
record home affordability, some signs of job formation, and a slowly
recovering stock market. Recent economic indicators also point to
sustained, albeit slow, growth for 2012.
I have personally witnessed other ``green shoots'' appearing in
local markets around the country. For example, I can say with some
optimism that I anticipate the first true spring buying season we have
had in a few years. Even more telling is the fact that some former
homeowners who exited the market through short sales or ``deed-in-
lieu'' transactions are now asking how they can return.
Chart 1 provides an overall perspective of homes for sale on the
market today with overlays of delinquent loans and loans in
foreclosure. Although the volume is still at historically high levels,
we are seeing consistently lower numbers in all key statistics. In
fact, MBA expects existing home sales to increase slightly in 2012
followed by more significant growth in 2013.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chart 2 shows the ratio of refinancings to purchase mortgages also
is reverting to normal trends. MBA expects purchase originations to be
a little over the $400 billion level in 2012, similar to 2011, before
increasing to $680 billion in 2013, as home prices turn upward more
definitively, and home sales increase. Refinance originations were
strong in 2011 as rates were at historical lows, and have remained
relatively strong thus far in 2012. The expanded HARP effort is
currently contributing roughly 30 percent of refinance application
volume.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chart 3 shows the trend in delinquency and foreclosure rates
remains disturbingly high. But on a positive note, we are clearly over
the hump in both measures. Closer analysis shows that we are back to
where we were before the crash in 2008.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Reaction to Bill
Turning now to the draft legislation, MBA fully supports its goal
of reducing operational inconsistencies and economic obstacles impeding
the ability of on-time borrowers to refinance their mortgages. We also
support the bill's provisions clarifying the post-sale obligations of
lenders for loans they sell to the Government-sponsored enterprises
(GSEs), Fannie Mae and Freddie Mac. It is likely that if many of the
provisions in this bill were included in the first version of HARP, we
probably would be much further along in the recovery. In reality,
however, this bill effectively would represent the third iteration of
HARP and is being introduced at a time when HARP 2 is just beginning to
show signs of progress. Therefore we believe it would be useful to
monitor HARP 2's effectiveness as you continue the deliberations
regarding this draft legislation to assess the tradeoffs between the
benefits the bill provides to borrowers and the operational costs to
the GSEs, lenders, and taxpayers. Following additional comments about
specific provisions of the bill, MBA suggests additional initiatives
for consideration.
Borrower Eligibility
MBA is particularly appreciative of the draft legislation's
provisions that reduce the complexity of HARP's eligibility and
compliance. For example, the ability of borrowers to lower their
mortgage payments by refinancing their loan through HARP should not
hinge on who services their loan. Additionally, the existing
distinction regarding whether a borrower's LTV is above or below 80
percent is subject to manipulation by mischaracterizing the value of a
borrower's collateral.
The bill also would prohibit the GSEs from establishing pricing
differences based on loan to value (LTV) ratios, income or employment
status. The rationale for this provision is that reducing the re-
underwriting requirements for loans already held by the GSEs is
appropriate because the GSEs already hold the risk. Moreover, reducing
a borrower's payments reduces the risk that a borrower will not repay
the loan. As a general rule, MBA believes strong underwriting
requirements including full documentation and verification are critical
to safe and sound lending practices.
However, MBA supports the concept of streamlining underwriting
requirements where the borrower is current and the loan being
refinanced is currently owned by Fannie Mae or Freddie Mac.
MBA also requests consideration of whether the provisions to
streamline HARP's eligibility requirements for conscientious borrowers
make it easier for unscrupulous borrowers to abuse the program. For
example, one of the primary tools lenders use to detect and prevent
fraud is to verify the employment, assets, and liabilities of
borrowers.
Additionally, MBA believes a refinancing is not always in the best
interest of a borrower, and that a modification is sometimes a better
alternative. For example, a loan modification is likely the better
option for the borrower in situations where the borrower is no longer
employed. Allowing origination of loans without any verification of a
borrower's income source effectively allows unemployed borrowers to
refinance their loans when other alternatives may be a better option.
Another concern is that the bill's reduced underwriting
requirements could be interpreted to interfere with a lender's ability
to comply with the requirements in the Dodd-Frank Act to verify whether
the borrower has a ``reasonable ability to repay the loan.'' Although
regulations are currently in the proposed stage, final regulations are
likely to be issued before the end of the year. Streamlined refinances
by the GSEs are not exempt from the statutory requirement and reliance
solely on pay history (as is currently permitted for manual refinances)
fails to meet the statutory standard for determining a reasonable
ability to repay under the Dodd-Frank Act. Furthermore, eliminating any
employment verification raises the concern that an assessment has not
been conducted of the borrower's ability to repay the loan.
MBA suggests the limitations on the types of loans eligible for
refinancing under HARP also restricts otherwise qualified borrowers
from lowering their monthly payments by refinancing into a lower
interest rate loan. For example, high balance loans owned by the GSEs
are ineligible to be refinanced under HARP if they are above the
existing conforming loan limit. MBA believes that if a borrower meets
HARP's eligibility requirements, and the GSE owns the existing
mortgage, the mortgage should be able to be refinanced.
For these reasons, MBA believes this section of the bill would
benefit from further refinement to ease implementation.
Repurchases
MBA is pleased that the bill attempts to reduce the existing
disparity between a lender's representation and warranty (rep and
warrant) obligations to Fannie Mae and Freddie Mac. MBA believes this
would encourage competition by allowing different servicers to
refinance a borrower on the same terms on which the current servicer is
able. This would create many more refinances of the targeted HARP-
eligible population, and those refinances would be at a considerably
better rate to the borrower. In our remarks below, we offer additional
considerations regarding rep and warrant obligations because MBA
believes this issue transcends the HARP context.
Collateral Valuation
The bill also would require collateral valuations to be estimated
through the GSEs' automated valuation models (AVMs). In locations where
AVM modeling data is nonexistent, such as rural areas, an actual
appraisal can be used, at no cost to the borrower.
MBA believes this is a prudent attempt to use technological
efficiencies to reduce the up front refinancing costs for eligible
borrowers. It should be noted, however, that appraisals are an
invaluable tool for protecting against fraud. Therefore, to the extent
that the bill conflicts with lenders' fraud prevention measures, we
request a commensurate adjustment in a lender's repurchase obligation.
We believe this will enable lenders to be able to maximize the cost
savings to borrowers.
Re-Subordinating Second Liens
The bill provides that if a servicer or creditor refuses to re-
subordinate certain second liens when the first lien is refinanced
under HARP, such servicer or creditor will be ineligible to deliver or
sell any future loans to Fannie Mae or Freddie Mac. It is unclear
whether such a bar would expire with HARP or continue in perpetuity.
Most junior lien holders today will subordinate their liens
provided the borrower finances only closing costs, such closing costs
are not excessive, the borrower derives a benefit from the refinance,
and the borrower does not receive cash out (other than to settle small
calculation discrepancies). This policy is also followed in most cases
even if the borrower's combined LTV is above 100 percent.
For these reasons, MBA believes this provision imposes harsh
penalties for a situation that seems to be resolving itself. When a
borrower's LTV exceeds 100 percent, second lien holders are rightly
concerned with an increase in the first lien debt because it imposes
additional risk of loss, by the amount financed, if the loan fails. We
are concerned that the harsh penalty will actually impair the recovery
of the real estate market by making junior liens extremely costly and
unattractive to originate and service.
We also question whether the penalties imposed by the bill are
worse than the problem it seeks to address. In theory, a single mistake
could render a significant market player or number of players unable to
do business with Fannie Mae and Freddie Mac. This does not appear to be
a positive result for borrowers or the GSEs as it could affect
competition, price, and the GSEs' future revenue opportunities.
In addition, it appears that the servicer would be held responsible
if the owner of the junior loan does not permit a subordination. In
many instances servicers are mere loan administrators and thus cannot
impose a requirement of this nature on the lien holder. Servicers,
therefore, should not be penalized for decisions outside of their
control.
While most second liens are held in portfolio as whole loans, there
are instances in which such loans are securitized. If trust documents
prohibit the servicer from impacting the security interest of the
notes, it would not be appropriate to penalize the servicer for
complying. The law would, in this instance, put servicers in an
unfortunate position; either they face litigation or get barred from
delivering loans to the GSEs.
There are also valid situations where the servicer should not be
required to subordinate. One example is where the borrower sold the
property without the lien holder's consent thus violating the due on
sale clause in the mortgage contract. Another example is where a first
lien holder provided a cash-out refinance without getting a
subordination agreement from the second lien holder. Had the request
been made, the second lien holder would not have approved the
subordination due to the cash-out feature. The second lien holder
should not be required to re-subordinate simply because the borrower
now seeks to refinance again under HARP when the subordination wouldn't
have been granted in the first instance. The examples given are not an
exhaustive list. Moreover, servicers cannot predict situations that
might arise in the future that support denying a subordination request.
For the reasons described above, we believe the re-subordination
requirement provisions are a well-intentioned attempt to streamline the
refinancing process for borrowers, but the operational and practical
consequences could negate the benefits they were intended to provide.
MBA would have strong concerns regarding these provisions if this bill
were to move forward.
Mortgage Insurance
A similar provision imposes a bar on mortgage insurers who refuse
to transfer coverage to the new HARP refinanced mortgage. Such insurers
would be ineligible to insure new mortgages purchased or guaranteed by
the enterprises. We are concerned that this penalty may create an
unintended outcome. Lenders must obtain mortgage insurance (MI) on
higher-LTV loans in order to deliver such loans to the GSEs. If one or
more insurers were barred from doing business with the GSEs, it could
severely strain the availability and cost of MI. Likewise, it would
increase the GSEs' counterparty risk.
It also is not clear whether the GSEs have the technological
capacity to monitor and track whether an MI refused to transfer
coverage and then to automatically terminate new deliveries of loans
insured by such an MI. If the operational framework is not in place
already, developing it could be costly and time-consuming.
It also is unclear whether the bill would apply to situations where
lenders or investors place MI on the loan after it was originated to
make it eligible for an enterprise to purchase (back-end MI) and in
cases for certain lenders where the lender has purchased mortgage
insurance (traditionally called LPMI). In these circumstances, special
processes need to be put in place by the GSEs, the MI companies and
lenders to ensure that coverage remains in place. These operational
challenges could be time-consuming and costly, which could ultimately
offset any potential consumer benefit.
MBA therefore requests this provision be reevaluated in light of
these considerations.
Credit Risk Guarantee Fees
The bill would be funded by a ten basis point increase in the
credit risk guarantee fees (g-fees) charged by Fannie Mae and Freddie
Mac, but only for those loans refinanced under the provisions of the
bill. MBA strongly believes that g-fees should be calculated as a
function of the costs of guaranteeing the securities they issue, i.e.,
the risk of underlying loans.
In this situation, MBA would prefer that the GSEs themselves be
authorized to adjust their g-fees in accordance with their increased
risk profile and with the strict oversight of their regulator. Given
Federal budgetary scoring constraints, however, we recognize that g-
fees must be deposited into an account at the Department of the
Treasury.
Because g-fees directly impact consumer borrowing costs, we ask
that Congress establish sufficient statutory firewalls so that these
funds can only be used to offset credit risk exposure by the GSEs.
Additional Recommendations
The timing of this hearing is fortuitous because MBA members were
in Washington, DC, just last week as part of our association's annual
advocacy conference. MBA met with leadership in the House, Senate,
several regulatory agencies, and President Obama's housing policy team.
The threshold question that we were asked in virtually every meeting
was what could be done to restore access to credit for all eligible
borrowers in a safe and sound manner.
MBA's response to this question is that a long-term recovery hinges
on restoring certainty and providing clear standards regarding the
rights and responsibilities of all market participants. Heightened
levels of uncertainty are pervasive throughout the housing market.
Borrowers are unsure of their job stability, are afraid of buying when
home prices may still be falling or are concerned about how they will
be treated by their lender or loan servicer.
Lenders face uncertainty not just because of the cascading effect
of new rules and regulations but also because existing, longstanding
agreements between counterparties are being reinterpreted and applied
retroactively. And private investors that could provide much needed
capital also are skittish; they don't know which way the market is
headed or what new policy may come next that will impact their
position. This overall uncertainty results in reduced access to
affordable housing finance options for qualified borrowers. MBA
supports provisions in the draft legislation that would address this
widespread uncertainty.
MBA also recognizes there are other challenges that need to be
resolved before a sense of vibrancy returns to the housing market.
Therefore, we offer the following additional recommendations to help
restore access to credit for qualified borrowers.
Foreclosure Inventory
While the draft legislation would do much to stem the tide of new
delinquencies and foreclosures, it is not directly focused on the
overhang of distressed properties. Addressing that overhang would spur
further economic recovery and stabilize neighborhoods and long-term
home prices. A reduction in the current ``real estate owned'' (REO)
inventory will provide for the swiftest and most efficient return to
market stability. As the country moves to correct the supply and demand
imbalance, it is critical that policy makers balance taxpayer
interests, investor interests, and consumer protections to ensure
responsible asset disposition.
Local investors understand their particular markets and have a
long-term stake in the stabilization of their neighborhoods. Providing
affordable, responsible financing options to investors not only
eliminates REO properties, but also empowers neighborhoods by giving
local residents an increased stake in its success. These tools would be
especially beneficial in urban neighborhoods that face the challenges
of older housing stock and neighborhood blight.
MBA believes the Federal Housing Administration (FHA) should
introduce an investor program--specifically one that includes a
renovation option. One solution would be to temporarily lift the
moratorium on investors participating in FHA's Section 203(k)
Rehabilitation Loan Program. The Section 203(k) program helps buyers of
properties in need of repairs reduce financing costs, thereby
encouraging rehabilitation of existing housing. With a Section 203(k)
loan, the buyer obtains one FHA-insured, market-rate mortgage to
finance both the purchase and rehabilitation of a home. Loan amounts
are based on the lesser of the sum of the purchase price and the
estimated cost of the improvements or 110 percent of the projected
appraised value of the property, up to the standard FHA loan limit.
HUD began promoting Section 203(k) to homeowners, private
investors, and nonprofit organizations in 1993. Private investors were
often able to find undervalued properties, renovate them and sell them
for more than the purchase price plus the cost of improvements, or
provide much needed rental housing. Motivated by this profit potential,
many investors successfully renovated and sold properties ranging from
individual homes to entire blocks, thereby expanding home ownership
opportunities, revitalizing neighborhoods, creating jobs, and spurring
additional investment in once blighted areas.
In 1996, however, following a report by HUD's Inspector General
describing improprieties concentrated in New York and insufficient
departmental oversight, HUD placed a moratorium on all Section 203(k)
loans to private investors. The Inspector General noted rampant
fraudulent activity that resulted in financial gain for the
participants and unrehabilitated houses in the neighborhoods.
MBA agrees that safeguards in any program are necessary to prevent
abuse and to ensure that the program meets its intended purpose. MBA
recommends that FHA lift the moratorium on investors participating in
the 203(k) and reinstate it as a pilot to facilitate the purchasing and
rehabilitating of REO properties by local investors. In recognition of
the historical abuses of the program, MBA also recommends that the
program be modified to ensure responsible lending and minimize
fraudulent activity. MBA's members welcome the opportunity to work with
FHA to develop a program that meets these criteria.
Ability To Repay Regulations
MBA also believes proper implementation of the Dodd-Frank Act's
ability to repay (ATR) and Qualified Mortgage (QM) requirements, now
pending before the Bureau of Consumer Financial Protection (CFPB), is
crucial to homeowners and those seeking home ownership. Under the
proposal, there are three major issues: (1) whether the QM is
structured broadly; (2) whether the QM is structured with clear bright
line standards as a safe harbor; and (3) whether the three percent
limit on points and fees is overly inclusive and has the effect of
limiting the availability of credit, particularly for loans under
$150,000.
Failure to comply with the ATR requirements risks very significant
liability including actual damages, up to 3 years of finance charges,
attorney fees, as well as a claim for offset at foreclosure for the
life of the mortgage. In light of these liability considerations, it is
anticipated that virtually all mortgages made will be QMs; those that
are not, if available at all, will be costlier and are not required to
offer borrowers QM protections. For these reasons, it is crucial that
the QM standards be established broadly so they offer affordable credit
and protect as many borrowers as possible.
The proposed rule offers alternative approaches to the construction
of a QM, only one of which will be adopted in a final rule--a safe
harbor or a rebuttable presumption of compliance. Specific standards
are contained in both, and under both borrowers may seek court review
of whether the lender complied.
The principal difference between the two approaches is that under a
safe harbor litigation is more predictable and addresses only whether
the standards set forth in the safe harbor have been met. Structuring
the QM as a safe harbor is the best means of ensuring that the largest
number of borrowers possible will enjoy the safest and most affordable
options for sustainable mortgage credit. A presumption of compliance
does not generally provide the same degree of predictability.
Consequently, if provided for in a final rule, a rebuttable presumption
structure will result in more conservative lending standards, and less
available and affordable credit.
The proposal also would apply the statutory requirement of a three
percent limit on points and fees for the QM so that it would appear to
include: (1) third party fees such as title services when the service
provider is an affiliate of the lender; (2) loan originator
compensation; and (3) escrows for taxes and insurance. The limit is
only adjusted up to 5 percent for loans under $75,000.
All third-party fees should be excluded from the three percent
limit. Any other outcome undermines competition and borrower choice.
The inclusion of payments from lenders (i.e., loan officer
compensation) has no place in a formula governing payments to lenders.
Likewise, escrows not retained by the lender have no place in a
calculation of points and fees. Additionally, consumers should continue
to have the option of using a lender with affiliated settlement
services providers. Finally, since the average loan size is closer to
$150,000, upward adjustment of the three percent limit for smaller
loans should commence for loans below that amount. Considering the
effects of the proposal on smaller loans, both revision of the small
loan requirements and revision of the formula's ingredients are
essential to ensure the availability of credit to low-and moderate-
income families with smaller loans.
How the QM is defined and structured is crucial to determining who
will benefit from affordable, sustainable mortgage financing. Loans
that fail the QM test will be costlier, if they are available at all.
MBA urges the Members of this Subcommittee to encourage the CFPB to
adopt a broad QM and a safe harbor for QM loans. MBA also encourages
Members of this Subcommittee to consider the introduction of Senate
legislation similar to that proposed in the House by Reps. Bill
Huizenga (R-MI) and David Scott (D-GA) that would make important
technical changes to the QM points and fees definition. The Consumer
Mortgage Choice Act (H.R. 4323) would exclude affiliate fees, loan
originator compensation and escrows.
GSE Repurchase Requirements
As mentioned above, MBA believes much more needs to be done to
clarify the rights and responsibilities of lenders with respect to
repurchase requirements. Leadership at the Department of Housing and
Urban Development (HUD), Federal Housing Finance Agency (FHFA), and the
Board of Governors of the Federal Reserve System all recognize that a
key driver of this tight credit environment is the unprecedented number
of loan repurchase demands by the GSEs to lenders, based on
representations and warranties made by lenders when they sell loans to
the GSEs.
We recognize the importance of these reps and warrants in holding
mortgage originators accountable for the loans they sell into the
secondary market. These contractual provisions are critical to the
securitization process, and a successful and liquid secondary market.
Reps and warrants appropriately allocate risk and align the incentives
of all parties in the direction of sustainable, responsible mortgage
lending. Unfortunately, lenders are now facing an unprecedented volume
of repurchase demands from investors looking to recoup losses. A
portion of these are legitimate requests and are being honored, as they
should be. However, lenders are finding more and more loans being sent
back for repurchase for minor, technical mistakes that had no impact on
loan performance.
Take, for example, a loan where the borrower had been paying his or
her mortgage on time for several years, lost a job, couldn't pay the
mortgage and went into default. Investors will sometimes scrutinize
loan documents to find a minor, immaterial infraction, like a forgotten
signature, and force the loan back to the originator for repurchase.
This is not why the process was put into place.
Lenders do have means to contest and defend repurchase requests,
but they are time-consuming and expensive. Instead of underwriting and
funding new loans for qualified borrowers, lenders have to go back
through old loan files and prepare a defense against the repurchase
claims. Even when the lenders prevail, they are forced to dedicate
scarce capital and staff time to adjudicate these cases. This is
disproportionally hurting smaller, independent community lenders who
simply don't have the resources to research, respond to and contest the
flood of repurchase demands they are facing.
Consumers are paying the ultimate price because buyback requests
for such minor mistakes only serve to make lenders even more cautious
when making new loans. The knowledge that every loan that defaults, no
matter how well it is documented and underwritten, could result in a
costly repurchase request, is forcing lenders to qualify only borrowers
with the most pristine credit histories, highest incomes and
significant cash reserves. Again, the impact is magnified for smaller
lenders with more limited resources to handle repurchase requests.
Lenders, regulators, the GSEs and other investors need to coalesce
in order to develop guidelines for the type of loan defects that are
and are not eligible to be put back on lenders. Loans that have been
performing for several years, and default with no signs of lender fraud
or underwriting deficiencies, should not be pushed back on the lender.
If a loan defaults and a flaw in the loan documents is found, the
investor should be required to demonstrate that the defect was material
to the default. Such flaws also should be based on objective criteria,
not a subjective opinion rendered after the fact.
MBA notes that correspondent lenders add their own credit overlays
to loans they purchase from other lenders in order to limit their
repurchase risk exposure. These ``downstream lenders'' tend to be
local, community or independent mortgage banks that do not have the
volume or corporate structure to deal directly with the GSEs. MBA
believes consumer access to credit would be greatly enhanced if GSE
repurchase requests also were addressed in the correspondent lending
channel.
MBA also notes an unfortunate conflict arising between HARP
provisions and State law. Some State laws impose specific underwriting
requirements on high-LTV loans, such as requiring a physical appraisal
and determining a borrower's ability to repay based on consideration of
specific statutory information. One of the GSEs' HARP rep and warrant
provisions is that lenders must stipulate the HARP loan complies with
all laws. Therefore, a lender would be required to repurchase a loan
that violated a State law high-LTV loan requirement even if they were
otherwise compliant with this bill, or existing HARP 2 provisions. We
strongly urge you to resolve this matter.
Future of the GSEs
MBA is firmly aligned with the Subcommittee's desire to attract
private capital to fund loans for a broad spectrum of qualified
borrowers, not just to help in the economic recovery, but for the long-
term. The current mortgage market relies far too heavily on Government
support, edging out private investment. This is neither desirable nor
sustainable. MBA believes the long-term stability of the real estate
market requires a vibrant secondary mortgage market that relies, first
and foremost, on private capital. However, the status quo of
overwhelming involvement by FHA, Fannie Mae and Freddie Mac has helped
to create insufficient private liquidity. It is time for the future of
the GSEs and the role of the Federal Government in housing finance to
be addressed in a comprehensive manner. MBA believes there is a need
for a clear definition of the Government's role in the mortgage
market--an explicit, limited guarantee of the securities, but not the
entities--paid for by actuarially sound, risk based fees, with the
entities tightly regulated as to their activities, risk-based capital
and the types of mortgages they can guarantee.
Conclusion
In conclusion, let me reiterate that MBA strongly supports the
intent and objectives of this proposed legislation. We believe the
Responsible Homeowner Refinancing Act of 2012 is a commendable effort
to reduce the costs and other barriers on-time borrowers face in
benefiting from today's historically low interest rates. We further
believe the bill's rep and warrant provisions are a welcome attempt to
solidify the allocation of responsibilities between the GSEs and their
lender business partners. Given the balance of multiple considerations
this bill poses, we urge this Subcommittee and the Congress to continue
to work with all engaged stakeholders as this dialogue moves forward.
In particular, we urge the Subcommittee to revisit the provisions
regarding subordinate liens and mortgage insurance.
All stakeholders in our housing finance system have an interest in
seeing the market rebound, and only together can we establish a housing
finance system that provides affordable housing finance options to as
many qualified borrowers as possible in a safe and sound manner. MBA
stands ready to serve as a resource to help you evaluate the economic
and policy tradeoffs to these various approaches.
______
PREPARED STATEMENT OF LAURIE S. GOODMAN
Senior Managing Director, Amherst Securities
April 25, 2012
Chairman Menendez, Ranking Member DeMint, and Members of the
Subcommittee, I thank you for your invitation to testify today. My name
is Laurie Goodman and I am a Senior Managing Director at Amherst
Securities Group, L.P., a leading broker/dealer specializing in the
trading of residential and commercial mortgage-backed securities. We
are a market maker in these securities, dealing with an institutional
account base: financial institutions, money managers, insurance
companies, and hedge funds. I am in charge of the Strategy area; we
perform extensive, data-intensive studies as part of our efforts to
keep ourselves and our customers informed of critical trends in the
residential mortgage-backed securities market.
In my testimony today, I will discuss actions that can be taken to
help responsible homeowners save money through refinancing, without
disrupting the very well functioning Agency mortgage market. I will
limit my comments to the refinancings of GSE mortgages, which are the
mortgages in which the GSEs already bear the risk. My number one
suggestion will be to allow for competition by permitting a different
servicer to refinance a borrower on the same terms that apply to the
current servicer. This will result in much better rates to the
borrower, and much more refinancing of the targeted Home Affordable
Refinance Program (HARP) population.
It is very clear that responsible borrowers with high loan-to-value
ratios (many of whom are underwater) or low FICO scores, who do not
hold a GSE or FHA/VA loan--have no or very limited refinancing
opportunities. Their counterparts, with higher FICO scores and lower
LTVs, can refinance through the GSEs; if such loans exceed the maximum
loan size limits, then bank portfolios are willing to take the risk. We
believe that a broader refinancing plan which allows the transfer of
risk on higher loan-to-value ratio (i.e., underwater) mortgages owned
by bank portfolios or investors in private label securities, to the
Government, would basically be a taxpayer bailout for both bank
portfolios and private label investors. We believe this would be a very
inefficient application of taxpayer money.
Sizing the Refinancing Opportunity
The Home Affordable Refinancing Program was initially rolled out on
April 1, 2009. This program was designed to help GSE borrowers who have
LTVs (loan to value ratios) greater than 80 refinance into another GSE
mortgage. At the outset, the program was referred to by the industry as
HARP 1.0, and included borrowers with LTV ratios of 80-125 who took out
loans prior to June 1, 2009. It was initially hoped that this program
would help 4-5 million borrowers. However, from April 1, 2009-February
28, 2012, only 1.12 million borrowers, a disappointingly low number,
were aided by the program. As Government officials and market
participants scrutinized the data, it became very clear that higher
LTV, lower FICO borrowers were still refinancing much more slowly than
their more creditworthy (lower LTV, higher FICO) counterparts. This is
best illustrated by looking at the prepayment speeds on 2008-issued
FNMA and FHLMC 4.5, 5.0, 5.5, and 6.0 passthrus during the period of
low rates in late 2010, as shown on the left side of Exhibit 1 (next
page). The lower coupon borrowers--the 4.0s and 5.0s--prepaid more
rapidly than the higher coupons--5.5s and 6.0s. This counter-intuitive
behavior, where mortgages with less incentive to refinance (less
potential savings) were prepaying more rapidly, clearly reflected the
difference in credit-worthiness between the coupons. I.e., if two
borrowers took out a mortgage at the same time, the less credit-worthy
borrower would have had to pay more (a higher interest rate,
translating into a higher coupon) for the mortgage. These differentials
in borrower quality can be seen on the right side of Exhibit 1. For
example, for the 2008 4.5s, 44 percent of borrowers are in the highest
quality bucket--they have mark-to-market LTVs of =80 and a FICO of
=750. However, only 14 percent of borrowers among the 2008 6.0s are in
the highest quality bucket. By contrast, only 14 percent of the 2008
4.5s have an LTV >80 and a FICO <750, while the representation is 38
percent for the 6 percent coupon. In short--the higher coupon, more
credit-impaired borrowers, who are more apt to default, were prepaying
far less quickly than their non- credit impaired counterparts. The
salient fact to bear in mind is that the borrowers that create the most
risk for the GSEs, would benefit the most from a refinancing, and would
benefit the taxpayers the most from a refinancing, were actually the
least likely to get a refinance opportunity!
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Armed with this information, the FHFA, Fannie Mae, and Freddie Mac
were determined to ``correct'' the situation. On October 24, 2011, the
FHFA, Fannie Mae, and Freddie Mac announced a series of HARP changes to
allow the program to reach more borrowers. Effective December 1, 2011,
the 125 LTV cap was lifted for new fixed rate loans, some ``rep and
warrant'' features were relaxed (which also served to bring Fannie and
Freddie more into line), and the program was extended for one more year
to year-end 2013 to encourage banks to invest more in personnel and
systems to ensure program success. For program eligibility HARP 1.0
required mortgages to be issued prior to the June 1, 2009; this cutoff
date remained firmly intact. This revised program is often referred to
as HARP 2.0.
It is useful at this point to take a step back and look at
aggregate refinancing activity since HARP was introduced in April 2009.
The FHFA, in their February 2012 Foreclosure Prevention and Refinance
Report, noted that as of February 2012 the HARP program had
cumulatively aided 1.12 million borrowers. (This refers only to
refinances on mortgages with a mark-to-market (MTM) LTV >80, where the
initial mortgage was issued before the 6/1/2009 cut-off date). In
addition, another 1.98 million borrowers have taken advantage of
streamlined refinance programs. These streamlined refinance programs
essentially follow the HARP framework, and are targeted for borrowers
with mark-to market LTVs =80, where the initial mortgage was issued
before the 6/1/2009 cut-off date. (Both Fannie and Freddie had
streamlined programs in place prior to the introduction of HARP. Fannie
replaced theirs with a HARP look-alike when the HARP program was
implemented in 2009. Freddie kept their streamlined program in place
until early 2011.) In addition to the 1.12 million HARP refinances, and
the 1.98 million streamline refis, there have been another 7.63 million
refis, raising total activity from 4/1/2009 to 12/31/2011 to a total of
10.73 million borrowers.
Now let's look forward. Exhibit 2 (below) sorts the universe of
borrowers into groups. We classify borrowers first by whether they meet
the HARP eligibility date (before June 1, 2009), then we sort according
to mark-to-market LTV (the loan-to-value ratio based on valuing a home
at today's actual, realistic current market price). We then sort each
group by whether the pay history would conform to that required by the
GSEs to be eligible for a HARP refi (i.e., no delinquencies in the past
6 months; no more than 1 delinquency in the past year). Finally, we
sorted by whether the borrower is refinanceable or not. For simplicity,
we assume a cut-off mortgage rate of 4.75 percent or higher for a 30-
year fixed rate loan; 4.25 percent on a 20-year; 4 percent for a 15-
year; and 3.5 percent for an ARM. Essentially, we assume the borrower
needs to have an incentive of 50-75 bps to be considered in-the-money
(for a refinancing); we use this to determine willingness to refinance.
(Our results should be regarded as an upper bound; we do not account
for borrowers or loans that may be ineligible as the property was
always used as an investor property).
The numbers are quite interesting. There are currently 10.9 million
borrowers who took out loans before the June 1, 2009, cut-off date, are
eligible for a streamline refinancing based on pay history (no
delinquencies in the past 6 months, no more than 1 in the past year)
and have an incentive to refinance. There are another 3.3 million
borrowers who are eligible for HARP 1.0 and HARP 2.0, and have an
incentive to refinance. In addition, due to the expansion of the 125
LTV ceiling, HARP 2.0 allowed for another almost 700,000 eligible and
incented borrowers.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
If we look after the cut-off date, there are another 4.8 million
borrowers who have LTVs less than 80, a good credit history and are
incented to refinance. These borrowers are not eligible for any
streamlined program. However, given that 71.1 percent of the
refinancings during the 4/1/2009-12/31/2011 period came from this
borrower group (7.63 million nonstreamlined refis/10.73 million total
refis), it is clear that many of these borrowers will be able to
refinance anyway. There are 2.1 million post cut-off borrowers with
strong pay histories who are between 80-125 LTV and another 29K
borrower who are over 125 LTV.
There are two separable issues. The first is what can be done to
increase the penetration of the borrowers that HARP is meant to reach.
The second is whether the scope of the HARP program should be
increased. We feel that there are a number of definitive steps that
should be taken to increase the penetration of the HARP program, and
our feelings are much more mixed on increasing the scope of the
program.
Allowing Different Servicers To Refinance on the Same Conditions as
Same Servicers
We have long argued that the single most effective change that can
be made to the HARP program is to encourage competition by allowing
different servicers to refinance a borrower on the same terms as the
current servicer is able to do. We believe this would create many more
refinances for the targeted HARP-eligible population, and those
refinances would be done at a considerably better rate to the borrower.
Under HARP 2.0, for both Fannie and Freddie, the current servicer
is released from all borrower representations and warrantees on both
the old loan and the new loan if three conditions are met:
The borrower has been current for the past 6 months and has
no more than one delinquency in the past year.
Employment (or a source of nonemployment income) must be
verified. Note that this is not a verification of income, just
a verification that there is a source of income.
The borrower must meet the net benefit provisions of a
refinance (it must reduce his payment, term, or move him into a
more stable product).
By contrast, different servicers are required to gather more
information on the borrower and are required to take the rep and
warrant risk on the new loan. For Fannie, there is a maximum debt-to-
income ratio in Desktop Underwriter (Fannie's automated underwriting
program) and there are requirements for the servicer to gather income
information. For self-employed borrowers, a Federal tax return is
required. For Freddie Mac, a different servicer refi requires that the
borrower have no delinquencies in the past year (a same servicer refi
allows one). In addition, the servicer must do a full underwrite,
including a current pay stub, W-2 forms for the last 2 years, verbal
verification of employment, as well as verification of assets to show
the funds are available to close. Since the servicer is taking the rep
and warrant risk on the new loan, most of the servicers we have talked
to require the full underwrite on Fannie loans as well as Freddie
loans.
To summarize the comparison between same and different servicer
refis under HARP 2.0--different servicer refis require servicers to
gather more information about the HARP 2.0 borrower than would be the
case under a same servicer refinance. Moreover, under different
servicer refis, the servicer is not released from borrower reps and
warrants on the new loans. We also believe same servicers have greater
access to Freddie Mac's Home Value Explorer and Fannie Mae's Automated
Valuation Model, which entitles the servicer to greater relief from the
property reps and warrants. Thus, same servicers have a huge advantage
in doing refinancings. Essentially, HARP has a design flaw that
eliminates put-back risks, to the detriment of the GSEs, while
simultaneously prevents the borrower from obtaining a competitive rate.
The Menendez-Boxer Discussion Draft contains a much smarter method
to handle the rep and warrant risk--allow different lenders/servicers
to enjoy the same rep and warrant relief as is currently enjoyed by the
current lender/servicer. Under that discussion draft, it does not
matter who does the refinance--neither the current nor a different
lender/servicer would have any put-back risk on the new loan, and the
put-back risk on the old loan is waived. Thus, the GSEs are in the same
position they are in now, but the borrower is able to obtain a
competitive rate as there is competition to extend the new loan.
We have noted that as the program is currently structured, a same
servicer refinancing is hugely advantaged, allowing the servicers to
charge the borrowers a higher rate. The benefits of this accrue
disproportionately to the top 3 servicers, who service well over 50
percent of the eligible loans. In actuality, a same servicer
refinancing of a HARP loan should actually be less costly to the
borrower than a nonadvantaged refinancing because: (1) the servicer has
less put-back risk, (2) less information collection is necessary, and
(3) investors are willing to pay more to obtain these so called
``Making Home Affordable'' (MHA) loans, as these loans have limited
ability to refinance again. Thus, the servicer is able to capture a
specified pool pay-up on these loans. (The borrower has limited ability
to refinance again; if his LTV is >95 he would be unable to refinance
even with mortgage insurance. If his LTV is 80-95, he would need to
take out mortgage insurance at current market levels, and the costs of
this insurance would be high.) The lack of competition has also
exacerbated the capacity constraints in the system, as the most
capacity constrained lenders are the only ones that can effectively
refinance borrowers with LTV >80.
To give a hypothetical illustration of how profitable this
operation is to a same servicer, let us assume the same servicer
originates a 4.5 percent loan to a borrower with a 95-100 LTV. (This
rate is about 35 basis points above the Freddie Survey Rate, and is
typical of the rate charged to a borrower in this LTV bucket). The loan
would typically have a 25 bps guarantee fee (ignoring loan level
pricing adjustments), and the servicer would generally retain 25 bps of
servicing. This retained servicing is worth $1.25 per $100 par to the
servicer. Thus, this loan could be sold into a Fannie Mae pool, bearing
a 4.0 percent coupon. This would command a price of $105.58 per $100
par in the secondary market. In addition, the investor would pay
another $1.15 for a pool consisting of refinance loans in the 95-100
LTV bucket, as the investor is betting that it is more difficult for
these loans to refinance. Thus, the proceeds to the servicer are
$107.98 ($105.58 +$1.25 +$1.15) for $100 in debt; assuming a $0.50
origination charge, the servicer is making $7.48 on this loan. Thus, on
a $200,000 loan, the total profitability to the servicer is $14,960. To
put this into perspective, the profitability of mortgage originations
over the past decade (taking into account variable but not fixed costs)
has averaged in the neighborhood of 1-2 points or $2,000-$4,000 on a
$200,000 loan.
Loan Level Pricing Adjustments, Appraisal Fees, Bank Costs
Thus far in our example, we have ignored the loan level pricing
adjustments charged by Fannie Mae and Freddie Mac. These are capped at
0.75 points (0.75 percent of the loan amount), or $1,500 on a $200,000
loan under HARP 2.0. (The loan level pricing adjustments are capped at
2.0 points for 30-year non-HARP, streamlined refis and uncapped for
refis of loans originated post 6/1/2009). And if the loan had needed an
appraisal this would cost another $500-$750. Compare this to the
$14,960 the originator/servicer is making because the borrower is
paying above market rates. Yes, we are in favor of eliminating loan
level pricing adjustments and all appraisals in situations where Fannie
and Freddie already have the risk on the mortgage, but we believe the
elimination of these items would result in a very marginally lower rate
to the borrower. To significantly reduce the frictions in the system,
it is necessary to recognize the fact that the largest banks have been
given the opportunity to extract monopoly profits on HARP refis, and
they have taken advantage of this. If you want to lower the cost of a
refinancing to the borrower, allow different servicers to refinance on
the same terms as the same servicer.
Program Inconsistencies Between Fannie and Freddie
The Menendez-Boxer Discussion Draft would require FHFA to issue
guidelines requiring that Fannie and Freddie make their refinancing
programs consistent to ease lender compliance (especially with respect
to loans below 80 LTV and to closing cost policies). We think this is a
good idea.
The HARP program only covers loans with LTV >80, issued before the
cut-off date. Fannie and Freddie were entitled to promulgate their own
rules for loans with LTVs =80. Fannie and Freddie both decided to allow
the same streamlined refinancing procedure for loans =80 LTV issued
before the cut-off date as applies to HARP loans. However, Fannie opted
to waive the lenders' rep and warrant risk on same servicer refinances,
whereas Freddie opted not to do so. Thus, for Freddie loans =80 LTV,
there is no same servicer rep and warrant relief on the new loan. We
have hypothesized that Freddie servicers would be incented to refinance
the HARP 2.0 borrowers first, before their lower LTV counterparts, as
they are able to shed the rep and warrant risk on the old and new loan.
In any case, this is illogical and confusing to lenders.
There is also a small difference in the treatment of closing costs
that should be made uniform. Fannie refinancings allow for the pay-off
of the first lien mortgage, the financing of closing costs and no more
than $250 cash to the borrower. Freddie refinancings on >80 LTV loans
are slightly less generous, capping closing costs at 4 percent of the
current unpaid principal balance of the loan or $5,000, whichever is
less, and limiting the cash to the borrower to $250. Freddie
refinancing on =80 LTV loans are slightly more generous than Fannie,
allowing for all closing costs to be financed (as with Fannie); while
permitting up to 2 percent of the loan amount or $2,000, whichever is
less, to be taken as cash to the borrower.
Automatic Transfer of Mortgage Insurance and Second Liens
The Menendez-Boxer Discussion Draft provides for the automatic
transfer of mortgage insurance and second liens. More precisely, it
requires that second liens and mortgage insurance be automatically
portable under the same terms to a newly refinanced loan if the second
lien holder or mortgage insurer wants to sell loans to the GSEs. While
we are in favor of these items, we do not believe the second lien issue
has been a major obstacle to refinancing. We also believe that most of
the mortgage insurers have voluntarily agreed to make the policies
fully portable; it is our understanding that United Guaranty is the
only hold-out.
It is important to realize that a refinancing on a first mortgage
makes the second lien more valuable, as it makes the costs of home
ownership more affordable, and hence makes the borrower less likely to
default. Thus, the second lien holder is generally happy to
resubordinate his interest. And the first lien holder rarely has a
problem locating the second lien holder. In fact, our work has shown
that, controlling for other factors, there was only a marginal
difference in the prepayment speeds between borrowers who had a second
lien and those that did not. Nonetheless, requiring subordination to
assure continued GSE access seems reasonable, and would help at the
margin.
Mortgage insurers will generally treat a refinance as a
modification of the existing policy in order to port the policy to the
new loan. In a same servicer refinancing, the reps and warrants made by
the originator of the original loan to the MI provider remain in
effect. However, this is only possible when the existing servicer
refinances the loans; in a different servicer refi the risk to the MI
provider is increased, as the MI provider loses the reps and warrants
on the original loan. Under HARP 1.0, if there was a servicer change,
some MIs required a new MI certificate at market rates, others charged
a surcharged or imposed other costs, and others required increased
documentation. During the negotiations for HARP 2.0, most of the major
mortgage insurers voluntarily agreed to allow the insurance policies to
be fully portable, in spite of the fact that it is not in their
economic interest to do so. We are told there was only one hold out,
United Guaranty, an AIG subsidiary, which imposes a surcharge on a
different servicer refis. We believe that all mortgage insurers should
allow for full portability, even in the event of a servicer change.
Moving the Cut-Off Date Until 6/1/2010
The Menendez-Boxer Discussion Draft requires the cut-off date be
moved from 6/1/2009 to 6/1/2010. This move was suggested because the
latter date was approximately when 30-year fixed rates loans dropped
below 5 percent, and would allow borrowers whose loans were originated
at higher rates to take advantage of refinancing.
If we use the same framework as in Exhibit 2, it would raise the
number of pre-cut off borrowers (=80, 80-125, >125) who have good pay
history and are in-the-money (have an economic incentive to refinance)
from (10.9 million, 3.3 million and 700 thousand) to (13.0 million, 4.2
million and 700 thousand). Therefore the number of post-cut off
borrowers (=80, 80-125, >125) who have a good pay history and are in-
the-money drops from (4.8 million, 2.1 million, 30 thousand) to (2.6
million, 1.1 million, 18 thousand).
We believe that the streamlined refinance program should be
expanded for borrowers with LTVs =80, with or without rep and warrant
relief. (Providing rep and warrant relief is expensive for the GSEs.)
This action alone would increase the number of eligible borrowers by
2.1 million. However, these are borrowers who most likely would have
been able to refinance anyway, this just makes the refinancing process
easier. Would these borrowers be ``crowding out'' the pre-cutoff
borrowers who need the help more? The answer to this is unclear. It
might divert some resources, at the margin, but would allow for many
more refinances.
For HARP loans, it is a much harder call; we have very mixed
feelings about the proposal and are on balance negative. We recognize
that it will give an extra 900 thousand borrowers the opportunity to
refinance, and these are borrowers who would otherwise not be able to.
This benefit has to be weighed against the ``covenant with investors.''
The FHFA has repeatedly reiterated the importance of the cut-off date.
The date was also used as the FHA cut-off; the FHA decided to roll-back
the Mortgage Insurance Premium for refinancing loans originated before
the cut-off date. Investors have relied upon that date and developed a
series of pay-ups on mortgages with this refinance friction. Changing
the date would be very disruptive to this covenant. The Agency mortgage
market is wide and deep, regarded as the second most liquid market in
the world behind the U.S. Treasury market. We believe that ``breaking
the covenant'' with investors would be very damaging to the health of
this market; if the date is moved once, market participants (investors,
borrowers, and originators/servicers) will assume it will be moved
again.
This could, in turn, create a set of adverse incentives. If
originators/servicers believe that an expansion of HARP 2.0 could allow
reps and warrants to be stripped off future loans, it could entice
originators to make more questionable loans, and then, a few months
later, target those loans to get rep and warrant relief.
We believe there is a continuum. Changing the cut-off date for
streamlined refinancings of loans with LTV =80 would be minimally
disruptive. If there is a groundswell of support to move the HARP date
forward by 1 year, we would suggest that it be done for purchase loans
only. Since allowing re-HARPing, and changing the dynamics of specified
pool trading would be extremely disruptive.
Increasing Homeowner Awareness
The Menendez-Boxer Discussion Draft would require the GSEs to send
eligible borrowers an official notice that they are eligible for
refinancing at a lower rate, with an indication as to how much they
would save each month. The notice would include referrals to Internet
portals where the borrower could determine the type of loan they have,
and get quotes from competing lenders. This is simply a notice to
increase homeowner awareness. It is hard not be in favor of this type
of action.
Conclusion
HARP 1.0 clearly fell short of expectations. The verdict on HARP
2.0 is still out. However, we believe that HARP 2.0 (for borrowers >80
LTV, loans made before the cut-off date) and current streamlined
refinancing programs (for borrowers less than 80 LTV, loans made before
the cut-off date) could be much more effective if different servicer
refinances were to be permitted on the same terms as the current
servicer. We believe that promoting competition is the single most
important action that can be taken to increase the impact of the
program. It is also the single most powerful action that can be taken
to decrease the mortgage rates and fees paid by the borrower.
We are very much in favor of a consistent set of guidelines for
Fannie and Freddie in order to ease lender compliance. We would like to
see pre-cut off Freddie loans with LTVs =80 LTV receive rep and warrant
relief, consistent with pre-cut off Freddie loans with LTVs >80 and all
pre-cut off Fannie loans. We would also like to see consistency on the
financing of closing costs.
Other actions, such as eliminating loan level pricing adjustments
and appraisals, are relatively minor. Borrowers are paying high fees
because the banks are making oligopoly profits. These costs can be
lowered by promoting competition. Similarly, requiring resubordination
of second liens and portability of all mortgage insurance policies are
nice features, but will only help at the margin. It is in the economic
interest of second lien holders to resubordinate. Most mortgage
insurers have already agreed to full portability.
We would like to see more penetration of the existing HARP program
by promoting competition and making borrowers aware of their
refinancing options before expanding the eligibility by moving the cut-
off date forward by 1 year. If the cut-off date were to be changed, it
can most easily be done for borrowers with LTVs =80, as there was never
a ``covenant with investors'' on these loans. If it is to be done on
HARP loans, we would suggest doing it on purchase only loans. Allowing
re-HARPing would be very detrimental to a well functioning market.
Thank you very much for the opportunity to testify on this
important set of issues.
______
PREPARED STATEMENT OF ANTHONY B. SANDERS
Professor of Finance, George Mason University School of Management
April 25, 2012
Senator Menendez and distinguished Members of the Subcommittee, my
name is Dr. Anthony B. Sanders and I am the Distinguished Professor of
Finance at George Mason and a Senior Scholar at the Mercatus Center. It
is an honor to testify before this Subcommittee today.
The proposal to be discussed at this hearing is the expansion of
affordable refinancing of mortgages held by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation.
The expansion represents changes in HARP that eliminates Loan Level
Price Adjustments (LLPAs), eliminates representations and warrants for
cross servicer refinancing and appraisal streamlining and orders Fannie
Mae and Freddie Mac to contact borrowers directly about HARP
opportunities.
It can be argued that Fannie Mae and Freddie Mac are resisting loan
modification to protect their retained portfolios. Hence, fewer
borrowers are able to refinance their mortgages. This proposal would
remove the safeguards from HARP and encourage more refinancing by
borrowers.
Even so, I would encourage a detailed examination of the projected
benefits to consumers and costs to American taxpayers of these proposed
changes by FHFA, the Congressional Budget Office and The Federal
Reserve Board before you proceed. Administrations and Congress have
undertaken large policy changes in housing and housing finance
(particularly since 1995) and these changes had unintended
consequences. Removing the safeguards may be appropriate, but we need
detailed studies of the 14 Federal Government loan modification
programs and how they interact with each other and The Federal
Reserves' monetary easing strategy.
Lessons From Jurassic Park
The Clinton Administration embarked on a well-intended strategy of
increasing the home ownership through the expansion of credit to lower-
income households. The first leg in the ``housing finance trifecta''
was the National Home Ownership Strategy: Partners in the American
Dream (1995). \1\
---------------------------------------------------------------------------
\1\ http://confoundedinterest.wordpress.com/2012/04/20/parsons-
blames-glass-steagall-repeal-for-crisis-but-glass-steagall-was-only-
13rd-of-clintons-housing-trifecta/
The partnership should support efforts to increase local lender
awareness and use of the flexible underwriting criteria
---------------------------------------------------------------------------
established by the secondary market, FHA, and VA.
The result was
A focused effort to target the ``low income'' borrower
through extensive outreach
The drastic reduction of minimum downpayment levels from 20
percent to 0 percent
And the ``partners'' for this ``Great Leap Forward'' in home
ownership included Fannie Mae and Freddie Mac who are now in Government
conservatorship under the Federal Housing Finance Administration.
The second leg in the ``housing finance trifecta'' was President
Clinton's desire to set capital gains tax on housing to zero (1997).
Tonight, I propose a new tax cut for home ownership that says
to every middle-income working family in this country, if you
sell your home, you will not have to pay a capital gains tax on
it ever--not ever. --President Bill Clinton, at the 1996
Democratic National Convention
With the first two legs of the housing finance trifecta, the
Clinton Administration was encouraging riskier low downpayment
mortgages coupled with no capital gains tax on housing, a recipe for a
massive increase in housing prices. This coincided with an explosion of
GSE debt (mostly Fannie Mae and Freddie Mac) to fund the required
mortgage debt expansion (see, Figure 1).
The third leg of housing finance trifecta was the repeal of the
Glass-Steagall Act of 1933. Deregulation per se is not damaging to the
economy (and is often beneficial), but the shock of such a major
regulatory change in conjunction with two large shocks in housing
policy make it extremely difficult to predict the outcomes and
unintended consequences. This is especially true when the Clinton
Administration insisted that no merger may proceed if any of the
financial holding institutions, or affiliates thereof, received a
``less than satisfactory [sic] rating at its most recent Community
Reinvestment Act exam,'' essentially meaning that any merger may only
go ahead with the strict approval of the regulatory bodies responsible
for the CRA. The Clinton Administration stressed that it ``would veto
any legislation that would scale back minority-lending requirements.''
\2\
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\2\ See, http://partners.nytimes.com/library/financial/
102399banks-congress.html.
---------------------------------------------------------------------------
Taken together, the trifecta clearly was a major policy change to
an extremely complex economy. I am unaware of any research at HUD from
their Policy, Development and Research group examining how the three
legs would work together and what the joint intended and unintended
consequences would be. This type of major policy shift can have
Jurassic Park type of unintended consequences for the housing market,
the mortgage market and borrowers. The Clinton trifecta ultimately
resulted in the taxpayers being eaten by the monster that was created
(as in $7.4 trillion in household equity being lost and millions of
borrowers in default or foreclosure).
In summary, I strongly believe that any change in policy for the
housing and mortgage market must be accompanied by sound theory and
econometric models of the policy impact. If we don't have the
appropriate theory or data, we shouldn't do it. It will simply unleash
more taxpayer-eating dinosaurs on the economy.
The 14 Federal Government Loan Modification Programs
There are currently 14 Federal Government loan modification
programs:
Home Affordable Modification Program (HAMP)
Principal Reduction Alternative (PRA)
Second Lien Modification Program (2MP)
FHA Home Affordable Modification Program (FHA-HAMP)
USDA's Special Loan Servicing
Veteran's Affairs Home Affordable Modification (VA-HAMP)
Home Affordable Unemployment Program (UP)
Second Lien Modification Program (2MP)
Home Affordable Refinance Program (HARP)
FHA Refinance for Borrowers in Negative Equity (FHA Short
Refinance)
Treasury/FHA Second Lien Program (FHA2LP)
Home Affordable Foreclosure Alternatives (HAFA)
Housing Finance Agency Innovation Fund for the Hardest Hit
Housing Markets (HHF)
Attorneys General Settlement for Mortgage Servicers (AGS)
We anxiously await the results on HARP 2.0 and the Attorneys
General Settlement has yet to kick in. In addition, there is pressure
from the Administration and Congress on having FHFA approve principal
reductions for the GSEs.
The Evidence so Far
The U.S. Department of Treasury provides us with a limited summary
of the magnitude and effectiveness of HAMP and other programs. \3\ But
the number that stands out is that approximately 25 percent of modified
mortgages go into redefault after 1 year. \4\ True, the data is from
2010, but the trend for most recent modifications shows the same
daunting trend.
---------------------------------------------------------------------------
\3\ See, http://www.occ.treas.gov/publications/publications-by-
type/other-publications-reports/index-mortgage-metrics.html.
\4\ See, Table 25 of the most recent OCC Mortgage Metrics Report.
http://www.occ.treas.gov/publications/publications-by-type/other-
publications-reports/mortgage-metrics-2011/mortgage-metrics-q4-2011.pdf
---------------------------------------------------------------------------
According to the Mortgage Bankers Association (MBA) Mortgage
Refinancing Index, mortgage refinancing applications have been
increasing since the beginning of 2011 (see, Figure 2). \5\ With
historically low mortgage rates, unprecedented intervention by the
Federal Reserve, and the continued European debt crisis that is driving
investors into the U.S. Treasury market. \6\ We are in unchartered
territory on Fed intervention and mortgage rates and we have to be
careful not to create more unintended consequences that could devastate
American taxpayers.
---------------------------------------------------------------------------
\5\ In the short run, HARP 2.0 is improving bank gain-on-sale
margins http://www.housingwire.com/news/harp-20-improving-bank-gain-
sales.
\6\ See, http://confoundedinterest.wordpress.com/2012/04/18/mba-
refinance-applications-up-13-5-purchase-applications-down-11-2-harp-at-
32-of-refi-volume/.
---------------------------------------------------------------------------
While this proposed expansion of HARP does not include principal
write downs, bear in mind that it is virtually impossible to accurately
predict the outcomes of HAMP and HARP if FHFA agrees to principal
reductions AND the Attorneys General Settlement (which includes
principal reductions). Before proceeding, I suggest a study from the
Congressional Budget Office, FHFA and The Federal Reserve on the joint
effects of all programs kicking in together.
I appreciate the difficulties faced by FHFA and others about
predicting the success rates for HAMP and HARP. We simply do not have
adequate data to make a sensible recommendation, particularly with
regard to principal write downs. Reuters made an attempt to model
principal reductions from Fannie Mae and Freddie Mac and estimated they
could cost taxpayers $128 billion. \7\ This is a much bigger number
than FHFA has indicated ($2.1 billion) and far more than the available
TARP funds ($41.7 billion). Likewise, we can only guess at the final
success of HARP and the Attorneys General Settlement. And there is the
moral hazard of principal reductions that must be considered in any
analysis (that is, will borrowers fall behind in their payments simply
to qualify for a mortgage write down?).
---------------------------------------------------------------------------
\7\ See, http://confoundedinterest.wordpress.com/2012/04/18/
reuters-uber-cool-mortgage-write-down-calculator-loss-to-taxpayers-of-
128-billion/.
---------------------------------------------------------------------------
Please exercise extreme caution and wait until we have more data as
to the effectiveness of the collected efforts of the 14 loan
modification programs AND the principal reduction proposals for FHFA.
And bear in mind that we only have data on loan modifications since
2008 and virtually no data over a long period (4 years) on principal
reductions.
Section 4: Having Fannie Mae and Freddie Mac Contact Borrowers Directly
Section 4 requires that Fannie Mae and Freddie Mac contact
borrowers directly about the possibility and benefits of a mortgage
modification. In addition, Fannie Mae and Freddie Mac must post
relevant refinancing information on their Web sites (see, Table 1 for
examples of existing Web sites).
Of course, this is an unprecedented change from current procedures.
Given the plethora of media and links on bank Web sites and Government
Web sites concerning loan modifications, I can't see how any borrower
interested in a loan modification could possibly not be aware of the
possibilities. And again, the lessons from Jurassic Park teach us that
large changes in Government policy can produce unintended consequences
(14 Government mortgage modification programs PLUS individual bank/
servicer/investor private mortgage modification programs). We must be
careful to avoid a firestorm of unintended consequences.
Should We Have Non-GSE Banks/Servicers Remove the Safeguards as Well?
I am on record above stating that careful analysis of the joint
impact of the 14 Federal Government loan modification programs should
be undertaken before any more changes are made (or new programs are
created). So, my answer is no, at least until the appropriate studies
are performed.
At some point, the collective impact of these programs could drive
our banks into bankruptcy. This possibility must be included in the
analysis before any further steps are taken.
Another reason that I am opposed to removing the loan modification
safeguards is that the banks and investors are private market concerns,
not private market concerns in conservatorship. Once again, this could
be a Jurassic Park moment where we signal to the world that the U.S.
will pass laws at will to alter contracts and dramatically change
investor expectations.
In summary, I encourage the Senate to request detailed studies on
the impact of this legislation before proceeding further. I strongly
suggest:
1. The cost of each proposed change to taxpayers and the expected
decline in default and redefault rates.
2. How these changes will interact the 14 existing loan modification
programs from the Federal Government and the proposed principal
write down proposals for Fannie Mae and Freddie Mac.
3. Ignore private market estimates of the costs and benefits if the
analysis comes from a firm that benefits from any of these
proposed changes or has ties to the Federal Government.
Let us be wary of creating another Jurassic Park policy change. We
are in unchartered waters for housing finance and Federal Reserve
policies and any further changes should be enacted with extreme
caution.
Thank you for the opportunity to testify.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
PREPARED STATEMENT OF MICHAEL CALHOUN
President, Center for Responsible Lending
April 25, 2012
Good morning Chairman Menendez, Ranking Member DeMint, and Members
of the Subcommittee. Thank you for inviting me to testify at today's
hearing on efforts to help homeowners refinance their mortgages through
responsible streamlined refinance policies.
I am President of the Center for Responsible Lending (CRL), a
nonprofit, nonpartisan research and policy organization dedicated to
protecting home ownership and family wealth by working to eliminate
abusive financial practices. CRL is an affiliate of Self-Help, a
nonprofit community development financial institution. For 30 years,
Self-Help has focused on creating asset-building opportunities for low-
income, rural, women-headed, and minority families, primarily through
financing safe, affordable home loans. In total, Self-Help has provided
over $6 billion of financing to almost 70,000 low-wealth families,
small businesses and nonprofit organizations in North Carolina and
across America.
In my comments today, I will highlight the following points:
First, time is still of the essence to improve the housing
market and prevent foreclosures, because the foreclosure crisis
is far from being over. Research completed by CRL shows that
the foreclosure crisis is around the halfway point for
borrowers with loans originated during 2004-2008.
Second, foreclosure prevention efforts, including
initiatives to help homeowners refinance their mortgage, are
necessary and still needed. Access to the Home Affordable
Refinance Program (HARP) is particularly important for
underwater homeowners and those homeowners still in a mortgage
with harmful features--including hybrid adjustable rate
mortgages (ARMs) and mortgages with high interest rates.
Opening up the refinance market to millions of American
families paying above market interest rates and currently
prevented from refinancing is a commonsense step that will
prevent foreclosures, improve homeowners' financial situation
and help the economy.
Third, while the improvements made in HARP 2 are
significant, more should still be done to increase refinancing
access to underwater borrowers and homeowners with mortgages
that have harmful features. This includes taking steps to
increase lender competition, further streamline the refinance
process and coordinate HARP outreach with other foreclosure
prevention programs. Additionally, CRL supports Congressional
action to expand refinancing opportunities through FHA for
borrowers with mortgages that are not owned or guaranteed by
the GSEs or FHA.
The U.S. Is Not Yet Halfway Through the Foreclosure Crisis
I'd like to begin my comments today by putting the current status
of the housing market in context. Last year, the Center for Responsible
Lending published research showing that the Nation is not yet halfway
through the foreclosure crisis. CRL's research, which is detailed in
our Lost Ground report, shows that for mortgages made during the height
of the lending boom that occurred between 2004 and 2008, 8.3 percent of
these loans were at least 60 days delinquent or in the foreclosure
process as of February 2011. This represents another 3.6 million
households that could possibly lose their homes. This is on top of the
6.4 percent of mortgages--totaling 2.7 million households--identified
in CRL's study that have already gone through foreclosure. Because our
research focused only on 2004-2008 originations, these estimates are
likely to be on the conservative side. For example, Moody's has
reported the completion of 5 million foreclosures or short sales.
In addition to highlighting the scope of the ongoing foreclosure
crisis, CRL's research also makes important findings about who is
likely to be affected by foreclosure. Our Lost Ground research confirms
that higher foreclosure rates and serious delinquency rates are linked
to mortgages with one of the following characteristics: having been
originated by a mortgage broker, containing hybrid or option ARMs,
having prepayment penalties, and featuring high interest rates
(subprime loans). Homeowners with mortgages that have one of these
features are much more likely to be seriously delinquent and at risk of
foreclosure than homeowners in a 30-year fixed-rate mortgage without a
prepayment penalty.
CRL's analysis in Lost Ground also confirms that foreclosures and
mortgage delinquencies continue to have a disproportionate impact on
African American and Latino borrowers. This disparity persists when
comparing borrowers with higher incomes. CRL's research also
demonstrates that African American and Latino borrowers were much more
likely to receive mortgages with harmful features as described above.
For example, African American and Latino borrowers with FICO scores
above 660 were three times as likely to have a high interest rate
mortgage than white borrowers in the same credit range.
The research published in Lost Ground is CRL's latest effort to
document the harmful impact of predatory and subprime lending. In fact,
this research builds on and updates CRL's 2006 study entitled Losing
Ground, which estimated that predatory lending would lead to
approximately 2.2 million foreclosures of subprime mortgages. While CRL
correctly predicted a likely foreclosure crisis, the number of
foreclosures has unfortunately been much larger than forecast, in part
because the crisis spread beyond the subprime market and into the
broader housing market.
As homeowners and communities struggle with ongoing foreclosures,
we encourage Members of this Subcommittee to continue all efforts to
find solutions that help families stay in their homes and prevent as
many foreclosures as possible.
Supporting Mortgage Refinancing Is a Needed Policy Tool To Avoid
Foreclosures and Help Homeowners Obtain Less Expensive and More
Stable Mortgages
Interest rates are currently at historic lows, but many homeowners
who stand to benefit from these low rates have not refinanced their
existing, higher-rate mortgage. Making refinancing more accessible for
underwater homeowners and those homeowners in mortgages with harmful
features should be an essential component of preventing foreclosures.
Millions of families across the country have seen the value of
their homes plummet over the last 5 years. According to the Fiserv
Case-Shiller house price index, housing prices have fallen by one-third
since the first quarter of 2006, and the statistics released yesterday
show that the housing market is still struggling. In the years leading
up to the housing market collapse, homeowners took out mortgages while
home prices were increasing. Unsustainable lending driven by Wall
Street investment bank demand for risky mortgages regardless of whether
borrowers could afford the loans fueled the housing bubble. The
subsequent drop in housing prices is a market price correction of the
housing bubble that has harmed current homeowners through no fault of
their own.
Decreased home prices have created complications for many
homeowners trying to refinance their mortgage. Homeowners have lost
over $7 trillion in home equity since the housing market collapse, and
approximately 11 million homeowners are now estimated to be underwater
on their mortgage, meaning that their mortgage balance is greater than
the value of their home. As a result, many of these homeowners have
been unable to refinance their mortgage because they now have a high
loan-to-volume (LTV) ratio well above standard underwriting
requirements.
Racial and ethnic differences in refinancing rates are a less-
discussed aspect of this issue, but an important one to examine. Home
Mortgage Disclosure Act (HMDA) data show that while the number of
refinance applications for Asian and non-Hispanic white borrowers
increased between 2008 and 2010, the number of refinance applications
for African American and Latino borrowers actually decreased. In
addition, CRL analysis shows that among borrowers current on mortgage
payments through February 2011, African American and Latino borrowers
remained more likely to be paying toward a high-interest (subprime)
loan than Asian and non-Hispanic white borrowers. While not conclusive,
these data suggest that many African American and Latino borrowers
would benefit from refinancing at today's historically low interest
rates, but that there remains significant frictions in the refinance
market that have prevented them from doing so.
The Federal Housing Finance Agency's announcement last year to
expand HARP to all underwater borrowers was a strong step in the right
direction. The initial HARP program was limited to borrowers with a
maximum LTV of 125 percent, and the revisions made in ``HARP 2'' have
removed this high-LTV restriction. HARP 2 program changes went into
effect on December 1, 2011.
The changes in HARP 2 have the potential to help underwater
borrowers and borrowers in mortgages with harmful features gain better
access to refinancing opportunities. To date, the majority of borrowers
entering into a HARP refinance fall between 80-105 percent LTV. Since
its inception in 2009 through February 2012, more borrowers with an LTV
between 80-105 percent benefited from HARP refinances (1.01 million)
than underwater borrowers with an LTV above 105 percent (110,000).
However, progress is being made with the improvements in HARP 2: more
borrowers with an LTV above 105 percent refinanced under HARP in
January and February 2012 than in any prior month.
Further Improvements to HARP 2 Should Be Designed To Maximize
Participation by Underwater Homeowners and Those Homeowners
Still in a Mortgage With Harmful Features
While the changes implemented in HARP 2 are very positive, we
believe that FHFA should take additional steps to expand access to
streamlined refinances of mortgages owned or guaranteed by Fannie Mae
or Freddie Mac. There is an urgent need to prevent as many foreclosures
as possible, and CRL supports changes that will maximize the
participation of underwater borrowers and those with mortgages that
have harmful features. Expanded access to streamlined refinances--along
with principal reduction in certain circumstances, principal
forbearance, and mortgage modifications--is an important part of the
solution.
Although FHFA has the authority to implement most of the
suggestions detailed below, in the meantime we also believe that the
Menendez-Boxer Discussion Draft would go a long way to further
improving borrower access to streamlined refinances.
First, CRL supports efforts to increase competition in offering
HARP refinances, which would result in better pricing and greater
access to refinancing opportunities. One way to accomplish this goal is
by putting servicers on par with one another regarding the waiver of
representations and warranties liability. Frequently called ``reps and
warranties,'' these statements require servicers to buy back a mortgage
if it later falls short of the characteristics promised when it was
originated. As Laurie Goodman has highlighted in her research,
servicers participating in HARP currently have reduced reps and
warrants liability if they are refinancing a mortgage already in their
servicing portfolio. However, servicers taking on a new mortgage to
refinance maintain full reps and warranties liability. Ms. Goodman and
her colleagues have persuasively argued that this differential
treatment reduces competition and, therefore, increases the cost of
HARP refinances.
Second, expanding HARP to all borrowers--regardless of LTV ratio--
would likely have several benefits. One benefit would be further
streamlining the refinance process by eliminating differences between
Fannie Mae and Freddie Mac's versions of HARP. It also would allow
borrowers who don't reach 80 percent LTV on their first mortgage but
have a combined LTV above 80 percent when factoring in a second
mortgage to qualify for HAMP refinances. This would put these borrowers
on par with borrowers over 80 percent LTV on a first mortgage alone.
Lastly, it would allow lower LTV borrowers who are unable to access
this market to actually obtain a refinance and at a lower cost.
Third, the Menendez-Boxer Discussion Draft language concerning
resubordination of second liens would also contribute to streamlining
the refinance process for these borrowers.
In addition to the Menendez-Boxer Discussion Draft language
concerning outreach to eligible borrowers, CRL encourages Fannie Mae,
Freddie Mac and FHFA to make every effort to coordinate their HARP
outreach efforts with other Federal agencies administering housing
initiatives. HARP is one part of a broader list of foreclosure
prevention initiatives, including the Independent Foreclosure Review
tied to the April 2011 Consent Orders between the banking regulators
and mortgage servicers; the Attorneys Generals and Administration
settlement involving refinancing and principal reduction; FHA
refinancing initiatives; and mortgage modifications through HAMP.
Coordinated outreach will help reach borrowers possibly eligible for
HARP or another program.
Finally, we support the Administration's proposal to pay the
closing costs of borrowers who refinance into shorter-term mortgages in
order to encourage principal reduction through quicker amortization.
The debt overhang facing borrowers needs to be addressed through
various means, and this is an important approach.
Given capacity constraints that would be further heightened by some
of these proposals, we do have concerns about opening up HARP to
investment properties. While investors would benefit from lower rates
and tenants are harmed when their landlords are foreclosed upon, we
believe the needs facing owner-occupants are so significant that
servicer capacity should continue to be focused on this group.
On top of the HARP improvements outlined above, CRL believes
several additional points merit further thought and consideration. One
is paying attention to whether lenders are adding overlays that limit
HARP's reach to underwater borrowers. It is especially important for
the refinancing market to serve underwater borrowers while also serving
those borrowers with a lower LTV ratio. Additionally, in developing
HARP outreach materials for eligible borrowers, we believe that
refinancing costs and fees should be included in these materials in
addition to the estimated monthly savings.
I want to end on a final point that also merits additional
Congressional action, which is expanding streamlined refinances to
borrowers in mortgages that are not owned or guaranteed by the GSEs or
FHA. The Administration's proposal to provide these borrowers with
streamlined refinancing opportunities through FHA would help both
underwater borrowers and those borrowers currently in mortgages with
harmful features, such as subprime mortgages. Every effort should be
made to reach these borrowers with responsible refinancing
opportunities.
Thank you for the opportunity to present this testimony before the
Subcommittee today, and I look forward to your questions.
Additional Material Supplied for the Record
WRITTEN STATEMENT SUBMITTED BY BILL EMERSON, CHIEF EXECUTIVE OFFICER,
QUICKEN LOANS
Chairman Menendez, Ranking Member DeMint, and Members of the Senate
Subcommittee on Housing, Transportation, and Community Development, I
thank you for your invitation to submit written testimony for today's
hearing, ``Helping Responsible Homeowners Save Money Through
Refinancing.'' My name is Bill Emerson and I am the CEO of Quicken
Loans, an independent Detroit, Michigan-based conventional, FHA, and VA
retail residential mortgage lender.
As a bit of background, Quicken Loans has been in business since
1985, and has approximately 5,000 employees, most of them working in
the city of Detroit. We do business in all 50 States and are the
Nation's largest online lender, one of the four largest retail mortgage
lenders, one of the three largest FHA lenders, and a top five VA
mortgage lender. We closed over $30 billion in mortgage loans in 2011,
helping almost 150,000 homeowners.
JD Power and Associates has ranked Quicken Loans highest in
Customer Satisfaction for Primary Mortgage Origination in the U.S. for
years 2010 and 2011.
My testimony will mainly address the issues with HARP, HARP 2.0,
and ``The Responsible Homeowner Refinancing Act of 2012,'' currently
being drafted by Chairman Menendez and Senator Boxer.
HARP 1.0
Has HARP 1.0 been a success? According to the FHFA's Web site, HARP
1.0, which was introduced in 2009, has assisted about 900,000
homeowners through October 2011. On the surface, that seems like a big
number. But upon closer examination, it appears there was a missed
opportunity to help those who faithfully make their mortgage payment
each month, but find themselves unable to take advantage of today's
historically low rates simply because they owe more than their home is
worth.
Of the 900,000 HARP refinances, only about 200,000 have been to
homeowners who owe more than their homes are worth. The rest were
``coded'' by the GSE's as HARP loans, but were to consumers who still
had equity in their homes. Further, estimates show that there are about
four million underwater homeowners who are in a mortgage backed by the
GSE's, current on such mortgage and employed. These homeowners could be
eligible for a HARP refinance but for their mortgage being underwater.
In other words, only about 200,000 eligible homeowners have been helped
out of a population of roughly four million. By this key measure, HARP
has been less than successful. More should be done to help these
homeowners.
HARP 2.0
HARP 2.0 is definitely positioned to help more homeowners than HARP
1.0, and we applaud the Administration, the FHFA, the GSE's, and the
mortgage industry for working together to improve the HARP product by
rolling out HARP 2.0. However, HARP 2.0 still is not designed to help
enough underwater homeowners and as a result we do not think enough of
the four million homeowners who are eligible for HARP 2.0 will actually
be helped.
Why will HARP 2.0 fail to help many of the four million homeowners?
The answer lies in the difference between the risk the homeowner's
existing servicer (same servicer) must bear under the HARP 2.0 program
versus the risk any other mortgage originator (new originator) must
bear under the program.
The risks born by same servicers and new originators under HARP 2.0
are different because the underwriting guidelines that a same servicer
must follow, as compared to the underwriting guidelines that a new
originator must follow are very different.
To refinance a borrower into a HARP 2.0 loan, a same servicer is
not required to verify (i) debt-to-income ratio calculations (ii) the
borrower's income or (iii) the borrower's assets. The same servicer
only needs to verify that the borrower has a viable source of income.
The new originator on the other hand, must calculate a debt-to-income
ratio, and verify income and assets. Both the same servicer and new
originator have the same clean title requirements and same appraisal
guidelines (if an appraisal is required).
Both new originators and same servicers are required to represent
and warrant to the GSE's that they are originating and underwriting
loans according to GSE guidelines. If the originator is found to be in
violation of a representation and warranty, the originator is required
to repurchase the loan. The GSE's routinely challenge the appraisals on
loans. In many such cases, the demands are predicated on simple
differences of opinion on the values that third party, licensed
appraisers provided. It is almost impossible for a lender to defend
themselves in such situations, and they wind up having to repurchase
many loans. In addition, the GSE's often require repurchases based on
other flaws (however minor) in the origination and underwriting
process. Sometimes such flaws are extraordinarily difficult to prevent
(example: a borrower who takes out a credit card or auto loan one day
before the loan closes), and originators are required to repurchase
loans, even though they acted diligently. Data models show that as a
loan's loan-to-value ratio (LTV) rises beyond 100 percent, default
rates begin to rise precipitously. When the LTV exceeds 125 percent and
beyond, default rates skyrocket. Because many HARP 2.0 loans are deeply
underwater, there is great risk of default and losses on any loan that
goes into default can be substantial. It's not uncommon for a minor
flaw on an underwater loan to cost $100,000 or more.
Because the new originators have more difficult underwriting
requirements than same servicers, the new originators' representations
and warranties are more stringent and the likelihood that they will
have to repurchase more loans and incur more losses is much higher.
Accordingly, most prudent new originators stay clear of any HARP 2.0
loan where the borrower is underwater, and for the most part HARP 2.0
loans are originated by same servicers, who bear less risk.
The reluctance of new originators to fully participate in HARP 2.0
has limited HARP 2.0's success. Roughly 70 percent of all GSE mortgages
are being serviced by the largest servicing firms. Because these same
servicers can originate HARP 2.0 refinances with reduced risk, these
servicers must carry the load of trying to administer the HARP 2.0
program. Notwithstanding the good intentions of the large servicers,
they will simply not be able to help all HARP 2.0 eligible borrowers.
Given all the other duties these larger servicers must perform aside
from originating HARP 2.0 loans, they simply can't ramp up their
platforms and hire and train people fast enough to help these millions
of homeowners. Additionally, some of the large servicers have greatly
reduced or eliminated their origination platforms, thereby
significantly reducing access to credit for the HARP 2.0 borrowers
being serviced by these large firms.
Because we are from the Motor City, we will provide a car-related
analogy.
The current HARP 2.0 program which funnels all underwater borrowers
to their current loan servicer for their new HARP loan is analogous to
a car recall program which requires all car owners whose car has been
recalled to return their cars to the factory for the needed repairs, as
opposed to visiting one of the many dealers in the nationwide network
that are capable of fixing the problem. Such a recall system would
never work, and yet that is exactly how HARP 2.0 is set up today.
The GSE's already bear the risk on these loans regardless of who is
originating the loans. So there is no viable reason to create
artificial barriers that effectively block new originators from using
the HARP 2.0 program to assist homeowners and to enable the GSE's to
improve their risk position. Because HARP 2.0 is being utilized mostly
by a small number of firms, the demand for HARP 2.0 originations is
dramatically exceeding the supply of firms who fully offer the program.
The imbalance between supply and demand has caused the price of the new
HARP 2.0 mortgage to be higher than it normally would be if competition
existed. Same servicer HARP 2.0 has created an oligopoly and, by any
measure, oligopoly pricing is in play.
Solutions
``The Responsible Homeowner Refinancing Act of 2012'' (the
``Act''), currently being drafted by Chairman Menendez and Senator
Boxer goes a long way toward addressing many of the underlying
problems. We have the following suggestions for improvement to the Act:
Eligibility
Allowing a new originator to operate under same servicer guidelines
resolves almost all of the issues we've addressed above. The current
draft of the Act requires that the GSE's allow all originators to
originate loans under same servicer guidelines. This alone would be a
major breakthrough. It would enable every loan originator in the
country the opportunity to help the four million HARP eligible
borrowers.
We strongly support the intentions of the ACT to instruct the GSE's
to allow all mortgage originators to use the same servicer guidelines.
Appraisals
On roughly 80 percent of HARP 2.0 loans, the GSE's will provide
originators an automated valuation that can be used in lieu of an
appraisal. Because this valuation comes from the GSE's, the originator
does not represent or warrant the value, marketability, condition, or
property type of the home that collateralizes the HARP 2.0 mortgage.
On the remaining 20 percent of HARP 2.0 loans that require an
appraisal to be completed by a licensed appraiser, there is great, and
unquantifiable, risk to originators. It is very common for the GSE's to
require that an originator repurchase a loan if, many years after the
loan was closed, the GSE's decide to challenge the value the
independent 3rd party appraiser provided at time of origination.
Insuring a 3rd party appraiser's opinion is always risky, but it is
downright irresponsible on a loan that is deeply underwater. This
reality has led most originators to put restrictions or overlays on the
HARP 2.0 appraisal and LTV guidelines.
We support the language in the Act that states--On HARP 2.0 loans,
the originator should only be required to comply with the GSE's methods
and standards for properly, ordering the appraisal and choosing the
appraiser. The lender should not be required to warrant the value,
marketability, condition or the property type that is evidenced by the
appraisal or any allowable alternative valuation methods.
Resubordination of Second Liens
We support the spirit of the ACT requiring that lenders subordinate
to HARP loans. However, we recommend that you carefully consider the
Mortgage Banker Association's testimony on the possibility of
unintended consequences that this requirement may cause.
Mortgage Insurance
We support the spirit of the ACT of requiring that all mortgage
insurers transfer mortgage insurance on all HARP 2.0 eligible loans.
However, we recommend, that you carefully consider the Mortgage Banker
Association's testimony on the possibility of unintended consequences
that this requirement may cause.
Consistency
We also agree with the language in the Act suggesting that the FHFA
issue guidance to require the GSEs to make their refinancing guidelines
under the HARP program consistent with each other to ease originator
compliance requirements.
Remove Barriers That Make Borrowers Ineligible for a HARP Loan
There are barriers which may cause a borrower to be ineligible for
a HARP 2.0 loan, such as:
Credit enhancements
Repurchase request outstanding
Loan was previously an alt A or subprime loan
We suggest the Act remove these barriers.
Automated Underwriting
We think the Act should address the use of automated underwriting
systems--Desktop Underwriter (Fannie) and Loan Prospector (Freddie).
These systems should provide insight into key data required to
determine eligibility for a HARP program as well as data necessary for
the refinance.
The systems should confirm:
The loan is eligible for a HARP refinance via confirmation
of all guideline requirements, identity of borrower(s), and
property address
The estimate value of the property when/if an appraisal is
not required
Provide all mortgage insurance data applicable to perform a
HARP MI Modification
Conclusion
If the Helping Responsible Homeowners Act were to be refined as
discussed above then the new version of HARP 2.0 could help millions of
underwater borrowers in short order. Therefore, we support the Act,
with the changes and enhancements that we have proposed.
Thank you for allowing me to testify on this very important topic.
WRITTEN STATEMENT SUBMITTED BY 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 how to help responsible homeowners
save money through refinancing.
It's no secret our Nation's housing markets remain in a tenuous
state. 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. In particular,
bringing relief to the millions of homeowners who have remained current
on their mortgages in the face of declining home values and rising
inflationary pressures will go a long way to kick starting not just the
housing sector, but the overall economy.
The Responsible Homeowner Refinancing Act
The National Association of REALTORS' supports the
``Responsible Homeowner Refinancing Act'' because it offers relief to
homeowners who continue to meet their mortgage obligation during this
ongoing period of economic unrest. Many homeowners have maintained
their mortgage payments even as the economy stalled and prices of other
consumer goods rose, squeezing their discretionary income.
Unfortunately, these same consumers have not been able to take
advantage of the low mortgage interest rates fostered by policy aimed
at stimulating the economy because of constraints embedded in the
Government-sponsored enterprises (GSEs) mortgage refinance guidelines.
The ``Responsible Homeowner Refinancing Act'' removes those
impediments and allows ``current borrowers'' to take advantage of
record low interest rates. Effectively, this places more money into
their pockets and gives them the confidence they need to participate in
our Nation's economy. Moreover, helping these responsible homeowners
lower their payments reduces their risk of default and aids the
recovery of the GSEs, Fannie Mae, and Freddie Mac. Finally, the
economic activity spurred on by these consumers' ability to meet an
affordable loan payment will act as a mechanism to begin moving our
Nation out of recovery.
The GSEs, under the guidance of the Federal Housing Finance Agency
(FHFA), have recently made improvements to their refinance guidelines.
This legislation codifies many of those improvements, and offers
enhancements to others in an effort to ensure that hard-working,
diligent mortgage payers, who are ``current,'' have options available
to them to relieve some of their economic burden during this tumultuous
period.
The proposed legislation does a number of things that
REALTORS' believe are necessary to entice both consumers and
lenders to pursue refinancing in this environment. First, it eliminates
unnecessary consumer costs associated with a refinance that tend to
keep homeowners who need a refi on the sidelines. These would be the
up-front risk-based fees charged by the GSEs that could cost consumers
up to $4,000 on a $200,000 loan, as well as costs associated with the
appraisal. Also, underwriting guidelines that restrict eligibility due
to loan-to-value (LTV) ratios would be waived for existing, performing
GSE loans in order to ensure all ``current'' borrowers have access to
affordable refinancing rates. In our present economic environment, many
consumers may not have the discretionary capital required to close a
refinance. However, many of these same consumers are current on their
mortgage indicating their ability, and desire, to observe their
obligation. The removal of these barriers will help reward those
diligent mortgage payers by allowing them to achieve a reduced mortgage
payment.
Second, the legislation improves competition for lenders looking to
compete with the existing mortgage servicer. The proposed legislation
directs the GSEs to require the same streamlined underwriting and
associated representations and warranties for the new servicer that are
in place for the existing servicer. This will level the playing field
in a manner that yields increased competition for the consumer's
business. Ultimately, this competition will lower the cost of
refinancing for the consumer, again benefiting the stability of the
GSEs and the overall economy.
An additional lender concern is addressed in the provision that
directs FHFA to align the refinance guidance of Fannie Mae and Freddie
Mac. Confusion over the standards applied by each GSE has caused
lenders to remain on the refinance sideline out of concern for
misunderstanding the guidance offered by the appropriate organization
and being subject to ``repurchase'' risk.
Finally, the legislation establishes penalties for servicers of
second liens and mortgage insurers who thwart the refinance process.
Establishing the ability for consumers to overcome the obstacles of
second liens and mortgage insurance will increase the number of
households that can take advantage of the Administration's,
Regulators', and Congress' efforts to help alleviate existing housing
costs pressures, and stimulate the economy.
Utilization of GSE Guarantee Fee as ``Pay-for'' for Nonhousing Programs
A final issue that has the ability to prevent consumers from
refinancing, or to keep potential homebuyers on the sideline, is the
use of GSE guarantee fees (g-fees) as a means to ``pay-for'' nonhousing
programs. Just as the proposed legislation will make refinances more
attractive by removing some cost barriers associated with the refinance
process, the potential for Congress to increase the GSEs' g-fees for
nonhousing purposes effectively re-erects a cost barrier.
Our members were deeply troubled by the use of a 10 basis-point
increase over the 2011 average g-fee to pay for a 2-month extension of
the payroll tax relief. That increase will impact homebuyers and
consumers looking to refinance their mortgages for the next 10 years.
Therefore, when Congress began negotiating the 10-month extension of
the payroll tax relief and the potential use of the g-fees to cover
that expense, you can understand why our members emphatically let
Congress know that housing cannot, and will not, be used as the
Nation's piggy bank. Though they are only rumors about the potential
use of g-fees to cover another non-housing expenditure, we would like
to use this opportunity to indicate the counter-productivity of such an
increase in the face of the proposed legislation, ``the Responsible
Homeowner Refinancing Act''.
The Nation's housing sector remains in a precarious state. Though
we are seeing signs of improvement, we are cautious of taking any steps
that may retard that recovery and ultimately send our overall economy
into another tailspin. Increasing the g-fee, even just extending the
current fee increase, effectively taxes potential homebuyers and
consumers looking to refinance their mortgages, at a time when the
housing sector can least afford it. The unintended impact of any
proposed fee increase would be to keep housing consumers on the
sideline, preventing the absorption of our Nation's large real-estate
owned (REO) inventory, as well as curtailing refinance activity that is
needed to keep responsible consumers in their homes.
Lastly, please note that g-fees currently are calculated by the
Enterprises as a function of the costs of guaranteeing the securities
they issue, i.e., the risk of underlying loans. We strongly believe
that fees charged by the Enterprises to manage risk and enhance capital
should not be diverted for purposes unrelated to the safety and
soundness of the housing finance system.
Conclusion
Home ownership matters. Either fostering new home purchases or
helping consumers remain in their homes must be a priority if we are
going to move our Nation from tenuous recovery to prosperity. Home
ownership 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.
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 continuing and
persistent 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. The
National Association of REALTORS' believes that the proposed
legislation will foster and encourage steps in that direction.
LETTER SUBMITTED BY MAURICE VEISSI, PRESIDENT, NATIONAL ASSOCIATION Of
REALTORS'
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LETTER SUBMITTED BY JAMES W. TOBIN III, SENIOR VICE PRESIDENT AND CHIEF
LOBBYIST, NATIONAL ASSOCIATION OF HOME BUILDERS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]