[Senate Hearing 112-709]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 112-709


           THE RESPONSIBLE HOMEOWNER REFINANCING ACT OF 2012

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

                                HEARING

                               before the

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

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                                   ON

          EXAMINING THE RESPONSIBLE HOMEOWNER REFINANCING ACT

                               __________

                              MAY 24, 2012

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs




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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                       Charles Yi, Chief Counsel

                     Laura Swanson, Policy Director

              Erin Barry Fuher, Professional Staff Member

                 William Fields, Legislative Assistant

                 Andrew Olmem, Republican Chief Counsel

            Chad Davis, Republican Professional Staff Member

            Dana Wade, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                     Riker Vermilye, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)









                            C O N T E N T S

                              ----------                              

                         THURSDAY, MAY 24, 2012

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2
    Senator Menendez.............................................    13

                               WITNESSES

Bill Emerson, Chief Executive Officer, Quicken Loans, Inc........     3
    Prepared statement...........................................    22
Christopher Papagianis, Managing Director, e21: Economic Policies 
  for the 21st Century...........................................     4
    Prepared statement...........................................    24
Moe Veissi, 2012 President, National Association of 
  Realtors'...........................................     6
    Prepared statement...........................................    38
Mark Zandi, Chief Economist and Cofounder, Moody's Analytics.....     7
    Prepared statement...........................................    43

                                 (iii)

 
           THE RESPONSIBLE HOMEOWNER REFINANCING ACT OF 2012

                              ----------                              


                         THURSDAY, MAY 24, 2012

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I call this hearing to order.
    I would like to thank our witnesses for joining us here 
today.
    Recently, the Committee has explored a variety of ideas to 
expand mortgage refinancing opportunities. We are here today to 
discuss one of those proposals, the Responsible Homeowner 
Refinancing Act, that was introduced by Senators Menendez and 
Boxer. The bill seeks to address barriers to refinancing that 
continue to exist in the HARP program run by Fannie Mae and 
Freddie Mac. While FHFA made some changes to the HARP program 
last year at the urging of Members of Congress and the 
Administration, I continue to hear from constituents and the 
housing industry that more could be done to encourage 
competition in the refinancing market and give homeowners 
additional options as they navigate current market conditions.
    The housing market continues to struggle with home values 
that are far below the levels seen a few years ago. Despite the 
dramatic decrease in home values since their peak in 2006, many 
homeowners are upholding their commitments to pay these loans 
back. However, as we have found in previous hearings, these 
responsible homeowners are at a disadvantage when it comes to 
refinancing their loans at today's record low interest rates. 
They often have limited options when shopping for the lowest 
interest rate because put-back risks mean they can only 
refinance with their current servicer.
    The GSEs have not applied HARP's benefits in a consistent 
manner, which creates unnecessary complications for lenders and 
homeowners. Loan level pricing adjustments increase the cost to 
homeowners seeking to refinance even though the GSEs already 
hold the credit risk associated with the original mortgage.
    Our witnesses today bring a wide breadth of knowledge 
concerning mortgages, the housing market, and the economy as a 
whole. I look forward to hearing your thoughts on how the 
Responsible Homeowner Refinancing Act will provide homeowners 
more options for refinancing and encourage competition among 
lenders to help stabilize our housing market and overall 
economy.
    Improving the housing market is the first step before we 
can take up broad housing finance reform, and I would ask my 
Republican colleagues to work with me to move this important 
legislation.
    With that, I will turn to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. Welcome to all of 
you.
    Today's hearing is focused on legislation that would expand 
the Federal Housing Finance Administration's Home Affordable 
Refinance Program. The program, commonly referred to as HARP, 
is designed to enable the refinancing of mortgages for 
underwater borrowers with GSE loans. And while this is an 
important area, I believe, to explore, it should be only one 
aspect of a broader debate.
    Our fragile housing market faces numerous challenges. The 
uncertainty created by the nearly 4-year conservatorships of 
Fannie Mae and Freddie Mac is just one such challenge. The 
resulting lack of clarity in the secondary market is a major 
impediment, I believe, to private capital returning to our 
housing finance system. Without that capital, I think it will 
be difficult to have a sustainable recovery in our housing 
market.
    New statutes and rules created by Dodd-Frank are also 
proving problematic. The potential consequences of rules 
pertaining to qualified mortgages, or QM, and qualified 
residential mortgages, or QRM, have drawn concerns from 
industry participants and consumer groups alike. FHA has also 
been woefully neglected. For years, FHA has severely misjudged 
the risk to which the taxpayer has been exposed, making a 
taxpayer bailout a real possibility.
    And despite these past mistakes, we can take steps to help 
the market move forward if we honestly assess our current 
situation. I think today's hearing is a first good step, Mr. 
Chairman, in that direction. Thank you.
    Chairman Johnson. Thank you, Senator Shelby.
    Are there any other Members who wish to make a brief 
opening statement?
    Thank you all. I want to remind my colleagues that the 
record will be open for the next 7 days for opening statements 
and any other materials you would like to submit.
    Now, I would like to briefly introduce our witnesses. Mr. 
Bill Emerson is the CEO of Quicken Loans, Incorporated, a 
mortgage lender based out of Detroit, Michigan.
    Mr. Christopher Papagianis is the Managing Director at e21, 
a nonprofit organization focused on economic research and 
public policy.
    Mr. Moe Veissi is the 2012 President of the National 
Association of Realtors.
    And, last, Dr. Mark Zandi is the Chief Economist at Moody's 
Analytics.
    Mr. Emerson, please commence.

  STATEMENT OF BILL EMERSON, CHIEF EXECUTIVE OFFICER, QUICKEN 
                          LOANS, INC.

    Mr. Emerson. Chairman Johnson, Ranking Member Shelby, and 
Members of the Senate Committee on Banking, Housing, and Urban 
Affairs, thank you for your invitation to testify at today's 
hearing for this very important issue, S. 3085, the Responsible 
Homeowner Refinancing Act of 2012.
    My name is Bill Emerson. I am the CEO of Quicken Loans. 
Quicken Loans is a 26-year-old independent retail residential 
originator proudly based in downtown Detroit. We are the 
Nation's largest online lender and the Nation's fourth-largest 
retail lender. J.D. Power and Associates has ranked Quicken 
Loans highest in customer satisfaction for primary mortgage 
origination in the United States for 2010 and 2011.
    My testimony will address some of the issues with HARP 2.0. 
HARP 2.0 will help more homeowners than HARP 1.0 and we applaud 
the current Administration, the FHFA, the GSEs, and the 
mortgage industry for working together to improve the HARP 
product. However, HARP 2.0 still is not designed to help enough 
underwater homeowners who are eligible and deserve assistance.
    Why will HARP 2.0 not help enough of these four million 
homeowners? There are two answers, the difference in repurchase 
risk for new originators versus same servicers and the lack of 
origination capacity the larger servicers face.
    The risks borne by same servicers and new originators under 
HARP 2.0 are different because the underwriting guidelines that 
a new originator must follow are different. To refinance a 
borrower into a HARP 2.0 loan, the same servicer is not 
required to verify or document the income ratios, the 
borrower's income, or 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 document and verify both income and 
assets. This is where the significant increase in risk exposure 
comes in for the new originator.
    Both new originators and same servicers are required to 
represent and warrant to the GSEs 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 GSEs regularly require repurchases based on flaws, however 
minor, in the origination and underwriting process. Sometimes 
such flaws are extraordinarily difficult to prevent, for 
example, a borrower who takes out a credit card or an auto loan 
1 day before the loan closes. And originators are required to 
repurchase loans even though they acted diligently.
    Because the new originators have more stringent 
underwriting requirements than same servicers and, therefore, 
more rep and warrant risk, there is a much higher likelihood 
that they will have to repurchase more loans and incur 
significantly higher losses. Accordingly, prudent new 
originators stay clear of most HARP 2.0 loans where the 
borrower is underwater, and for the most part, HARP 2.0 loans 
are originated by same servicers who bear much less repurchase 
risk.
    The reluctance of new originators to fully participate in 
HARP 2.0 will limit its 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 greatly reduced risk, these servicers are carrying 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 enough HARP 2.0 eligible 
borrowers given all the other duties these large servicers must 
perform aside from originating HARP 2.0 loans. They simply 
cannot wrap up their platforms and hire and train people fast 
enough to help the 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. Thus, the 
capacity issue I mentioned earlier and the limiting of 
opportunities for the consumer to take advantage of lower 
rates.
    Quicken Loans is from the Motor City, so let me try an 
analogy to illustrate my point. If one of the automakers needed 
to do a recall of all of their vehicles, they would not require 
the owners to return their car to the factory to have the 
vehicle fixed. Instead, they would quickly and efficiently use 
their nationwide dealer network to resolve the problem.
    Yet HARP 2.0 is constructed such that it will lender the 
nationwide origination network largely ineffective and instead 
rely on a handful of larger servicers to carry the load. The 
GSEs already bear the risk on these loans regardless of who is 
originating them. There is no viable reason to create 
artificial barriers that effectively block new originators from 
using HARP 2.0 to assist homeowners and to help the GSEs 
improve their risk position.
    Because HARP 2.0 is being utilized 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 of this age old law of supply and demand results in 
higher prices for the new HARP 2.0 mortgage than it normally 
would if competition existed.
    The Responsible Homeowner Refinancing Act of 2012 goes a 
long way toward addressing many of the underlying problems. If 
the Responsible Homeowner Refinancing Act of 2012 can remain 
exclusively focused on improving HARP 2.0 and avoid complicated 
detours into other subject matters, the new version of HARP 2.0 
can help millions of underwater borrowers in short order. 
Therefore, we support the Act as proposed.
    I thank you for allowing me to testify on this very 
important topic.
    Chairman Johnson. Thank you.
    Mr. Papagianis, please begin.

 STATEMENT OF CHRISTOPHER PAPAGIANIS, MANAGING DIRECTOR, e21: 
             ECONOMIC POLICIES FOR THE 21ST CENTURY

    Mr. Papagianis. Chairman Johnson, Ranking Member Shelby, 
and Members of the Committee, thank you for the opportunity to 
testify at this legislative hearing on the Responsible 
Homeowner Refinancing Act of 2012. I am the Managing Director 
of the nonprofit think tank e21: Economic Policies for the 21st 
Century. We aim to advance free enterprise, fiscal discipline, 
economic growth, and the rule of law. We are focused on 
developing public policy research that advances market 
performance and implementing rules to prevent market 
malfunction.
    I would like to say up front that I continue to see a great 
deal of stress across both the demand and supply dimensions of 
the housing market, as demonstrated by the thousands of 
borrowers that are still struggling to make their payments and 
stay in their homes.
    However, it is also important to acknowledge that many of 
the major negative trends that have dominated the headlines 
since the crisis are now well off their post-crisis peaks. For 
example, the current level of housing supply that is for sale 
suggests that the market is close to equilibrium. In many ways, 
it is now weak demand for single-family homes that appears to 
have eclipsed the supply challenge.
    Another important market development to acknowledge is that 
lenders are capacity constrained today. As I detail in my 
written testimony, I believe that lenders and servicers are 
hesitating to make the necessary infrastructure investments in 
the near term because they just do not have a good sense of how 
profitable the housing finance and servicing business will be 
over the medium to long term.
    The implication is that there are a lot of policy and 
regulatory uncertainty that is holding back a broader housing 
recovery, and I grouped them into three buckets: Servicing, 
underwriting, and GSE reform. I believe this backdrop is 
crucial to understanding the challenges that face the housing 
market. Resolving some of this uncertainty also holds the 
greatest potential on a comparative basis for positively and 
responsibly impacting the housing market.
    On the bill before this Committee today, which would 
further expand HARP 2.0 to, say, 3.0, my summary conclusion is 
that while I think the intentions behind many of the provisions 
are admirable, there are potential unintended consequences that 
this Committee should consider.
    For example, changing the eligibility date from June 2009 
to June 2010 and/or allowing for HARP loans to be re-HARPed 
would be controversial. Some additional borrowers might be 
helped by this date change, but the prices paid by borrowers 
for HARP refinancings and maybe even the broader agency TBA 
market would go up. When refinancing programs are continually 
expanded, investors may be forced to adjust their expectations 
about future prepayment speeds, effectively assuming that 
future mortgages will have an embedded policy risk function 
that could give borrowers easier access to a lower rate 
mortgage. While that may sound like a good policy objective in 
the long run, the net effect could be that market participants 
simply demand higher yields on mortgage-backed securities.
    It is also worth noting, or highlighting, that HARP 2.0 has 
only been up and running since March. Since it is not clear how 
many additional borrowers could or would be helped under HARP 
3.0, it is important to recognize that a new implementation 
process may actually delay the HARP 2.0 boom that appears to be 
underway.
    Thank you again for the opportunity to testify today. I 
look forward to answering your questions.
    Chairman Johnson. Thank you.
    Mr. Veissi, please begin.

 STATEMENT OF MOE VEISSI, 2012 PRESIDENT, NATIONAL ASSOCIATION 
                    OF REALTORS'

    Mr. Veissi. Thank you, Chairman Johnson, Senator Shelby, 
and Members of the Committee. Thank you for the opportunity to 
testify on the solutions that will provide relief to homeowners 
who continue to be current on mortgage obligations during this 
prolonged economic recovery.
    My name is Moe Veissi. I am the 2012 President of the 
National Association of Realtors, with about a million members. 
I am a practicing Realtor myself in Miami, Florida, a market 
that has experienced pretty severe downturns during the period 
of time that we discussed.
    The Responsible Homeowner Refinancing Act removes 
impediments and allows current borrowers--and I would like to 
underline that, current borrowers--whose loans are held by GSEs 
to take advantage of record low interest rates. When I say 
current, I mean that these folks are continuing to make their 
commitment and obligations in the manner that they promised to 
do when they took the loan out.
    We calculate that it will save borrowers somewhere between 
$4.5 and close to $5 billion a year after tax considerations 
and more than about $45 to $48 billion over a 10-year period of 
time from 2012. That is a significant impact on local markets, 
not just simply because those folks may invest a portion of the 
savings, but because those local markets are the quilt that 
knits the American fabric of homeowner together across this 
country. We think it will reduce a family's average annual 
obligation roughly by about $2,800.
    There are two examples that I want to bring forward. One, 
about 4 months ago when I was traveling to D.C., I sat down in 
my seat on the plane and a young lady sat next to me and she 
started to recount after some conversation the fact that, one, 
she is an interior designer, and two, that her husband is a 
golf pro and they live in Southern California in the desert. 
They bought a house in 2007 and are severely underwater. I 
said, ``Well, what are you doing about it?'' She said, ``We are 
continuing to make the payments and we really do not have any 
other opportunities to get out from under.'' A person like that 
is exactly the person we are talking about, making sure that 
their obligations are met, knowing that they are on point, and 
still underwater.
    The second example is a little more poignant. I got a 
referral from a college professor in Chicago, Illinois, who had 
bought a condo-tel in Miami Beach and another home which he and 
his wife anticipated retiring to. The condo-tel, he thought 
would be an income producer for him in his retirement, and the 
home was a retirement home. He paid $450,000 for the home and 
upwards of $650,000 for the condo-tel. Well, both of those 
investments turned south and he used up the balance of his 
retirement income and savings across the board to carry those 
two investments until he could no longer. He declared 
bankruptcy. That is the kind of person that we need to catch 
before he gets into those kinds, or they get into those kinds 
of severe circumstances. I guarantee that he paid as long and 
as efficiently as he could for that length of period of time.
    We think that that kind of legislation will benefit about 
three million folks who are in trouble today. It eliminates 
unnecessary consumer fees. It allows the refinancing market 
to--well, we do not think it will explode, but certainly to 
address those opportunities that exist. The legislation 
establishes penalties for servicers of second liens and 
mortgage insurers who thwart the refinance process that exists 
today.
    And the Nation's housing sector remains in a precarious 
state, as Chairman Johnson indicated. There is no question that 
this is a fledgling recovering housing market. Six of the last 
eight recessionary periods have come out of recession because 
of a strong real estate market, mostly housing and peripheral 
industry steps. Any steps that can do that and create a better 
housing market is something we continually support. And any G 
fees that exist should not be used for the purpose related to 
housing, such as paying for extensions of payroll taxes and 
relief. NAR applauds the Menendez-Boxer legislation for not 
utilizing the G fees for a pay-for.
    Home ownership is inextricably linked to a healthy 
community and a healthy American economy. This is why the 
National Association of Realtors supports any and all efforts 
that support the ownership and investment in real estate, and 
we so say.
    Chairman Johnson. Thank you.
    Dr. Zandi, please begin.

STATEMENT OF MARK ZANDI, CHIEF ECONOMIST AND COFOUNDER, MOODY'S 
                           ANALYTICS

    Mr. Zandi. Thank you, Chairman Johnson, Senators Shelby, 
Corker, Merkley. It is good to be here. I am the Chief 
Economist of Moody's Analytics and these are my views, not 
those of the Moody's Corporation. You should also know that I 
am on the Board of Directors of MGIC, the largest mortgage 
insurer in the country.
    I will make four points in my remarks. First, policy steps 
to facilitate more refinancing, I think, are among the most 
straightforward ways to help the housing market and the 
economy. Both the economy and the housing market are making 
progress. We are moving in the right direction. But, clearly, 
conditions are still very weak and the risks are significant. 
The threat from Europe, the fiscal cliff, lots of different 
threats to this very fragile recovery. So I think it is 
important that policy makers continue to think about ways about 
supporting the housing market in particular and the economy 
more broadly.
    The second point is that the key policy effort to 
facilitate more mortgage refinancing, HARP, has to this point 
been a disappointment. If you look at the numbers, according to 
FHFA, there has been 1.2 million HARP refinancings since the 
inception of the program back in 2009. A little over 100,000 of 
those have been for homeowners that are in negative equity 
positions. Expectations were for something much more 
significant than that, and so I think it is fair to say it has 
not lived up to expectations.
    The changes that were proposed late last year and are now 
being implemented appear to be quite good. They seem to be 
working well. If you look at some of the data coming from the 
Mortgage Bankers Association on refi applications, they picked 
up quite significantly. Now, part of that is related to the 
very low fixed mortgage rates. We are now at record lows, below 
4 percent, and obviously a very propitious time to refinance. 
But I think what HARP has done, the HARP changes have been 
very, very good and very therapeutic. My expectation for the 
HARP 2.0 program, if the policy makers do nothing going 
forward, we will get roughly 2.5 million to 3 million 
refinancings through HARP at the end of the day.
    The third point, given how well the HARP changes seem to be 
going, I think it makes logical sense to extend those 
guidelines and rules to all Fannie and Freddie loans. I do not 
really see any good reason not to do that. And I think we 
should do it quickly, because mortgage rates are very low and 
this is such a very good time to refinance.
    This is clearly a significant benefit to borrowers. I agree 
with all of the arithmetic that the Realtors put forward. It is 
going to save the average homeowner somewhere between $2,500 
and $3,000 a year. For the economy as a whole, it will save in 
interest $6 to $7 billion. That is not considering that tax 
consequences, but $6 to $7 billion. It is small in the grand 
scheme of things, but it is very helpful, and I should point 
out, it is going to be very, very helpful for those markets 
that are under a lot of stress, so Florida, Atlanta, Arizona, 
Nevada, California, New Jersey. These are really hard-pressed 
areas and these are areas where this refinancing money could be 
quite helpful.
    And this comes at no cost to taxpayers. I mean, I think the 
way this is designed, at the end of the day, it is not going to 
cost the GSEs anything. It is not going to cost taxpayers 
anything.
    So from a homeowner perspective, a broader economic 
perspective, a taxpayer perspective, this seems to make a lot 
of sense to me.
    The fourth point, there is a loser in this and that is the 
investor, the mortgage securities investor. So, very simply, if 
homeowners are paying less in interest, then the other side of 
that, the investor is collecting less in interest, and so they 
do lose. Now, I will make a couple points about that.
    First, the Federal Reserve is now the largest mortgage 
securities investor. So, because of QE, they now have $1.25 
trillion in securities on their balance sheet, so they are the 
biggest investor.
    The second thing I would say is the QE action was a 
windfall to those investors. So MBS investors, mortgage 
securities investors, have been tremendous beneficiaries of 
Government policy, and one might argue there is no bigger 
beneficiary from Government policy throughout the financial 
crisis than mortgage securities investors.
    And then, finally, I would say that these investors in most 
cases thought they would get prepaid out already. I mean, if 
the market was well functioning, if there were not these 
problems in the marketplace, then all the models would say--and 
all the investors have these models--that they would have 
already gotten paid out of these mortgages a long time ago. So, 
in a sense, they are benefiting from the failure in the 
marketplace, and this legislation, the Menendez-Boxer 
legislation, addresses that market failure in a reasonable way 
and I think this legislation is good legislation and should be 
passed.
    Thank you.
    Chairman Johnson. Thank you all for your testimony.
    As we begin questions, I will ask the Clerk to put 5 
minutes on the clock for each Member.
    Mr. Emerson, your testimony describes the problems you face 
when working with homeowners seeking to refinance a mortgage. 
FHFA continues to deny that there are different requirements 
for new business compared to refinancing customers under HARP. 
So that we are clear about how this program works in practice, 
would you describe the differences again. Also, do these 
differences create barriers that prevent you from competing 
with loan originators that also service the loans they are 
refinancing? How would the Menendez-Boxer bill remove those 
barriers?
    Mr. Emerson. Certainly, Senator. I appreciate the question. 
So I cannot speak to what the FHA denies or does not deny. From 
a practicality perspective, we have conversations with the GSEs 
on a regular basis. We have looked at the guidelines. We 
understand how they operate.
    So today, if I am originating a loan as Quicken Loans, I 
have to do a full underwrite on that transaction. I have to 
fully underwrite income, assets, everything associated with it 
as I would with a normal loan. The same servicer does not have 
to do that. There is no verification of income. There is no 
verification of assets. It is a very streamlined process. So it 
is faster for a same servicer, but there is also less risk, 
because at the end of the day, if we originate a loan and we 
document income and assets and for some reason there is a 
mistake in that origination process, the GSEs will put that 
loan back to us.
    And when you take a look at the LTVs on these--again, the 
GSEs own the risk already on this. So when you start looking at 
increasing LTV is above 125 percent, you are going to see that 
those loans--if something goes bump in the night for some 
reason and it is underwater, they will have a higher propensity 
to default. And when that happens, a person who has more rep 
and warrant risk, such as a new originator does today, will buy 
more loans back than a same servicer will and there is no way 
to quantify that dollar amount and that risk.
    So by getting rid of that piece of it, you reduce risk. You 
bring originators now into the mix who have capacity to help 
homeowners, and that is what they do full time for a living. A 
lot of our larger players have multiple things that they serve. 
A lot of the other originators, that is what they focus on, is 
just the homeowner and helping that homeowner out. So by 
eliminating that barrier, you really do open up a much larger 
landscape. You bring in competition. It allows pricing levels 
to be competitive. And it really, at the end of the day, I 
believe, facilitates the opportunity to help more homeowners 
than will be helped if we do nothing with this--if we leave 
HARP 2.0 the way it is today.
    I am not sure if that clearly answers your question, but--
--
    Chairman Johnson. Mr. Veissi, as a Realtor in Florida, you 
see firsthand the barriers that homeowners and the housing 
market are trying to overcome. In your opinion, how will the 
Responsible Homeowner Refinancing Act help homeowners and 
ultimately the housing market?
    Mr. Veissi. I want to restate it so I am sure I understand 
the question. How is the--how would it affect the existing 
housing market?
    Chairman Johnson. How will the Responsible Homeowner 
Refinancing Act help homeowners and ultimately the housing 
market?
    Mr. Veissi. OK. I think it offers an opportunity to those 
people who have assumed their obligations, like the ones that I 
made as an example to you, and I think there will be a lot of 
folks across the country that would take advantage of this, 
especially today, the opportunity to get into a mortgage at 
rates at 3.875 to 4.5 percent versus five or 6 percent that 
they might be paying ultimately.
    I think there are two opportunities that exist when 
somebody does that. We have indicated that there is an 
opportunity to save about, on average, $2,800 a year. I will 
bet you a dollar to a doughnut that most of those people will 
take the majority of that and begin to save, because we have 
seen over a period of time that people are becoming more savers 
than before. But I will bet you also that there will be an 
excess of some of that that will go back into the marketplace 
to stimulate the economy in those communities that are most 
hard hit, like Miami, like Las Vegas, like Southern California, 
like Phoenix, Scottsdale.
    Chairman Johnson. Dr. Zandi, would you describe for the 
Committee how investors are affected when a mortgage is 
refinanced, and would the Menendez-Boxer legislation distort 
the market reaction to the current historically low interest 
rates?
    Mr. Zandi. Well, investors would lose the interest income 
they would collect if the homeowner was paying the higher 
interest rate. So if we refinance the homeowner down into a 
lower interest rate, then that lower interest income means less 
to the investor. Or they get their money back--some investors 
will get their money back in a lower-rate environment and they 
cannot invest it and get the same return.
    So this is a problem that mortgage investors have been 
dealing with from the beginning of time, prepayment risk. They 
understand it very well. They have models that they use to 
determine what the prepayment risk is in investing in these 
securities and they price accordingly.
    The surprise that many investors received in this recent 
environment is that a lot of these mortgages have not prepaid 
as fast as they thought they would because of the marketplace, 
because house prices are down, because people are in negative 
equity positions. Because of all the problems in the housing 
and mortgage market, a lot of loans that would normally get 
refinanced out, prepaid at these very incredibly low rates, 
just have not happened. So they have actually enjoyed more 
interest income over a longer period of time than they would 
have expected.
    But nonetheless, they are enjoying this higher income and 
these higher interest rates, and this bill, if it facilitates 
more refinancing activity, means less interest would come to 
investors and they would suffer as a result.
    Now, my own view is, as I expressed in my oral testimony, 
is that I think that they have already considered this. They 
have already priced it. I do not think this is going to have 
any impact--material impact--on market pricing going forward. I 
think it is already embedded in market pricing.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you.
    I hope I pronounce it right, and correct me if not. Is it 
Papagianis?
    Mr. Papagianis. That is correct.
    Senator Shelby. OK. Thank you. Mr. Papagianis, in some 
regions of the country, a major problem facing the housing 
market is the number of underwater borrowers we have talked 
about. According to data from FHFA, the vast majority of 
borrowers who would be eligible for a refinancing under the 
Menendez-Boxer bill would not only be above water but have at 
least 20 percent equity in their home. If that is true--this is 
coming from the FHFA--is the Menendez-Boxer bill likely to 
materially reduce the number of underwater borrowers?
    Mr. Papagianis. That is an excellent question. I think a 
couple points are worth keeping in mind here. Generally 
speaking, the number that people throw out is that there are 
ten to 11 million people in the U.S. that are underwater. The 
GSEs are probably responsible or own somewhere between three 
and four million of those mortgages.
    When you think about HARP, and this came up in another 
panelist's statement, HARP really has helped people refinance 
that have LTVs between 80 and 105. Since 2009, April 2009 when 
HARP was established, the GSEs have refinanced more than nine 
million mortgages for those borrowers that have LTVs below 80. 
So I think your question is spot on, that there are already 
refinancing solutions for borrowers that have equity in their 
home.
    Senator Shelby. Would most of the participants be likely to 
be borrowers who could already refinance in today's market with 
low interest rates if their properties were above water and 
they were making their payments and so forth?
    Mr. Papagianis. If the borrower is current and has equity 
in their home, there are refinancing programs that the GSEs 
have that have been very robust. There is a pricing 
differential, but again, those borrowers have equity, and what 
we are talking about here with regards to moving potentially to 
a HARP 3.0 program is to lower the cost. But, really, I think, 
it is wise for the Committee to think about whether we are 
really reaching truly underwater borrowers as opposed to those 
borrowers with equity.
    Senator Shelby. Dr. Zandi, in your testimony, among other 
things, you state that the Menendez-Boxer bill should be 
amended to remove provisions that would impose monetary 
penalties on second lien holders and mortgage insurance 
companies that do not permit refinances. Why do you think that 
is necessary?
    Mr. Zandi. Yes, that is a good question. My sense is that 
second liens and MIs are not a problem with respect to HARP 
refinancing, that the largest mortgage servicers have agreed 
that if they have the second lien, they are going to 
resubordinate, and I have not heard anything to suggest that 
they are not doing that.
    With regard to the MIs, they have all----
    Senator Shelby. Please explain what you mean by this. I 
understand, but----
    Mr. Zandi. Ah, OK. So----
    Senator Shelby. Say you got a first mortgage lien. You got 
a second mortgage lien. Ordinarily, if you refinance or pay 
down or whatever the first mortgage lien, that makes the second 
mortgage worth more, does it not?
    Mr. Zandi. It does. It does. And so----
    Senator Shelby. So when you resubordinate, tell me--explain 
what you mean.
    Mr. Zandi. So the second lien has to agree to the 
refinancing on the first, and so that means I resubordinate. It 
is just fancy words. I agree. Go ahead. And you would think 
they have some economic reason for doing it. As you say, you 
are lowering the monthly payment on the first, so that makes it 
more likely that they are going to pay on the second. But there 
have been cases for various reasons where seconds have impeded 
refinancing, but the mortgage servicers who are participating--
the big ones that are participating have agreed under HARP 2.0 
rules that they will not do that. Most of the second liens are 
on their balance sheet. They are going to resubordinate.
    Senator Shelby. If you had, say, a $300,000 first lien on a 
nice home and you had a $100,000 second lien and you refinance 
and pay down, you know, somebody takes a haircut or they pay it 
down themselves, you pay down the first mortgage, then the 
second mortgage obviously goes up in value, does it not?
    Mr. Zandi. All else being equal, yes, because the 
probability of fault declines.
    Senator Shelby. Sure.
    Mr. Zandi. Yes.
    Senator Shelby. Mr. Papagianis, what do you think about his 
recommendation? Do you have any thoughts on it?
    Mr. Papagianis. I agree----
    Senator Shelby. Do you agree with him?
    Mr. Papagianis. I agree. I think subordination of second 
liens, subordination of mortgage insurance, I believe that that 
problem has largely been addressed, I think, through HARP 2.0. 
I do think that FHFA did an admirable job of working with 
industry to wash away that issue. There may be a few remaining 
miscellaneous holdouts in that area, but I think, largely, that 
problem has addressed itself.
    Senator Shelby. One last question to you about FHA reform. 
I will direct it to you, Mr. Papagianis. The Federal Housing 
Administration, as we all know, continues to face a severe 
capital shortfall, making it, a lot of us believe, likely that 
FHA will eventually need a taxpayer bailout. We hope not, but 
the numbers indicate that. This is a problem that FHA has been 
seeing coming for years, but nothing has been done to 
sufficiently address that. Considering the overall importance 
of having a stable housing market for our economic recovery, 
how critical is it that we reform FHA? And the sooner, the 
better?
    Mr. Papagianis. I think it is very critical, Senator. If 
not for the AG settlement and specifically the award that was 
directed to FHA, FHA would be insolvent this year and would 
require a bailout. I define a bailout as accepting a loan from 
Treasury to continue its operations. I think----
    Senator Shelby. A loan that might not ever be paid back----
    Mr. Papagianis. That is correct. I think that there is a 
consensus in the market that FHA does struggle to manage risk, 
and I think, moving forward, greater attention should be placed 
on the agency to ensure the taxpayers are protected and that 
they are appropriately pricing for the risk that they take on.
    Senator Shelby. Mr. Chairman, I have one, if I could, one 
quick last question to any of you, probably to Mr. Zandi to 
start. Explain for the record, quickly, how the default rate on 
home ownership is much higher than the multifamily. Is it 
because people have to put more money down on multifamily loans 
or what? Mr. Zandi, are you familiar with the question?
    Mr. Zandi. Well, I think----
    Senator Shelby. In other words, we have had testimony 
here----
    Mr. Zandi. Right.
    Senator Shelby. ----that the foreclosure rate with Freddie 
Mac and Fannie Mae on multifamily properties is very low, 
whereas the foreclosure rate on single family is pretty high.
    Mr. Zandi. In the current environment, that is very true.
    Senator Shelby. Yes.
    Mr. Zandi. The multifamily market is being driven by very 
strong absorption demand because of the foreclosure crisis and 
because of demographics. But in a normalized market, on 
average, over time, historically, single-family mortgages have 
performed better than multifamily have.
    Senator Shelby. They have?
    Mr. Zandi. Yes.
    Senator Shelby. OK. Do you have any comment?
    Mr. Papagianis. I really do not have any.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Menendez was absent on the floor 
doing other business, and because he has a leading role in the 
Menendez bill, I will afford him extra opportunity to begin 
with an opening statement followed up by questions.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Mr. Chairman, thank you for your courtesy 
and those of the Members, as well. I was on the floor on 
something that is incredibly important to New Jersey, which is 
the FDA reauthorization, as we are the medicine chest of the 
world. So I appreciate your courtesy and I appreciate you and 
the Ranking Member holding this hearing specifically on the 
Menendez-Boxer legislation, which I think is incredibly 
important.
    As I have said many times, we need to fix the housing 
market in order to get the broader economy moving again and 
create jobs, and fixing the housing market has to involve 
multiple strategies to attack the problem from different 
angles. And to me, refinancing should be one of those 
strategies, particularly for borrowers who are making their 
payments but whose interest rates on their mortgages are above 
today's interest rates of four to 5 percent.
    And that is why Senator Boxer and I introduced the 
Responsible Homeowner Refinancing Act of 2012. The goal of the 
bill is very simple. Any homeowner with a Fannie or Freddie 
loan should be able to get a pre-approved package in the mail 
from their lender, sign on the dotted line, and be 
automatically put into a refinanced loan that saves them 
hundreds of dollars a month. No more lending bureaucracy. No 
more red tape. It should be simple for any homeowner to do 
this.
    That is why our bill is supported by borrower groups, by 
the National Association of Realtors, the National Association 
of Home Builders, many lenders, like Quicken Loans, some 
mortgage investors, like Amherst Securities, and by small 
business groups.
    Our bill will help the 17.5 million borrowers who have 
Fannie Mae and Freddie Mac loans but who are trapped paying 
interest rates above 5 percent because of barriers to that 
refinancing. Most estimates are that it is likely to help an 
additional three million borrowers to refinance, although that 
depends on how many borrowers actually take advantage of it.
    Our bill will make it easier for homeowners to refinance 
and lower their mortgage payments, which is both a popular and 
common sense way to help the housing market, and by the way, I 
would say help the economy, as well. If I have that roof that 
has been leaking and all I can do is afford to patch it up, but 
now I have the wherewithal to fix it, I am going to both 
preserve my property, preserve its value, and at the same time 
go ahead and hire somebody to do that, and that creates a 
ripple effect in our economy.
    Allowing a homeowner to refinance from a loan that is 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.
    Some, but not all, of the refinancing barriers--I heard 
discussion here about what has already happened in FHFA's HARP 
expansion called HARP 2.0--not all of the barriers to 
refinancing were addressed there. For example, HARP 2.0 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. My office has heard from New Jersey 
homeowners who are in exactly this situation.
    FHFA's 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 2.0, but they did not scale back representations and 
warranties liability for cases where a different servicer was 
refinancing the loan, which has led to a lack of competition 
among lenders that has resulted in much higher interest rates 
for borrowers, according to analysis from Amherst Securities 
and many others. It seems to me--that is something I know many 
of my colleagues support--competition--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, and I have heard discussion on this here 
today, is that second mortgage holders and one particular 
mortgage insurer, United Guarantee, do not always allow their 
interests to be transferred to a new refinance 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.
    So I compliment the other mortgage insurers for working 
with FHFA to streamline these refinances and transfer their 
interest automatically. But United Guarantee is an AIG 
subsidiary, a TARP bailout recipient, that has not agreed to do 
that, thereby hindering refinances and costing both homeowners 
and Federal taxpayers money. It is pretty amazing to me.
    Another obstacle is up-front fees and appraisal costs that 
homeowners without savings cannot afford keep them trapped in 
high-interest loans. And yet another barrier is verification of 
income tax returns and other paperwork which is needed for new 
loans but not necessary for refinance loans where the borrower 
is already making payments on time. And I was gratified to 
hear, Mr. Chairman, at our subcommittee hearing that I chaired 
a few weeks ago from every witness representing all points of 
view that they did not think this paperwork was necessary for 
refinance loans. For these Fannie and Freddie loans, taxpayers 
already own the risk if 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 and taxpayers and is obviously, in my mind, terrible 
policy. FHFA needs to change this now. This is urgent because 
we do not know how long those low interest rates will remain. 
And once interest rates rise, it will not make any sense for 
homeowners to refinance. Every day the FHFA and Congress delays 
is another day that both taxpayers and homeowners are losing 
millions of dollars.
    Finally, one of the best aspects of the Boxer-Menendez 
Responsible Homeowner Refinancing Act is that according to 
preliminary CBO estimates, it will stop bailouts, it will save 
taxpayers money because fewer homeowners will default when 
their mortgage payments are lowered. That means that it is not 
a cost, according to that preliminary estimate.
    So, Mr. Chairman, I appreciate that opportunity and I just 
have two questions. One is to Mr. Emerson. Do you believe that 
current HARP 2.0 policies give an advantage to the borrower's 
existing lender, thereby reducing competition among lenders and 
increasing interest rates for borrowers?
    Mr. Emerson. Senator, I believe that that is the case, 
simply from the fact that it is, as you said, more difficult 
and more risky for a new originator to take on the rep and 
warrant risk associated with the way the loan is originated 
today, and that as a result of that, they are staying away from 
doing a lot of the HARP 2.0 loans.
    And I think another point that is important is velocity, 
and you mentioned, you know, we do not know how long it is 
going to be before rates go up. We may get to 2.5 million 
borrowers if we do nothing, but how long is it going to take to 
get there? And I think the sooner that we can act and open up 
the origination capabilities of the entire country to help 
these homeowners, the better opportunity we are going to have 
to help more of them faster and make sure they get into the low 
rates that exist today.
    Senator Menendez. Well, it seems that only the FHFA are 
about the only ones who think that HARP 2.0 is not limiting 
competition.
    Let me ask Mr. Veissi and, for that fact, anyone who wants 
to join in, another obstacle to refinancing is that second 
mortgage holders, as I said, and mortgage insurers do not 
always allow their interest to be transferred to a new 
refinanced loan, even though they are 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. Does it make sense to require 
automatic portability to the refinance law?
    Mr. Veissi. That is an interesting concept. What we hear, 
Senator, across the board is a little bit different than the 
statistical evidence that you get, and I deal with folks from 
California to New Jersey and back down to Florida, again, 
across the country, and we are hearing again and again that 
secondary financing in many cases holds up both refinancing 
and, in many cases, sales. I would have to think about the 
answer to that question and maybe confer with you, but my knee-
jerk may be that that might be an interesting opportunity.
    Senator Merkley. Mr. Emerson, what do you think?
    Mr. Emerson. I think we are open to looking at how do we 
make that process better from a subordination perspective. I do 
think that there are a lot of second lien holders that are 
subordinating. I think, though, that the problem is that in the 
process, it becomes very cumbersome. It is very time--there is 
a time delay in the information. Many times, you are not--with 
this HARP program, you are not utilizing an appraisal because 
there is no need to. But when you subordinate, the second lien 
holder requires that appraisal and so you now have to go out 
and charge additional monies to get an appraisal when you do 
not need it for the first lien.
    So while I do think that a lot of people are--a lot of 
lenders are subordinating. The process itself needs to be 
dramatically improved. We hear that every day from homeowners. 
So some form--I do not know if portability is the right answer, 
but we do need to figure out a way to make that process a 
little more streamlined.
    Senator Merkley. Would our bill largely take care of most 
of what you are concerned about in the context of the process?
    Mr. Veissi. Based off of what I have read so far, I think 
it goes a long way to getting there, yes.
    Senator Menendez. Finally, Mr. Zandi, I am not sure if you 
say the Federal lender survey that came out recently, but it 
indicates that mortgage insurance and second liens are, in 
fact, obstacles to HARP refinancing. I would call your 
attention to it because I do believe this is one of our 
challenges in moving forward, and that survey made it pretty 
clear that these are elements of a real challenge and that is 
something we seek to take on in terms of the legislation.
    Mr. Zandi. Can I just make one quick point? I think the 
legislation, the key points of the legislation, are very good, 
and if enacted quickly, given the rate environment, are going 
to have a very significant impact. I think, though, to try to 
complicate it in any way, unless it is absolutely clear that 
that is going to make it better, is a mistake because it is 
going to slow things down. It is not going to get done and you 
are going to lose your window. So you have got to--I would err 
on the side of being parsimonious here in getting what can be 
done done, because we are really close to generating a lot of 
refinancing activity.
    Senator Menendez. Thank you for your courtesies, Mr. 
Chairman.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and, you know, 
while I have a bias--I began with a bias--and I say this to the 
Senator from New Jersey--we have had 16 programs now trying to 
fix the housing, and I do think we have done a lot to try to 
jigger things around. I am open to looking at this and I have 
some questions that I hope you will consider legitimate as you 
look at trying to move this legislation through.
    And I want to thank the Chairman for having this hearing 
and I hope--I noticed the other day he left to go to a markup 
in Appropriations, so I know he knows what those are, and I 
hope that we will have a markup on this bill, a real markup. I 
think the Senate has not been functioning properly because we 
have been air dropping things in, and yet I notice when we pass 
things out of committee in a bipartisan way, they actually seem 
to happen, and I hope we will have a markup on this bill.
    But with those editorial comments, I would ask--my 
questions really go to Mr. Papagianis and Dr. Zandi today. I 
thank all of you for your testimony.
    One of the things that--and I notice in this bill, I guess 
you could just continue to refinance. Would it be fair to say 
that each homeowner could only use this program one time? Would 
that be a legitimate parsimonious move to make?
    Mr. Zandi. Yes. I think that would make sense, just to move 
this thing along. I think that would be an appropriate thing to 
do. One time, get it done.
    Senator Corker. And you agree?
    Mr. Papagianis. I agree with that.
    Senator Corker. I do not know about the sponsor. I hope so.
    Is there a way to do the streamlining in such a way that--
and I really appreciate the desire to do that and I certainly 
appreciate the attempt of the Senator from New Jersey to solve 
this problem--but is there a way to do it without vitiating the 
GSEs' ability to put these loans back? In other words, we are 
saving the taxpayers a lot of money by putting loans back where 
originators did not follow appropriate guidelines. Is there a 
way we could streamline this but not give up the right to put 
it back if things were done inappropriately on the front end?
    Mr. Zandi. Could I say, this is why I think you would only 
want to do it once, right, because if you allow one refi, then 
you have--and you have a history with this borrower, in most 
cases you have several years of history with the borrower, they 
are current on the loan and you are confident there is not 
fraud and misrepresentation, that is why it makes sense to do 
the streamlined refinancing, relaxed rep and warranties, and no 
recision rights. The MI companies are saying, listen, I have a 
good experience with this and my economics say I can do this 
without any recision rights. So once, it makes sense to me.
    If you start doing it over again, then you do not have that 
experience and you may--you just do not know and I think it 
becomes more of an issue. But once, I think you have got that 
experience and I do not think we need to do anything. We 
understand what the risks are and we can go forward.
    Mr. Papagianis. I agree with that.
    I think one other issue, and it has come up earlier on the 
panel, thinking with regards to new servicer refinancing versus 
same servicer financing and whether in a new servicer situation 
income needs to be verified--that is one of the challenges that 
has been presented here before the Committee--I do think it is 
important to keep in mind that from the GSEs' point of view, 
and this speaks to rep and warranty risk, is it is really in 
everybody's interest to ensure that the borrower does have a 
job and does have income in this situation because it may be 
that a refinancing is actually not the best option for that 
borrower. It may be that they should have a modification and 
they should go through HAMP as opposed to HARP. And I think 
that is an important point and I do not think it gets talked 
about enough.
    Senator Corker. I just have a couple more questions, if we 
could be brief. The changing of the dates--I mean, one of the 
problems that we are having right now is the huge reliance on 
Government refinancing. The private sector is on strike, and 
for good reason. I know all of us want to encourage them back 
in. But I think there has been sort of an unwritten rule that 
all loans made prior to June of 2009 were fair game, but 
anything after that, they had a chance to refinance in a low 
environment, low interest rate environment, and we would not 
fiddle with things beyond June of 2009. Would it be an 
appropriate thing, an appropriate ask on this bill to say that 
the date should not be June of 2010 but should be June of 2009 
so that we, again, do not continue to rattle the private sector 
side? The two of you.
    Mr. Zandi. I think that is appropriate. I think June of 
2009, because, again, you want a historical record and you need 
that to relax the reps and warranties and give up the recision 
rights. But moreover, I do not think you are giving up very 
much, because between June of 2009 and June of 2010, I am not 
really sure what we are talking about here. The rates were 
pretty low. So I do not think you are going to give up a whole 
lot of potential refis by moving the date back to 2009, but you 
do get the benefit.
    Senator Corker. And since I see a ``yes'' from the other 
person, we will leave it there.
    And again, I appreciate the streamlining of all this. I 
know the GSEs have asked if they could at least collect data, 
not for underwriting, but just so they could continue their 
risk management processes. Would it be appropriate for them to 
still collect data if they did not use it--in other words, they 
continued to streamline these, but they had that data available 
for future risk management opportunities?
    Mr. Zandi. Well, actually, I would be surprised if they 
would not do that----
    Senator Corker. Well, the bill prevents them from doing 
that.
    Mr. Zandi. Oh. OK. I am not sure why that would be the 
case.
    Mr. Papagianis. I agree. I think it is important to collect 
that.
    Senator Corker. So I appreciate the input and I certainly 
hope the sponsors will consider some of the changes that have 
been proposed by these questions.
    I will close by saying the whole junior lien process, to 
me, has been incredible, that we have given the mortgage 
servicers in this country such a home run win with all these 
programs, and yet, you know, typically, a junior lien gets 
extinguished when something happens with the primary mortgage. 
And I just hope that this bill does not address that. I know 
you all talked about some potential changes to make this 
simpler, but I do hope at some point this Committee will look 
at this whole junior lien process and realize that, in many 
cases, these guys have received a huge, huge benefit, I would 
say unnecessarily so in many cases. You know, there is a big 
conflict of interest between the servicers and the primary 
mortgage holders because they hold the second mortgage and they 
are basically benefiting themselves.
    But I thank you for your testimony and, Mr. Chairman, for 
the hearing.
    Chairman Johnson. Thank you.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair. I have 
noticed that at a lot of these hearings, we have a similar 
collection of Senators and I really appreciate my colleagues on 
both sides of the aisle continuing to wrestle with this issue 
of mortgages. Certainly, the family home has been such a 
pathway to the middle class for families across America, and 
through the whole subprime debacle, 2003 forward, that was 
deeply damaged and I appreciate colleagues coming back time and 
time again to wrestle with how we restore home ownership as a 
pathway to wealth, equity, a piece of the American dream, if 
you will, for the American family.
    A couple quick questions, and I am going to direct these to 
Dr. Zandi. In your testimony on page three, you note that of 
the HARP loans, just more than 100,000 out of 1.2 million have 
been families underwater. That is roughly 8 percent. So you 
have this other 92 percent that benefit in the HARP program but 
were not underwater. The question keeps coming up, did HARP 
need to exist for those families, and if so, what is the short 
answer, why?
    Mr. Zandi. Yes, because there are other criteria other than 
LTV determining whether you get a refinancing, right. So it is 
back-end DTI, meaning what are your other debts, what is your 
credit score, other factors, and many of those borrowers, 
because they were kind of on the edge in terms of equity, were 
getting dinged and could not get refinancing, so I think it did 
help quite a bit.
    Senator Merkley. Have you had any ability to analyze the 
statistics in terms of families that could or could not get 
refinancing without HARP? And let me throw an anecdote in here.
    Mr. Zandi. OK.
    Senator Merkley. When I sought to refinance my house, the 
mortgage agent sent me a HARP refinancing and I called up and 
said, ``Why are you sending the HARP refinancing? This is for 
folks who have X, Y, and X.'' And she says, ``Well, we are just 
utilizing that in virtually every case.'' I thought that was 
very interesting and it suggests to me that perhaps there are 
some sizable number of folks--and by the way, I did not get a 
HARP loan--but----
    Mr. Zandi. Can I ask when that was? Was that recently?
    Senator Merkley. That was 2010.
    Mr. Zandi. Oh, it was 2010.
    Senator Merkley. Yes, 2010.
    Mr. Zandi. All right. Yes. So you are asking for the 
counterfactual, what would it have been without the HARP. I can 
think about how I might try to approach that. I do not know the 
answers----
    Senator Merkley. OK. No need to dwell on it, but it goes to 
some of the questions that have been raised.
    Mr. Zandi. Right.
    Senator Merkley. Second, in your spoken testimony, you 
referred to--that the bond holders have done pretty well by 
those who are trapped in underwater mortgages. Christopher 
Mayer testified here and said bond holders have received $60 
billion over the last 3 years in excess mortgage payments from 
homeowners trapped in high interest rate loans. I am assuming 
to some part, also, though, that folks trapped in underwater 
loans who have then defaulted, bold holders have lost something 
there in terms of being able to get their full principal back. 
Is there a sense of how these two factors have weighed against 
each other, the benefits of the higher interest--being trapped 
in higher interest loans versus the foreclosures in that 
sector?
    Mr. Zandi. Well, generally, in the prepay models that they 
use, they also account for default. That is just a form of 
prepay. And if you look at the models, they were all saying 
this should have all been prepaid out a lot faster, so even 
accounting for the default. So I think they benefited net quite 
significantly.
    And then, you know, that is kind of first order. Second 
order effects would be quite significant. What I mean by that 
is all the things that policy makers did to support the housing 
market, to stabilize the housing market, obviously were for the 
benefit of investors, right, because you would have had house 
prices fall to a much greater degree. There would have been 
many more foreclosures. It would have been much more of a mess 
and their losses much greater. So I think it is pretty clear, 
on net, they have benefited enormously from Government policy.
    Senator Merkley. Great. Thank you, because that issue of 
also being affected by the defaults is brought up sometimes 
when the point is made----
    Mr. Zandi. Yes.
    Senator Merkley. ----that you had made.
    You also mentioned in your testimony the Rebuilding Equity 
Act, which is a strategy that I put forward to encourage folks 
who are refinancing who have essentially the choice of do they 
want to refinance to a lower interest rate, benefit from lower 
payments, or is it valuable for them to benefit from lower 
interest but make larger payments and have a shorter term, a 
15- or 20-year term. And when you look at the comparison of how 
quickly people get out from being underwater with the 15- or 
20-year strategy, it is substantial. Folks who are 25 percent 
underwater are largely out from underwater after 5 years under 
a loan between 15 and 20 years. Does it make sense to help 
incentivize this option?
    Mr. Zandi. Yes. I think this is a great piece of 
legislation. I think it is a nice corollary with Senator 
Menendez's legislation. Basically, you are giving the homeowner 
an option. Either they can go for the lower monthly payment or 
they can--they could get a smaller reduction in their monthly 
payment and use some of the saving to pay down principal 
quickly and get out from under more quickly. So I think it is a 
nice option and we are incenting them to save and build equity, 
which is in everyone's, I think, best interest.
    Now, obviously, there is a cost involved. I do not think we 
are talking billions. We are talking probably hundreds of 
millions. It depends on the take-up. But that has to be paid 
for. But I think the reasonable ways of doing it, you can even 
ask the homeowner to pay for it in the form of a slightly 
higher interest rate, you know, something like that, over time. 
Basically, you are taking the closing costs, instead of asking 
for them up front, you are extending it over a longer period of 
time and it makes it just--it is an incentive and you get them 
toward building equity, which, again, I think is in everyone's 
interest. So I think it is a great idea.
    Senator Merkley. OK. Thank you very much. Thank you.
    Chairman Johnson. I would like to thank all of our 
witnesses for being here with us today. Senators Menendez and 
Boxer have a substantive bill that seeks to provide relief and 
assistance to responsible homeowners and I hope we can work 
together to move it forward.
    This hearing----
    Senator Merkley. Mr. Chairman?
    Chairman Johnson. Yes?
    Senator Merkley. Before you close the hearing, I said it to 
Senator Corker as he was leaving. Unfortunately he had to 
leave, but I just want it for the record. On the question, our 
legislation does not prevent data collection. It simply does 
not require it, and there is a fundamental difference. But I 
look forward to working with him and other Members of the 
Committee to get to where we want to be.
    Chairman Johnson. This hearing is adjourned.
    [Whereupon, at 11:09 a.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
                   PREPARED STATEMENT OF BILL EMERSON
              Chief Executive Officer, Quicken Loans, Inc.
                              May 24, 2012
    Chairman Johnson, Ranking Member Shelby, and Members of the Senate 
Committee on Banking, Housing and Urban Affairs, I thank you for your 
invitation to testify at today's hearing for this very important issue: 
S. 3085: ``Responsible Homeowner Refinancing Act of 2012''. 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 background, Quicken Loans has been in business since 1985, and 
has approximately 5,000 employees, most of them working in downtown 
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 address HARP, HARP 2.0, the differences between 
the representations and warranties of a ``same servicer'' and ``new 
originator'' and how this affects the approximate four million 
underwater homeowners in America.
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, assisted about 900,000 homeowners 
through October 2011. On the surface, that seems like a large number. 
But upon closer examination, 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 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 Government Service Enterprises (GSE's) as HARP loans, 
but actually were made 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 some 200,000 eligible homeowners have been helped 
out of roughly four million who need help. 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 positioned to help more homeowners than HARP 1.0, and 
we applaud the current 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 be 
provided with the assistance they need.
    Why will HARP 2.0 fail to help many of these 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 borne 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 the borrower's (i) debt-to-income ratio 
calculations, (ii) income, or (iii) 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 challenges 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 
(for 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 bear a much 
higher degree of repurchase risk via their representations and 
warranties. 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.
S. 3085
    The ``Responsible Homeowner Refinancing Act of 2012'' (the ``Act'') 
goes a long way toward addressing many of the underlying problems. Our 
comments are below.
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 provides that 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.
Re-Subordination of Second Liens
    We support the spirit of the Act requiring that lenders subordinate 
to HARP loans.
Mortgage Insurance
    We support the spirit of the Act requiring that all mortgage 
insurers participate in the HARP 2.0 program.
Consistency
    We also agree with the language in the Act suggesting that the FHFA 
issue guidance requiring the GSE's 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 believe the current language in the Act removes 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 ``Responsible Homeowners Refinancing Act of 2012'' can 
remain exclusively focused on improving HARP 2.0 and avoid complicated 
detours into other subject matters, the new version of HARP 2.0 could 
help millions of underwater borrowers in short order. Therefore, we 
support the Act as proposed.
    Thank you for allowing me to testify on this very important topic.
                                 ______
                                 
              PREPARED STATEMENT OF CHRISTOPHER PAPAGIANIS
     Managing Director, e21: Economic Policies for the 21st Century
                              May 24, 2012
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, thank you for the opportunity to testify at this legislative 
hearing on ``The Responsible Homeowner Refinancing Act of 2012.'' I am 
the Managing Director of the nonprofit think tank e21: Economic 
Policies for the 21st Century (also known as Economics21). We aim to 
advance free enterprise, fiscal discipline, economic growth, and the 
rule of law. Drawing on the expertise of practitioners, policy makers, 
and academics, part of our mission is to foster a spirited debate about 
the way forward for democratic capitalism. We are supportive of free 
markets while recognizing the need to devise and implement a reasonable 
structure of law and regulation that will help ensure our markets avoid 
catastrophic events in the future. We are therefore focused on 
developing policies that advance market performance and implementing 
rules to prevent market malfunction.
    Previously, I was Special Assistant for Domestic Policy to 
President George W. Bush over the last few years of his Administration. 
In this role, I helped guide the collaborative process within the 
Executive Branch to develop and implement policies, legislation, and 
regulations across numerous agencies, including the Departments of 
Treasury and Housing and Urban Development.
    Today, I will focus on the following themes and provisions:

  1.  Reflections on the ``evolving'' housing market--supply and demand 
        dynamics.

  2.  Micro-policy uncertainty (servicing, underwriting, and GSE 
        reform).

  3.  The Responsible Homeowner Refinancing Act--Overview.

  4.  Realistic expectations for ``more'' refinancing--HARP 2.0 to 3.0.

  5.  Expanding the initial objective of HARP.

  6.  Addressing representation and warranty issues (i.e., putback 
        risk).

  7.  Loan Level Pricing Adjustments and other fees.

  8.  Mortgage insurance and second liens.

  9.  Moving the cut-off date and ``re-Harping'' loans.

  10.  Efforts to increase homeowner awareness of HARP.
1. Reflections on the ``evolving'' housing market--supply and demand 
        dynamics.
    Six years have passed since aggregate house prices started to 
decline. Yet, the housing market remains weak and any looming rebound 
in 2012 or 2013 is uncertain.
    Over the last few years, house prices have been under tremendous 
downside pressure. Distressed sales from foreclosures and the shadow 
inventory have been large contributing factors. Broader economic forces 
have also been at work, including high levels of unemployment, stagnant 
income or wage growth, and negative wealth effects from the decline in 
home equity.
    Without a doubt, there is still a great deal of stress across both 
the demand and supply dimensions of the housing market, as demonstrated 
by the thousands of borrowers that are still struggling to make their 
payments and stay in their homes.
    However, it's important to acknowledge that many of the major 
negative trends that have dominated the headlines since the crisis are 
now well off their post-crisis peaks. New delinquencies are trending 
lower on a percentage basis. \1\ The decline in home prices also 
appears to be leveling off or approaching a bottom on a national basis. 
While prices are only flat to slightly down year-over-year, there is 
finally some optimism in this area for probably the first time in more 
than 3 years. Data from Corelogic suggests that house prices have 
increased, on average, across the country over the first 3 months of 
2012 when excluding distressed sales. \2\
---------------------------------------------------------------------------
     \1\ http://www.lpsvcs.com/LPSCorporateinformation/NewsRoom/Pages/
20120424.aspx
     \2\ http://www.corelogic.com/about-us/news/corelogic-march-home-
price-index-shows-slight-year-over-year-decrease-of-less-than-one-
percent.aspx and http://www.calculatedriskblog.com/2012/05/corelogic-
house-price-index-increases.html
---------------------------------------------------------------------------
    A somewhat under-reported development in the market is the relative 
decline in the supply of homes for sale. \3\ The chart below shows how 
the existing stock of homes for sale is now approaching a level equal 
to 5-6 months of sales. \4\ This is a very promising development. 
According to the Commerce Department, the housing inventory fell to 
just over 5 months of sales in the first quarter, the lowest level 
since the end of 2005 (see the chart on the following page).
---------------------------------------------------------------------------
     \3\ http://online.wsj.com/article/
SB10001424052702304723304577366294046658820.html
     \4\ Monthly Supply of Homes in the United States (MSACSR); Source: 
U.S. Department of Commerce: Census Bureau.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    In short, the level of housing supply today suggests that the 
market is close to equilibrium, which implies house prices should rise 
at a rate consistent with rents. Market analysts often look at a level 
above or be low 6 months of sales as either favoring buyers or sellers 
respectively. It's not surprising then that the recent stabilization of 
home prices nationally has occurred as the existing inventory, or 
supply level, has declined.
    A couple of important caveats should be kept in mind, however. 
First, almost any discussion of national inventory trends can gloss 
over regional problems, or acute supply challenges in individual State 
markets. Second, the transaction data around home sales suggests that 
any near-term demand-supply equilibrium is occurring off of an 
extremely low base. In essence, weak demand for single-family homes 
appears to have eclipsed the supply challenge moving forward for the 
housing market.
    Consider that the National Association of Realtors Home 
Affordability Index is at its highest level in decades.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The Realtor's index measures the ``affordability'' of a median-
income family purchasing a median-priced home (using a 20 percent 
downpayment for a 30-year fixed rate mortgage). All of which is to say 
that house prices look low on a historical, user-cost basis.
    So, this begs the question--why are existing home sales still so 
depressed? After all, the Mortgage Bankers Association has reported 
that their index for purchase activity is at an approximately 15-year 
low.
    One of the major impediments to a rebound in demand for housing is 
tight lending or underwriting standards. Earlier this month, Federal 
Reserve Chairman Bernanke commented on this trend by reviewing 
information from the latest Senior Loan Officer Opinion Survey on Bank 
Lending Practices (SLOOS):

        To be sure, a return to pre-crisis lending standards for 
        residential mortgages wouldn't be appropriate; however, current 
        standards may be limiting or preventing lending to many 
        creditworthy borrowers. For instance, in the April SLOOS, we 
        asked banks a hypothetical question about their willingness to 
        originate GSE-eligible mortgages relative to 2006 for borrowers 
        with a range of credit scores and available downpayments. The 
        SLOOS found that even when the loans were accompanied by a 20 
        percent downpayment, many banks were less likely to originate 
        loans to borrowers with given GSE-eligible credit scores, 
        despite the originating bank's ability to sell the mortgage to 
        the GSEs. Most banks indicated that their reluctance to accept 
        mortgage applications from borrowers with less-than-perfect 
        records is related to ``putback risk''--the risk that a bank 
        might be forced to buy back a defaulted loan if the 
        underwriting or documentation was judged deficient in some way. 
        \5\
---------------------------------------------------------------------------
     \5\ http://www.federalreserve.gov/newsevents/speech/
bernanke20120510a.htm

    Other analysts have presented evidence before this Committee on how 
credit availability remains tight, including Laurie Goodman of Amherst 
Securities. \6\ Federal Reserve Governor Elizabeth Duke also gave a 
speech earlier this month on this theme, providing yet even more detail 
on the conclusions from the April SLOOS:
---------------------------------------------------------------------------
     \6\ Goodman: ``In reaction to the extremely sloppy underwriting 
standards prevailing in the 2005-2007 period, the GSEs and bank 
originators have dramatically tightened origination standards. The 
average GSE origination for 2009-2011 has a 762 FICO, and a 68 LTV. The 
average bank portfolio loan has a 756 FICO, 67 LTV.'' See: http://
banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=Of96eOff-8500-41a5-aOf2-
0139dOdf2e07.

    Compared with 2006, lenders are less likely to originate 
        GSE-backed loans when credit scores are below 620 regardless of 
---------------------------------------------------------------------------
        whether the downpayment was 20 percent or not.

    Lenders reported a decline in credit availability for all 
        risk-profile buckets except those with FICO scores over 720 and 
        high downpayments.

    When the lenders were asked why they were now less likely to offer 
these loans:

    More than 84 percent of respondents who said they would be 
        less likely to originate a GSE-eligible mortgage cited the 
        difficulty obtaining mortgage insurance as factor.

    More than 60 percent of lenders pointed to the risks of 
        higher servicing costs associated with delinquent loans or that 
        the GSEs might require them to repurchase loans (i.e., putback 
        risk). \7\
---------------------------------------------------------------------------
     \7\ http://www.federalreserve.gov/boarddocs/snloansurvey/201205/
fullreport.pdf

    Another important market development to acknowledge is that lenders 
are capacity constrained today. Anecdotal evidence suggests that some 
lenders are simply struggling to keep up with processing loan 
applications. Part of the problem appears to be the structural shift in 
the market towards full and verified documentation of income and 
assets, which has lengthened the processing time for mortgage 
applications.
    But if lenders and servicers don't have enough capacity, why are 
they not just hiring more staff or upgrading their infrastructure so 
they can handle more loans or business? This seemingly innocent 
question is really important. Don't market participants still perceive 
this business as profitable over the medium to long-term with a 
comparatively good return on investment when viewed against other 
business lines?
    Like Governor Duke, I believe that lenders or servicers are 
hesitating to make these investments in the near-term because they just 
don't have a good sense of how profitable the housing-finance and 
servicing business will be over the medium to long term.
2. Micro-policy uncertainty.
    Over the past few years, many analysts have held out the 
``uncertain'' macroeconomic outlook as a key reason why business 
investment remains depressed generally and the labor market continues 
to be weak. The connection or ripple effects to underperforming sectors 
of the economy is fairly straightforward. For example, a liquidity 
shock like a job loss is one of the key triggers for mortgage 
delinquencies and it's reasonable to expect lenders to remain flexible, 
or on the sidelines and not ``fully'' invested, until the labor market 
improves.
    That said, there is perhaps no other major industry that faces more 
micro-policy uncertainty than housing today. And, it's important to 
remember that basically all loans made today do not involve lenders 
actually assuming any of the credit risk in the event that a borrower 
defaults on their mortgage. \8\ The following chart from CBO reviews 
mortgage originations by the entity that bears the underlying credit 
risk. \9\
---------------------------------------------------------------------------
     \8\ There is some private mortgage insurance--but the broader 
point still holds.
     \9\ Source data is from Inside Mortgage Finance. CBO Working 
Paper: An Evaluation of Large-Scale Mortgage Refinancing Programs. 
September 2011.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    If lenders are capacity constrained but are not even helping to 
originate mortgages that have them not taking on new credit risk, the 
implication is that there are probably other discrete micro-policy 
uncertainties that are holding back a broader recovery in housing, 
including the legal risk that mortgages are transferred back to the 
originator (along with the underlying credit risk). I group these 
micro-policy risks into three buckets: servicing, underwriting, and GSE 
reform.
A. Uncertainty within servicing
    The Consumer Financial Protection Bureau (CFPB) recently 
        announced that it plans to propose new industry-wide servicing 
        rules for all mortgages. The end result could certainly be a 
        positive for all stakeholders over the long-term, but there is 
        a lot of uncertainty about how this will impact the cost-
        structure of servicing in the future. In turn, this may be a 
        factor in servicers delaying the decision to make new 
        investments in their servicing infrastructure.

    FHFA has a pending initiative to change the way that 
        servicers are compensated by the GSEs. Many industry 
        stakeholders believe that this new compensation regime could 
        quickly become the de facto industry standard, even for non-GSE 
        loans. As servicers discovered during the crisis, they were not 
        charging sufficient fees to cover the costs associated with 
        large-scale modifications, which require a much more robust 
        infrastructure.

    The Basel process has changed the capital treatment of the 
        asset known as ``mortgage servicing rights'' (MSR), which in 
        essence is the expected cash-flow or revenue that servicers 
        expect to earn off a book of mortgages. In short, the 
        implementation of the new Basel rules is set to limit how MSRs 
        can be counted as regulatory capital. This means that banks or 
        lenders may seek to sell or shrink their servicing business 
        since MSRs will not have the same capital management 
        advantages. \10\
---------------------------------------------------------------------------
     \10\ From the April SLOOS: 38.6 percent of banks mentioned new MSR 
capital treatment as a factor. This process could also impact 
perceptions of whether MSRs should be considered ``tangible'' book 
value for extra-regulatory capital assessments performed by analysts as 
part of their valuations.
---------------------------------------------------------------------------
B. Underwriting requirements and securitization
    The Dodd-Frank Act directed regulators to set requirements 
        that ensure a borrower has the ability to repay a mortgage 
        (also known as ``qualified mortgage'' or QM) and to establish 
        the definition for a ``qualified residential mortgage'' or QRM, 
        which is the subset of QM that would not be subject to risk 
        retention requirements.
C. GSE reform and the future of mortgage finance
    By the end of 2012, more than 4 years will have passed 
        since Fannie Mae and Freddie Mac were put into conservatorship. 
        The Dodd-Frank law was enacted in 2010, but didn't address the 
        two failed enterprises. It's key for the Government to announce 
        a clear framework and timetable so homebuyers, sellers, and 
        suppliers of capital can adjust and make plans for the future. 
        \11\ The counterargument that today's fragile housing market 
        should be left alone to heal is no longer sustainable. 
        Congressional inaction still represents a choice, albeit one 
        that assumes that the current degree of uncertainty around the 
        future model of mortgage finance in this country is not holding 
        back a housing recovery. Schedule and speed are two discrete 
        issues. \12\ Congress could establish a framework but then set 
        a deliberate transition schedule that would allow for 
        monitoring market conditions.
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     \11\ http://www.bloomberg.com/news/2012-01-23/put-fannie-and-
freddie-on-federal-books-papagiani s-and-swagel.html
     \12\ http:/Idailycaller.com/2011/11/10/time-to-end-the-taxpayer-
guarantee-of-mortgage-investors/
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    GSE reform is also increasingly connected to the housing-
        demand problem. Rather than having the Government (through 
        Fannie, Freddie, and FHA) so comprehensively involved in 
        setting mortgage underwriting standards, it would be better for 
        the private sector to take on the risk and rewards of credit 
        decisions. While the temptation for public officials to involve 
        themselves in the details of credit standards is logical given 
        the current conservatorship arrangement, it's important to take 
        a step back and at least question whether this trend is at 
        least partly responsible for the lack of private sector 
        interest in the space.

    All of these elements affect the cost structure and opportunity 
cost associated with mortgage lending, which of course factors into the 
relative appeal of the mortgage finance and servicing business. They 
also impact the future of house prices, as credit terms and 
availability are intimately linked to the user-cost of housing.
    The urgency to resolve all of this uncertainty is all the more 
important because while there are clear short-term impacts on the 
market, there are also potential long-term consequences. For example, 
if lenders decide to hold off on making new near-term investments in 
their mortgage business, the long-term potential of a full rebound in 
housing may be diminished as the existing or legacy infrastructure and 
skills can be expected to atrophy further.
    Mortgage servicers are not in business to lose money. Moreover, the 
total volume of societal resources devoted to performing this 
function--employees, investment in computers and telecommunications 
infrastructure, legal compliance officers, sales staff--is not static. 
It adjusts upwards and downwards based on perceived opportunities, 
expected future revenues, and Government involvement. Today, it is 
clear that investments that could be made are not because of concerns 
that regulations will impose cost burdens on the industry that cannot 
be recovered through servicing fees or other revenue streams that may 
look like ``hidden charges'' to regulators. At the same time, no one 
really knows who the ultimate purchasers of mortgages are likely to be 
5 years from now. Since the ultimate holders of mortgages--currently 
the GSEs--are the servicers' client base, the current lack of clarity 
on who or what is likely to fund mortgages in the future has obvious 
ripple effects on servicers and all other professions exposed to 
mortgage finance.
    A similar phenomenon is casting a shadow over the mortgage 
insurance industry. The difficulties in obtaining mortgage insurance 
are constraining lenders from selling to Fannie and Freddie, even if 
they have found buyers and are willing to originate the loans. Several 
mortgage insurance companies have failed in recent years, others are no 
longer offering insurance on a forward-looking basis and are just 
managing their existing exposures.
    While I believe this backdrop is crucial to understanding the 
challenges that face the housing market moving forward, I don't want my 
comments to be interpreted as precluding any new legislative or 
regulatory action that is aimed at addressing a near-term friction in 
the market.
    My view is simply that resolving the aforementioned uncertainty 
holds by far the greatest potential, on a comparative basis, for 
positively and responsibly impacting the housing market moving forward.
3. Overview--The Responsible Homeowner Refinancing Act.
    The expansion of HARP (2.0) announced in October 2011 and fully 
implemented in March, along with the additional expansion contemplated 
under Menendez-Boxer, is meant to both reduce foreclosures (by 
improving affordability) and provide a stimulative boost to the 
economy. This stimulus effect would come from increased spending by 
borrowers who would have more money as a result of having to make lower 
monthly mortgage payments as a result of a refinancing.
    I agree with the comments from Professor Phillip Swagel before this 
Committee earlier this year that these types of refinancing efforts are 
analogous to the stimulus plans that would send a monthly check to 
qualifying households. \13\ My view is informed by the fact that the 
previous HARP expansion, and the one being contemplated today, would be 
limited to borrowers who have been in their homes for at least 3 years 
and have made all of their payments on-time over the preceding year 
(with an allowance for one 30-day late payment in the previous 6 
months).
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     \13\ http://banking.senate.gov/public/
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    In short, HARP expansions are aimed at borrowers who have kept up 
on their payments despite a very challenging economic environment. 
While each additional HARP participant will receive a benefit that will 
help them on the margin, the broader point here is that the targeted 
population is not particularly ``at-risk'' of foreclosure on a 
comparative basis.
    Approaching the issue from the other side, the households most in 
need of relief are also precisely the borrowers most likely to increase 
the credit risk exposure of the GSEs (on net). It's this conclusion 
that leaves stimulus as the main driver of the refinancing program--not 
foreclosure prevention.
4. Realistic expectations for ``more'' refinancing--HARP 2.0 to 3.0.
    When HARP was first established in 2009, the Obama administration 
projected that 4-5 million people would be helped. Before HARP 2.0 
really took effect in March 2012, the program had helped approximately 
1.1 million borrowers refinance. \14\
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     \14\ http://www.fhfa.gov/webfiles/23906/Feb2012 
ForeclosurePrevention.pdf
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    It is still way too early to project with any real confidence how 
many additional people will be helped as a result of the HARP 2.0 
expansion. Putting aside the challenge of properly categorizing 
beneficiaries as having only been able to participate as a result of 
the programmatic changes rolled out in March (versus 1.0), the recent 
spike in HARP applications suggests that HARP 1.0/2.0 could see a 
significant jump in take-up or participation.
    Secretary Donovan commented to this Committee earlier this month 
that servicers have already started processing applications from nearly 
a half-million families. FHFA Director DeMarco estimated that by the 
end of 2013, HARP refinancings could double from their current level. 
\15\
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     \15\ http://www.fhfa.gov/webfiles/22723/
HARP%20release%20102411QandA%20Final.pdf 
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    Let me encourage this Committee to request specific data on these 
applications and projections to learn more about how lenders and 
borrowers are responding to HARP 2.0. In fact, its hard to recommend 
that policy makers move forward with additional changes to HARP without 
first reviewing this new data. After all, I'm not aware of any official 
presentation on how HARP 2.0 will impact total take-up for the program.
    This exercise could also go along way towards narrowing the 
enormous range for potential take-up estimates that analysts are using 
for this HARP 3.0 proposal. Against this fluid backdrop around 
projections, I would also recommend that proponents of this bill remain 
cautious about setting unrealistic expectations with regards to the 
number of incremental borrowers that would be helped under a further 
HARP expansion.
    For example, many commentators over the past few weeks have 
conflated the take-up projections from some of Professor Chris Mayer's 
plans in this area. \16\ But an important distinction is that the 
Menendez-Boxer bill would keep in place the current delinquency 
standard for determining borrower eligibility. Under the version of 
Professor Mayer's plan that has received the most attention, borrowers 
would only need to have made their last three payments on-time in order 
to qualify whereas Menendez-Boxer would keep the requirement that 
borrowers must be current on their mortgage over the previous year 
(with one 30-day late payment allowed over the previous 6 months). It's 
reasonable to conclude that this difference would have a fairly 
dramatic effect on projected take-up, which means the Menendez-Boxer 
bill would likely fall considerably short of the projections that 
Professor Mayer has advanced.
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     \16\ http://www4.gsb.columbia.edu/null/
download?&exclusive=filemgr.download&file_id=739308
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    Properly calibrating take-up expectations is especially important 
given the poor track record of practically all of the major 
modification and refinance programs that have been launched to date. 
The Committee should request, if it has not already, a detailed take-up 
projection from both FHFA and CBO that specifically takes into account 
the trajectory for HARP 2.0 refinancings and then describes the 
incremental take-up that would be achieved by each of the provisions in 
the Menendez bill. To not ask for and then review this information 
would open up this Committee to repeating some of the more common 
errors that have occurred since the crisis around appropriately 
managing expectations.
5. Expanding the initial objective of HARP.
    This HARP 3.0 proposal can be considered across two dimensions with 
regards to take-up and eligibility. First, what can or should be done 
to further increase the penetration of HARP--or the original pool of 
borrowers that were targeted. Second, should the scope of the HARP 
program get adjusted--to pull in new borrowers that would not have been 
eligible previously. My view is that the merits or case for the second 
objective is much more limited than the first.
    For example, expanding the HARP program to help more borrowers that 
are not underwater, particularly those with more than 20 percent equity 
in their homes, will likely end up only ``counting'' borrowers who 
could have refinanced without the additional programmatic flexibility. 
The GSEs already have other streamlined refinancing programs for these 
borrowers.
    If the Committee is set on blurring the line or the original 
intention of the HARP program with regards to borrowers with more than 
20 percent equity, one idea to consider would be a combined loan-to-
value ratio (CLTV), which could help target the additional programmatic 
flexibility to those borrowers who are underwater (when home equity 
lines of credit or second liens are factored in to the equation). 
Consideration could also be given to further limits on the ``cash out'' 
allowance for borrowers who pursue a HARP refinancing. While the 
current allowance may help boost or incent borrower participation, it's 
questionable whether extracting any additional equity in the form of 
cash should be encouraged right now.
6. Addressing representation and warranty issues (i.e., putback risk).
    The current system of relying on representations and warranties to 
help ensure quality originations should probably be revisited on a 
wholesale basis. Right now, lenders are concerned not only about 
assuming new putback risk when they refinance another lender's original 
mortgage, but also that some of their own new originations may 
eventually default and then add to their overall put-back exposure. 
Devising a system that verifies loan origination quality before an 
eventual default triggers a review of representations and warranties 
violations should be a common objective for all market participants.
    In the near-term, it's important to acknowledge that FHFA has 
already made a lot of progress with regards to rep and warranty issues 
as it relates to HARP. The Menendez-Boxer bill attempts to wash away 
the remaining rep and warranty concerns so that lenders or servicers 
compete more for refinancing business--without having to consider 
whether they are assuming more putback risk in aggregate. The mission 
here appears to be to lower the prices or premiums that lenders are 
charging HARP borrowers compared with regular refinancings. \17\
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     \17\ Laurie Goodman has made the case that the lack of servicer 
competition for refinancings has led to a large price differential 
between HARP and non-HARP refinancings and new purchase loans. FHFA's 
letter to Sen. Boxer on May 17 suggests this issue is not 
straightforward.
---------------------------------------------------------------------------
    I am not opposed to this action, but I do have concerns that the 
expected competitive benefits may not materialize. It is still very 
possible, if not likely, that the lenders competing for new refinancing 
business will still charge a premium to take on the new underwater 
borrower since it is generally more expensive to service these 
borrowers over the long-term given that they face a higher incidence or 
probability of delinquency. FHFA also indicated in a letter to Sen. 
Boxer (dated May 17th) that the data ``clearly demonstrate that the 
rates for HARP loans are similar to those for other Enterprise-backed 
refinance products,'' a point which directly undermines the case for 
making this change. Deutsche Bank also did an analysis of HARP pricing 
as part of a research note published on April 18th that generally 
supports FHFA's claims. \18\
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     \18\ ``Analysts and policy makers have justifiable interest in 
understanding the profitability of mortgage lending these days, 
particularly if policy has inadvertently distorted the market. Any 
analysis of HARP has to account for the risk-based pricing that Fannie 
Mae and Freddie Mac have mandated for most of the life of the program 
through the LLPAs. Mortgage bankers may have captured some extra 
revenue from the program. But the lion's share of it looks like it has 
flowed from borrowers' risk-based coupons, through the hands of the 
mortgage banks and the agencies and into the pockets of taxpayers.''
---------------------------------------------------------------------------
    FHFA also made the case in this letter that the processes under 
same-servicer and new-servicer arrangements are comparable:

        [T]he lender is responsible for determining that the borrower 
        meets the basic eligibility standards, based on the information 
        available to them, and that the data used to make the 
        determination is accurate. There are no higher-level demands on 
        a new originator; in fact, the new originator may be at a 
        slight advantage to an existing lender, because they have no 
        responsibility whatsoever for the original loan, whereas the 
        existing lender continues to be liable for any fraud or 
        noncompliance with Federal and State laws, including the 
        Enterprises' Charter Acts. As a result, in some instances, 
        existing servicers choose to use the automated underwriting 
        tools provided by the Enterprises, which are generally used by 
        new originators, to extinguish any responsibility for the old 
        loan.

    Taking a step back, providing relief for representations and 
warranties can also be an expensive proposition for the GSEs (as 
reviewed or determined by FHFA). CBO described this very well in their 
working paper from September:

        A potentially important consideration is that a large-scale 
        refinancing program may negatively affect the value of the 
        GSEs' and FHA's contractual right to recover money from the 
        originating lender in some instances. Specifically, they may 
        ``put back'' a defaulted loan to the originating lender if the 
        loan was closed in violation of the lender's representations 
        and warranties, avoiding losses associated with those loans. 
        Once a loan is refinanced, they forgo the right to put back 
        losses associated with the original loan (assuming the 
        refinanced loan does not also violate those representations and 
        warranties).

    CBO went on to describe how difficult it is to estimate the cost of 
providing this relief to lenders. Important factors include the number 
of outstanding legal disputes between lenders and the GSEs and also the 
scope of existing settlements. Here is the key line from CBO on this 
issue: ``For the put-back option on the incremental participating loans 
to have value, the borrower must default on the loan, a violation of 
representations and warranties must be uncovered and the loan must be 
from a lender that has not already negotiated a settlement with the 
GSEs or FHA on violations of previously originated loans.''
    Before proceeding with this legislation, both FHFA and CBO should 
disclose how much the incremental representations and warranties relief 
under Menendez-Boxer would cost the taxpayer, or the GSEs. \19\
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     \19\ Some of the concerns in this area may be offset by how the 
loans from HARP-eligible borrowers are ``seasoned'' at this stage. See 
FHFA's comments from when they announced the representations and 
warranties relief under HARP 2.0: ``Nearly all HARP-eligible borrowers 
have been paying their mortgages for more than 3 years, and most of 
those for 4 or more years. These are seasoned loans made to borrowers 
who have demonstrated a capacity and commitment to make good on their 
mortgage obligation through a period of severe economic stress and 
house price declines. Reps and warrants protect the Enterprises from 
losses on defective loans; typically, such defects show up in the first 
few years of a mortgage and so the value of the reps and warrants 
decline over time. By refinancing into a lower interest rate and/or 
shorter term mortgage, these borrowers are recommitting to their 
mortgage and strengthening their household balance sheet, thereby 
reducing the credit risk they already pose to the Enterprises. 
Therefore, FHFA has concluded that eliminating the reps and warrants 
that may have discouraged industry participants from taking greater 
advantage of HARP to-date will be good for borrowers, housing markets, 
and the Enterprises and taxpayers.'' http://www.fhfa.gov/webfiles/
22723/HARP%20release%20102411QandA%20Final.pdf
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    A more minor representations and warranties issue exists for loans 
with LTVs below 80 percent. Fannie has waived lenders' representations 
and warranties exposure for this cohort of HARP borrowers, but Freddie 
has not. I do not think there is a reason why the policies for Fannie 
and Freddie in this area should not be in alignment. Perhaps one factor 
that drove Freddie not to change their representations and warranties 
policy for loans below 80LTV, however, is that they purposely wanted to 
incent lenders to target borrowers with less or even no equity. This 
rationale or concern should be further explored by the Committee, 
especially since underwater borrowers are rightfully the focus of the 
program.
7. Loan level pricing adjustments and other fees.
    While HARP 2.0 greatly reduced the loan level pricing adjustments 
(LLPAs), the Menendez-Boxer bill would eliminate them completely. Under 
HARP 2.0, LLPAs are capped at 75 basis points of the loan amount. The 
rationale is that the GSEs already own the credit risk on these loans. 
While I would want to hear why FHFA has not embraced this position, 
absent additional information this seems like an appropriate step to 
consider.
    That said, it's also important to recognize that eliminating these 
fees would result in only a minor incremental benefit to borrowers and 
there could be some marginal lost revenue for taxpayers under the terms 
of conservatorship. A broader point is also worth keeping in mind here, 
namely that all borrowers or beneficiaries of a Government-backed 
mortgage should continue to expect to pay at least some amount for 
receiving a Government insured mortgage. If the long-term objective is 
for the GSEs to charge a market price for a Government guarantee--to 
reduce or limit the current and ongoing subsidy--then a change in 
policy that effectively eliminates even a modest risk-based fee should 
give policy makers some pause. There is also the issue that eliminating 
LLPAs would mean that the broader GSE business--and all of the other 
mortgage borrowers specifically--would indirectly be cross-subsidizing 
HARP refinancings.
8. Mortgage insurance and second liens.
    In general, the Menendez-Boxer bill would require automatic 
transfer of mortgage insurance and second liens and use a fine as the 
mechanism to ensure compliance. The goal is to make these contracts 
portable under the same terms with regards to the original mortgage and 
the refinanced one. There was some concern when HARP 2.0 was coming 
together that the representations and warranties for mortgage insurers 
would not be re-validated through the refinancing process, but I 
believe that this issue has been largely resolved.
    Given that I think the purported benefits (with regards to 
additional take-up) in this area are small, I am concerned about the 
signal this provision sends to private suppliers of capital in the 
housing market. Remember, under HAMP--second lien holders are getting 
paid to resubordinate. If this provision were to take effect, then HARP 
would take the exact opposite approach by fining these same entities to 
achieve the same result. In the long-term, nearly every GSE reform 
proposal notes the importance of attracting more private capita l to 
bear credit risk. Provisions like this one, at least on the margin, 
will make that effort more difficult by further unsettling the market 
expectations by signaling that policy makers could continue to change 
the rules of road for private capital providers midstream.
9. Moving the cut-off date and ``re-Harping'' loans.
    This is perhaps the most controversial change contemplated by the 
Menendez-Boxer bill. Moving the cut off date for eligibility from June 
2009 to June 2010 could increase HARP take-up. But the incremental 
borrower pool would not be a cohort that could reasonably expect to 
receive a sizeable reduction in their mortgage payment through a 
refinancing (at least on a comparative basis). This simply acknowledges 
that for most of these borrowers the rate differential would be fairly 
marginal in comparison to other HARP beneficiaries.
    One concern is that changing the date could indirectly crowd out 
other borrowers who would be eligible for HARP--a reflection of the 
fact that servicers are capacity constrained. Another concern is that 
the market has long worked off of this date--as it was the cut-off 
established when HARP was announced and it's also a date that FHA uses 
for some of its refinancing programs. Laurie Goodman has described this 
as breaking the ``covenant with investors.'' I share her concerns and 
agree with her description of the issue:

        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. \20\
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     \20\ http://banking.senate.gov/public/
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29b55f7f63bc

    The exact consequences from a date change are difficult to predict. 
If lender expectations change such that they now believe that new 
refinancings or originations might be eligible in the future for relief 
from representations and warranties, then they might be incentivized to 
process more loans with questionable underwriting in the meantime. At 
minimum, I would recommend that policy makers consider whether to 
explicitly prohibit the re-harping of loans to limit the negative 
effects of changing market expectations.
    I want to be clear here that buyers of MBS--and in this case GSE-
backed MBS--rightfully assume any refinancing risk. They are 
compensated for this in the spread that is charged on rates or yields 
for GSE MBS above Treasury debt securities. But, when refinancing 
programs are continually expanded, investors may be forced to adjust 
their expectations about future prepayment speeds, effectively assuming 
that future mortgages will have an embedded policy-risk function that 
could give borrowers easier access to a lower rate mortgage. While that 
may sound like a good policy objective, the net effect could be that 
market participants simply demand higher yields on MBS moving forward--
negating any of the near-term benefits to a change in this area over 
the medium to long-term. Put another way, current homeowners might 
benefit at the expense of future borrowers as the premium associated 
with the refinance option is revalued upward prospectively.
    In the case of allowing for loans to be re-HARPed, the market 
should be expected to fold into the price that borrowers pay an 
additional premium to account for this additional prepayment risk. In 
short, it's possible that the effect of a date change could be that the 
prices for HARP refinancings actually go up. And it's unclear to say 
the least at this point if making HARP more expensive on the margin is 
worth the trade-off of boosting volume, again on the margin.
10. Efforts to increase homeowner awareness of HARP.
    The Menendez-Boxer bill would require the enterprises to notify all 
eligible borrowers of their opportunity to participate in HARP. While I 
have some concerns that families and borrowers are now being inundated 
with ``awareness'' campaigns, the objective is clearly admirable.
                                 ______
                                 
                    PREPARED STATEMENT OF MOE VEISSI
      2012 President, National Association of Realtors'
                              May 24, 2012
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.
    My name is Moe Veissi, and I am the 2012 President of the National 
Association of REALTORS'. I have been a REALTOR' 
for over 40 years, and am the broker-owner of Veissi & Associates, 
Inc,. in Miami, FL. Since 1981, I have served the REALTOR' 
community in many capacities, from local association president, to 
State association president, to regional Vice-President, and now on the 
national stage as the NAR President in 2012. My life and my passion are 
real estate. So, it is my honor to be here today to lend voice to NAR's 
1.1 million members, and the millions of Americans who own a home, want 
to sell a home, or just provide rental opportunities to those who 
require a home.
    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.
    That sentiment was acknowledged by Federal Reserve Chairman 
Benjamin Bernanke during comments he made to the Federal Reserve Bank 
of Chicago on May 10th. Chairman Bernanke indicated that, although 
``conditions in the financial system have improved significantly'' 
lending remains strained in the U.S. home-mortgage market. He went on 
to note that ``tighter lending standards and loan terms remain 
especially evident in the mortgage market,'' though banks are seeing 
growing demand for consumer credit and they are lending more easily in 
the credit card and auto loan sectors. The Chairman acknowledged that 
``while a return to lax lending standards that prevailed before the 
housing bust would not be wise, current standards may be limiting or 
preventing lending to many creditworthy borrowers.''
    The ``Responsible Homeowner Refinancing Act'' will encourage 
lenders to return to the home mortgage market by removing impediments 
and allow ``current borrowers,'' whose loans are owned by Fannie Mae 
and Freddie Mac, 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. 
According to NAR's analysis, based on data gathered by Lender 
Processing Services, this effort would support over 3 million 
refinances, reduce average annual payments by $2,800, and save 
borrowers between $4.5 billion to $4.8 billion per year, after tax 
considerations (see Appendix A).
    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. According to NAR's white paper, Cutting Through 
the Red Tape, ``the CBO estimates that a similar program extended to 
loans securitized by the GSEs and FHA might result in 111,000 fewer 
defaults.'' 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 Non-housing 
        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. NAR applauds 
the Menendez-Boxer legislation for not utilizing the guarantee-fee as a 
``pay-for'' to support this legislation.
    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 piggybank. Though they are only rumors about the potential use 
of g-fees to cover another nonhousing 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.
    In this period of tenuous housing recovery, we must utilize all 
available tools to encourage lenders and consumers to take the steps 
necessary to successfully support home ownership.
    We can accomplish this by supporting efforts like the ``Responsible 
Homeowner Refinancing Act'' that is aimed at helping ``current 
homeowners'' lower their monthly payments, and by creating confidence 
in the housing finance system that encourages lenders to reach out to 
creditworthy borrowers.
    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.


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                    PREPARED STATEMENT OF MARK ZANDI
            Chief Economist and Cofounder, Moody's Analytics
                              May 24, 2012
    The U.S. economy has made significant progress since the Great 
Recession ended 3 years ago. Payrolls have increased by 3.75 million 
since job growth resumed, and the unemployment rate has fallen by 
nearly two percentage points from its peak. Businesses and households 
have reduced their debt loads significantly, and the financial system 
is much better capitalized.
    Despite this progress, the recovery is still struggling to take 
root. The U.S. economy is growing, but at a disappointing pace, and the 
unemployment rate remains uncomfortably high at more than 8 percent. 
The economy also faces significant threats, including turmoil in Europe 
and the Federal Government's rapidly approaching fiscal cliff. Policy 
makers also need to credibly address the Nation's long-term fiscal 
challenges.
    Another significant impediment to stronger growth is persistent 
weakness in the housing market. Home sales and construction are off 
bottom but still extraordinarily low, and house prices remain weak in 
many parts of the country. With millions of foreclosures and short 
sales certain to hit the housing market over the next several years, 
prices could fall further.
    The economy will not be in full swing until house prices are rising 
consistently. For most Americans, the home is still the most important 
asset, and consumers will be reluctant to spend while their wealth 
erodes. Many small-business owners use their homes as collateral for 
business loans, and local Governments rely on property tax revenues, 
which are tied to housing values, to fund schools and other important 
public services. Other serious longer-term effects of falling house 
prices include a reduction in labor mobility and the erosion of 
retirement savings for low- and middle-income homeowners.
    There are some reasons to be optimistic that the housing slump is 
ending. Prices have fallen enough to make single-family housing 
affordable and attractive compared with renting. Investors are putting 
up cash to purchase distressed properties. Overbuilding remains a 
problem, but a diminishing one, given a record low pace of construction 
and increased household formation.
    But this optimism will be easily overwhelmed if house prices fall 
further, risking a vicious cycle that puts more homeowners underwater, 
accelerating foreclosures and distress sales and driving prices lower 
still. During the recession, only an unprecedented monetary and fiscal 
policy response short-circuited that cycle. \1\
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     \1\ An estimated 14.1 million homeowners are underwater, 6.2 
million by more than 30 percent.
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    In light of the risks, policy makers should consider additional 
temporary help for housing. Once expectations for home prices turn 
positive, the foreclosure crisis will abate quickly and the recovery 
will gain traction. Given that house prices in many parts of the 
country are already low relative to incomes and effective rents, it 
wouldn't take much additional effort to accomplish this. The key is to 
reduce the number of properties in delinquency or foreclosure before 
they reach the market as distress sales. House prices will rise 
significantly once the distressed share of home sales declines 
definitively.
    Moving more properties out of the foreclosure pipeline before they 
go to distress sales would reduce the downward pressure on home values. 
A key to doing this is to get private investors and property managers 
involved in converting distressed properties to rentals. Investors show 
a healthy interest in doing this, attracted by the combination of low 
purchase prices and sharply rising rents. Most investors are not house 
flippers looking for quick profits--considering the state of the 
housing market, this wouldn't be a winning strategy--but have 
investment horizons of 3 to 7 years. Such investors will likely be 
willing to rent properties purchased from Fannie Mae, Freddie Mac, and 
the Federal Housing Administration for at least several years, selling 
them after house prices begin to rise again.
    Facilitating more loan modifications, including those involving 
principal reduction, would be a much larger and costlier step but would 
bring the housing downturn to a quicker and more definite end. 
Principal write-downs have economic positives and negatives, but are a 
net positive if well designed. The main concerns are moral hazard and 
fairness. To deal with these, modifications must be well targeted, with 
clearly articulated eligibility requirements. A long vesting period and 
some type of clawback provision for future capital gains to guard 
against potential fraud would also be helpful. The number of 
modifications and the amount of principal reduction necessary to 
stabilize house prices can be reasonably financed with funds from the 
recent mortgage settlement and the president's proposals to expand Home 
Affordable Modification Program, or HAMP.
    Arguably the most straightforward policy step would be to provide 
further support to mortgage refinancing. Despite record low mortgage 
rates, many homeowners continue to have difficulty refinancing. Recent 
changes to the Home Affordable Refinance Program appear to be helping 
more of these households, but policy makers can take further steps to 
encourage refinancing. Legislation being considered by Congress, 
including the Responsible Homeowner Refinancing Act, the Expanding 
Refinancing Opportunities Act, and the Rebuilding Equity Act, would be 
very helpful in this regard. More refinancing will mean fewer borrower 
defaults and more money in the pockets of homeowners, supporting the 
recovery through a quick and sizable cash infusion at no meaningful 
cost to taxpayers.
More Mortgage Refinancing
    Policy makers should act to substantially increase mortgage 
refinancing activity. \2\ This is a propitious time for homeowners to 
refinance, as mortgage rates have fallen to record lows. The 30-year 
fixed mortgage rate for prime borrowers is currently below 4 percent 
and likely to remain low for some time in light of the Federal 
Reserve's stated resolve to keep interest rates modest for several 
years. The central bank is also keeping open the possibility of 
additional quantitative easing, which would likely include more 
purchases of mortgage-backed securities by the Fed.
---------------------------------------------------------------------------
     \2\ Calls for policy makers to enable mortgage refinancing have 
steadily increased since late 2010. See, Mark Zandi and Cristian 
DeRitis, ``Restringing HARP: The Case for More Refinancing Now'', 
Moody's Analytics Special Report, October 7, 2010. http://
www.economy.com/mark-zandi/documents/HARP_100710.pdf
---------------------------------------------------------------------------
    Despite record low borrowing costs, refinancing has been 
disappointingly slow. In 2003, when fixed mortgage rates were between 
5.5 percent and 6 percent, home loans were being refinanced at an 
annualized rate of more than $4 trillion. The current level is about 
one-fourth of that (see Chart 1). The 2003 boom was fueled by the large 
number of mortgages that had been originated when rates were much 
higher, making a sub-6 percent rate very attractive. Yet even today, 
some two-thirds of all outstanding mortgages carry coupons above 5 
percent. Millions more U.S. homeowners should be refinancing, 
significantly cutting their monthly payments. This would be a boost 
both for individual household finances and for the economic recovery.


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    The Obama administration has worked since the introduction of the 
Home Affordable Refinance Program in mid-2009 to encourage refinancing 
among homeowners with little or negative equity whose loans are insured 
or owned by Fannie Mae and Freddie Mac. Originally, the Administration 
said HARP would allow between 4 million and 5 million homeowners to 
reduce their interest rates to market levels. But so far, only about 
1.2 million homeowners have refinanced using HARP, and just more than 
100,000 underwater homeowners have refinanced. \3\
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     \3\ The FHFA tracks HARP refinancing activity on a monthly basis. 
The most recent data are available at http://www.fhfa.gov/webfiles/
23906/Feb2012ForeclosurePrevention.pdf
---------------------------------------------------------------------------
    The disappointing results prompted the Administration to make a 
number of important changes to HARP late in 2011. These included 
relaxing eligibility requirements, allowing loan-to-value ratios higher 
than 125 percent, streamlining the appraisal and underwriting process, 
persuading mortgage insurers to drop recession rights, and requiring 
Fannie and Freddie to relax their reps and warranties. It has taken a 
few months for mortgage servicers and insurers to implement the new 
HARP rules, but the benefits have become evident. \4\ HARP refinancings 
in early 2012 appear to have run close to 50,000 per month, up from 
30,000 per month since the program's inception (see Chart 2). Also 
encouraging has been a more recent pickup in applications for 
refinancing as reported by the Mortgage Bankers Association. Mortgage 
servicers appear to be particularly enthusiastic about the possibility 
of reducing their put-back risk. \5\
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     \4\ See Mark Zandi and Cristian DeRitis, ``Improved HARP Will 
Expand Refinancing and Boost Recovery''. Moody's Analytics Special 
Report, October 31, 2011. http://www.economy.com/mark-zandi/documents/
2011-10-26-Zandi-Improved-HARP-Will-Expand-Refinancing-Boost-
Recovery.pdf
     \5\ Put-back risk is the chance that Fannie and Freddie will 
require the servicer to take back a loan that was improperly 
originated. There is also a risk that mortgage insurers will rescind 
insurance on a poorly underwritten loan. The cost to servicers of 
having loans put back has been considerable.


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    In February 2012, the Administration proposed even more aggressive 
steps to support refinancing, affecting all mortgage loans including 
those insured by Fannie, Freddie, the FHA and nongovernment lenders. 
\6\ Congress is working to implement these proposals in legislation 
being considered, including the Responsible Homeowner Refinancing Act, 
the Expanding Refinancing Opportunities Act, and the Rebuilding Equity 
Act. \7\ With a few changes, this legislation should be enacted. If 
passed quickly, it should meaningfully boost refinancing, speeding the 
recovery in housing and the broader economy.
---------------------------------------------------------------------------
     \6\ A fact sheet describing the President's housing plan can be 
found at http://www.whitehouse.gov/the-press-office/2012/02/01/fact-
sheet-president-obama-s-plan-help-responsible-homeowners-and-heal-h
     \7\ Recent versions of this legislation can be found at: http://
www.opencongress.org/bill/112-s3085/text; http://
www.feinstein.senate.gov/public/index.cfm/files/serve/
?File_id=7c86b21c-6466-4684-b8ab-
543c76d23ff3&SK=12CACF0005BFD88B9D24F3FC7528118F; http://www.gpo.gov/
fdsys/pkg/BILLS-112s2909is/pdf/BILLS-112s2909is.pdf
---------------------------------------------------------------------------
    For Fannie and Freddie loans, the Responsible Homeowners Act would 
apply the new HARP rules to all loans, not just those with loan-to-
value ratios higher than 80 percent, as is now the case. For 
nongovernment loans, the Expanding Refinancing Opportunities Act would 
allow servicers to refinance into FHA loans. The FHA would drop these 
refinanced loans from its ``compare ratio'' process by which the 
performance of lenders is assessed (analogous to Fannie and Freddie's 
reps and warranties). The Rebuilding Equity Act would require the 
Government-sponsored enterprises to pay closing costs when homeowners 
agree to loans of 20 years or less with monthly payments equal to those 
on their current loans. This would allow homeowners to build equity 
more quickly.
    This legislation would substantially increase the pool of 
homeowners eligible to refinance and remove impediments to more 
refinancing. Significantly reducing the put-back risk faced by lenders 
on refinanced loans would encourage lenders to aggressively compete for 
refinancing business. Lowering borrowers' closing costs would increase 
the incentive for them to participate as well.
    If fully implemented, this legislation would increase the number of 
homeowners eligible to refinance and ``in the money'' to nearly 21.5 
million, covering almost half of all loans outstanding (see Chart 3). 
\8\ Of these loans, 18 million are Fannie or Freddie loans and the 
remaining 3.5 million are nongovernment loans. The legislation could 
potential benefit mortgage loans on owner-occupied single family homes 
with a current mortgage rate above 5 percent and which have been 
current over the past 6 months. For nongovernment loans to qualify for 
the expanding Refinancing Opportunities Act, borrowers would have to 
have been no more than 1 month past due in the prior 12 months, be 
within the conforming loan limits, and have a credit score above 580. 
There would be no restriction on when the loans were originated, unlike 
HARP's current limitation to loans originated before mid-2009.
---------------------------------------------------------------------------
     \8\ This is based on an analysis conducted by LPS using the McDash 
servicing database and the LPS-AA HPI.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    For all this, many homeowners would still not refinance. Yet under 
reasonable assumptions--including that the legislation is implemented 
by the fourth quarter of this year and that mortgage rates remain near 
their current 4 percent through the end of 2013 and rise gradually 
after that--we estimate that the legislation would result in 4.2 
million more refinancings. That comprises 2.9 million Fannie/Freddie 
borrowers and 1.3 million nongovernment borrowers.
Economic Benefits
    The benefit to borrowers will be meaningful. Assuming the average 
homeowner can refinance into a 4 percent fixed-rate, 30-year mortgage 
loan, the interest saving would exceed $2,500 a year. Collectively, 
borrowers' mortgage payments would decrease by more than $10 billion a 
year (4.2 million borrowers x $140,000 average mortgage balance x 1.8 
percent average rate reduction). This would provide a quick cash boost 
for mostly middle-income homeowners. Some of the money saved would be 
used to repay other debt, but the bulk would likely be spent on home 
improvements or other needs. This would provide only a small boost to 
overall economic growth, but the U.S. recovery can use all the help it 
can get.
    More refinancing would also further the Federal Reserve's short-
term monetary policy goals. Monetary policy makers are considering a 
new round of quantitative easing--a process in which the Fed purchases 
long-term securities in an effort to bring down interest rates, 
including fixed mortgage rates. Indeed, the recent decline in mortgage 
rates is due in part to expectations that the Fed will resume 
quantitative easing. If it does, arguably the most significant benefit 
would involve increasing the pace of home-loan refinancing. Anything 
fiscal policy makers can do to support the Fed's efforts would be a 
plus.
Taxpayer Costs
    There should be no cost to taxpayers for the additional Fannie and 
Freddie refinancing. While the agencies would lose some interest income 
on their $1.2 trillion in mortgage securities and whole mortgage loans, 
under reasonable assumptions that would be offset by lower default 
rates on refinanced loans. Borrowers are more likely to stay current if 
their monthly payments drop by $100 or $200. Indeed, under reasonable 
assumptions, Fannie and Freddie would break even if the probability of 
default on the loans and securities they own and insure falls by about 
25 basis points. \9\
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     \9\ The break-even change in the default rate equals the lost 
interest income divided by the product of the mortgage debt owned and 
insured and the loss from default, which is assumed to be 50 percent of 
the mortgage balance.
---------------------------------------------------------------------------
    As the FHA refinances loans of nongovernment borrowers, it will 
take on added credit risk. \10\ Given the FHA's fragile finances, this 
cost should be paid for. A reasonable way to do that would be a 1-year 
extension of the higher guarantee fees currently being paid by the GSEs 
to fund this year's payroll tax holiday. Policy makers should limit any 
additional increase in guarantee fees solely to support the housing and 
mortgage markets. It also makes sense to create a separate FHA fund for 
this purpose, independent of the FHA's Mutual Mortgage Insurance Fund.
---------------------------------------------------------------------------
     \10\ The credit risk associated with refinancings these homeowners 
may be relatively low. These homeowners have been paying on their 
mortgages in a timely way despite the tough economy, their lack of 
equity, and their inability to refinance.
---------------------------------------------------------------------------
    The closing costs associated with refinancing into shorter-maturity 
mortgages to accelerate the building of homeowners' equity should be 
very modest and borne by the GSEs. The costs will depend on the take-up 
by homeowners, but under most assumptions the cost to taxpayers via the 
GSEs should be in the hundreds of millions, and not billions of 
dollars.
Economic Costs
    While homeowners would clearly benefit from more refinancing and 
taxpayers would be largely unaffected, global investors in agency 
mortgage-backed securities would be hurt financially. As more loans are 
refinanced, higher-yielding MBS would be retired and replaced with 
lower-yielding MBS. To be precise, if a more effective HARP resulted in 
4.2 million more refinancings, private investors would receive 
approximately $6.5 billion less in annual interest income. \11\
---------------------------------------------------------------------------
     \11\ This excludes the interest income that would be lost by 
Fannie, Freddie, and the Federal Reserve.
---------------------------------------------------------------------------
    MBS investments are held by a wide array of institutions. Through 
its credit easing efforts last year, the Fed quickly became the largest 
owner of agency MBS, amassing $1.25 trillion, or about a fourth of the 
total outstanding. The Nation's central bank can easily absorb the lost 
interest income from increased prepayments, but this may put pressure 
on the Fed to be more aggressive in its quantitative easing efforts to 
forestall a counterproductive rise in mortgage rates. The interest-rate 
spread between MBS and Treasury yields will increase regardless, but 
MBS yields need not rise if the Fed buys a sufficient amount of 
Treasury bonds.
    Although other private MBS investors won't be happy to get their 
money back when interest rates are low, they were aware of this 
prepayment risk when they purchased their securities. Indeed, investors 
are likely surprised that their securities have not been retired 
already, as they would have been in a more normally functioning 
mortgage market. The updated HARP can thus be seen as a way to correct 
a serious market failure. It is also important to note that MBS 
investors have been significant beneficiaries of the monetary and 
fiscal policy response to the financial panic and Great Recession. The 
Fed's massive purchases of agency MBS during a previous round of 
quantitative easing was a windfall. Myriad Federal policies aiming to 
stem foreclosures have also significantly benefited investors through 
reduced prepayments.
    Policy makers may be nervous that overseas investors, who 
constitute a sizable and growing source of capital for the U.S. 
Treasury, will be annoyed by faster prepayments. Policy makers may also 
worry about implications for the financial health of the Nation's 
depository institutions and pension funds, who also are big investors 
in agency MBS. While not unreasonable, these seem marginal concerns, 
given the magnitude of the losses that will be widely distributed among 
investors.
    Another potentially unwelcome side effect from more refinancing 
today could be less labor mobility in the future. Borrowers who lock in 
record low mortgage rates now will be less willing to move when rates 
start to climb. Considering that homeowners are more likely to be 
skilled workers than are renters, this impediment to labor mobility 
could aggravate the U.S. economy's current skills mismatch. However, it 
is difficult to know the scale of this consideration; it seems small 
against the sizable near-term benefit of a refinancing program. It is 
also worth noting that homeowners who switch from adjustable-rate to 
fixed-rate mortgages will be protected when interest rates ultimately 
rise.
Suggestions
    The Responsible Homeowner Refinancing Act should drop monetary 
penalties on second lien holders and mortgage insurance companies for 
nonparticipation. The largest mortgage servicers have agreed to 
subordinate their second liens on mortgages refinanced via the HARP 
program, and mortgage insurers, except for United Guaranty, have agreed 
to give up their rescission rights on HARP refinancings. Indications 
are that second lien holders and MI companies are not a meaningful 
impediment to more HARP refinancing activity.
    Policy makers may also want to consider adding a provision in the 
Responsible Homeowner Refinancing Act requiring the GSEs to provide 
timely information regarding approval rates for streamlined refinancing 
via the automated tools provided by the GSEs to servicers. There is 
some concern that cross-servicer refinancing is being impeded by low 
approval rates, and this information would be useful in determining 
whether this is a significant problem.
    The still-fragile housing market remains a serious threat to the 
economic recovery. Home sales and housing construction are off bottom, 
but remain at exceptionally low levels, while house prices are still 
falling in many parts of the country. Millions of families have lost 
homes, and millions more are likely to follow them, given the 
unprecedented number of loans in or likely to soon enter the 
foreclosure pipeline. \12\ It is hard to be enthusiastic about the U.S. 
economy's prospects as long as housing is weak. One of the most 
effective and straightforward policy steps to ensure that the housing 
market gets back on track is to facilitate more mortgage refinancing. 
The legislation currently before Congress to support more refinancing 
activity would be very helpful to this end.
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     \12\ More than 5 million U.S. homeowners are believed to have lost 
homes through foreclosures, short sales, or deeds-in-lieu since the 
housing crash began in 2006. Another nearly 5 million more homeowners 
are expected to lose homes before foreclosures return to levels 
consistent with a well-functioning housing market, which we expect to 
happen in 2015.
