[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]





                       A LEGISLATIVE PROPOSAL TO
                       PROTECT AMERICAN TAXPAYERS
                      AND HOMEOWNERS BY CREATING A
                   SUSTAINABLE HOUSING FINANCE SYSTEM

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 18, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-40






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                 HOUSE COMMITTEE ON FINANCIAL SERVICES


                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 18, 2013................................................     1
Appendix:
    July 18, 2013................................................   103

                               WITNESSES
                        Thursday, July 18, 2013

Calabria, Mark A., Director, Financial Regulation Studies, the 
  Cato Institute.................................................    13
Calhoun, Michael D., President, the Center for Responsible 
  Lending........................................................    78
Deutsch, Tom, Executive Director, the American Securitization 
  Forum (ASF)....................................................    76
Holtz-Eakin, Douglas, President, the American Action Forum.......    10
Howard, Jerry, Chief Executive Officer, the National Association 
  of Home Builders (NAHB)........................................    73
Levitin, Adam J., Professor of Law, the Georgetown University Law 
  Center.........................................................    11
Loving, William A., Jr., President and Chief Executive Officer, 
  Pendleton Community Bank, on behalf of the Independent 
  Community Bankers of America (ICBA)............................    70
Sheppard, Janice, Senior Vice President, Mortgage Compliance, 
  Southwest Airlines Federal Credit Union, on behalf of the 
  National Association of Federal Credit Unions (NAFCU)..........    72
Stevens, Hon. David H., President and Chief Executive Officer, 
  the Mortgage Bankers Association (MBA).........................    75
Wallison, Peter J., Arthur F. Burns Fellow in Financial Policy 
  Studies, the American Enterprise Institute (AEI)...............     9
Zandi, Mark M., Chief Economist, Moody's Analytics...............    15

                                APPENDIX

Prepared statements:
    Calabria, Mark A.............................................   104
    Calhoun, Michael D...........................................   119
    Deutsch, Tom.................................................   126
    Holtz-Eakin, Douglas.........................................   141
    Howard, Jerry................................................   148
    Levitin, Adam J..............................................   172
    Loving, William A., Jr.......................................   191
    Sheppard, Janice.............................................   196
    Stevens, Hon. David H........................................   212
    Wallison, Peter J............................................   227
    Zandi, Mark M................................................   240

              Additional Material Submitted for the Record

Hensarling, Hon. Jeb:
    Written statement of the American Bankers Association (ABA)..   252
    Written statement of Federal Financial Analytics, Inc........   262
    Written statement of the Credit Union National Association 
      (CUNA).....................................................   267
    Written statement of the Mortgage Insurance Companies of 
      America (MICA).............................................   273
    Written statement of the National Multi Housing Council 
      (NMHC) and the National Apartment Association (NAA)........   277
    Written statement of the National Association of REALTORS...   281
Miller, Hon. Gary G.:
    Written statement of the California Association of REALTORS.   299
Moore, Hon. Gwen:
    Written statement of the American Hospital Association (AHA).   303
Watt, Hon. Melvin L.:
    Financial Times article entitled, ``Oxley hits back at 
      ideologues,'' dated September 9, 2008......................   306

 
                       A LEGISLATIVE PROPOSAL TO
                       PROTECT AMERICAN TAXPAYERS
                      AND HOMEOWNERS BY CREATING A
                   SUSTAINABLE HOUSING FINANCE SYSTEM

                              ----------                              


                        Thursday, July 18, 2013

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 1:04 p.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Miller, 
Bachus, Royce, Capito, Garrett, Neugebauer, McHenry, Campbell, 
Bachmann, Pearce, Fitzpatrick, Westmoreland, Luetkemeyer, 
Huizenga, Duffy, Hurt, Stivers, Fincher, Stutzman, Mulvaney, 
Hultgren, Ross, Pittenger, Wagner, Barr, Cotton, Rothfus; 
Waters, Maloney, Velazquez, Watt, Sherman, Meeks, Capuano, 
Clay, Lynch, Scott, Green, Cleaver, Moore, Ellison, Perlmutter, 
Himes, Peters, Carney, Sewell, Foster, Kildee, Murphy, Sinema, 
Beatty, and Heck.
    Chairman Hensarling. The committee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the committee at any time.
    Before recognizing Members for opening remarks, I want to 
make a statement about process. We are starting this hearing at 
1:00 as opposed to our usual 10:00. That was at the request of 
the ranking member, who brought to my attention the Nelson 
Mandela birthday celebration. And certainly, I was in accord 
with her recommendation. So that is why we are starting at 
1:00. The bad news is we will undoubtedly be interrupted by 
votes. And this is a two-panel hearing. So ahead of time, I 
wanted to apologize to Members and apologize to panelists, 
particularly those in the audience who are on the second panel, 
because I cannot tell you the exact time that the second panel 
will convene. But, hopefully, you will call this, as I do, an 
excused tardiness in the beginning of this hearing.
    At this time, I will recognize myself for opening remarks 
for 5 minutes.
    Today, the Financial Services Committee meets in its 12th 
hearing over the last 6 months on the need to create a 
sustainable housing finance system. By the end of the hearing, 
our committee will have heard from more than 50 witnesses on 
the subject since January. Americans clearly deserve a better 
housing system, one that protects homeowners and taxpayers, so 
that every American who works hard and plays by the rules can 
have opportunities and choices to buy homes they can actually 
afford to keep. One that protects hardworking taxpayers so they 
never again have to bail out corrupt Government-Sponsored 
Enterprises like Fannie Mae and Freddie Mac, whose top managers 
engaged in extensive accounting fraud to trigger huge executive 
bonuses for themselves.
    America needs a housing policy that is sustainable over 
time, not one that causes endless boom/bust cycles in real 
estate which harm our economy. Regrettably, such a commonsense 
and responsible system is not in place in America today. Today, 
taxpayers have been forced to pay nearly $200 billion for the 
bailout of Fannie Mae and Freddie Mac. Today, taxpayers remain 
on the hook for more than $5 trillion in mortgage guarantees, 
roughly one-third the size of our economy. Today, the Federal 
Government has a virtual monopoly on the housing finance system 
that is unwise, unfair, and unsustainable.
    Today, Washington elites decide who can qualify for a 
mortgage. That puts homeownership out of reach for millions of 
creditworthy American families. That is not fair. Americans 
truly deserve better. The proposal we will discuss today will 
give Americans the better, fairer, and sustainable housing 
finance system they deserve. It is called the PATH Act because 
it Protects American Taxpayers and Homeowners. The PATH Act 
ends the bailout of Fannie Mae and Freddie Mac by gradually 
winding them down over a 5-year transition period. On their 
best day, they delivered 7 to 25 basis points interest rate 
advantage to home buyers and could only deliver a mediocre rate 
of homeownership.
    Contrasted with almost $200 billion of bailout, wrecked 
lives of those who lost their homes, artificially driving up 
the cost of principal, and helping bring the economy to its 
knees, Fannie and Freddie did little to help the home buyer but 
an awful lot to hurt the taxpayer and the economy.
    The PATH Act also protects taxpayers and homeowners by 
finally codifying what most everyone claims the FHA was 
designed to do, and that is, an agency that was intended to 
help first-time home buyers and those with low and moderate 
incomes. But instead, today they can insure millionaires' 
mortgages for homes valued as high as $729,750. In many 
sections of my district, that is a mansion.
    The mission creep has overextended FHA. Today, it is broke, 
unsustainable, and projected to need its own taxpayer bailout, 
just like Fannie and Freddie. An unsustainable, bankrupt FHA 
will help no one. The PATH Act puts it on a sound footing.
    The PATH Act tears down barriers to private capital and 
frees home buyers from a government-dominated system that puts 
again Washington elites in control of deciding who can and 
cannot buy a home. Washington should not steer our citizens 
into mortgages that may not be right for them, nor should 
Washington prevent them from taking out mortgages of their 
choosing. Reforms in the PATH Act increase competition, enhance 
transparency, and give consumers more freedom to choose the 
mortgage that is right for them as long as the terms are fully 
disclosed and understandable.
    Witnesses at our previous hearings have warned that 
regulations coming down the pike could increase mortgage 
interest rates 1 to 4 percentage points, lead to fewer home 
sales, and deter community banks from making mortgage loans. 
Core logic is that only half of today's mortgages would comply 
with the bureaucratic Dodd-Frank rules that could go in effect 
in just 177 days. Again, this is wrong and unfair.
    Now, a significant number of Members in this room have said 
they want to end Fannie and Freddie, they want a new system, 
but they want to do it up until it is time to actually do it. 
Nearly 5 years after the bailout of Fannie and Freddie, I asked 
my friends on the other side of the aisle and in the 
Administration, if you don't like our plan, where is your plan? 
Some say the plan will end the 30-year fixed-rate mortgage. But 
it exists today without a government guarantee, and many of 
these same naysayers are the ones who said we have nothing to 
worry about with Fannie and Freddie, let's roll the dice. Thus, 
their track record on predictions is not an enviable one.
    Some say this plan would end the Federal guarantee for the 
housing finance system. Yet FHA, the Federal Home Loan Banks, 
the VA, and the rural housing programs are still there. Some 
say the PATH Act is ideological. But it seems to me that those 
who defend the status quo of a government-run monopoly, 
complete with taxpayer bailouts, economic crises, and mediocre 
rates of homeownership are the ones that are being ideological. 
It is past time to protect taxpayers and homeowners. It is time 
to pass the PATH Act today. As I have stated publicly before, 
it is my intention to mark up the PATH Act before the House 
adjourns for the August district work period, and I look 
forward to this hearing.
    At this time, I yield 5 minutes to the ranking member.
    Ms. Waters. Thank you, Mr. Chairman.
    While I am appreciative that you are holding this hearing 
today, I am deeply disappointed in the radical and unworkable 
discussion draft that is before us today as well as the lack of 
interest in making this a bipartisan effort.
    Mr. Chairman, it did not have to be this way. We have on 
the table a bipartisan housing finance reform proposal in the 
Senate. During the last Congress, we saw numerous bipartisan 
reform proposals here in the House. But this bill you have put 
forward, with zero input from Democrats, is obviously a non-
starter among all the individuals who have a stake in a healthy 
housing finance system. It is an unrealistic proposal based on 
the notions of ideological academics whose ideas have no real 
audience or weight outside of certain members on this 
committee. We Democrats here on this committee have authored 
principles that guide our consideration of this discussion 
draft as well as all proposals to reform our markets. To put it 
plainly, the ``Path to Nowhere Act'' fails all of them. To take 
them one by one:
    The proposal would be bad for America's middle-class, 
ending the affordable 30-year fixed-rate mortgage and making it 
a product only available to a tiny subset of lower-income FHA 
borrowers, or to the richest households getting jumbo loans.
    The proposal would be bad for investors, expecting them to 
accept all the credit risks on U.S. mortgages, but removing key 
protections in our securities laws and excluding them from the 
management of this new utility.
    The proposal would be bad for community banks and credit 
unions, with the new utility presenting them with tremendous 
challenges, access in the capital markets, and severely 
undercutting the FHA. The proposal also leaves them in the dust 
with a big bankcentric covered bond proposal that requires them 
to pick up the tab if these bonds bankrupt the deposit 
insurance fund.
    The proposal would be bad for consumers, repealing the 
predatory lending provisions in the Wall Street Reform Act and 
inviting unscrupulous subprime lenders back in the market.
    The proposal would be bad for renters at a time when 
vacancy rates are at an all-time low and American families 
increasingly need access to rental options. The proposal 
abolishes the trust fund, eliminates the GSE's role in multi-
family housing, and makes the FHA multi-family program an 
administrative nightmare in which no lender would want to 
participate.
    And finally, the proposal would be bad for taxpayers, 
codifying an implicit guarantee on our housing market instead 
of making the guarantee explicit and paid for by the industry 
as other bipartisan proposals suggest.
    When the Republican experiment in extreme privatization 
ultimately fails, we will see a future Administration come into 
Congress asking for us to clean up the mess this bill created. 
And, finally, your proposal would be a disaster for the 
American housing market, which drives nearly 20 percent of our 
Nation's GDP.
    Mr. Chairman, I stand ready to work with you if you want to 
get serious on housing finance reform or regulatory relief for 
our Nation's community banks and credit unions. But, to be 
candid, this proposal is a failure on all accounts and for all 
stakeholders. And given that this draft bill undercuts both the 
homeownership and rental market, I am not sure where my 
Republican counterparts expect middle-class American families 
to live. I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey, the Chair of the Capital Markets Subcommittee 
and the chief author of the PATH Act, for 2 minutes.
    Mr. Garrett. Thank you, Mr. Chairman, for holding this 
important hearing, and thank you for your hard work and also 
for the hard work all of the staff put into the legislation. I 
am very pleased this committee the is addressing one of the 
underlying causes of the financial crisis: the 
oversubsidization and misallocation of credit through Fannie 
and Freddie.
    But the hemming and the hawing and the gnashing of teeth by 
my friends across the aisle maybe is a little bit surprising 
given all the compromises you will find in this draft. Over the 
last 2 years, our friends on the other side have set forth a 
number of demands that must be included in any GSE reform 
measure. Now that we have listened to them and introduced 
legislation that specifically addresses each of those concerns, 
I see it is still not good enough. See, first, they demand that 
GSE reform be comprehensive. You would be hard-pressed to find 
anyone who says the package before us today is not 
comprehensive.
    Second, they demanded that reform ensure all financial 
institutions have access to the secondary mortgage market. So 
we compromised and ensured that they have access to the 
mortgage market through a different government-sponsored 
entity, the Federal Home Loan Banks. Included in the bill are 
several provisions which directly authorize Federal Home Loan 
Banks to aggregate loans for community banks and credit unions.
    Next, they demanded we retain some method for the 
government to play a countercyclical role in the market to 
ensure continued access to credit during times of market 
uncertainty. We compromised again, and included a provision in 
Title II that allows the FHA to do just that. Then, they 
demanded that we ensure the government continue to provide 
direct support for first-time and low- and moderate-income home 
buyers. So we compromised again, and made changes to FHA to 
preserve its important role in the marketplace of serving those 
people most in need.
    And finally, they required we preserve the availability of 
the 30-year fixed mortgage. We compromised yet again and 
included language to facilitate a new marketplace that will 
replicate the deep and liquid market enjoyed by investors today 
that allowed for the continued widespread availability of a 30-
year fixed mortgage.
    Mr. Chairman, I commend you on your hard work on this 
legislation, your willingness to compromise and address their 
concerns, and your moving forward on this important debate.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, Mrs. Maloney, for 1\1/2\ minutes.
    Mrs. Maloney. I thank the chairman for starting this 
important conversation. And while the chairman's bill includes 
vague language about maintaining the 30-year fixed-rate 
mortgage, wishing doesn't make it happen. The bill would 
virtually eliminate the 30-year fixed-rate mortgage by making 
it unaffordable and inaccessible to middle-class Americans.
    According to Moody's economist Mark Zandi, this bill would 
raise mortgage rates by at least 90 basis points, or $130 a 
month. That is a great deal of money over 30 years. This is not 
only unacceptable, it is unnecessary, because there are 
proposals such as the bipartisan Corker-Warner bill that would 
reserve the 30-year fixed affordable mortgage, and also protect 
taxpayers. Under their bill, taxpayers would have multiple 
layers of protection.
    First, private investors would have to take the first 10 
percent of any losses. If the losses exceed 10 percent, then an 
industry guarantee fund similar to the FDIC would kick in and 
be able to bear losses even greater than the losses Fannie and 
Freddie suffered during the recent housing bust. Only then, in 
a catastrophic crisis, worse than 2008, could the government 
potentially be asked to provide a backstop. And even then, 
there is a clawback to the industry-guaranteed fund that would 
reimburse and protect the taxpayer.
    The housing market accounts for 20 percent of our overall 
entire economy. And the affordable home is part of the American 
dream. So it is absolutely critical that we work together in a 
bipartisan way to get this right to protect the taxpayer and 
the affordable home for Americans dreams.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, Mr. Neugebauer, Chair of the Housing and Insurance 
Subcommittee, and another co-author of the PATH Act, for 2 
minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman, for holding this 
important hearing. And, most importantly, thank you for driving 
the House finance reform debate on behalf of taxpayers and 
homeowners.
    Today, we are discussing the PATH Act, a commonsense and 
pragmatic reform measure of which I am proud to be a cosponsor. 
After 12 hearings and multiple conversations with stakeholders, 
we have put together a framework for a dynamic, healthy, and 
stable housing market. The PATH Act is a transformative piece 
of legislation that will bring our housing markets into the 
21st Century and allow our housing finance system to function 
without the unprecedented government intervention that we have 
seen in recent years.
    The PATH Act will do three things. First, it will end the 
costly bailouts of Fannie and Freddie by phasing them out over 
a 5-year period. Second, it will right-size FHA by clearly 
defining its mission to ensure that the agency is focused on 
serving first-time home buyers and low- to moderate-income 
borrowers. And lastly, it will facilitate increased investor 
interest in the secondary mortgage market by removing 
impediments to private capital and defining a clear set of 
rules for securitization in the future.
    Now, I know some of my colleagues want to gloss over the 
cronyism and the Enron-style accounting and the outright 
financial fraud that allowed Fannie and Freddie to generate a 
subprime crisis. They would like to extol the virtues and the 
benefits of GSEs and propose to simply place a Band-Aid on the 
current government-centric housing system. But these calls 
remind me of a saying we have back in Texas, ``You can put your 
boots in the oven, but it doesn't make them biscuits.'' This 
basically means that you can say what whatever you want to 
about these entities, but they are what they are. Let me remind 
my colleagues exactly what the system delivered for the 
American people: $16 trillion in wealth destruction; and $200 
billion in taxpayer bailouts, all in the name of homeownership, 
in which, by the way, we rank 17th in the world. I know that it 
is human nature to resist change. I get it. Change is 
difficult. But in the case of housing finance, not to change is 
fatal. I urge all of my colleagues to support the PATH Act so 
that we can finally have of a 21st Century housing finance 
model that protects taxpayers and helps homeowners.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, Ms. Velazquez, for 1\1/2\ minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Chairman, while I understand the need to reform the 
housing finance system, I am extremely troubled by the proposal 
before us. The PATH Act removes the main source of viability in 
the multi-family market, the government guarantee. This will 
unduly impact many New Yorkers who rely on rental housing 
because of high homeowner costs. New York State is home to very 
tight rental markets. In fact, vacancy rates in Manhattan 
decreased to 1.83 percent in the last year. We need more rental 
housing options to keep up with the demand. Yet this proposal 
does the opposite: reducing liquidity; increasing building 
costs; and driving up working families' rent.
    As the ranking member of the House Small Business 
Committee, I am also concerned about the bill's impact on small 
businesses. Even though my community is a short subway ride to 
Wall Street, it is our credit unions and community banks that 
working families rely on for a loan. These are the exact 
institutions that this proposal will crowd out of the mortgage 
market.
    Mr. Chairman, we need a system that leads to stable, 
affordable housing. However, this bill is a path to nowhere. It 
does not protect anyone; indeed, it eliminates housing options 
for working families and excludes small businesses from the 
market. Thank you, and I yield back.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from West Virginia, the Chair of the Financial 
Institutions Subcommittee, and also a co-author of the PATH 
Act, for 1 minute.
    Mrs. Capito. Thank you, Mr. Chairman. Thank you for the 
hearing. This an issue that we need to address and we want to 
address. And I thank the chairman for his hard work.
    As we have heard before, the focus of this discussion draft 
is protecting consumers and protecting taxpayers. I am 
especially pleased that this legislation reforms the secondary 
mortgage market and also provides much-needed reforms for FHA 
that we have discussed time and time and time again in this 
committee. The FHA is an extremely important component of the 
Nation's finance system. And the reforms here will focus on 
first-time home buyers and those with moderate and low incomes 
and will ensure that the FHA is serving its core mission in 
future generations.
    The PATH Act also will end the bailouts of Fannie and 
Freddie. As a Nation, we cannot return to a system that allows 
private entities to enjoy the profits in a bull market and then 
sticks the taxpayers with the bill in a downturn. Moving 
towards a privatized security--secondary mortgage markets will 
prevent this from happening in future housing cycles.
    Finally, there are critical provisions in Title IV that 
ensure small banks and credit unions will have access to the 
secondary mortgage market. These provisions provide significant 
release and certainty for these institutions that are extremely 
important in the relationship banking that they do every day in 
communities. I yield back. Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Massachusetts, Mr. Capuano, for 2 minutes.
    Mr. Capuano. Thank you, Mr. Chairman. Thank you for having 
this hearing. Mr. Chairman, look, everybody today is going to 
pontificate an awful lot. I guess it is pontification day. And 
I would really rather avoid as much as possible. So for our 
panel members, here is what I am interested in: What will this 
bill do to the average person who wants to buy a home? Simple. 
Please don't talk in basis points or market. Here is what they 
want to know: Will they have access to an affordable, standard, 
fixed 30-year mortgage at rates they are currently seeing 
without massive downpayments? That is really what it is all 
about. All of this is just hyperventilating to make ourselves 
sound smarter than we really are.
    What we are interested in is does this bill work. And, 
honestly, I have my doubts. We have only had it for a couple of 
days, and we are trying to pore through it, trying to get as 
much information as we can. The information I have at the 
moment is that the answers to all the questions I just said is 
probably no. I know full well you won't know it. But they won't 
have access to a standard 30-year mortgage. There might be 30-
year mortgages, but no one I know will be able to afford them.
    So, for me, I would like to limit these panel comments to--
I know you are all 10 times smarter than I will ever be, but 
you don't have to prove it today. Speak in small words, words 
that we understand, words that I can explain to my constituents 
at home, and to me, to figure out what this bill does to 
America. And to assuage my fears as I enter this that the 30-
year mortgage is gone, the downpayments will skyrocket, and 
that my average homeowner, based on my brief numbers, would 
have to pay $40,000 more over the life of a 30-year mortgage, 
if they could get one, on a $200,000 mortgage, which in my 
district is a small mortgage. We have high values.
    So, my time is up. But please, again, you don't have 
anything to prove to me. Small words. Thank you.
    Chairman Hensarling. Today, we have two panels of 
witnesses.
    Mr. Capuano. Between your accent and mine, we have to have 
a translator.
    Chairman Hensarling. I concur.
    Today, we have two panels of witnesses. At this time, we 
will welcome our first panel of distinguished witnesses.
    Peter Wallison is the Arthur F. Burns Fellow in Financial 
Policy Studies at the American Enterprise Institute. He 
previously served as General Counsel to the U.S. Treasury 
Department, and was a member of the Financial Crisis Inquiry 
Commission. Mr. Wallison is the author of several books, 
including a 2004 work on Fannie Mae and Freddie Mac. He holds 
law and undergraduate degrees from Harvard.
    Douglas Holtz-Eakin is the President of the American Action 
Forum, and is the former Director of the Congressional Budget 
Office. He also previously served as an economic advisor to 
President Bush 41. He, too, was a member of the Financial 
Crisis Inquiry Commission. He earned his Ph.D. from Princeton 
and holds an undergraduate degree from Denison University.
    Adam Levitin is a law professor at the Georgetown 
University Law Center where he teaches bankruptcy, commercial 
law, and financial regulation. He earned his law and 
undergraduate degrees from Harvard, and a master's degree from 
Columbia.
    Mark Calabria is the Director of Financial Regulation 
Studies at the Cato Institute. We welcome him back as a 
previous Congressional staffer. He has also served as the 
Deputy Assistant Secretary for Regulatory Affairs at HUD, and 
has held a variety of positions at Harvard's Joint Center for 
Housing Studies, the National Association of Home Builders, and 
the National Association of REALTORS. He earned his Ph.D. from 
George Mason University.
    Last but not least, Mark Zandi is the Chief Economist at 
Moody's Analytics where his research focuses on macroeconomics, 
financial markets, and public policy. Dr. Zandi also has 
written a number of books on the economy, including at least 
one on housing finance. He holds his Ph.D., master's, and 
bachelor's degrees from the University of Pennsylvania.
    I believe all of you have testified before our committee 
before. You will each be recognized for 5 minutes to give an 
oral summary of your testimony. And without objection, each of 
your written statements will be made a part of the record. 
After each of our panelists have finished--as I warned earlier, 
votes may interrupt us. But at some point, each Member will be 
recognized for questioning for 5 minutes apiece.
    Mr. Wallison, you are now recognized for your testimony.

   STATEMENT OF PETER J. WALLISON, ARTHUR F. BURNS FELLOW IN 
  FINANCIAL POLICY STUDIES, THE AMERICAN ENTERPRISE INSTITUTE 
                             (AEI)

    Mr. Wallison. Thank you, Mr. Chairman.
    Chairman Hensarling, Ranking Member Waters, and members of 
the committee, although there seems to be a near consensus in 
Congress that Fannie and Freddie should be eliminated, there is 
no agreement on what should replace them. Since the financial 
crisis in 2008, almost every plan that has been put forward in 
Washington has involved one or another ingenious way to wind 
down Fannie and Freddie while keeping the government involved 
in housing finance. This reflects, in my view, a kind of 
delusion that Fannie and Freddie were bad but government's 
involvement in housing finance is somehow good. In reality, 
Fannie and Freddie did what they did, and became insolvent 
doing it, because they were backed by the government.
    If Congress adopts another plan for the government to back 
housing finance, we will end up in the same way, with a 
mortgage meltdown, a major recession, taxpayer losses, and 
millions of families losing their homes. The last point finally 
got to a former chairman of this committee, Barney Frank, who 
said in 2010, ``I hope by next year we will have abolished 
Fannie and Freddie. It was a great mistake to push lower-income 
people into housing that they couldn't afford and couldn't 
really handle once they had it.''
    It is easy to see why government does this. Every Member of 
Congress wants to do something for his or her constituents. 
Congress spends because the voters like it. All the better then 
when the benefits for constituents do not involve spending. 
Fannie and Freddie are examples of this. Because they were 
controlled by the government, they could be forced to provide a 
government guarantee for subprime and other risky mortgages, so 
that financial institutions and others would buy these 
mortgages when, in any other world, they would not think of 
taking such a risk. This was a taxpayer gift to constituents 
who did not have the financial resources or the credit records 
to get a mortgage, but the reduced underwriting standards that 
Fannie and Freddie were compelled to use inevitably spread to 
the whole market.
    There were no appropriations or increases in the debt until 
the whole system crashed because of risky mortgages in 2008, 
and millions of surprised and angry Americans lost their homes.
    Housing finance is a particularly good example of how 
Congress likes to spread the government benefits around. In the 
2000s, it also made sure that wealthy constituents, people who 
were buying million-dollar homes, could get the benefits 
offered by the GSEs and FHA. If Congress adopts another plan 
for government-backed mortgages, this will happen again. The 
Corker-Warner bill is an example of the many proposals that 
will eliminate GSEs, but put another government program in its 
place. Investors will be protected, but the government 
insurance program that would replace Fannie and Freddie will 
eventually be pressured by Congress to make the same risky 
mortgages that brought the financial system down in 2008.
    We should recall that FHA started its life requiring 20 
percent downpayments. Now, it requires 3 percent downpayments 
and needs a government bailout.
    This story should tell all of us that the bill now before 
this committee makes practical sense. It would take the 
government out of most of the housing finance market, but it 
would still provide for a new and very prudent FHA for first-
time home buyers. It winds down Fannie and Freddie over 5 
years, terminates the affordable housing goals, creates a 
utility to organize and standardize the private securitization 
market, and clears away obstacles to the revival of private 
securitization.
    I have some suggested improvements for this bill detailed 
in my written testimony. But on the whole, it will eliminate 
the repetitive cycles of failure that have been the story of 
the housing finance market in the past. Instead of yet another 
government program and another meltdown in the future, the PATH 
Act would open the way for the private sector to do for housing 
finance what it has always done for the rest of the American 
economy, that is, innovate and cut consumer costs. It is the 
first hopeful sign that Congress isn't mired in ideology but 
can learn from history and practical experience. Thank you. I 
look forward to your questions.
    [The prepared statement of Mr. Wallison can be found on 
page 227 of the appendix.]
    Chairman Hensarling. Dr. Holtz-Eakin, you are now 
recognized for your testimony.

   STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, THE AMERICAN 
                          ACTION FORUM

    Mr. Holtz-Eakin. Thank you, Mr. Chairman, Ranking Member 
Waters, and members of the committee. It is a privilege to be 
here to discuss the PATH Act today. I look forward to your 
questions. Let me say four things briefly, with short words, to 
begin. First, I applaud action. For anyone who has looked at 
the crisis and watched events since the crisis, the inability 
of Congress to move forward on genuine reform of the GSEs has 
been a frustration, and to begin reform is to make a real step 
toward the ultimate recovery of the U.S. housing market. And so 
I am thrilled to see the bill under discussion, and I hope we 
see legislative action and law making in our future.
    Second, I think there is a broad consensus that Fannie Mae 
and Freddie Mac should be phased out. And the winding down on 
this bill is a desirable action. They were at the heart of poor 
mortgage origination, which was a key part of the 2008 
financial crisis. Their structure guaranteed that the bad 
mortgages and the mortgage-backed securities were disseminated 
widely through the financial system, and the interconnectedness 
guaranteed that taxpayers were required to step in and keep 
them from failing. Not only are these facts well understood by 
experts and by the members of this committee, they are very 
well understood by the American public. And the evidence from 
polling and other sources is that the American public believes 
that they should no longer have a future in American housing 
finance either. And I am thrilled that this bill would wind 
them down.
    The third thing I think is admirable is the fact that the 
FHA reforms are taken in a coordinated fashion with the other 
GSE reforms. In too many efforts on both sides of the Congress, 
these are done in separate silos and don't recognize that we 
have, in fact, seen one government backstop substitute for 
another at different times, and that we ought to have a single, 
coherent strategy for backstopping the low-income Americans who 
need help getting into the housing that we believe they 
deserve. And the coordination, the targeting toward a more 
appropriate footprint for the FHA, and the steps taken to 
threaten its solvency and protect it--the taxpayers from its 
exposures at present are all desirable steps in this 
legislation.
    And then, lastly, I want to applaud the broad array of 
efforts to bring private capital back into mortgage finance in 
the United States. We simply cannot go forward with 80 to 90 
percent of housing finance running through the Federal 
Government. The private sector is imminently capable of 
providing large-scale finance. As Mr. Wallison mentioned, it 
does so in every other sector of the American economy. We can 
be relied on to do so and do so in an innovative and consistent 
fashion in housing finance. The steps taken to clarify, and in 
some cases slow down, recent rule making will allow that to 
happen, as opposed to impede it. And I would encourage the 
committee to keep a focus, 100 percent, on attracting private 
capital. That in the end will be the best solution to all of 
the problems we have experienced over the past several years. 
Thank you for the chance to be here today, and I do look 
forward to your questions.
    [The prepared statement of Dr. Holtz-Eakin can be found on 
page 141 of the appendix.]
    Chairman Hensarling. Professor Levitin, you are now 
recognized for 5 minutes.

STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, THE GEORGETOWN 
                     UNIVERSITY LAW CENTER

    Mr. Levitin. Chairman Hensarling, Ranking Member Waters, 
and members of the committee, good afternoon.
    The housing finance market does badly need reform. But the 
PATH Act is the wrong path to take. The PATH Act would recreate 
the worst features of the housing finance market during the 
housing bubble: predatory lending; unregulated securitization; 
and too-big-to-fail banks. I detail these and other problems in 
my written testimony.
    My remarks today will focus on the key feature of the PATH 
Act, a proposal to privatize the housing finance system. 
Privatizing the housing finance system has several problems. 
First, there is not sufficient capital willing to assume credit 
risk on U.S. mortgages. Currently, there is $6 trillion in 
interest rate risk investment in the U.S. housing finance 
system. There is no reason to believe that these rate risk 
investors will transform into credit risk investors. If they 
do, the yields they will require will substantially raise 
mortgage costs, thereby depressing housing prices.
    Privatization could leave the housing finance system 
without sufficient capital. In plain language, that means 
higher rates and higher downpayments for your constituents. The 
PATH Act, therefore, is a risky gamble with the entire U.S. 
economy, based on ideology, not evidence.
    The second problem with the private housing finance system 
is that the products available would change. If the PATH Act 
were law, it would be difficult for most American families to 
obtain 30-year fixed-rate mortgages or to lock in interest 
rates in advance of closing.
    The 30-year fixed is not the best product for all home 
buyers, but it is a consumer-friendly product that is 
particularly well-suited for financial stability. It has been a 
bedrock of post-war American homeownership. The availability of 
the 30-year fixed is also heavily a function of Federal backing 
of the housing finance system. While it is true that one can 
find a 30-year fixed in the private jumbo market, as Mr. 
Wallison likes to note, the truth is that jumbo 30-year fixed-
rate mortgages are rare. Jumbo mortgages are a small part of 
the housing finance market, and most jumbo mortgages are 
adjustable rate.
    Fixed-rate jumbos are less than 4 percent of the entire 
housing finance market, and not all of those are for 30-year 
terms. Instead, the massive evidence is that private lending 
markets do not generate widespread availability of long-term 
fixed-rate loans. And this is because the interest rate risk is 
too great, as Mr. Loving from the ICBA explains in his written 
testimony. Thus, 30-year fixed-rate loans are also a rarity in 
the totally private commercial real estate market, and they did 
not exist before the entry of the Federal Government into the 
housing finance space.
    Similarly, the PATH Act would make it difficult for most 
American families to lock in interest rates in advance of 
closing. The ability to get a preclosing rate lock is a 
substantial benefit to the entire U.S. housing market. American 
home buyers are able to lock in rates in advance because of the 
To Be Announced (TBA) market. This is a market in forward 
contracts on GSE MBS. A TBA market requires tremendous 
liquidity, and that liquidity requires a high degree of 
interchangeability among MBS. GSE MBS has that high degree of 
interchangeability because they entail uniform credit risk for 
investors, namely, none.
    The PATH Act would produce private label MBS with all types 
of variation in credit risk that would make a TBA market 
impossible. While there is a TBA market for jumbos, it is a--
you can get a rate lock on jumbos, it is only because that rate 
risk can be hedged in the GSE TBA market. The jumbo market 
piggybacks on the existence of the federally-backed market. 
Thus, the PATH Act would make it impossible for most Americans 
to get preapproved for a mortgage at a particular rate before 
shopping for a home.
    The third problem is that the PATH Act encourages riskier 
lending. Not only does the PATH Act repeal key anti-predatory 
lending laws, but it recreates the unregulated securitization 
markets that could produce the housing bubble and financial 
crisis. The PATH Act creates an optional, privately owned but 
regulated securitization utility. It is questionable whether 
banks will find that the benefits of the utility outweigh its 
costs. Because the utility is merely optional, the utility will 
have to compete with unregulated securitization by banks for 
market share. The result could well be a race to the bottom in 
underwriting standards that increases the likelihood of 
government bailouts.
    In an ideal world, I would unequivocally prefer to see the 
U.S. housing finance system financed entirely with private 
capital. The government's involvement in the U.S. finance 
system does carry with it serious concern of moral hazard and 
politicized underwriting. Yet, proposals like the PATH Act that 
would eliminate any government guarantee from the housing 
finance system are not a solution. Every developed economy 
either has an explicit or implicit guarantee of its housing 
finance system because housing is too important to the economy 
and social stability for any government to let the market 
collapse. Accordingly, we need to proceed by thinking about how 
to structure an explicit government guarantee realistically so 
as to minimize moral hazard rather than pretending that we can 
simply have a private market and ignoring the implicit 
guarantee that will always exist in that market. The PATH Act 
is not the right act for reforming our housing finance system. 
Thank you.
    [The prepared statement of Dr. Levitin can be found on page 
172 of the appendix.]
    Chairman Hensarling. Dr. Calabria, you are now recognized 
for 5 minutes.

 STATEMENT OF MARK A. CALABRIA, DIRECTOR, FINANCIAL REGULATION 
                  STUDIES, THE CATO INSTITUTE

    Mr. Calabria. Chairman Hensarling, Ranking Member Waters, 
and distinguished members of the committee, I thank you for the 
invitation to appear at today's important hearing, and I also 
want to express my delight to be among so many friends on both 
sides of the aisle. It truly is a pleasure to be back here. The 
committee will note from my biography that I have spent the 
last 2 decades involved in various aspects of housing and 
mortgage finance policy. Let me be very clear that I believe 
housing is a critical component of our economy; moreover, I 
believe that housing is one of the basic necessities of life, 
if not the most important necessity of life. So, to be very 
clear, I do have a stake in a healthy mortgage finance system.
    Without stable, decent, and affordable housing, many other 
goals in life become quite difficult if not impossible to 
achieve. With that in mind, I would submit that our current 
system of mortgage finance has not facilitated the dream of 
affordable, accessible homeownership. Our current system has 
largely encouraged families to become highly leveraged and 
highly indebted, leaving both them and our greater economy at 
risk.
    Our current system has not resulted in long-term gains of 
homeownership. You can look at the Census data, it is pretty 
clear. Nor has our current system provided financial stability, 
which should be obvious. The recent recession and the 
accompanying 8 million-plus job losses were a direct result of 
our current mortgage finance policies along with other policy 
mistakes. Were we to choose to retain the current system or to 
make only cosmetic changes, we guarantee, let me emphasize, we 
guarantee a repeat of the recent recession.
    It is far past time we recognize the failures of our 
current system and move toward a better system that effectively 
serves homeowners and taxpayers. Fortunately, in my opinion, 
such a system need not cost the taxpayer nor endanger our 
economy. Affordable--in contrast to what my good friend Adam 
has said--fixed-rate financing is available in other parts of 
our financial system. Jumbo mortgages today trade at rates, and 
you can get at rates comparable to the conforming, in my 
opinion, having about 40, 50 percent of the jumbo market is not 
rare. I think it is actually quite common.
    You can get affordable fixed-rate financing in the auto 
market. And if you look at the recession, auto sales followed a 
similar trend downward as the housing market, yet auto sales 
recovered years ahead of the housing market, despite a lack of 
direct government support from auto purchases, with the 
exception of Cash for Clunkers.
    So, let me be crystal clear. We can't have affordable, 
long-term mortgages without the support of Government-Sponsored 
Enterprises. In my opinion, claims to the contrary are pure 
fiction. Elimination of Freddie and Fannie would also have 
limited impact on homeownership rates. Let me emphasize that 
the Nation's homeownership rates reached levels comparable to 
those today before we witnessed even having a secondary 
mortgage market. That is a fact. I would be happy to give you 
cites for the data. In fact, the initial growth period of the 
secondary mortgage market, between 1982 and 1992, was a time of 
declining homeownership rates.
    Let me turn now to the Protected American Taxpayers and 
Homeownership Act, the PATH Act. Let me commend the Chair and 
the committee staff on their efforts. I would also say I have 
followed the actions of this committee for close to 20 years. 
And let me say, I think this is without a doubt the most 
balanced, thoughtful, and logical piece of legislation I have 
ever seen come before the committee. I recognize it is a low 
bar. We urgently need to eliminate Fannie Mae and Freddie Mac. 
The PATH Act charts a course for doing so.
    I will note that even if the PATH Act was passed into law 
as written, our mortgage market would be characterized by 
extensive government support. Yes, the PATH Act helps create a 
freer mortgage market, but it does not create a free one. My 
one complaint would be that the PATH Act does not go far enough 
and contains too many compromises. For instance, I would 
suggest to the committee that an additional 5 years of 
conservatorship for Fannie and Freddie is unnecessary. I think 
at most, a 2-year lead time for FHFA would give a sufficient 
time to prepare for a receivership. The reduction in GSE and 
FHA loan limits should also be accelerated. A loan limit of 
525, 500, as ultimately envisioned by the PATH Act, still 
covers around 90 percent of the U.S. housing market.
    In my opinion, a more reasonable number would be closer to 
200. Our mortgage finance system has long been a massive, 
regressive subsidy to America's wealthiest families. And while 
I commend the new income-targeting requirements for the FHA 
retained in the PATH, I believe we can do a lot more to ensure 
that what subsidies are provided are targeted to those in need.
    Lastly, I want to commend the committee's inclusion of 
reforms to stop abuses of eminent domain. While I would extend 
these provisions far beyond the mortgage market to protect all 
homeowners from having government steal their homes, I think 
the included provisions are an important first step.
    So, again, let me close by commending the Chair for his 
efforts to take our mortgage market in a more rational and 
sustainable direction. I would certainly say I have yet to see 
a perfect piece of legislation. This is certainly not one. I 
don't expect to ever see a perfect piece of legislation. I 
certainly think there are changes that could be made, but I 
think this is a terrific start.
    [The prepared statement of Dr. Calabria can be found on 
page 104 of the appendix.]
    Chairman Hensarling. The Chair will note the call of votes 
on the Floor. So, we will listen to Dr. Zandi's testimony, I 
will take the liberty of taking my 5 minutes to ask questions, 
and then when we return, if it is acceptable, the ranking 
member can ask her questions at that time, and then Members may 
leave when they feel it necessary. I hope everybody stays for 
Dr. Zandi's testimony.
    Dr. Zandi, you are now recognized for 5 minutes.

 STATEMENT OF MARK M. ZANDI, CHIEF ECONOMIST, MOODY'S ANALYTICS

    Mr. Zandi. Thank you, Mr. Chairman, Ranking Member Waters, 
and the rest of the committee for the opportunity to be here. I 
am an employee of Moody's Analytics, but these are my views and 
opinions, not those of Moody's. You should also know that I am 
on the board of directors of MGIC, which is one of the largest 
private mortgage insurance companies in the country. And I am 
also on the board of directors of the Reinvestment Fund. That 
is one of the largest CDFIs in the country, and also has a 
stake in all of this.
    I have three points to make. The first point is, I do want 
to congratulate the chairman and the other members of the 
committee who worked on this, particularly the staff. This was 
clearly a very significant piece of work, with a lot of moving 
parts and a lot to digest. And to be frank, I haven't been able 
to digest it all. But it is significant. And I agree with the 
word ``comprehensive.'' It is a comprehensive effort. And I 
think that is laudable, because I don't think we can consider 
solving the problems posed by Fannie and Freddie without 
considering the housing finance reform system in its entirety. 
That involves FHA reform, and it involves getting private 
capital in more through the banking system and through the 
private residential mortgage securities market. So, that is all 
good.
    The part on covered bonds, I enjoyed that very much. I 
think that is a very appropriate place to look for additional 
capital. I think there is a lot more work that needs to be done 
there to make this a workable proposal, but I think that is a 
good direction to head.
    And as the chairman knows, I have long been skeptical of 
the QRM rule as currently written. And I am hopeful the Federal 
Reserve will address those issues before the end of the year. 
So, this isn't necessary for part of GSE reform. But the first 
point is, I think this is a significant piece of work.
    My second point is that the vision in the PATH for the 
private mortgage finance, that the private mortgage finance 
system would be the primary provider of credit, is not viable. 
It is not viable for three reasons. The first reason is it will 
lead to much higher mortgage rates. By my calculation, and 
there are a lot of assumptions, obviously, that go into these 
calculations; you need to vet them very carefully. But for the 
typical buyer, home buyer in today's market, and today's market 
is a pretty tight market, the quality of the borrower is very 
high relative to the average market. But for the typical 
borrower today, by my calculation, this will--if the PATH was 
passed in its entirety, it would raise mortgage rates by 90 
basis points. So, that is .9 percentage points, that is $130 
per month for the typical borrower. For the borrower who is not 
as high quality through, say, an edge of the qualified mortgage 
box which is being used to find eligible mortgages, it will be 
measurably higher than that. And in times of stress, in times 
of recession, even typical recessions, it would be even higher 
than that.
    So, this is very costly. One of the key reasons for this is 
a lack of liquidity in this market that, with no government, 
explicit government guarantee. The To Be Announced market, the 
TBA market, this is absolutely critical to a well-functioning 
housing financial system, this has to be preserved. This will 
not be preserved under the vision that is in the current PATH 
plan with regard to privatization. It will not work.
    Now, I understand there are other elements of the plan that 
try to address this issue. You clearly understand this is an 
issue. The common securitization platform is a good idea. But I 
am very skeptical that there will be any takeup on that 
platform. There are some benefits, but there are also costs. 
And there is no compelling reason for anyone to move to the 
platform.
    The second reason this isn't viable is that the 30-year 
fixed-rate loan will become marginalized in this system. In our 
current system, three-quarters of the mortgage loans are fixed-
rate. We can debate the merits of fixed-rate loans. But I think 
Americans like them, and we should preserve that. I think in 
the PATH, it would be closer to 20 to 25 percent of mortgages 
would be 30-year fixed.
    And finally, when push comes to shove, the government is 
going to step in. When times are tough, the government is going 
to step in. And we need to recognize that and charge for that. 
And if we don't do it up front, it is going to cost taxpayers a 
lot more.
    The third point I want to make, and it is a very quick 
point, and I will just state it, is I do worry about access in 
this proposal, access for small banks and community banks. I 
know you try to address it through the Federal Home Loan Bank 
System. I don't think it is adequate. And for access for 
disadvantaged homeowners. I think we need to do more for them 
in the context of a bill like this.
    Thank you for your time. I really appreciate the 
opportunity.
    [The prepared statement of Dr. Zandi can be found on page 
240 of the appendix.]
    Chairman Hensarling. The Chair will now recognize himself 
for 5 minutes for questions. And again, to Members, votes are 
taking place on the Floor right now.
    Dr. Zandi, in listening to your testimony, you said in your 
opinion, as you have examined the PATH Act, you believe that it 
could drive up interest rates 90 basis points, 9/10ths of 1 
percent; correct?
    Mr. Zandi. Yes, that is correct.
    Chairman Hensarling. And you also mentioned in your 
testimony your earlier concern about premium capture. You have 
been on the public record saying that the premium capture 
reserve account could increase interest rates not 90 basis 
points, but 100 to 400 basis points. Do you still stand by your 
earlier statement?
    Mr. Zandi. I do, yes, sir. That is under the--the current 
way the QRM and premium capital--
    Chairman Hensarling. So one current regulation of the 
status quo, in your opinion, could drive up interest rates 1 to 
4 points in the entirety of the PATH Act, you believe may drive 
up interest rates 9/10ths of 1 percent. Is that correct?
    Mr. Zandi. That is correct. For the typical borrower, the 
borrower in the middle of the distribution.
    Chairman Hensarling. Next question: You recently wrote in 
Moody Analytics, it is dated July 13th, that under the PATH Act 
the FHA would account for no more than one-fifth of the 
mortgage market on average, which is 20 percent. Historically, 
prior to the crisis, it has averaged 10 to 15 percent.
    Mr. Zandi. Right.
    Chairman Hensarling. So what do you consider to be the 
optimum footprint of FHA if the PATH Act leaves it larger than 
its historic average?
    Mr. Zandi. I don't have a number for you. And I really--I 
think the FHA's key role is providing affordable credit to 
first-time borrowers, lower-income households, as envisioned in 
the PATH plan. And I also think in the Path plan, one good 
element to the plan is that it allows the FHA to expand its 
footprint in times of economic crisis. I think that is 
appropriate. But I don't have a number for you.
    Chairman Hensarling. Okay. Thank you. I want to read from a 
Financial Times article dated Tuesday, which is entitled, 
``U.S. Jumbo Loan Rates as Cheap as Standard Mortgages.'' ``The 
rates on mortgages for expensive U.S. homes are converging with 
loans on government-subsidized loans. The difference between 
the average jumbo rate and the standard rate on a 30-year 
fixed-rate mortgage--so this is 30-year fixed to 30-year 
fixed--has been 20 basis points or less, two-tenths of 1 
percent, in 6 of the past 7 weeks.''
    We have heard some who say that under the PATH Act you 
could still find a 30-year fixed, but the delta would be such 
that it could not be affordable. What do you make of this 
Financial Times article, Dr. Holtz-Eakin?
    Mr. Holtz-Eakin. These are the facts on the ground. I do 
think they call into question the blanket claim that we can't 
have a 30-year fixed-rate mortgage in the absence of the 
current government backing.
    Chairman Hensarling. Dr. Calabria, did you want to chime 
in?
    Mr. Calabria. Let me say, I very much agree. I am going to 
disagree with my friend Mark here.
    When you look at the jumbo market today, it is 60, 70 
percent fixed-rate. So it is not clear to me why would assume 
that you are going to have 25 percent of it be fixed-rate if 
you got rid of that government guarantee. So, again, the fact 
that you can get affordable 30-year fixed-rate financing in the 
jumbo market is proof that it can be done. It is done.
    Chairman Hensarling. We have observed in 2 of the last 3 
decades that we have had serious housing bubble pops that 
precipitated economic crises. One of the things we are 
attempting to do with the PATH Act is ameliorate these boom-
bust cycles. I know this is something that you had studied, Mr. 
Wallison. Do you believe that the PATH Act as currently drafted 
would help ameliorate those cycles?
    Mr. Wallison. I do, Mr. Chairman. Private markets very 
seldom result in the kind of bubbles that we confronted, for 
example, in 2007 and 2008. That bubble was 9 times larger than 
any housing bubble we had ever had. The biggest before that was 
about 10 percent. In 2008, the bubble was about 90 percent.
    Now, that was because of the fact that the government had 
begun to pour a lot of money into the housing market and the 
government was not concerned about the risks. In a private 
market, the lenders become concerned about the risks as the 
prices go up. The government had no concern about that, and 
that would be true under any government-backed program.
    Chairman Hensarling. My time has now expired.
    Again, votes are on the Floor. With apologies to our 
audience and our panelists, this committee will stand in recess 
until immediately after this vote series, approximately 2:30.
    [recess]
    Chairman Hensarling. The committee will come to order. The 
Chair now recognizes the ranking member for 5 minutes.
    Ms. Waters. I would like to direct my question to both Adam 
Levitin and Mark Zandi. The question-and-answer document that 
was released by the proponents of this discussion draft claim 
that the affordable 30-year fixed-rate mortgage will continue 
to exist even without a government guarantee. Though they offer 
little by the way of evidence to support this claim, does the 
language in the bill specifying that the new mortgage utility 
needs to include for securitization a 30-year, fixed-rate 
mortgage actually mean that the middle-class borrowers will 
have access to their product on affordable terms? The 
Republican Q and A document then pivots and says that most 
Americans shouldn't have 30-year fixed-rate mortgages anyway 
because homeowners typically move after 7 years.
    Can you discuss the benefits of the 30-year fixed-rate 
mortgage, including how the predictable payment helps families 
with financial planning? Are loans that amortize on a 15-year 
schedule affordable for most American households?
    Let me start with Mr. Levitin.
    Mr. Levitin. Thank you very much, Congresswoman. In the Q 
and A that the Majority produced on this bill, they give an 
example of the difference between a $400,000 30-year fixed-rate 
mortgage and a $400,000 15-year fixed-rate mortgage, and the 
example is meant to illustrate that with a shorter mortgage 
term, principal gets paid down faster, and that is true, but 
what is not stated in the example is the effect on the monthly 
payment for that homeowner. Using the numbers from that 
example, the homeowner's monthly payment would go up almost 
$1,000 by going from a 30-year fixed-rate mortgage to a 15-year 
fixed-rate mortgage.
    Now, when you figure that the average--the median American 
family has an income of about $55,000, adding $12,000 in 
mortgage payments a year just isn't feasible. Even for a family 
who is earning double the median, $100,000, adding $12,000 in 
mortgage payments just doesn't work. So, if the availability of 
30-year fixed-rate mortgages decreases, that means there are 
going to be people who are just kept out of the housing finance 
market and that is really going to be a problem.
    Ms. Waters. Thank you. Mr. Mark Zandi?
    Mr. Zandi. Yes. The debate about the 30-year fixed-rate 
loan is a legitimate debate. I can see both sides of the 
argument, but my sense is that at the end of the day, it is a 
product that is very good for American households. It is really 
a question of who bears the interest rate risk, the homeowner, 
the household, or the financial system, the folks making the 
loans, and I think we decided as a nation, at least since the 
Great Depression, that it is better that the risk resides in 
the financial system and it is best handled there, and I think 
that is appropriate.
    So I think we should work really hard to preserve the 30-
year fixed-rate loan as a mainstay of the American mortgage 
finance system. And to second Adam's point, this is very key to 
affordability. If you can extend the payments over 30 years, it 
makes the loans much more affordable.
    One last quick point: We are unique in the world in having 
a 30-year fixed-rate loan. The rest of the world does not have 
a 30-year fixed-rate loan, and that is largely because of the 
way we have organized our system and because of the government 
guarantee.
    Ms. Waters. Taking a page out of Congressman Green's book, 
he has sometimes asked a question of all of the panelists at 
one time, and it doesn't require everybody to talk but simply 
to raise your hand. How many think we should preserve the 30-
year mortgage? If you think so, would you raise your hand?
    [Show of hands.]
    Mr. Holtz-Eakin. I don't understand the question.
    Ms. Waters. I beg your pardon?
    Mr. Holtz-Eakin. I don't understand what the question 
means. You can have a mortgage.
    Chairman Hensarling. Microphone, please, Doctor, we can't 
hear you.
    Mr. Holtz-Eakin. Congresswoman, I am not sure I understand 
what the question means. You can have a 30-year mortgage, it 
can be at a fixed-rate, you can have no penalties for 
prepayment, you can have at what rates, there are lots of--
    Ms. Waters. We are talking about a 30-year fixed-rate 
mortgage. That is what we are talking about. I know that there 
are lots of products. Some of them sound like 30-year fixed-
rate mortgages, but they are not, and I am simply just asking a 
basic question about the 30-year fixed-rate mortgage. It is not 
complicated.
    Chairman Hensarling. The time of the gentlelady has 
expired. The Chair now recognizes the gentleman from New 
Jersey, Mr. Garrett, for 5 minutes.
    Mr. Garrett. Thank you, Mr. Chairman. So, some people say--
and I will direct this to start with Mr. Wallison--that if 
there is less of a government guarantee in the housing market, 
there will not be enough investor demand to support the market. 
That is what some people say. Now, I spent some time digging 
down into the question, and I want to discuss with you and the 
panel what I found, and I will use, as been requested, some 
basic language here as we look at Fannie and Freddie.
    I am going to talk about supply and demand. On the supply 
side, when you wind down Fannie or Freddie and eliminate them, 
you have to ensure that there are significant pieces to fill 
the pie that they leave open. Under this legislation, we have a 
variety of mechanisms, as you know, that have filled the pie. 
There is a new qualified securitization market that is 
established under the bill, there is a new U.S. covered bond 
market under this bill, there is an enhanced and more 
transparent private label market, there is an initial room on 
bank balance sheets through regulatory changes provided under 
the bill, there is an expanded role of the Federal Home Loan 
Banks provided under the bill, and there is a restructured and 
a solidified FHA Ginnie government guarantee issue and 
structure under the bill as well. So when you add all these up, 
these new and enhanced supply channels, I believe you are 
getting very close to equaling the current space that Fannie 
and Freddie occupy.
    Now, I heard in regards to the demand side, many supporters 
of a large government role in the housing market, including on 
the panel, Professor Levitin, talk about how there are certain 
so-called rate buyers out there who don't want any credit risk 
and they won't participate in the market without a government 
guarantee. And Dr. Zandi mentions that, too, in some of his 
assumptions.
    Mr. Levitin actually, not only in his written testimony 
speaks to this specifically, and he identifies what he is 
talking about. He specifically gives examples. He talks about 
the Norwegian pension funds and states that they are ``unlikely 
to seek to assume credit risk or mortgages in a consumer credit 
market that they do not know intimately.'' I am sure you 
remember that.
    The pension fund that he is referring to is the Government 
Pension Fund Global. It is the largest sovereign wealth fund in 
the world with roughly $730 billion in assets under its 
management, and since he referred to it, I thought I would dig 
it up and see what he is talking about. And I have a part of 
the Norwegian pension fund here in my hand. This is part of the 
Partners Group which spells out their guidelines that he is 
talking about, which I assume he knows about.
    What does it say as far as their intentions? They say they 
will involve themselves with securities such as lower unrated 
tranches of pre-existing securitized or structured debt 
instruments such as mezzanine debt or others that have that 
feature. In other words, they will engage in credit risk, 
contrary to your testimony.
    Now, to make sure that the Norwegian fund was not an 
outlier, I examined the next biggest fund that is out there, a 
sovereign wealth fund. That is the Abu Dhabi Investment 
Authority, which is over $600 billion in assets under 
management, and I did some research there on this fund, and one 
of the things that popped up was a recent article--a Google 
search is all you had to do--and they have in here that they 
are basically doing $200 million in Indian real estate. Now, I 
know that Abu Dhabi is closer to India than it is to the United 
States, but I assume if they are going to go over there 
investing it, they will be looking over here as well.
    Now, another class of rate investors that frequently gets 
mentioned by some commentators who won't theoretically buy U.S. 
mortgage bonds without a government guarantee are foreign 
central banks, and this in fact is one of the three assumptions 
that Dr. Zandi uses, that he used in his numbers to get to the 
90 basis points.
    So, what I did there, I looked up to see whether that is 
true as well and I found a article from April of 2013 from 
Bloomberg News that reports that foreign central banks are 
actually loading up on equities, and as you well know, equities 
have far more credit risk associated with them than what we are 
talking about here.
    The potential rate investors it mentions also are insurance 
companies, pension funds and diamonds. So I think if you do an 
analysis as I have done here--which didn't take too long--of 
their investments, there are plenty of products with credit 
risk in their portfolio.
    So, Dr. Wallison, or Mr. Wallison, would you like to 
address that as to whether there is enough appetite to fill the 
rest of the pie as we seem to see that there is?
    Mr. Wallison. I am glad that you almost called me ``Dr.'' 
Wallison. I am the only one on this panel who doesn't deserve 
that. In any event, the way the private market works is there 
are groups within the economy that do want to buy securities 
that do not involve credit risk, and of course, they would be 
clustered around government agencies of various kinds.
    So the fact that it is now true that certain banks and 
foreign banks and so forth are buyers of Fannie and Freddie 
securities doesn't mean that there isn't an economy out there 
made up of many other kinds of financial institutions, life 
insurance companies, private pension funds that need the kinds 
of private securities that pay good yields to invest in.
    Mr. Garrett. We are--
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, for 5 minutes.
    Mrs. Maloney. Thank you. I would like to ask Mark Zandi 
some questions on the FHA section of the bill.
    Supporters of this bill claim that FHA would play a 
countercyclical role by increasing lending during times of 
economic downturn and cushioning the housing market, but under 
this bill the FHA would only be permitted to lend to a limited 
segment of the market and could not backstop the mortgage-
backed securities market. Without a government backstop, 
wouldn't the mortgage-backed securities market be vulnerable to 
investor runs in times of financial stress? And I am interested 
in any other comments you may have on the FHA portion of the 
bill.
    Mr. Zandi. Yes, that is a good point. Another concern about 
a privatized system as envisioned in the PATH is that it does 
leave the system open to runs. The banking system was subject 
to runs, deposit runs, prior to the formation of the FDIC. We 
established the FDIC to provide deposit insurance, and that has 
worked marvelously well. We haven't had a run on the banking 
system since the Great Depression.
    My worry would be that in a system which has no explicit 
catastrophic government backstop, we would see runs in the 
mortgage securities markets in times of stress, and that would 
impair the system and result in much higher interest rates, 
particularly for borrowers with lower credit quality, and it 
would be quite damaging not only to the housing market but also 
to the financial system because the U.S. mortgage market is 
such a large part of the global financial system, and obviously 
to our economy as well. So, I think that is a very reasonable 
concern.
    The PATH does recognize this as an issue and tries to allow 
the FHA to help step in the void, and I think there is credit 
due. It tries to provide that kind of cyclical entry point for 
the government, but I would be concerned that it is inadequate 
and would not be sufficient to forestall runs throughout the 
barter system and we would have problems, yes.
    Mrs. Maloney. All right. You also stated in your testimony 
that the underlying bill would increase mortgage rates by 
roughly 90 basis points and that this was a conservative 
estimate, and I would like to allow you time to respond to some 
of the issues raised by my colleague, Mr. Garrett, and also, if 
you use less conservative assumptions, how much could mortgage 
rates realistically rise under this bill? 200 basis points? 300 
basis points? If you could elaborate and comment on this 
section?
    Mr. Zandi. Sure. The 90 basis point estimate is based on 
the typical borrower in the current credit environment. That is 
a borrower with a 20 percent downpayment, that is a borrower 
with a 750 credit score, which as you know is very high. The 
median credit score in the Nation is about 720, and it also has 
a borrower with a debt-to-income ratio, a front-end debt-to-
income ratio of 31 percent, so this is a pretty high-quality 
borrower. So, it is 90 basis points in a normal economic 
environment for that typical borrower.
    For a borrower who is on the edge of the credit spectrum 
but is still a Qualified Mortgage (QM) loan, let's just say 
that is the definition of the credit box we are using here, in 
a stressed environment, let's say a typical recession since 
World War II, not the Great Recession, say the average typical 
recession, it could result in interest rates that are almost 
double that, so it would be quite significant. And it goes to 
my point about the 30-year fixed-rate loan. At that kind of an 
interest rate, when you raise rates that much, it is 
unaffordable, and therefore you won't have borrowers who take 
on a 30-year fixed-rate loan. They just can't afford it, and 
therefore, the share of the market that is 30-year fixed would 
decline quite substantively.
    Now, the question that--would you like me to go on, or 
would you like me to stop? I can go on for 5 hours or 5 
minutes.
    Mrs. Maloney. I want to move on to another issue that you 
have raised in testimony. You testified that and related 
industries were 25 percent of our overall economy. Other 
economists say it is 20 percent. Some make it higher, some make 
it lower. It is important. How important is this, getting this 
bill right and making sure that housing is available to middle-
class buyers to our overall economy?
    Mr. Zandi. It is vitally critical that we get this right. 
We can't mess this up because there is $10 trillion in U.S. 
mortgage debt outstanding. Just for context, there is $40 
trillion in credit market debt in the United States. It is a 
big part of our financial system. If we mess this up, we are 
going to mess up our financial system and we are going to mess 
up the barter economy. There is no doubt that we have to get 
this right, and I applaud this kind of intellectual debate 
because we are not going to get it right unless we have this 
kind of debate.
    Chairman Hensarling. The time of the gentlelady has 
expired. The Chair recognizes the gentleman from Texas, Mr. 
Neugebauer, Chair of the Housing and Insurance Subcommittee.
    Mr. Neugebauer. Thank you, Mr. Chairman, and I thank the 
witnesses for being here this morning, this afternoon, I guess, 
now.
    Mr. Zandi, you mentioned in your testimony that the cost of 
FHA insurance would likely rise because of the required changes 
in the premium policy and the doubling of its reserve fund from 
2 to 4 percent. Do you know what the FHA's capital ratio was in 
2005?
    Mr. Zandi. In 2005? I don't recall, no.
    Mr. Neugebauer. We have a chart. Let me just put that chart 
up here.
    Mr. Zandi. That was a trick question.
    Mr. Neugebauer. And so it was--in 2005, it was 6.5 percent, 
the capital ratio, and as you can see from there, it went up to 
7.38, 6.97, and I guess the other question is, was the premium 
at that particular time lower or higher than it is now?
    Mr. Zandi. I believe it is higher now, but I don't know for 
sure, no.
    Mr. Neugebauer. So, I guess the question is, do we think 
that a higher capital ratio is a harmful thing? Or why would a 
more solvent entity cause the rates to go up when in fact we 
are asking this entity to go from--actually what we would like 
for it to do is move away from a minus 1.44 percent capital 
ratio to a 4 percent, which--and I believe you said that you 
sit on the board at MGIC; is that correct?
    Mr. Zandi. Yes, I do.
    Mr. Neugebauer. Yes. So would MGIC be underwriting any 
mortgage insurance today if they had a capital ratio of minus 
1.44 percent?
    Mr. Zandi. No, they would not, sir.
    Mr. Neugebauer. Would they be underwriting anything at 2 
percent?
    Mr. Zandi. No, it wouldn't be with us.
    Mr. Neugebauer. Yes. So--
    Mr. Zandi. Yes. I don't disagree with you. I am not arguing 
with you. I would not disagree about your points about the FHA. 
I would like to stipulate that.
    Mr. Neugebauer. But you are saying that you think that the 
premiums would have to go up to be--to go to that level?
    Mr. Zandi. All I am saying is that under the provisions of 
the legislation--let me preface this by saying one thing: This 
is a very complicated part of the bill, with a lot of moving 
parts, and as I said in my testimony, I have to digest all of 
it, so I was opaque for a reason. But my sense of it is it 
would result in higher premiums, but I am not saying that is a 
bad thing or a good thing. That was just a description of what 
would happen.
    Mr. Neugebauer. The point I would make here is they have 
had higher capital ratios with lower premiums in the past, and 
see how that is stopped, so the argument that the premiums are 
going to go up to reach this goal is not necessarily validated 
by history.
    Mr. Zandi. And we can go through the arithmetic, but yes, 
it is possible.
    Mr. Neugebauer. This is to Mr. Calabria and Mr. Wallison, 
we have had 12 hearings and we have heard a lot of perspectives 
from a lot of different groups about the impact on housing to 
move to strengthen FHA, the potential impact on housing to--if 
we begin to wind down Freddie and Fannie, but the people who 
keep getting locked out of this discussion are the taxpayers. 
It is the taxpayers who have been making their house payment, 
and then they ended up making up for the fact that some of 
their friends and neighbors didn't make theirs, to the tune of 
$200 billion. As you look at this bill, the two of you, is this 
going to be a better deal for the taxpayers?
    Mr. Wallison. Yes, I think it is. What this bill does is 
create a much more prudent FHA, one that has to stand on its 
own 2 feet without the support of the taxpayers, although the 
taxpayers are ultimately going to be behind it, but there are 
sufficient provisions in this legislation that would reduce 
what the FHA does so that it only is covering low-income buyers 
of their first home. That would be exactly the right thing that 
we ought to encourage through this system. And if we can help 
low-income people to make their first purchase so that we can 
bring them into the housing market, that would be the way the 
FHA would be working best without any threat to the taxpayers.
    Mr. Neugebauer. Thank you. Mr. Calabria?
    Mr. Calabria. Let me say, I very much believe that the 
responsibility of the committee, in my opinion, is to look out 
for the good of the entire American public, and that doesn't 
just mean borrowers, renters, lenders, whatever; it is 
everybody. And as a borrower, if you give me a 90-cent subsidy 
and then take a dollar out of me as a taxpayer, I am worse off, 
I am not better off, so that is one point.
    The other point I would make is if you pass that subsidy on 
to me through my friends in the lending industry, the real 
estate industry, they are not going to give me all of it. They 
are going to take part of that. If you want to subsidize 
homeowners, cut them a check directly.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from North Carolina, Mr. 
Watt, the President's nominee to be Director of the FHFA whose 
nomination was approved by the Senate Banking Committee earlier 
this morning, and if the gentleman--in the words of Mr. Cleaver 
yesterday--would like to be eulogized, I am sure he will let 
the rest of the committee know.
    The Chair yields to the gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman, and I think I am going 
to--in everybody's interest--pass on the opportunity to ask 
questions, but I didn't want to pass on the opportunity to 
commend the Chair for starting this discussion. It is a 
discussion that is long overdue and there are lots of moving 
parts we have to get through, and I suppose I am not supposed 
to say anything facetiously, but Mr. Calabria mentioned the 
possibility that the FHFA might be put out of business earlier 
than 5 years. That possibility was mentioned at the Senate 
hearing also, and a lot of people thought I would be offended 
by that notion, but the truth of the matter is that would be an 
indication that we have gotten through this discussion and to a 
point in the future where we would have a housing system that 
has been approved in the political process.
    So in that sense, I would certainly welcome that. I said 
that to the Senate, and I say that to Mr. Calabria, also. So 
with that, I can either yield my time to somebody else or yield 
back.
    Chairman Hensarling. Since the gentleman yields back and 
effectively did not use his time, the Chair will instead 
recognize the gentleman from New York, Mr. Meeks, for 5 
minutes.
    Mr. Meeks. Thank you, Mr. Chairman. Let me ask Mr. 
Levitin--I believe you testified that an overwhelming majority 
of investors in the U.S. secondary mortgage market are not 
credit risk investors. So, do you see any emerging appetite to 
assume this risk by any major private sector source of capital, 
and what could be the risk premium or capital charges that 
could be imposed for assuming this risk?
    Mr. Levitin. This is one of the really scary unknowns about 
any attempt to privatize the housing finance system. I would 
hope that everyone could agree that the first rule of housing 
finance reform should be to do no harm, and we don't know how 
much transfer there will be of investors who currently are 
interest rate investors into being credit risk investors. To 
maintain current housing prices, to keep the system functioning 
as it is, we need $6 trillion of rate risk investors to 
transform into credit risk investors.
    It may well be that many rate risk investors are willing to 
take on credit risk, but if it is only $5 trillion, not $6 
trillion, that is going to have a serious effect on housing 
prices. It is going to push them down. And to the extent that 
we have that transfer from rate risk investors to credit risk 
investors, those investors are taking on new risk and they are 
going to be charging for it. I don't know exactly how much that 
is going to increase housing prices. Dr. Zandi has some 
estimates of that, but it is going to cause the cost of a 
mortgage to go up.
    Mr. Meeks. Speaking of that, Dr. Zandi, let me ask you 
this: Many small community banks and credit unions rely heavily 
on the secondary market to sell up to 60 percent of the 
originated mortgage loans, and with the elimination of GSEs and 
the formation of a national mortgage market utility, what do 
you think would happen to these institutions' access to a 
secondary market?
    Mr. Zandi. That is a good question. It is an open question, 
I think. The PATH Act, from my reading, tries to address this 
in two ways, this concern you have: the first is to the utility 
and telling the utility, you have to take all comers on equal 
terms; and the second is to use the Federal Home Loan Bank 
System as an aggregator of loans from small banks.
    Now, the way the legislation is written, I would be nervous 
about both entry points. The utility is not compelled to follow 
through, and there is not--more importantly, there is no--it is 
not compelled--there is no compelling reason why mortgage 
companies would use the utility. It is not clear to me why they 
would do it, and so I don't think you have a lot of people 
moving through the utility. And using the Federal Home Loan 
Bank System, it might work, but the Federal Home Loan Banks are 
not compelled in the legislation to do it, and I think even if 
they wanted to do it, and maybe it could work, it probably, 
because the small lenders aren't on the same--there is a 
potpourri of them, they are all doing different things at 
different times in different ways, the Federal Home Loan Banks 
would probably have to backstop the reps and warranties to make 
it work. They would have to do some other things to make the 
loans coming to them from the small community banks on the same 
equal footing with the large banks to make it work in a 
reasonable way for the small banks.
    So, bottom line, I am not sure. I am skeptical that the way 
it is written would actually work. Maybe the legislation could 
be rewritten in a certain way to address these concerns and 
make it more viable, but as written, I would be concerned about 
it.
    Mr. Meeks. Thank you.
    Mr. Calabria. If I could only clarify some of the 
discussion. The special risk about the 30 years, the interest 
rate risk has been alluded to. It is important to keep in mind 
that Fannie and Freddie provide a guarantee of the credit risk. 
Now, more often than not, how it functions is, let's say Bank 
of America sells 1,000 mortgages to Fannie Mae, buys back the 
mortgage-backed security holding those 1,000 mortgages, Bank of 
America brings back that interest rate risk on its own books. 
It transfers the credit risk to Fannie Mae. So again, what is 
special about the 30-year mortgage, by and large, in a 
securitization model, is that interest rate risk is transferred 
on to the final investor.
    So unless we are envisioning a model where Fannie and 
Freddie maintain very large portfolios, because that is the 
only time where they maintain interest rate risk, otherwise it 
is passed on, and what I finally want to end with is the 
Democrat principles that were released earlier today say, we 
want to charge a fair price but with adequate revenue to cover 
the risk, so I think everybody is of a consensus here that this 
should be paid for one way or another. So even in this, rates 
go up.
    Mr. Meeks. Is it the concern, though, that based upon this, 
it seems as though that not only will rates go up, but the 
individuals would have to have almost 20 to 30 percent down and 
not able--and an adjustable rates where we just got out of that 
problem. I am out of time. I have to yield back.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair recognizes the gentlelady from West Virginia, Mrs. 
Capito, the Chair of the Financial Institutions Subcommittee.
    Mrs. Capito. Thank you, Mr. Chairman. This question is for 
Dr. Holtz-Eakin on how the market utility is envisioned to work 
as proposed to set uniformed standards for securitization. Do 
you believe that a standardized platform would provide the 
market with a certainty that it would need about the terms of 
an agreement?
    Mr. Holtz-Eakin. Frankly, I have some ambivalence about the 
utility as it is written. I think there is tremendous value to 
standardization. I think, and there is great role in the 
legislation for providing that standardization. I am less 
enthusiastic about government-sanctioned monopolies of any 
type.
    Mrs. Capito. Government-sanctioned what? I didn't--
    Mr. Holtz-Eakin. Monopolies, single entities of any type, 
and so I have some ambivalence about how this might play out in 
practice. The standardization, I wholly applaud. That is a very 
important step, something that I think would allow 
securitization broadly to function very effectively.
    Mrs. Capito. Thank you. This is for Dr. Calabria. I 
represent a rural area, and my great independent banker is 
going to be on the next panel, Mr. Loving from Pendleton 
Community Bank, and he holds his mortgages on the books in his 
community bank. Do you think that without the government 
guarantee, more institutions will be moving in that direction, 
where they keep their mortgages on their portfolio, and is that 
a bad thing?
    Mr. Calabria. I generally do think that without the Fannie 
and Freddie structure, you would have more portfolio lending. 
Quite frankly, I think that's a positive. I included a graph in 
my testimony. Before 1980, and again, you need to keep all the 
failures of the savings and loan industry in mind. We don't 
want to repeat that either, but I think you get better mortgage 
modification, for instance, you get a better knowing of the 
borrower when you have a problem with your mortgage, you can go 
to your lender, they have it, you have that discussion, you get 
a workout.
    I think a lot of the problems in the most recent crisis was 
an outcome of the securitization model, which we embraced, and 
as I mentioned, we previous pretty much had reached the 
homeownership rates we have today when securitization was 
irrelevant, so it is hard for me to see the last several 
decades of securitization as actually having brought a lot of 
good, other than in my opinion transferring risk to the more 
highly leveraged parts of the system.
    So, I think we should reconsider a broad portfolio model. I 
will say, I think a private TBA market certainly has a place. I 
think covered bonds has a place, but at the end of the day, 
going back to a lender makes it, keeps it, is responsible for 
it, I think you get better quality lending out of that.
    Mrs. Capito. Thank you. And this is a bit of a statement 
and then a question for Dr. Zandi. We talked about the 30-year 
fixed-rate mortgage. That is important to me. In the place 
where I live, we have lower incomes, and we have lower property 
values, and you absolutely gauge whether you are going to be 
able to do this or not on whether you can meet your monthly 
obligation, and in a State like mine which has lower 
socioeconomics, we do meet our obligations. We have some of the 
highest homeownership in the entire country, and so that can be 
achieved.
    But my question is--we have had hearing after hearing on 
this QM. There is a study out there by CoreLogic that says the 
mortgages that were written in 2010, under the QM, 52 percent 
of those mortgages would not qualify for a QM. So that is 52 
percent of folks who got a mortgage under those standard--under 
those underwriting, and in this market now, with a QM, would be 
unable to access the mortgage market. That, to me, is an 
enormous red flag, and so if--I don't see how we are going to 
have do no harm and keep a 30-year mortgage rate when we are 
going to be cutting out half of the people under the Dodd-Frank 
Act, under the auspices of protecting the consumer when the 
consumer, many of them are in Mr. Loving's bank who are farmers 
and rural and folks who don't met the metrics of a QM, they are 
the ones, those are the families, the young families who aren't 
going to be able to buy that first house.
    There is a bank in Wheeling, West Virginia, which 
underwrites a program where the first-time home buyer doesn't 
have to put down a downpayment. It is a charity program that 
was established by a trust 30 years ago. They are out of it. 
They are not going to be able to do it. So I would like to know 
what your response to something--to these folks are going to 
be, these 52 percent.
    Mr. Zandi. I would say a few things. First, I think the 
intent of QM is a good intent. We want to make sure that 
borrowers can afford the mortgages that they are taking on. I 
think we can all agree.
    Mrs. Capito. Right.
    Mr. Zandi. And I think that we do want some criteria for 
determining that, and it would be helpful if they are clearly 
defined and articulated, and I think that is the intent and 
purpose of QM.
    Second, I would say with regard to its implementation, I 
think there are some reasonable concerns about how tight QM has 
been defined. I think actually the Consumer Financial 
Protection Bureau (CFPB), the keeper of the rule, has relaxed 
some of the key constraints on QM over time and much of the 
industry feels comfortable with those.
    Mrs. Capito. I think I have just lost my time. Thank you.
    Mr. Zandi. I had a third point, but it was the best one 
actually.
    Chairman Hensarling. Maybe in the next round.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Capuano, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman. I actually found your 
testimony very interesting and intriguing. I didn't disagree 
with almost anything anybody said. A couple of things you said, 
Mr. Calabria, but pretty much nothing else. Especially, Mr. 
Holtz-Eakin, I agreed with pretty much everything you said. The 
generic goals are the same. The question is, okay, what does 
this bill do to those goals, and I only have one segment to 
look at things.
    I can't find any models that I think are comparable with 
the United States today that I can really look at a purely 
private market, and the only thing I can look at is the United 
States prior to 1930, 1933, and in that market everything I 
found, the history is a little vague, tells me that we had 
about the same rates we have today, give or take, but with a 50 
percent down, 5-year payment, which pretty much came out to 
double any monthly mortgage anybody would have, rough numbers. 
And in today's world, the average person who qualifies, which I 
agree, there are fewer people who qualify. And by the way, 
before I forget, I want to echo 100 percent the comments that 
were made by the previous speaker. If the QM, the QRM, the ABC, 
XYZ, anything ends up turning 50 percent of the potential 
market away, that is a wrong goal, that should be addressed 
immediately, and I haven't had an answer to that by some 
people. That is a different hearing.
    But under today's market, just based on some work I did 
today, the average mortgage that is available today to the 
qualified person, which is most people, most people who are 
looking to buy a house, for a 30-year fixed is 4\1/2\ percent, 
that comes out to $1,013 a month, which is still out of the 
range for a lot of people, but it is there.
    I can't imagine taking that $1,000 and turning it into 
$2,000 a month, and so I need to go back to my original opening 
statement. Mr. Wallison, do you think that this bill, as 
currently drafted, would provide 90 percent of the people who 
are currently getting a mortgage today with access to a fixed 
30-year mortgage in the 4\1/2\ percent range with a 10 percent 
downpayment, roughly, do you think this bill achieves that 
goal?
    Mr. Wallison. I think this bill could very easily achieve 
that goal, and in fact, right now, Wells Fargo is offering a 
30-year jumbo fixed-rate mortgage for 4\1/4\ percent--less than 
the conforming loan.
    Mr. Capuano. Jumbo.
    Mr. Wallison. A jumbo.
    Mr. Capuano. Who qualifies for jumbo? Tell me that again.
    Mr. Wallison. A jumbo is a mortgage that is over and 
above--
    Mr. Capuano. I understand that, but who qualifies?
    Mr. Wallison. Who qualifies?
    Mr. Capuano. Could my mother qualify for one of those?
    Mr. Wallison. Of course. I don't know your mother, but I 
assume she's--
    Mr. Capuano. I think not, but that is beside the point.
    Mr. Wallison. --a person who meets her obligations.
    But the point--
    Mr. Capuano. Would most of my constituents qualify for 
that?
    Mr. Wallison. Of course, because when you have--
    Mr. Capuano. Really?
    Mr. Wallison. When you have a market in which there is a 
lot of private competition, those rates will be kept low by the 
competition.
    Mr. Capuano. The one thing that is interesting to me is 
that one of your colleagues came in and dramatically demanded 
that we get rid of the 30-year mortgage in favor of a 20-year 
mortgage, and if we did that at the same rates, you are 
basically adding another $300 a month to it, but that is beside 
the point.
    Ms. Levitin, do you think that this bill would allow a 
typical, as we understand it today, 30-year mortgage to be 
available?
    Mr. Levitin. I do not think that under the PATH Act a 30-
year fixed-rate mortgage on affordable terms would be available 
to most home buyers.
    Mr. Capuano. Mr. Holtz-Eakin, do you have an opinion on 
this?
    Mr. Holtz-Eakin. I do, and respectfully, I don't think it 
is the right question.
    Mr. Capuano. You don't have to think it is the right 
question. I just want you to answer it.
    Mr. Holtz-Eakin. But respectfully, you just said there was 
a consensus that we have to change from where we are now, and 
so the mortgages that you are comparing to are ones which are 
vastly subsidized, have all sorts of opaque risks, and have 
left the taxpayer--
    Mr. Capuano. That is all well and good. But my average 
constituents are not interested in that. They just want to know 
if they can get a mortgage and their kids can.
    Mr. Holtz-Eakin. I hope they are interested because it is 
costing them a lot of money. So the question will be, in 
whatever new system we have, will they have access to an 
affordable mortgage, and the answer to that is yes.
    Mr. Capuano. Are they going to have access to a mortgage 
that is in the range of what they have now? Because 
``affordable'' is not an objective term. Would you agree with 
that?
    Mr. Holtz-Eakin. ``Affordable'' is not an objective term, 
but I believe there will be a well-functioning mortgage market 
under the PATH Act that will give your constituents the housing 
finance they need.
    Mr. Capuano. So, thank you for not answering it, but close 
enough. I am trying to avoid this ideological philosophical 
statement so that I can go home and tell people yes or no.
    Mr. Zandi, do you think that the mortgage that my average 
constituents can get today will still be available under the 
PATH Act?
    Mr. Zandi. No, I don't. Going to the jumbo market, it is--
the loans in that market current--especially today are 
incredibly high quality. I love Peter's--I only have 7 seconds 
left, so--
    Mr. Capuano. Use it well.
    Mr. Zandi. I have a good story for you.
    Mr. Capuano. Thank you, Mr. Chairman.
    Chairman Hensarling. And Mr. Zandi, your timing isn't the 
greatest.
    The Chair now recognizes the gentleman from California, Mr. 
Miller.
    Mr. Miller. Thank you, Mr. Chairman. Mr. Zandi, I am not 
going to ask you, because you are wearing some kind of dart on 
your chest or something out there.
    Mr. Zandi. I am used to that. I grew up in a big family.
    Mr. Miller. It is very tough to determine what is happening 
in the marketplace because the marketplace is not normal today. 
The quotes that we had about the jumbo loans being competitive, 
70 percent loan-to-value, 750 FICO scores and stable for 3 
years, you look at the conforming mortgage, $75 billion is 
being bought each month by the Fed, so it is almost impossible 
to look at anything today and say that is the norm and this is 
where we go from.
    My only concern is will financing be available for 
homeownership. Remember back in 1983, remember how bad that 
was. I had major lenders telling me that you will never see a 
fixed-rate 30-year loan again. That proved, thank goodness, not 
to be true, but the prime rate was 21.5 then. Fannie and 
Freddie made some horrible, horrible mistakes, but in 2008 the 
default rate for the jumbo marketplace was greater than Freddie 
and Fannie's even, so everybody in the marketplace made 
horrible mistakes. They made loans they shouldn't have made. 
They made them to people they shouldn't have made them to, and 
we ended up with a mess on our hands. First, $2.7 trillion lost 
in mortgage--default market, $180 billion was lost by Fannie 
and Freddie which they owned a bunch of it, but that is still 
$180 billion they should not have lost. So there is no excuse 
for any of it, but what do we do today is my concern.
    Mr. Holtz-Eakin, you wrote an article last year stating 
that should another housing bust occur, Congress will intervene 
in some way. I think that is probably a reasonable statement, 
and yesterday, Fed Chairman Bernanke echoed that if we don't 
define the role of government, won't it cost taxpayers more in 
the end. So, there are some red flags that we need to look at 
and say what do we do.
    My question to you is without a guarantee, what happens in 
time of crisis, and we need to worry about crisis. Will 
investors be there to purchase mortgage-backed securities and 
will interest rates tend to rise?
    Mr. Holtz-Eakin. It is a very good and a difficult 
question, and I have struggled with it.
    Mr. Miller. Even the committee.
    Mr. Holtz-Eakin. A lot of it is an issue of a Federal 
backstop. The focus today has been on what will a 30-year 
fixed-rate mortgage look like. That is one way to think about 
it, but the second way to think about it is what is the 
cheapest taxpayer protection we can get, because if you do 
believe that in a--
    Mr. Miller. I think Freddie made a horrible mistake.
    Mr. Holtz-Eakin. --major crisis Congress will intervene, 
will that be more expensive than something that is a backstop 
price now. That is a fair question--
    Mr. Miller. And my concern is--
    Mr. Holtz-Eakin. --that I worry about.
    Mr. Miller. --as your statement here last year and Chairman 
Bernanke's is the government is probably going to end up being 
there, and that is a huge concern if we don't define some role 
and purpose for them. But numbers bother me, and I say, let's 
look at the market today. What is the private sector doing?
    Banks own about $1.5 trillion of wrapped mortgage-backed 
securities. Foreign holders own approximately 1 trillion of 
wrapped. The Fed owns $1 trillion of wrapped. Insurance 
companies, State and local investment funds own about a 
trillion between them in wrapped. So you have about $4 trillion 
in residential mortgages to buyers who don't buy unwrapped 
mortgages, and I am looking at a huge sector of the economy 
that is buying only wrapped.
    Mr. Levitin, you have kind of gotten by unscathed. I will 
direct this one to you. Can you, as an academic, tell this 
committee and the American people that the market participants 
are wrong in what they are doing today and that some other 
fashion is right?
    Mr. Levitin. That they are wrong in only buying wrapped?
    Mr. Miller. Yes.
    Mr. Levitin. No, I can't say that. I think a mortgage 
investor right now should rightly have a lot of concern about 
credit risk on any loans that are being originated, and 
therefore would want wrapped securities.
    Mr. Miller. Any of you, there is no definition of the TBA 
market. That is a huge concern for me out there because there 
is no front and there is no rear. You have your microphone up, 
go for it.
    Mr. Calabria. Let's keep in mind that part of the existence 
of a TBA market is because Fannie and Freddie have 1933 
Securities Act exemptions, so you could craft those sort of 
exemptions for a TBA market that allows you to sell that 
forward.
    Mr. Miller. But if we don't do that on the front end, the 
back end connecting the person who wants to buy a house to the 
person who wants to buy the loan could be problematic.
    Mr. Zandi, you touched on that briefly. The bull's-eye is 
back on you at the conclusion. I have 30 seconds, so what do 
you think about the TBA market? Is it necessary? Is it 
something that's--
    Mr. Zandi. Yes, I think that is a very important part of 
our mortgage housing finance system. It provides liquidity, it 
keeps rates much lower than they otherwise would be, and we 
need to preserve that under all circumstances.
    Mr. Miller. So, Freddie and Fannie made huge mistakes, no 
doubt. I'm not defending Freddie and Fannie, something has to 
change, but there are some holes that bother me, and TBA is one 
of them, and the wrapped on the investment side is the other, 
and Mr. Chairman, thank you for the time. I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Georgia, Mr. Scott, for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Zandi and Mr. Levine, I kind of want to direct my 
questions to you. Is that right, in the middle, is it Levine 
or--
    Mr. Levitin. Levitin.
    Mr. Scott. Levitin. All right. I am really worried about 
this bill. It sort of reminds me of like a Darth Vader, sort of 
a dark star that kind of sends us on the dark side, because, 
Mr. Zandi, you mentioned this because it sends us back, all the 
way back 80 years to the Great Depression. We have had a need 
to respond, and I have listened to this discussion, and nowhere 
in this discussion have we considered the plight of the 
American people, the struggling homeowner, the person out 
there, the fact that we need to admit the truth here that this 
bill not only sends us back past 80 years, back to 1934 when 
the National Housing Act was put in place, where we knew we 
needed a government backing for housing.
    And now in this rush to declare this war on Fannie and 
Freddie, we are losing sight of that human quality, the middle-
class. And I really would like--I have 3 minutes, and I would 
like for the two of you to really stress how this definitely, 
without question, will cause havoc to the 30-year fixed 
mortgage rate, which is the crucible that allows people to be 
able to have an affordable payment schedule and how refusal of 
this will send them into the arms of predatory lenders, of 
prime selection, and of some of the very things that caused the 
trouble in the first place.
    Please tell us, without question, that this bill will end 
for those people, the vast majority, the 30-year mortgage rate 
and impact of that.
    Mr. Levitin. Congressman, we have never seen a private 
mortgage lending market produce long-term fixed-rate mortgages 
on any scale. We have several examples of these markets. We 
have the current jumbo market, which does produce some fixed-
term, fixed-rate mortgages, but not on a large scale. The much 
higher percentage of jumbos are adjustable-rate and fixed-rate. 
We have the commercial mortgage market which generally does not 
produce loans much longer than 10 years in duration, and we 
have the pre-depression housing finance market, which was 
totally private and the standard product there was a 3- to 5-
year fixed-rate loan where it was not amortized. It was 
interest only. They were called bullet loans, because at year 
5, you had to bite the bullet. Either you could pay the entire 
principal or you had to roll it over, and if markets were 
frozen, if your credit was damaged, or if rates had simply gone 
up, you might lose your home.
    Mr. Scott. But I want to--what I am after is, will not this 
cause havoc to the--I am not worried about the rich folks. They 
are going to go get their house. They are not worried about 
that. We have to worry about the middle income and the lower 
income and will not this, in effect, end that 30-year fixed 
mortgage for them in large measure? Yes or no? That is what I 
am after here.
    Mr. Levitin. It is going to make it much harder for them to 
get affordable 30-year fixed-rate mortgages.
    Mr. Scott. All right. Mr. Zandi, your comments on this, 
please.
    Mr. Zandi. Yes, I would agree with that. It is going to 
make it a lot more difficult for lower- and middle-income 
households with lower credit scores, less of a downpayment, 
more disadvantaged folks who don't fit quite in the box for a 
30-year fixed-rate loan.
    Mr. Scott. And in addition to that, will not it make it 
more difficult for those poor little community banks and those 
credit unions who could fill in the gap here under this 
legislation, would be very, very hurtful to them?
    Mr. Zandi. Yes, but let me just say that I think the 
legislation is sensitive to that concern. It is just a matter 
of getting the mechanics right to address that concern, so it 
is not a matter of intent. It is a matter of can we get this 
workable in the framework that has been put forward in the 
legislation.
    Mr. Scott. But it is the bottom line that you all agree 
that this bill, as structured, needs to be fixed or else it 
will do tremendous damage to the middle-class and the lower-
income people.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from North Carolina, Mr. 
McHenry, the Chair of the Oversight and Investigations 
Subcommittee.
    Mr. McHenry. Thank you, Mr. Chairman. Thank you for having 
this important hearing, and for a great panel of witnesses. I 
think it is a deep ideology we hear from my colleagues on the 
other side of the aisle that says only government can provide 
this type of product and otherwise it would simply not exist in 
nature.
    It is wholly ridiculous on its face that that is in fact 
not what a new market would look like without the government 
intervention. In fact, Mr. Zandi, to--a quote the chairman 
referenced before about QRM and the premium capture rule, and 
you stated before, quote, as a result of the way the premium 
capture rule is stated, the mortgage rate impact to borrowers 
would be significant, on the order of an increase of 1 to 4 
percent.
    Now, I am bringing this up because many of us believe that 
Dodd-Frank is going to drive up the cost of lending, especially 
in the mortgage marketplace. And Mr. Zandi, you said as much in 
the response to the chairman at the beginning. And so, let's 
talk about that. Walk me through your thinking on this, why the 
reforms that we have and a part of this legislation actually 
will end that, right, and that is beneficial in your view, Mr. 
Zandi, is it not? I am sorry, Dr. Zandi.
    Mr. Zandi. Yes. Specifically on QRM. As QRM and the premium 
capture rule are written, it would be, I think, a mistake 
because it would raise mortgage rates considerably, 
particularly for households with lesser credit scores, more 
disadvantaged groups, so I think as currently written, it would 
be a mistake.
    Now, having said that, the Federal Reserve, which is the 
keeper of that rule, understands this and has been working 
quite hard over the last couple of years--I think it has been 
at least 2 years since they introduced the rule--to address 
these concerns, and they are going to rule on this, at least it 
is my understanding, by the end of the year, so let's take a 
look at it, and they understand--because I have gone back and 
forth with spreadsheets and they understand the concerns.
    Mr. McHenry. Right. So we are dealing with this 
legislation. Do you think this is a beneficial provision that 
we have in the bill?
    Mr. Zandi. I think it is almost irrelevant because by the 
time this bill gets anywhere or any other bill gets anywhere, 
this will be--
    Mr. McHenry. No, no, no, but today. We are talking about 
today. If you are telling us as Congress to hang out for 6 
months, we are not Members of the Senate. We don't do that well 
in the House.
    Mr. Zandi. If I were king for the day, I would say I 
understand the intent of QRM, I understand the intent, but it 
does not--it is skin in the game, the logic is straightforward. 
If you have skin in the game, therefore you are going to make 
better quality mortgage securities. I am on board with that. I 
just don't think the QRM rule, as it is currently defined, will 
accomplish that. That is all.
    Mr. McHenry. Right. Thank you.
    Mr. Calabria, when we talk about the impact of Dodd-Frank 
on mortgage-backed securities, rather than making it a more 
robust, more liquid market, it actually has the opposite 
effect; is that your view?
    Mr. Calabria. I would very much agree. I think the 
provisions in Dodd-Frank are going to do more to restrict 
mortgage credit than anything in the PATH Act. I also want to 
mention to Congressman Capuano's question, 2 or 3 years from 
now, nobody is going to get a mortgage for 4\1/2\ percent under 
any system because of what the Federal Reserve is going to do. 
So, you should have raised that yesterday with Ben Bernanke. 
That is the place to go.
    Mr. McHenry. Okay. So the cost of mortgages has more to do 
with Federal Reserve policy?
    Mr. Calabria. And I would also emphasize, if you look at 
the difference between choices in say Europe between fixed-
rates and short-rate financing, it has far more to do with the 
conduct of monetary policy. We have talked repeatedly about 
interest rate risk. The prime source of interest rate risk in 
this country is the Federal Reserve.
    Mr. McHenry. Sounds like a good way to articulate for the 
Taylor Rule for monetary policy.
    Mr. Wallison, when we talk about the PATH Act, in the 
provisions that are there to entice and attract private capital 
to the MBS market, do you think that is sufficient, do you 
think those are proper for us to have in this legislation?
    Mr. Wallison. Yes, I do. The one thing to realize is that 
in the private sector, people are compensated for taking risks. 
The idea that there isn't enough capital in the private sector 
to replace government-supported capital such as with Fannie Mae 
and Freddie Mac is, of course, wrong, because the rest of our 
economy is financed entirely by people who do take risks in 
order to make loans. And if you are looking at institutional 
lenders, insurance companies and pension funds, have about $13 
trillion that they do not invest by and large today in 
government-backed instruments. They are looking for risk-based 
instruments.
    Mr. McHenry. And finally, only half of today's mortgage 
originations would meet Dodd-Frank requirements.
    Chairman Hensarling. You are out of time. The time of the 
gentleman has expired. The Chair now recognizes the gentleman 
from Massachusetts, Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman.
    I want to thank the panel as well for your willingness to 
help us out on this. Dr. Zandi, I had an opportunity to read 
your testimony last night. I think you did a great job. Very 
balanced. But you have raised some very real concerns about 
what might happen to mortgage rates if we went through with the 
PATH bill as is written.
    There is a formula here that you have used which describes 
at least what the minimal impact might be, and that would be, I 
believe, under certain conditions to raise mortgage rates by 90 
basis points. Is that correct?
    Mr. Zandi. That is correct. For the typical borrower in the 
current mortgage market, it would be about 90 basis points, 
under the assumptions that are laid out clearly in the 
testimony.
    Mr. Lynch. But there are other parts of your testimony 
where you talk about the inability to quantify the tangible 
risks that might be increased because of the lack of a 
government backstop. And I was just trying to add that in if 
there was any sense of what you thought that might bring us to 
above the 90 basis points.
    Mr. Zandi. I took a crack at estimating that. This brings 
up a broader point. And that is, we are going to have a debate 
about the impact of this legislation and other legislation on 
mortgage rates and the 30-year fixed and mortgage credit 
availability. It is really an empirical question. It is going 
to be very difficult to answer. Given that, we have to be very 
careful that we don't, as Adam said, do anything that harms the 
current system. It is like--I am not going to have as good a 
metaphor as the Congressman from Texas with the boot and the 
oven, but if you are standing on a cliff, you want to make sure 
there is some water underneath you if you dive off.
    Mr. Lynch. Right.
    Mr. Zandi. And I am very concerned that under the 
legislation, we will be diving off a cliff, and we don't know 
what is underneath us.
    Mr. Lynch. Right. Here is my problem. You are describing a 
90 basis point increase under average conditions here with an 
average buyer when the time at which we actually need the 
backstop and we need the system to hold firm is under the 
direst or the most calamitous market conditions. That is when 
we need the backstop to be there. Have you thought about--in 
the past, we have seen private capital flee when market 
conditions are unfavorable. So what does that say about the 
ability of private capital to replace a government backstop 
under those conditions?
    Mr. Zandi. That is a very good point. So my sense, just to 
give you the sense of magnitude, is that if you took a borrower 
who is at the edge of the QM credit box, that is kind of the 
box we have defined as we are going to lend into in general, in 
a stressed environment, let's call it a typical recession, 
since World War II, not the Great Recession, just a typical 
recession, that for that borrower the impact on mortgage rates 
in the vision presented in the PATH plan for privatization 
would probably be double the 90 basis points, closer to double, 
so closer to 180 basis points. I am giving too much precision 
to this because there are so many assumptions. But that kind of 
gives you kind of order of magnitude, yes.
    Mr. Lynch. Okay. The other--in your testimony you also talk 
about the covered bond piece of this. And you made some--I 
think it was your testimony talked about some of the--the use 
of covered bonds in Europe and how the government backstop 
there really is what made the covered bond work. Talk about 
that.
    Mr. Zandi. Yes. The covered bond market works in Europe as 
well as it does because the financial system is dominated by 
too-big-to-fail banks. And in Europe, there really is no 
significant debate about too-big-to-fail. That is taken as a 
given, very different from here, where we are working really 
hard, Congress, the Administration, and regulators, to reduce 
too-big-to-fail risk. But in Europe, if Deutsche Bank gets into 
trouble--just picking a name of the air--the German population, 
the policymakers are going to be behind and backstop Deutsche 
Bank. So the guarantee, in a sense, the government guarantee in 
Europe is through the banks and the banking system and that is 
how--
    Mr. Lynch. Right. And large banks, not just--that is not 
just a bank--the banks are increasingly large there to make 
that covered bond work.
    Mr. Zandi. Correct, yes.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Westmoreland.
    Mr. Westmoreland. Thank you, Mr. Chairman. And thank all of 
you for being here and going through this process.
    The CFPB put out a statement trying to tell the consumers 
about not paying the minimum on a credit card, saying, pay your 
debt off quicker. Because if you pay the minimum, you are 
just--the debt is just going to continue to build. And so, they 
recommend paying the most you can.
    If you compare that to if you look at a home loan, let's 
say of $100,000 at 5 percent interest, a 30-year fixed-rate, it 
is going to be about $550 a month, and a 15-year would be about 
$800 a month. You would pay total interest of $93,000 on a 30-
year, and $42,000 for the interest on a 15-year. So is this 
something that you would--is the 30-year fixed something that 
is making it so easy for people to assume all this debt rather 
than getting a shorter-term loan? Anybody?
    Mr. Wallison. All right. I will pick that up. Yes, indeed, 
you are pointing to something very important. And that is the 
question of leverage. People who take a 30-year fixed-rate loan 
or any kind of 30-year loan are in a position where they are 
not actually accumulating any equity or very much equity in the 
house for the first 6 or 7 years. Most people then move after 6 
or 7 years. So they haven't accumulated much.
    The question always comes down to this: What is the monthly 
cost in relation to the size of the home. And what we are doing 
with 30-year mortgages, by reducing the monthly cost with less 
amortization, we are encouraging people to buy bigger homes. 
What people should be thinking about is the same thing you 
mentioned with the credit card. And that is, they should be 
buying a house that enables them to get equity as soon as 
possible, and that is with a shorter term, not with a 30-year 
term, and to pay as much of the principal as they can in terms 
of the size of the home.
    We don't necessarily have to persuade people to buy the 
biggest home they can possibly buy with whatever they have 
available to spend on a mortgage.
    Mr. Holtz-Eakin. That was beautifully said. And I just want 
to emphasize the flip side to that transaction is lenders who 
have private capital risk are going to take the argument Peter 
just made and give good counsel to borrowers and say, this 
really isn't the house you should be buying, it is too much. 
And in a system that used private capital just to screen risks 
to make sure wise decisions are being made you will get better 
information on both sides of that transaction.
    Mr. Levitin. I would agree with everything that has been 
said so far. But I would add in this. The credit card analogy 
is problematic for two reasons. Number one, credit cards are 
now pretty much all variable rate, and that means that the 
consumer is taking on the risk that interest rates can go up. 
With a fixed-rate mortgage, it may be advantageous not to 
prepay sometimes. On the other hand, you can prepay your credit 
card whenever you want, you can pay off the whole balance, you 
don't have to pay the minimum. That gives you an option. That 
option is really valuable because you might have an unexpected 
expense in a month when you don't want to have a make a larger 
payment. The 30-year fixed-rate mortgage basically builds in 
that option. You can always prepay. You can make that larger 
payment, pay down the debt. And that is often the smart thing 
to do, but you have the flexibility. And that is one of the 
real consumer benefits of the 30-year fixed-rate.
    Mr. Calabria. I want to make a broader point about this 
sort of--all of this takes context in obviously the housing 
market. So let's even think about the height of the bubble in 
2006, 2007. We added less than 2 percent to the total stock of 
housing. So part of the problem here is that supply is 
relatively fixed in the short run. And if Adam and I are 
bidding against the same house and you keep raising the amount 
we can borrow, one of us is just going to bid higher and 
higher. This is great for the home seller, great for the real 
estate industry. It is not so great for Adam and me. And a 
better world would be Adam and I agree we are not going to bid 
each other up. Unfortunately, we are in a bad equilibrium. So 
how do you get past this where people who are struggling don't 
have to bid higher and higher prices for housing? At the end of 
the day, a lot of these subsidies in the mortgage market just 
go to the seller of the house, not the buyer.
    Mr. Westmoreland. Mr. Zandi, I am not trying to keep you 
from answering. But I would like to say that if these--if it 
did come about that the shorter-term mortgages came out, people 
could still buy houses. They just might not be able to buy as 
big a house as what they want. And the same thing with credit 
card debt; it depends on what your limit is.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Clay.
    Mr. Clay. Thank you, Mr. Chairman. And I thank the panel 
for being here today.
    The discussion draft we are considering today repeals the 
affordable housing goals and the trust fund, it eliminates the 
GSE's role in multi-family housing, and it would make the FHA 
multi-family program an administrative nightmare, making it 
similar to the Section 8 program by setting income limits and 
requiring annual recertifications of income.
    Can you talk about the cumulative impact this would have on 
multi-family housing rents across the United States? And 
wouldn't it be a mistake to undertake such a dramatic 
divestment to multi-family housing at a time when vacancy rates 
are at an all-time low in many years and when we expect the 
demand for rental housing to surge due to demographic trends? 
Let me start with Mr. Levitin.
    Mr. Levitin. Let me start with this: There is definitely a 
need to rethink the affordable housing goals. And I would say 
in conjunction with that also the Community Reinvestment Act. 
Both of those are dated in many ways. But rethinking is not the 
same as getting rid of them. And I am not ready to make 
prescriptions about what they should look like, but I would say 
that whatever is done should apply marketwide, not simply to a 
securitization utility or the GSEs, but duties to serve should 
apply across the entire housing market, that we should have a 
level playing field that ensures affordable access to all 
Americans in that way.
    As far as the rental market goes, there is a real concern 
right now that if we make--if we tighten up credit availability 
for multi-family, we are going to see real problems in the 
rental market. As people lose houses in foreclosure, they don't 
just disappear. Instead, they become renters. And we are seeing 
an increase in demand for rental housing as homeownership rates 
have fallen. And it is very important that we ensure that there 
is both adequate supply of rental housing and of housing to 
buy.
    Mr. Clay. Thank you. Mr. Calabria?
    Mr. Calabria. Let me try and take a couple of these things. 
First of all, in the trust fund, I am generally a believer that 
these things should be done through the appropriations process, 
keeping in mind the various problems that the appropriations 
process has. But my read of the Constitution is if you want to 
spend money out of the Treasury, it has to come from 
appropriations. There is accountability.
    Second, in terms of the multi-family FHA, a lot of what 
this is does mirror, for instance, the low-income housing tax 
credit. If you want to get a low-income housing tax credit for 
property, there are income restrictions. Currently, in terms 
of--we give insurance to multi-family properties and ask 
nothing from the lender-developer in return. In my neighborhood 
on U Street here in Washington, I have seen a number of multi-
family FHA signs. And I can tell you those properties are not 
serving low-income poor. So I think they should give back if we 
are going to give them to get FHA insurance.
    Mr. Clay. So that is why you agree with the annual 
recertifications of income?
    Mr. Calabria. I don't think you need to do it on annual 
basis; 5 years is probably sufficient.
    Mr. Clay. Okay. Dr. Zandi, any comments?
    Mr. Zandi. Yes. I think there is a role for an explicit 
catastrophic government guarantee for multi-family mortgages 
for two reasons. One, the multi-family mortgage market is 
subject to runs, and it does shut down in times of extreme 
stress. We saw that in the Great Recession. Without Fannie Mae 
and Freddie Mac's guarantee, the market would have completely 
shut down, and that would have ended construction activity and 
caused vacancies to fall, and rents to rise.
    Second, and I think also very important, is that the flow 
of multi-family mortgage capital to rural areas and non-large 
urban areas is constrained, particularly the lower-income 
households, and the middle-income households. And I think there 
is a role to try to help facilitate the flow of credit to those 
parts of the multi-family market. I think that this is 
something we need to think about very carefully. I think there 
are changes that need to be made in how we do this. But I think 
the principles should be that there should be some backstop 
there as well, yes.
    Mr. Clay. Thank you for that response.
    Mr. Wallison or Mr. Holtz-Eakin, any comments?
    Mr. Holtz-Eakin. I would just like to make the point that I 
think if you look at the multi-family history, the credit risk 
is probably lower. They performed much more through the crisis 
and the need for a government backstop and everything is less 
than whatever you believe it is on the other side in the 
single-family.
    The place where I would express concern, without knowing 
how--again this is going to be an empirical question--is 
liquidity in that market after reform. And that will be 
interesting to watch.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    I think the panel here would agree that one of the reasons 
we are looking at an alternative model is because we have 
experience with what happened with the GSE model and how that 
did help lead to a ballooning of the market and in terms of 
what it did--and with respect to moral hazard, it was a serious 
problem. Part of the problem with creating something which is a 
public-private partnership is in this case, the profits accrue 
to the benefit of the shareholders and the management at the 
GSEs, right? Whereas the risks, which you could see coming, 
which the regulators could see coming, because they came to us. 
I had legislation in 2004 and in 2005 that tried to regulate 
those institutions for systemic risk, so that we could do 
something about the portfolios. The portfolios were then about 
$1.6 trillion. Fannie and Freddie had moved away from their 
historic model of securitization. Now they were taking on this 
enormous new risk, and so much of that was subprime. And the 
government's stamp of approval on that also bled into the 
private market. So this was a problem.
    So today, what is the proposed solution here? It is to take 
low- and moderate-income home buyers and keep them in a GSE, 
have the FHA do and first-time home buyers and so forth, and 
then try to bring the private capital back into the market by 
slowly drawing down and making space for private capital to 
come in. And it would seem to me if we wanted to adequately 
price risk going forward, we would have to devise something for 
that end of the spectrum, for people who are better off, where 
the risk is borne--where the market indicates what the risk 
should be.
    The other advantage of this is we still have $1.2 trillion 
in those portfolios. And, as you know, economists are still 
pretty worried about the quality of that $1.2 trillion and what 
that is going to mean in terms of eventual losses. So the other 
thing the legislation tries do is slowly ratchet down or at 
least codify the reduction at 15 percent a year.
    There is one thing here that is still missed. In my 
original legislation, working with the Fed, what we were trying 
to do was also look at the Federal Home Loan Bank, because that 
is sort of the forgotten GSE. You can have a problem with some 
of the largest financial institutions accessing the window 
there. And basically, you would have some of the same questions 
that you have here in terms of moral hazard. That is not really 
addressed in the legislation.
    But in terms of what I have laid out here, if members of 
the panel would like to respond to those observations, I would 
be happy to hear your thoughts.
    Dr. Calabria, would you like to begin?
    Mr. Calabria. I would be happy to. But let me take just a 
moment and say I was there at that time and I very much do 
commend your efforts in the past and think if we had listened 
to you we would be in much better shape today. So I think that 
needs to be appreciated. I also remember that at that time, the 
Federal Home Loan Banks actually received more scrutiny than 
Freddie and Fannie and came through this better. So in some 
sense, I feel like the cooperative structure is probably more 
stable than Freddie and Fannie, but were you to do a variety of 
things to the Federal Home Loan Banks, certainly, my ultimate 
goal would be to get rid of them. In the interim, I think 
looking at their debt registration, I would certainly put them 
under the 1933 Securities Act in terms of their debt 
registration. I think certainly some concerns about the 
concentration and advances to a small number of lenders is a 
concern. We all remember the very large advances that were 
given to Countrywide before it went down. So, there is a very 
high concentration in advance to a small number of 
institutions. I think that is something--
    Mr. Royce. Thank you.
    Dr. Zandi?
    Mr. Zandi. I can concur with the spirit of what you said. I 
really do think this is a very therapeutic process. We need to 
go down all the paths, and this is a very important path that 
we need to explore in great detail and just work it out. My 
sense of it, just based on the work I have done and my 
experience, is that this isn't going to be viable. But I am not 
saying we shouldn't go down the path. We should. And you are 
doing a good job of it.
    Mr. Royce. Thank you.
    Mr. Wallison or Mr. Holtz-Eakin?
    Mr. Holtz-Eakin. I can't resist the temptation to say that 
I concur with your reading of the record on Fannie and Freddie. 
And I told you so, literally. When I was the CBO Director, we 
testified in 2003 that it was going to cost the taxpayers about 
$20 billion a year for 10 years. We were pretty close to right 
when it went down. So we cannot replicate that structure again. 
This FHA is not that. It is better capitalized. I think we will 
survive better than they did. But certainly the thing I would 
emphasize most is the steady withdrawal to allow private 
capital to come in. That has to happen.
    Mr. Royce. Right. Mr. Wallison?
    Mr. Wallison. I think that it is pretty clear that the way 
Fannie and Freddie worked was troubling. And everything that 
has been said here is correct. We have to stop that kind of--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Ms. 
Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Levitin, your testimony indicated that the PATH Act 
could potentially undermine the TBA market and make it 
extremely difficult for borrowers to lock in mortgage rates 60, 
90 days before closing. Do you believe that the mortgage market 
will see fewer closings and subsequent sales under these 
circumstances?
    Mr. Levitin. I do. The ability to lock in a rate before 
closing means that a borrower knows what the expense of the 
loan will be. And when you are buying a house, you have to 
figure out how much house you can buy and how much loan you can 
buy, as it were. If you can figure out how much loan you can 
buy in advance, you then know how much house you can buy. That 
means when you go out looking for a house, you know what the 
price range is that you can bid on. If you don't have your rate 
locked in, in advance, there is some uncertainty about what 
that rate will be. And that means you are going to have to 
lower your bid on the housing price. And the effect of that is 
going to be to lower housing prices, which have real effects on 
the economy.
    Ms. Velazquez. Thank you. As the Representative of a number 
of credit unions, community banks, and CDFIs in New York's 7th 
Congressional District, I am troubled by the PATH Act's lack of 
protections for small financial institution access to the 
secondary mortgage market.
    Dr. Zandi and Mr. Levitin, do you believe the proposed 
national mortgage market utility provides small financial 
institutions with adequate opportunities to securitize their 
mortgage portfolios?
    Mr. Zandi. I think that is an open question. My sense is 
there wouldn't be, as currently written in the legislation, 
that there would be much take-up on the platform. The key 
incentive for institutions to go to a common securitization 
platform is the ability to gain the government reinsurance, the 
government guarantee. Of course, in PATH, there is no 
government guarantee, so there is not that incentive. There are 
additional restrictions, though, and you might call costs to 
going to the platform. There are data requirements--you have to 
disclose data. You have to pool--a pooling servicing, all kinds 
of different things you have to worry about. So the question 
is, what is the benefit? Here are the costs. So I am very 
skeptical that the platform as structured would get any take-
up, or significant take-up. And if you don't get take-up, you 
don't get liquidity, the TBA market. So that makes me nervous 
about the whole structure of the platform.
    Ms. Velazquez. Professor Levitin?
    Mr. Levitin. I agree. As the PATH Act is written, there 
certainly is open access to the utility for smaller financial 
institutions. And I think that is very important. But for all 
the reasons that Dr. Zandi just outlined, that may not matter. 
If there isn't enough scale created with the national mortgage 
utility, it is just not going to be successful, and that will 
mean that smaller institutions are basically kept out of the 
market. And critically, I want to underscore for the other 
financing channel that the PATH Act envisions, covered bonds, 
smaller institutions are not going to be able to issue--do 
covered bond programs, that investors simply do not want to 
take on that type of credit risk on those smaller institutions. 
They would rather take on the credit risks of the too-big-to-
fail banks.
    Ms. Velazquez. Thank you. Dr. Zandi, one of the most 
important issues for me, coming from New York, is multi-family 
mortgages, and ending the government guarantee represents a 
very important issue for us.
    Do you think that the private sector effectively taking 
over the GSE's role as a facilitator of credit for multi-family 
mortgages with our government guarantee will help meet this 
growing demand?
    Mr. Zandi. No. I do think there is a role for an explicit 
catastrophic government guarantee to backstop the multi-family 
mortgage market. I think the experience of the Great Recession 
makes that--strikes that point very clearly. The market shut 
down, and there was no credit. And this is obviously very 
important to multi-family construction, to vacancies, to rent. 
And not only in urban areas but particularly in--especially in 
rural areas and ex-urban areas. So I do think a role--has to be 
explicit, it has to be catastrophic, has to be paid for, has to 
be very clear. But I think there is a role for it.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    Chairman Hensarling. The gentlelady yields back.
    The Chair now recognizes the gentleman from New Mexico, Mr. 
Pearce.
    Mr. Pearce. Thank you, Mr. Chairman. And thanks to each one 
of you who are here today.
    Dr. Zandi, you have quantified your estimate of the cost of 
doing what we are considering here today. Is there a 
quantifiable cost to not doing anything, a quantifiable cost to 
the government backstop, the explicit guarantee?
    Mr. Zandi. If we do nothing, if we keep the current system?
    Mr. Pearce. If we keep the current system, yes.
    Mr. Zandi. I think that would be a serious and grave error. 
I think there is no reason why the government needs to be 
making 85, 90 percent of the mortgage loans in the United 
States. It is a cost that taxpayers don't need to--
    Mr. Pearce. Does it have to be higher, less--I am back with 
Mr. Capuano from Massachusetts. Just get it down to the big 
stuff for us, our constituents. So are the costs going to be 
greater in the current system or less under the current system?
    Mr. Zandi. I haven't done--I haven't thought through that 
calculation.
    Mr. Pearce. You are in a better position than me. I could 
flip a coin, and it might end up heads or tails. But you would 
come up with a closer guess than I would.
    Mr. Zandi. Can I answer--I am not going to be satisfactory 
in my answer, but let me answer it this way. I don't like 
either approach. I wouldn't go down either path at the end of 
the day. There is a better approach.
    Mr. Pearce. Mr. Wallison, do you have an opinion?
    Mr. Wallison. You have to take everything into account, 
including the costs that occur when--
    Mr. Pearce. I think that's the point.
    Mr. Wallison. --we make the kinds of investments that 
Fannie and Freddie made, that is the current system. And when 
those investments are in poor quality mortgages, we have a 
loss, a severe loss in the case of Fannie and Freddie, up to 
almost $200 billion, and the taxpayers had to pay for that. So 
if you are looking at the costs, if you look at the entire 
cost, including what it may cost the taxpayers, I think the 
system that is recommended in this bill in the PATH Act would 
be cheaper for the taxpayers and still produce a very effective 
system of financing mortgages.
    Mr. Pearce. When I first came to Congress, I read and heard 
speculation that the Japanese had damaged their economy to a 
point that it might never recover in the 1990s. And when I read 
what they did, they started letting housing prices escalate. 
And in order to make it affordable, they began to lower 
interest rates. And then, they began to mix public and private 
money. And they hurt their economy maybe forever. And we are 
still short of that year. We have not yet reached forever.
    So I would come back to Dr. Zandi, when you are estimating 
a cost of implementing this, can you now compare it to what the 
Japanese did, which sounds exactly like what we have done, 
starting with Mr. Greenspan and now with Mr. Bernanke? Could 
you quantify the cost of ruining an economy forever versus 90 
basis points, or whatever, can you give me sort of an indicator 
on that?
    Mr. Zandi. Congressman, we are not Japan. We have made a 
lot of progress--
    Mr. Pearce. I understand. So you are saying we can do 
things that Japan can't do.
    Mr. Zandi. No. I'm not saying that. I am saying--
    Mr. Pearce. Excuse me, sir.
    I view the laws of economics as being one of the really 
neat things. They don't know boundaries, they don't know 
anywhere. If you do the wrong thing, the capital is going to 
get up and leave today. That is really refreshing to me. It is 
pure. It is beyond human touch. And to say that the Japanese 
economy is not our economy, I'm sorry, sir, but that says we 
have different rules. We can print 40 percent of our national 
budget, and we are okay. I don't think we are okay. But I am 
sitting here with just some country background from New Mexico. 
And I am just trying to get a sense--
    Dr. Levitin, I see you kind of peering. Do you have an 
opinion? We only have 47 seconds for your opinion.
    Mr. Levitin. I am not quite sure where to begin. I think 
that there is a real problem that we may be locking ourselves 
into a period of very low interest rates. Lots of homeowners 
have refinanced into incredibly low rate loans. And when they 
want to move, when they have to move, if rates are up, we are 
going to have a problem.
    Mr. Pearce. Dr. Calabria, why don't you finish this up? 20 
seconds.
    Mr. Calabria. I will just say that the biggest problem, in 
my opinion, having been to Japan, and talked to people there, 
is every other company is like Fannie Mae, it is such a crony-
capitalism society that we want to avoid that, in my opinion, 
or you will regret it.
    Mr. Pearce. All right, fair enough. Thanks.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. And I thank the 
witnesses for appearing.
    Let me start with you, Mr. Zandi--Dr. Zandi, excuse me. We 
have all seemed to make this faux pas today.
    Mr. Zandi. You can call me anything you would like. It 
doesn't matter really.
    Mr. Green. I will call you a friend.
    Mr. Zandi. Thank you. I appreciate that.
    Mr. Green. Dr. Zandi, you have wanted to juxtapose the 
conforming market to the jumbo market. And each time I think 
you were not given the opportunity to express yourself. I did 
step out for a moment, and I don't know whether it occurred 
while I was away or not. So would you kindly now give us your 
explanation as to why we cannot anticipate the jumbo market to 
be indicative of what will happen in the conforming market?
    Mr. Zandi. Thank you. Yes. I don't think the jumbo market 
is, as I would say, scalable. It will serve a small part of the 
market, it does serve a small part of the market. Just for 
context, in a normal housing market it is 10, 15 percent of the 
market, something like that. These are usually higher-quality 
borrowers. In many cases, they are not 30-year fixed-rate 
loans, they are adjustable rate mortgage loans. There's a--Mr. 
Wallison had in his testimony, go Google, ``30-year fixed-rate 
loan.'' If you do that, you get to the Wells Fargo site, and 
you compare a Wells Fargo conforming loan with a jumbo loan, 
and the interest rates are very comparable. The thing is, you 
have to assume a 20 percent downpayment. If you put into the 
calculator a 10 percent downpayment, which is more typical for 
many Americans, it doesn't calculate, because they don't offer 
that. So that goes to the point that this is a market that is 
very specialized.
    Now, in a world like PATH, this market will expand. The 
U.S. economy and financial system are very adept, and they will 
adjust, and we will see the ability to provide jumbo-like loans 
to a bigger part of the market grow. But it will never, in my 
view, be able to offer up 30-year fixed-rate loans to the vast 
majority of American households. And I think that should be a 
key working assumption that we want to preserve that as part of 
our system.
    Mr. Green. Thank you. I think that was very important for 
us to have in the record.
    Let's move to the covered bonds for just a moment.
    What percentage of the covered bond market is contained 
within the United States, if you can, Dr. Zandi?
    Mr. Zandi. I think it is marginal. There are no covered 
bonds, or very few covered bonds of which I am aware.
    Mr. Green. And in Europe, where we do have covered bonds, 
we don't have, generally speaking, 30-year fixed-rate 
mortgages. Is that correct?
    Mr. Zandi. That is correct.
    Mr. Green. Which means--
    Mr. Zandi. Just to be precise, France has a 30-year fixed-
rate market. But there are very extensive prepayment penalties. 
And the Danish have 30-year fixed, but that goes to the very 
idiosyncratic nature of their system.
    Mr. Green. But my point that I would like to get to is that 
if you don't have a 30-year, you have, say, 3, 5, up to 15, 
maybe, that means that you don't get the asset liability 
mismatch that you can get when you have a mortgage that will 
expire in 30 years, matures in 30 years, but your covered 
bonds, if the pool will mature in 5 to maybe 10 years. And this 
creates some sort of market value risk that many investors will 
have a second look at.
    Can you just briefly comment on this, please, in terms of 
how this impacts the market?
    And I would also add this: That when this occurs, it seems 
to have some pressure on the market to avoid the 30-year fixed-
rate product because of this mismatch that can occur.
    Mr. Zandi. Yes. That is correct. And that is one of the 
reasons why you don't see 30-year fixed-rate loans in other 
parts of the world, including Europe. And the key to the 
European system, and this is a point we were discussing 
earlier, is that the European banks are very large. So if you 
go to any European country, three or four banks dominate the 
banking system. And the banking system is where all the credit 
is provided. That is because they are too-big-to-fail, and 
Europeans really don't have a problem with that. That is part 
of their system.
    Mr. Green. Quick response to this question, please: If we 
have the FDIC backing in the shadows the covered bonds, would 
this cause the premiums that banks will pay to go up?
    Mr. Zandi. Okay. That is an interesting, good point. So 
there is--if we are going to incent more of the mortgage 
lending to come out of the banking system through, say, a 
covered bond market, then you are using a government guarantee. 
It is not the Fannie, Freddie, or the catastrophic guarantee; 
it is the FDIC. It is just another form of government 
guarantee.
    Mr. Green. Yes. So what we have done is sort of move the 
chairs around.
    Mr. Zandi. Just moving the chairs around, to some degree, 
yes.
    Mr. Neugebauer [presiding]. I thank the gentleman.
    Now the gentleman from Michigan, Mr. Huizenga, is 
recognized for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that. 
And you interrupted one of my Google searches here. Because I 
do want to explore this as we were going into this what other 
countries are doing. But I would be remiss if I didn't bring up 
a portion of the bill that I have some distinct interest in. My 
bill, H.R. 1077, having to do with the points and fees that are 
going to be part of the final QM rules, which are going to be 
taking effect in January. This is part of it. And I am very 
concerned about the consequences if Congress doesn't resolve 
the issue. And I appreciate the chairman and others including 
that. I don't know if anybody wants to comment on that, but it 
seems to me that is another barrier for entry as we are looking 
at that for consumers.
    I have a background in construction, real estate. My family 
has been involved in that for about 60 years. We have an 
employee, Irv. Irv has worked for my grandfather, my dad, and 
myself. This is a man who has worked for my family for nearly 
50 years. I have an obligation to him as well to make sure what 
we are doing is getting it right, because he works in and 
depends on that. And whether it's Irv, Dirk, Mark, or Larry, 
the guys who work for us are intensely interested in this, as 
are all of our constituents.
    But I think, Mr. Calabria, you hit the nail on the head. 
Yesterday, when Mr. Bernanke was here, I asked him, only half 
tongue-in-cheek, whether or not we should refinance. That was a 
question my friend had. He did quip that he wasn't qualified to 
give that advice, at which point I was concerned for all of us. 
And maybe Keynes is right, and in the end we are all dead 
anyway. But that was very problematic.
    My background in real estate started in the late 1980s and 
into the 1990s, and interest rates were significantly higher 
than they are now. Downpayments were typically much higher than 
what they are now. I will never forget when my real estate 
mentor pulled me aside one day when we had seen interest rates 
going from 12 percent to 11 to 10 to 9 to 8 and at 7.95 
percent, he pulled me aside and said, ``Buy a house now, 
interest rates will never be this low again.'' He had been in 
the industry for about 30 years. And Mr. Miller had talked 
about the 21\1/2\ percent mortgage rates. Downpayments went 
from 20 percent to 15 to 10 to 7 to 5 to 3 to 2 to 1 to nothing 
to 20--120 percent loan to value. I will never forget that my 
first closing was one of those where they are sliding a check 
across to the purchaser, not just the seller. This is a 
generational issue. We have seen house sizes increase 
dramatically. Hey, I am 44 now, and when I was buying my first 
house about 20 years ago, a little short of that. It wasn't 
going to have to be long, because I am pretty darn sure I 
deserve the three-stall garage and the walk-in closet and let's 
get a pool, and all of those other things. So we have some 
generational expectations that I have been talking about with 
my friends.
    Part of the problem also has been as we saw equity. Equity 
didn't rise because people were putting more in, whether it was 
a 30-year or 15-year or 5-year mortgage. They saw equity 
increase because of home values. That was why. And you only 
realized it when you got out. A bubble occurs when people 
outpace reality. Would you agree with that? That is certainly 
part of what they are doing.
    And that has happened way too many times. I commend the 
chairman and everybody else who has put time into this because 
the cycle needs to end. It used to be when I was in real estate 
getting an FHA loan, there was some sort of stigma to it. It 
was a bit of a taboo. One, you didn't want to have an FHA deal. 
And you didn't want to be the buyer or the seller who was 
having to deal with that. And the taxpayer was a backstop of 
last resort. And now it seems that taxpayers are the first 
stop, not the backstop. And we have to get serious about this.
    So, 30-year fixes. What is the proper downpayment, Dr. 
Zandi? You were saying 20 percent certainly isn't it. What is?
    Mr. Zandi. There is no one answer because you have to take 
the borrower's entire financial situation into account.
    Mr. Huizenga. 20 percent--
    Mr. Zandi. Are they an owner? Are they an investor? Do they 
have an 830 FICO score?
    Mr. Huizenga. All right. Does anybody have anything else 
other than a government program that is going to help people 
get into homes? It happened during the 1980s a lot. In my 2 
seconds, I will close it with land contracts. The marketplace 
is going to fill in if and when that there isn't a specific 
government program-backed mortgage. It might not be ideal. But 
there are a lot of other things that are going to happen that 
we can't even predict right now necessarily of what is going to 
be happening.
    Sorry, Mr. Chairman, I filibustered myself. I apologize for 
that.
    Mr. Neugebauer. Now, the gentleman from Missouri, Mr. 
Cleaver, is recognized for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. This is primarily a 
question for Dr. Zandi, but I would like for Mr. Levitin to 
also become involved.
    In your statement, Dr. Zandi, on the fourth page, you state 
that complete privatization is much more plausible in theory 
than it would be in practice. Private capital is not limitless 
and there are plausible catastrophic scenarios similar to the 
Great Recession that would completely wipe it out.
    On page 8 of your testimony, you state that, ``a fully 
privatized mortgage finance system will have difficulty 
providing stable mortgage funding during difficult financial 
times.''
    I tried to get Mr. Bernanke to respond to this yesterday. I 
failed. But my question is, the private markets are generally 
going to bail out in tough times. And if that is the case, and 
I don't think there is a question we just witnessed that after 
2008. This proposal, this PATH Act, can you envision in any way 
how this would--how we would be able to effectuate this PATH 
Act in a time of financial crisis? If this bill as proposed is 
approved, do you think it would hold up in post-2008 to 2012?
    Mr. Zandi. No. I think one of the significant drawbacks to 
a purely privatized system without any catastrophic government 
backstop is it would be subject to runs. Investors would lose 
faith and they would run at just the worst time for the housing 
market and for the economy. And of course we saw that in regard 
to deposits. And that is why we have an FDIC that provides a 
catastrophic backstop to our depositors. The principle is just 
the same. We apply the same principle to the mortgage market, a 
catastrophic backstop which would prevent runs. It should be 
paid for by homeowners. It is a service we are providing. But 
it is a very valuable service and would ensure that we would 
not have this problem at the worst possible time.
    Mr. Cleaver. Yes, Mr. Levitin?
    Mr. Levitin. On its face, the PATH Act would create a 
private housing finance market. But in reality it would create 
an implicitly guaranteed housing finance market. There is no 
such thing as a non-guaranteed housing finance market. It is 
only whether there is an explicit guarantee or an implicit one. 
And we know this from our own history. In 2008, we had a 
statute that said Fannie and Freddie debt is not guaranteed by 
the government. It was there in bright letters for everyone to 
see, and we bailed them out. And if you look outside of the 
United States, Germany bailed out its banks, Denmark bailed out 
its mortgage banks. We know that there will be bailouts if the 
housing finance system gets in trouble because housing is 
simply too important to too many people. Therefore, the 
question is whether we just kick the can down the road and let 
some other Administration pay for the costs or whether we 
prudently try and charge risk premiums now that will--and build 
up an insurance fund, essentially, against future problems.
    Mr. Holtz-Eakin. If I may?
    Mr. Cleaver. Yes, please.
    Mr. Holtz-Eakin. I think this is an important question, but 
there are arguments on the other side. First, it is important 
to remember as well that one of the things that happens when 
private capital comes in is there is better scrutiny of risk. 
So the trouble you are going to get in is going to be smaller. 
And, second, if you have better scrutiny of risk broadly in the 
system--the greatest failure we had was poor pricing of risks. 
If you price risks, you don't get runs because people aren't 
afraid of the securities. And so the very act of putting the 
private capital in mitigates the fears they are worried about.
    Mr. Cleaver. I agree with you. But is there any scenario 
whereby you can envision the government not being a backstop?
    Mr. Holtz-Eakin. You can always envision a disaster so bad 
it is impossible for the private sector to survive. So, let's 
just stipulate that.
    Mr. Cleaver. We just had one.
    Mr. Holtz-Eakin. The question is, how do you want to handle 
the issue of providing the bulk of housing finance? And we are 
right now providing the bulk of housing finance on the 
taxpayers' dime, not on the private sector.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Fitzpatrick.
    Mr. Fitzpatrick. I thank the chairman for all of your hard 
work in reforming a finance system that is in desperate need of 
reform, and I appreciate the time and patience of the panel as 
well. It was about 3, 3\1/2\ hours ago when you gave your 
opening statements, and I listened to each one of them. And I 
have been out of the room since.
    But Professor Levitin, you made a statement that I think is 
important. You said--and I want to make sure I am correct in 
this, so please correct me if I am wrong--that one of the 
bedrock principles of housing finance post World War II has 
been the availability of the 30-year fixed-rate mortgage. Which 
we are all interested in. Is that correct?
    Mr. Levitin. That is correct.
    Mr. Fitzpatrick. And I have a lot of very specific 
questions. And I think probably a lot of them have been asked. 
I am going to write each of you and just ask you to consider 
some of what I am saying. And if you get a chance, get back to 
me. And I will share that with my constituents.
    But I would like to kind of ask a general question by 
telling a story. And it is a story of my hometown, Levittown, 
Pennsylvania. But I believe the story of Levittown is somewhat 
the story of America. In 1950, in Bucks County, the president 
of the United States Steel Corporation, Ben Levitt, announced 
he was going to build a steel mill in Bucks County. And he did. 
And that mill provided about 10,000 really good jobs to folks 
who were going to come from the coal mining country of 
northeastern Pennsylvania, out from Pittsburgh. And jobs for a 
lot of returning veterans, World War II and Korea veterans.
    All those jobs created quite a demand for housing in lower 
Bucks County. And we being Americans, we met that demand. We 
figured out how to do it. It is the town where I grew up; I 
would never have grown up anywhere else. Bill Levitt, from Long 
Island, New York, who had figured out how to mass produce 
housing, he came down. He was part of the solution in meeting 
that demand. He came to Bucks County, and he built 17,311 
houses between 1952 and 1957. And if you were a returning 
veteran from World War II or Korea--my father was a veteran who 
purchased his first home in Levittown around that time--you 
could purchase the basic Levittown model for $9,990. If you 
were a veteran, it was $100 down. And it was a perfectly 
planned community--some say too planned. Bill Levitt even 
brought a bank with him from New York, the Bowery Savings Bank, 
and they provided mortgages for those individuals who--most of 
whom thought they would never own a home in their life. And so 
this was described to be their first home. And for many of 
them, 60 years later, it is still their home, if they are still 
there. And so this for many is everything that they own in the 
world. It is their complete retirement, what they will pass on 
to their children.
    But the point of the question is that--and my father and 
others who settled Levittown, they would build a statue of Bill 
Levitt in the middle of town, if they could. They were provided 
that opportunity because of the availability of a great 
builder, a community willing to accept it, and a fixed-rate 
mortgage that they could afford, they could figure out what it 
was.
    So my question is today, 21st Century in the year 2013, how 
would the PATH Act have affected the ability of Bill Levitt to 
build that community and those veterans to move out of the 
cities, the first suburban planned community to be able to own 
that home today, in your view?
    Mr. Levitin. With the PATH Act, Levittown, Pennsylvania, 
would not exist. Your father would not have been able to buy a 
home. That is the sad truth.
    Mr. Calabria. If I could make a comment on that. Let's be 
clear. Freddie Mac didn't exist at that time. Fannie Mae's 
operations in the mid-1940s were approximately zero; about 1, 2 
percent of the market. As mentioned, it was a bank that made 
those loans, and held them on portfolio. There is nothing in 
the PATH Act that says you can't do this. There is nothing in 
the PATH Act--nobody here is talking about banning the 30-year 
mortgage. Again, before the 1980s, we did not have a secondary 
mortgage market. So I think, going back and looking at some 
history--I also want to emphasize there is nothing to pass on 
to your children if you are drowning in debt. Getting people in 
with 100 percent financing, with nothing in there, there is 
nothing to pass on. You are leaving them debt to pass on. And 
that to me, I think, is not what we should be looking for, for 
our children or our future generations.
    Mr. Wallison. If I could just add something to that. And 
that is in the 1980s, the technology of securitization was 
developed. What Fannie and Freddie were initially intended to 
do was to create a secondary mortgage market and the liquidity 
that allowed banks to sell the mortgages into the secondary 
market and make more mortgages. Once we had the technology in 
the private sector, we didn't need Fannie Mae and Freddie Mac. 
So if this had existed, if the PATH Act had existed back then, 
and if the technology of securitization had existed, a private 
secondary market could have existed. Either of those mortgages 
could have been portfolioed by the bank that made them or they 
could have sold them to private securitizers without Fannie and 
Freddie.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Wisconsin, Ms. 
Moore.
    Ms. Moore. Thank you so much, Mr. Chairman.
    I guess I want to start out by asking Mr. Wallison a 
question. I notice that you served on the Financial Crisis 
Inquiry Committee, appointed by our Speaker, Mr. Boehner. And 
there was a minority report. And then you had a separate report 
of your own, which it mirrors--I looked it up, I Googled too 
because I thought it was kind of familiar, kind of a familiar 
argument with your testimony that you have given here today.
    And I guess your testimony here today seems to sort of lay 
the blame for the entire financial crisis at the feet of these 
constituents of ours who just wanted a house so badly that we 
sort of induced, the government induced the bad underwriting 
and tolerated bad underwriting. These are words that I have 
sort of taken out of your testimony.
    And your minority report, along with the other three 
commissioners who gave a minority report, didn't mention a word 
about credit default swaps or derivatives or credit rating 
agencies. Or we have heard testimony on this committee from 
people like Andrew Cuomo who said that at the bottom of every 
single one of these things was a bad appraisal. Predatory 
lenders. I think Mr. Fitzpatrick made a wonderful point. There 
are people who are living in the first and only house that they 
have ever bought. So, how were they supposed to know that they 
needed to bring certain documentation? Freddie and Fannie 
weren't doing the underwriting. And so I guess I am curious, 
particularly in view of your--Freddie and Fannie do need some 
reforms. They were overleveraged, there were many things done. 
And you also said maybe CRA was also sort of at fault as well. 
And what we have found is that only 6 percent of all of these 
toxic loans were--had a delinquency rate of 2012 of--from the 
GSEs versus 28 percent for non-GSEs. And of course the CRA was 
definitely not a factor in subprime lending or the crisis.
    And so I am very curious to see--to ask you why you think 
the GSEs, in view of all these other things that we know 
happened in the marketplace, why you say that at the 
centerpiece of it all was the fault of our constituents who the 
government induced us to give them all these loans.
    Mr. Wallison. In my dissent, I focused on the affordable 
housing requirements which were put into effect in 1992, when 
many people came to Congress and said that Fannie Mae and 
Freddie Mac actually are much too conservative in their 
underwriting, so many of our constituents cannot buy homes. 
Congress acted in 1992 and said, okay, Fannie and Freddie, from 
now on you are going to have to buy a certain number of these 
loans that are made to people who are below the median income. 
Fannie and Freddie did in fact control the market. And as 
Fannie and Freddie reduced their underwriting standards in 
order to meet the affordable housing requirements, the result 
was that by the year 2008, we had 28 million subprime loans in 
this economy--
    Ms. Moore. Thank you.
    Mr. Wallison. --about half of all mortgages.
    Ms. Moore. My time is lapsing. And so, Freddie and Fannie 
were not--they did not do the--the underwriting was wrong.
    Let me ask you a question, Mr. Zandi, in my last 49 
seconds.
    You keep saying that we are going to have this guarantee, 
but if we don't, what do you think downpayment and interest 
rates will be so that the private sector can finance its risk 
in the marketplace to have this private securitization market?
    Mr. Zandi. The calculation I did in the testimony was for 
the typical borrower in the current mortgage environment, 20 
percent down, 750 credit score, 31 percent debt-to-income 
ratio. That is the middle of the distribution right now. The 
PATH Act as currently envisaged would raise the mortgage rate 
for that borrower by 90 basis points. That is .9 percentage 
points. That is $130 a month in monthly mortgage payments.
    Ms. Moore. And interest rates, what would it do to interest 
rates, specifically?
    Mr. Zandi. That 90 basis points, that .9 percentage points, 
that is the effect on mortgage rates.
    Ms. Moore. Okay. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    I was going to start off by saying I was surprised, but I 
guess I'm not surprised. I guess I am just disappointed that 
somehow this debate today has turned into rich versus poor. It 
strikes me that if you think that Fannie and Freddie and more 
directly the abuses that we saw in Fannie and Freddie were 
about somehow helping poor people or helping deal with the 
plight of the American worker, you are sadly mistaken.
    Ms. Moore. Will the gentleman yield?
    Mr. Mulvaney. No, I will not.
    The abuses at Fannie and Freddie were designed mostly--
    Ms. Moore. Will the gentleman yield?
    Mr. Mulvaney. I absolutely will not. And I would appreciate 
not being interrupted.
    Ms. Moore. Well, you are talking about me.
    Chairman Hensarling. It is the time of the gentleman from 
South Carolina.
    Mr. Mulvaney. The abuses at Fannie and Freddie were 
designed to enrich the shareholders and to a great extent the 
executives, most of whom were heavily connected to both 
parties. It was never involved, never designed to help the 
plight of the American workers. We are dealing with--a question 
that we just asked Mr. Zandi. I heard $150 a month, not $130, 
so I ran the numbers on $150 of additional payment, the 90 
basis points leading to $150 of additional monthly payment. I 
ran the numbers on that. It is a multi-variable equation, so 
you sort of have to freeze an interest rate. But it looks like 
that house costs about $325,000. Is that poor? Because that 
could buy 90 percent of the houses in my district. It is not 
about rich and poor. What really is telling is that we had 
testimony today, or at least the chairman mentioned it, that 
there is currently a regulation that is being considered by 
this Administration that would raise interest rates 400 basis 
points. Where is the outrage over that? Where is the concern 
that this Administration is beating up on poor people and 
making housing unaffordable for the American worker with a 400 
basis point increase in the regulation that we will never see? 
Where are the demands for a hearing on this regulation from my 
friend across the aisle?
    We are sitting here. We talked about a hundred mortgage 
points, a hundred--a hundred basis point increase last week in 
the 30-year. A hundred interest basis points last week in large 
part because of the fiscal policies that this government is 
undertaking. We are hurting poor people. We are hurting the 
people who are trying to buy houses because we are borrowing 
money. We are going to the markets and saying, would you please 
lend us money. They are going to the same markets and saying, 
please lend them money. And we are driving up the price of them 
buying their houses. We are doing that. Where is the outrage 
over that?
    Since the outrage today, though, seems to be focused on the 
90 basis points and how that is supposedly going to be the end 
of the world, I will accept for sake of the argument that there 
is going to be a 90 basis point increase in this, Mr. Zandi.
    And I will simply point out the fact that my family has 
been in this business off and on for the last 50 years, okay. 
1970. Does anybody remember--and I had to Bing it, not Google 
it, since I have friends who work at Microsoft--I Binged it. Do 
you know what the average interest mortgage rate was in 1970? 
It was 8 percent, 350 basis points higher than it is today. Did 
we have a functioning mortgage market in 1970, gentlemen? Does 
anybody know what the homeownership rate was in 1970--it was 62 
percent. In 1980, interest rates, 18 percent, 15 percent, pick 
a number. 1,400 basis points higher than we are today, than we 
have today. We still had a functioning mortgage market, and we 
still had 64 percent of the people living in houses. In 1990, 
it was 9 percent, 64 percent.
    In 2000, it was 7 percent. And we are sitting here today 
saying that supposedly a 90 basis point increase, just so we 
can protect the American taxpayer, is somehow going to end the 
housing market in this country. It is absurd. It is absolutely 
absurd.
    We are trying to have a conversation not about rich versus 
poor. We are trying to have a conversation that somehow finds a 
way to protect the American taxpayer, rich and poor. And ends 
the abuses that fabulously enriched people probably illegally 
at the expense of the American taxpayer.
    I would hope, Mr. Chairman, that is what this debate would 
be about, and not about class warfare, not about pitting 
against each other. There are reasons that there are bipartisan 
bills on the Floor to try and fix this problem, because it 
needs to be fixed. You may disagree with the fact that this 
might be the best way to do it, but don't accuse us of going 
after poor people because that is not what we are doing. We are 
trying to help the taxpayers. And I would think that would be 
something on which we could all agree.
    With that, I yield back the balance of my time.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Colorado, Mr. 
Perlmutter.
    Mr. Perlmutter. I knew somebody would raise my blood 
pressure on this one. So, the first thing I would like to do is 
introduce for the record something I always do when we talk 
about housing and Fannie Mae and Freddie Mac, and that is the 
Financial Times article of September 9, 2008, where Mr. Mike 
Oxley hits back at ideologues that--Mr. Wallison, you and I 
have had this conversation on at least three occasions, if I am 
counting right, where this was a few days after Fannie Mae and 
Freddie Mac were placed in conservatorship. Do you recall that?
    Mr. Wallison. Yes.
    Mr. Perlmutter. Okay. And what Mr. Oxley said in this 
article was--Congress was taking a lot of criticism about why 
there wasn't more oversight. And he said, ``Instead the Ohio 
Republican, who headed the House Financial Services Committee 
until his retirement after midterm elections, blames the mess 
on ideologues within the White House, as well as Mr. Greenspan, 
former Chairman of the Federal Reserve. The critics have 
forgotten that the House passed the GSE reform bill in 2005 
that could well have prevented the current crisis.'' He fumes 
about the criticism of his House colleagues, ``All the 
handwringing and bedwetting is going on without remembering how 
the House stepped up on this. What did we get from the White 
House? We got a one-finger salute.''
    Okay. So, Mr. Wallison, you and I have had a chance to talk 
about this on several occasions. And, quite frankly, you and I 
agree on a lot of the basic points. But we draw very different 
conclusions. And we have talked about the length of time that 
Fannie Mae has been in existence, since 1933 or 1934 to today. 
We talked about the fact that in the period of time from 2004 
to 2007, especially the time when no documents were required, 
no downpayment was required, that time the public sector, 
Fannie Mae, Freddie Mac, had much less than the private sector 
in terms of outstanding loans. Then when the market fell apart 
in the fall of 2008, that is when Fannie Mae and the public 
sector was the only game in town. The only lender in town. And 
I would just--instead of me filibustering, which I have already 
done, let me just ask a couple of simple questions.
    How many of you own a home?
    Okay. So I assume there is one renter. Do you own a home or 
are you renting?
    Mr. Holtz-Eakin. I am renting.
    Mr. Perlmutter. For those of you who own a home, do you 
have mortgages?
    The answer is yes. Mr. Levitin, good job.
    Okay. Within those mortgages, does anybody have a jumbo 
loan?
    Mr. Wallison. Yes.
    Mr. Perlmutter. I just bought a house. We just sold a 
house, and bought a house. And I know that between the jumbo 
loan to the loan under $417,000, which is what it is in the 
Denver area, in Colorado, there is a difference of about a 
point. So did any of you go looking to try to get under what 
would be the FHA number of $417,000 or whatever it might be in 
your locale?
    Doctor?
    Mr. Calabria. If I can make a point where I think you are 
going with this. Let me--
    Mr. Perlmutter. I am not sure where I am going, so 
hopefully you can make a point.
    Mr. Calabria. Let's have me filibuster for a little while 
then if that is going to be the case.
    Mr. Perlmutter. I will interrupt you if you get off track.
    Mr. Calabria. Please do. So, full admission, I have a 
mortgage. I got it with Wells. I think they might have sold it 
to Freddie. I even take the mortgage interest deduction. I, as 
a citizen, am willing to give up all of those things because I 
believe our system will be safer because of that. Will I pay 
higher mortgage costs? Probably. I will say that I paid more in 
taxes last year than I made in mortgage payments. Now, that is 
not necessarily a bad thing because again, it is better to be 
non-poor.
    Mr. Perlmutter. One of the points was that you are not 
building up much equity with a 30-year loan, but I would like 
to ask Dr. Holtz-Eakin, do you build up any equity by renting?
    Mr. Holtz-Eakin. Not in my apartment, but elsewhere.
    Mr. Perlmutter. Maybe elsewhere, but certainly not in your 
apartment. These are so simple. And I have to ask a question. 
Dr. Calabria, we were talking a little bit about auto loans. We 
are looking at auto loans. So I am looking at your graph which 
shows that in 2009, basically there were no auto loans. Do you 
see that?
    Mr. Calabria. I am going to apologize because the scale of 
that chart is not zero at the bottom. So, again, that probably 
is not the best. It is cut off at actually a positive number at 
the axis. So, my apologies.
    Mr. Perlmutter. Okay, let's go to the bottom there. At the 
bottom, there is a spike. I think the spike was the Cash for 
Clunkers?
    Mr. Calabria. It was.
    Mr. Perlmutter. Okay. So that was Federal injection of 
money, right?
    Mr. Calabria. Another great policy.
    Mr. Perlmutter. Okay. But there was a spike. Oh, heck. 
Thank you, Mr. Chairman.
    Chairman Hensarling. That word would almost be stricken 
from the record.
    The Chair now recognizes the gentleman from Alabama, the 
chairman emeritus, Mr. Bachus.
    Mr. Bachus. Thank you. In the last few years, I guess since 
the financial meltdown, the one question I have been asked more 
than any other question back home is, ``How can you justify 
asking me to pay somebody else's mortgage? I struggle to pay my 
mortgage. Why does the government take my tax dollars and help 
someone else pay their mortgage?''
    And I think it is almost impossible when you have a 
government-sponsored entity for it not to subsidize someone 
else's mortgage with your tax dollar. Maybe that is not the 
intent, but it always has mission creep and more. And what we 
have discussed today is that FHA intended to help low-income 
Americans, and it has morphed into something quite different, 
where even in attempts to lower the high number of those 
eligible, we have not been able to accomplish that. Once you 
start, once you put it out there, it is almost impossible to 
end it.
    Dr. Zandi, you said you liked parts of this bill. I find 
the parts where it does seem to, the provisions to attract 
private capital or to lessen some of the barriers to private 
capital. Do you see those as helpful? And you said you don't 
believe enough private capital will come into the market, is 
that right?
    Mr. Zandi. I do like the provisions in the bill that try to 
attract capital, yes. I like the idea of trying to support and 
promote a covered bond market. I think that is a laudable 
effort. I think it is going to be difficult in the context of 
our current financial system and some of the issues with regard 
to the FDIC. But I applaud the effort to go down that path, 
yes.
    I think some of the provisions related to the residential 
mortgage securities market, we talked a lot about QRM, but 
there are others, I think that is laudable because we need to 
get the RMBS market up and going again. It is still dead in the 
water. So getting private capital is exactly the right thing to 
do. And there is a lot of good in the bill that I think we 
really should think through, yes.
    Mr. Bachus. We have the largest and deepest financial 
system in the world. There are always tremendous amounts of 
capital looking for more return. And now that the return on 
Treasuries and other things is not that good, I would imagine 
there is an immense amount of capital that would love to come 
in and invest in safe mortgages.
    Mr. Zandi. Can I respond? I agree. You want to design a 
mortgage finance system, a housing finance system for all 
times, good times and bad times and everything in between. So 
in the good times, yes, you will find private capital and 
people taking chances. But that is not--we can't build a 
housing finance system for our kids and our grandkids based on 
that.
    Mr. Bachus. But in the bad times, it creates bad times. I 
asked the chairman yesterday whether unemployment was 
structural. He had said it was cyclical. Some of it is 
structural. But in the bad times, the cyclical, people are 
losing their jobs. So when you lose your job, it is hard to 
keep your home.
    Mr. Zandi. Yes, it is. Yes.
    Mr. Bachus. I would just ask Mr. Wallison or Mr. Holtz-
Eakin, do you have any comments on anything you heard in the 
last few minutes or during this hearing on which you would like 
to further elaborate? Or do you believe--our private markets in 
the United States are immense.
    Mr. Holtz-Eakin. I want to second what Mr. Zandi said 
about--or I guess I should say Dr. Zandi. I think the 
provisions to attract private capital are very important. I 
think it does a very good job of bringing in better scrutiny. I 
would like to see it be more aggressive about bringing in 
taxpayer protection, broader, deeper capital.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from Delaware, Mr. 
Carney.
    Mr. Carney. Thank you very much, Mr. Chairman. Thank you 
for having this hearing, and thank you to all the panelists for 
staying so long. I apologize for coming in and out.
    Dr. Zandi, you said when I was here about an hour or so 
ago, that this is a really critical issue and an important 
decision. We have to get it right. You said we have to get it 
right not only because we could screw up the housing finance 
system, but we could screw up the financial--I don't think you 
used the words ``screw up,'' we could mess up the financial 
system as well.
    What are the risks here? What do I tell my middle-income 
constituents back in the State of Delaware, are the risks 
associated with adopting this approach to housing finance? You 
mentioned some of them in answer to the questions. But in terms 
that the ordinary guy or gal that I talk to on the street can 
understand, what are the risks involved in this approach?
    Mr. Zandi. There is no bigger risk I think at this point 
that--the housing finance system, the mortgage market is the 
largest market, say, for the U.S. Treasury market on the 
planet, and if we mess that up, it is going to raise interest 
rates not only for mortgages, but for every other thing that we 
borrow, credit cards, auto loans.
    The other thing to consider is that the home is the most 
important asset for most Americans.
    Mr. Carney. So what is it going to do, in your view, to 
real estate values and values potentially?
    Mr. Zandi. If the bill is passed as it is and mortgage 
rates rise as is? It would hurt home sales, it would hurt 
housing construction, it would lower house prices.
    Mr. Carney. It would lower house prices and therefore 
reduce personal wealth.
    Mr. Zandi. Can I make a broader point?
    Mr. Carney. Sure you can.
    Mr. Zandi. Look, I think we have to put our housing finance 
system on a more solid ground and it is not going to be free, 
it is going to cost us.
    Mr. Carney. I want to get to that. But I want to talk about 
the risks first. At the end, you said that there is a better 
approach and I want you to answer that question. But let's 
focus on the risk first, just so we understand, so I can tell 
my constituents when they ask me, do you support this piece of 
legislation or not.
    What do I tell them specifically that might be at risk for 
them? I take a little bit of offense to the insinuations that 
were made about some of my colleagues on this side of the aisle 
defending or being concerned about lower-income access to 
homeownership. Is that at risk here at some level?
    Mr. Zandi. Yes. I think that it means higher mortgage rates 
for all homeowners with mortgages. It will make it harder for 
first-time home buyers to become homeowners. It will make it 
harder to refinance. Particularly in the worst of economic 
times, when things are going badly, wrong, and when people are 
losing their jobs and they can ill afford any other financial 
stress, it means that the asset that they own that is most 
important to their financial well-being, their home, will be 
worth less.
    So, the housing finance reform is going to cost us, but 
there are more efficient ways to do it, better ways. We can 
accomplish all the goals that we have in a different way.
    Mr. Carney. What about the effect on jobs and real estate 
and housing, home construction, that kind of thing. Positive or 
negative effect, big risk?
    Mr. Zandi. It would be negative. Higher mortgage rates, 
less housing activity, fewer jobs in the housing sector.
    Mr. Carney. So what is the better approach? You mentioned 
earlier that there is a better approach. In your view, what is 
the better approach?
    Mr. Zandi. There is. In my view, I would call it a hybrid 
system, somewhere between the privatized system that the 
committee is working on, and the current system that is a 
nationalized system, the government is making all the loans. It 
involves an explicit catastrophic government guarantee, private 
capital in front of the guarantee, a lot of private capital. It 
can be a boatload of private capital. I am all on board with 
that. It is explicit and it is paid for by mortgage borrowers. 
And it is fashioned off the FDIC so that it protects us in bad 
times.
    Mr. Carney. So a better system, a more prudent system and a 
big change, but not the kind of risk that we would be taking in 
going down the approach of the past. It is a pretty serious 
change as well.
    Mr. Zandi. In my view--I don't know if you were here for my 
cliff metaphor. With the privatization path, you are diving off 
a cliff, but you don't know what you are diving into. With a 
hybrid system, you are diving off the cliff, but you are diving 
into water. We have a much better sense of what that means and 
what the implications are.
    Mr. Carney. So we are looking at a pretty big dive or a big 
change in any case?
    Mr. Zandi. It is a big change. And by the way, of all the 
financial and all the economic efforts to address the great 
recession and the financial crisis, we are addressing each of 
them, we have addressed each of them except for what we are 
going to do with Fannie Mae and Freddie Mac.
    Mr. Carney. And as you say, it is absolutely critically 
important that we get it right, that we are careful. Otherwise, 
as you said, we could ruin the financial system. Did I hear you 
say that right?
    Mr. Zandi. You heard right.
    Mr. Carney. Thank you, I yield back.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from North Carolina, Mr. 
Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman, and thank you, 
gentlemen, for being with us today. As I assess where we are in 
terms of our debt obligations, we have about $1 trillion in 
student loan debt, about $1 trillion in credit card debt, and 
we have about $5.1 trillion in mortgage guarantees. The 
American taxpayers have paid now for $200 billion or so of 
obligations back to Fannie and Freddie for which they were 
responsible. So in a sense, as Mr. Bachus said, Billy Bob from 
North Carolina has assumed the obligation of Winston from 
Connecticut, or vice versa, and he has taken on their debt and 
their obligation.
    Mrs. Maloney and our distinguished body authored a bill, 
the CARD Act, that put restrictions on interest rates for 
credit cards, all for the stated purpose of protecting the 
American consumer. We have, as a body, as a government, 
according to the testimony of Mr. Wallison a few minutes ago, 
facilitated the access of credit for homeowners by offering 
easy credit, by encouraging if not instructing lenders to make 
credit available to some of those who perhaps were not worthy 
of credit, but they had that requirement nonetheless.
    So the government has, in many ways, been complicit in a 
way to cause those consumers that we are so concerned about to 
have an inordinate amount of debt and obligation that has been 
catastrophic for their lives and their families and enormous 
displacement for where they are today. And I think the point 
that I would like your response to is it seems to me that the 
manager, the government, as the manager of housing financing, 
we have been an abysmal failure. What we have done, with all 
good intentions, in all good faith, seeking the best from our 
position, trying to control it through central planning, has 
had an adverse effect, has been counterproductive to what we 
had intended.
    Having said that, it would beg the question of have we done 
anything thus far to correct the problem, to make that change, 
to protect the taxpayer, to protect that consumer, as well as 
look at beyond--if we haven't done a good job, what is the 
alternative? And I would say to you, and I would like your 
reaction, that markets work, free markets work. And perhaps it 
is true that a market-driven housing industry would better 
determine who is worthy of that credit so that we don't create 
a problem for them in the long run, that they are assuming an 
obligation that they cannot afford. Maybe that is the reason 
why some people won't be able to get those loans. Maybe they 
shouldn't be taking on those loans and maybe we are complicit 
in causing their own demise.
    So I would state to you, and welcome your response in the 
minute left, that markets can work and they should work. Thank 
you. I welcome your response.
    Mr. Wallison. Let me try to take that on, and thank you for 
leaving me a minute. Actually, I haven't had much of that this 
afternoon. But what we are looking for here is balance, and one 
of the really wonderful things about this Act as I see it is an 
attempt to achieve a balance between a social program, which is 
fundamentally what FHA does, that is, to enable people to get 
into homes who wouldn't otherwise have the downpayments, for 
example, to do that, and to eliminate the things that have 
always caused difficulties in the housing market, which is 
excessive use of credit for people who ultimately--
    Mr. Pittenger. All right. I have 10 seconds left. Does 
anybody else have anything they want to say?
    Mr. Levitin. That we have seen markets not work though in 
housing finance. In the housing bubble, that was private--
    Mr. Pittenger. We have done it worse though, haven't we?
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair recognizes the gentleman from Washington, Mr. 
Heck.
    Mr. Heck. Thank you, Mr. Chairman, and to each and every 
one of the panelists, thank you so much for the generous 
presence of your time and your expertise. It is exceptional, 
even by congressional standards.
    Dr. Zandi, I am not quite done with the 90 basis point 
issue, but I kind of want to turn it on its ear. I am a little 
taken aback at the prospect that somebody would need to have a 
credit score of 750 and put 20 percent down to pay 90 basis 
points more, but I want to turn it on its head.
    Under the proposed legislation, what credit score and how 
much down would you guesstimate would be required for a home 
purchaser to pay interest rates that are currently available?
    Mr. Zandi. That is a great question.
    Mr. Heck. Would you repeat the part about it being a great 
question?
    Mr. Zandi. That is a great question. That is a nice way of 
thinking about it. Let me just do the calculation. Obviously, 
it would be a very pristine borrower, yes. But I don't want to 
give a number without--I can run it through my model with you 
and I will show you what the results are. But it would be a 
pristine borrower, yes. A very, very interesting way of looking 
at it.
    Mr. Heck. So given that all of these things would occur, 
higher interest rates and the removal of the mandate to serve 
all borrowers, I am interested, and I realize that the proposal 
has only been out a few days, if you have thought about or even 
begun to do any modeling about what would happen to the rate of 
homeownership in the country? The rate has been, as best as I 
can determine, relatively stable over a long period of time, 
and we are at what now, about 63 percent?
    Mr. Zandi. 65 percent, a little over 65 percent.
    Mr. Heck. What would happen to that over what period of 
time?
    Mr. Zandi. You are asking such precise questions and they 
are great questions. I just don't have the answers at my 
fingertips. But they would be lower, obviously. I don't know 
how much lower.
    Mr. Heck. Materially lower?
    Mr. Zandi. Yes, I think it would be meaningful. I guess the 
bigger point is it is unnecessary.
    Mr. Heck. Mark, I actually think the bigger point is 
whether or not we think homeownership is an inherently good 
thing on balance. Do you?
    Mr. Zandi. Yes, I think that is a good question. 
Ultimately, that is a question we have to ask and answer 
ourselves collectively. Is homeownership something that we want 
to promote or not? But that is a basic question, yes.
    Mr. Calabria. If I could make a point?
    Mr. Heck. Make it quick.
    Mr. Calabria. Okay. I love homeownership. I think it is a 
great thing. I am happy to be a homeowner. I am not sure having 
somebody drowning in debt--people aspire to be homeowners. 
People don't aspire to be highly leveraged and drowning in 
debt.
    Mr. Heck. So back to you, Dr. Zandi. Have any of the green 
eyeshade, sharp-penciled economists ever tried to quantify what 
the community and societal benefits are of increased 
homeownership?
    Mr. Zandi. Yes.
    Mr. Heck. Does this go beyond just a value that has long 
held the American dream? Are we let better off when more people 
own homes when they can?
    Mr. Zandi. You are asking really good questions. Too bad we 
are 3\1/2\ hours in and I am running out of juice. But this is 
actually a very legitimate discussion and debate we should 
have.
    I think we have come to the conclusion that homeownership--
there are costs and there are benefits, and on net, it is a 
benefit. It is part of the American dream. But it is not--that 
is not an immutable fact and we should really think about and 
there are actually a lot of--I am just bringing this up--there 
is a lot of really good recent research that calls into 
question just what is the benefit and the cost. And it is 
worthy of looking at more carefully.
    This goes back it a bigger point, broader than housing 
finance reform that has been brought up, and that is the 
subsidies we provide to the housing market. They go well beyond 
the guarantee, right? We are talking about the mortgage 
interest deduction, we are talking about FHA. This goes on and 
on and on. It is very, very significant and we need to ask 
ourselves is this appropriate, are we getting our money's 
worth? These are very legitimate and important questions.
    It is not a slam-dunk to say, I think, homeownership, this 
is the number and in every case it is a good thing. It really 
is much more complicated than that. But, again, I am sorry I am 
not as articulate as I would aspire to be, but I am literally 
running out of--
    Mr. Heck. My sixth grade teacher, Harry Noonan, God rest 
his soul, used to say, ``That is a really good question. The 
definition of a good question is one I can't answer.''
    Mr. Zandi. Yes, that is exactly right.
    Mr. Heck. So I am out of time except to reiterate--
    Mr. Zandi. But I will definitely get back to you. I 
absolutely will.
    Mr. Heck. I hope you will, sir. If I might just reiterate 
my gratitude. Thank you all.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr.
    Mr. Barr. Thank you, Mr. Chairman.
    Professor Levitin, you testified that we have a government 
guarantee of housing finance regardless, that it will either be 
explicit or implicit. Isn't your assumption proof that moral 
hazard exists by virtue of the fact that interventionist 
politicians have, in fact, kind of carried out your point, and 
then if we had restrained ourselves as an institution, that 
moral hazard would not exist and market discipline would exist 
in this world?
    Mr. Levitin. I don't think that this Congress or any 
Congress can restrain itself or would in the face of a collapse 
of the housing market. While I understand that certainly there 
are Members of Congress who would just let the chips fall as 
they may, I think we saw proof that two different 
Administrations, a Republican Administration and then a 
Democratic Administration, were willing to proceed with a wide-
ranging bailout, not just of housing, but of all sorts of 
sectors of the economy. Yes, ideally, if we could credibly 
commit never to have bailouts, we would see a better 
functioning market. But I don't think we can credibly do that.
    Mr. Barr. Let me ask any of the panelists who want to 
comment about the flow of private capital back into the housing 
finance system. Presumably, the PATH Act would require a great 
deal more credit risk investors as opposed to rate risk 
investors. Can you all comment, and Dr. Zandi, in particular, 
can you all comment on why there are barriers in a more market-
driven mortgage finance system? Why credit risk investors are 
not there?
    Mr. Zandi. In part, it is legacy. We have set up a system, 
it is the system that has been in place since the Depression, 
and as a result of that to some degree. Part of it is that 
credit risk is very difficult to evaluate and assess. It is 
very idiosyncratic. It depends on the specific credit, and when 
we are dealing with lots, millions, tens of millions of 
homeowners, it becomes very difficult to evaluate. And in the 
case of mortgage securities which are based on the mortgage 
payments, those securities themselves are quite complex, right? 
There are all kinds of financial structures, and the rating 
agencies obviously didn't get that right when they were trying 
to evaluate the quality of those structures.
    So it is a level of complexity that when you combine it 
with the interest rate risk makes it incredibly difficult.
    The third point is that it is hard to hedge. Interest rate 
risks, there are mechanisms to hedge it and you can assess and 
quantify your risk. Credit risk is a lot harder. We have tried 
to develop mechanisms for doing that. For example, the credit 
default swap market, the CDS market was an effort to try to 
hedge credit risk. But as we know, we didn't really get that 
quite right. It will be better in the future, but that is also 
a problem, and all those things combined make this very 
difficult to do.
    Mr. Barr. Does anybody else have a comment on that in terms 
of the availability of credit risk investors?
    Mr. Wallison. Yes, let me try to address that, because a 
mortgage is a particularly good investment for life insurance 
companies and private pension funds, because they want long-
term assets to deal with their long-term liabilities. The 
reason they don't invest now in Fannie and Freddies, most of 
them do not, and they don't put a lot of money into Treasuries 
either, is because the yields are too low for them. They need a 
higher yield and they get that higher yield by making prudent 
investments, taking prudent risks. That is the market that this 
bill would open up because those investors will be looking for 
private credit risk that will compensate them for taking those 
risks and be long-term assets.
    Mr. Calabria. I want to make an important point because 
sometimes we talk as if the government is there, then magic, 
the risk goes away. The credit risk is always going to be 
there. The interest rate risk is always going to be there.
    I would choose to have that risk borne by people who choose 
to bear it, and I don't believe as a taxpayer--our taxpayers in 
general are very good at managing credit risk. So I am not 
going to pretend the private sector is going to do a great job, 
but I am absolutely certain that the government will do a 
horrible job at managing that credit risk.
    Mr. Barr. Just in the 20 seconds left, does anyone on the 
panel wish to respond to, I believe it was Dr. Zandi's concern 
about the utility in the PATH Act? Does anybody wish to respond 
to the concern that with the utility, there is no requirement 
compelling use of the utility? Why would people not use the 
utility for purposes of securitization?
    Mr. Levitin. They don't want to have to comply--one reason 
not to use it would be that the utility would have certain 
underwriting standards with which a bank that is conducting its 
own private label securitization might not want to have to 
comply.
    Mr. Zandi. Large lenders would almost assuredly not use it, 
right, because they have their own platform?
    Mr. Barr. I yield back.
    Mr. Garrett [presiding]. The gentleman from California is 
now recognized.
    Mr. Sherman. Thank you, Mr. Chairman.
    I am glad we are holding these hearings, but I think that 
we have selected a room that is way too small, because if we 
were going to put all of the business groups that have come to 
me and others and said they oppose the path that we are on in 
this bill but they don't want to say so on C-SPAN, they don't 
want to offend the chairman, we would need to be in the large 
auditorium in the Capitol Visitor's Center.
    This is a long hearing, but this is a bill with hundreds of 
pages, that has taken many years to write behind closed doors, 
and now in a couple of weeks, we are supposed to go from seeing 
the bill to moving it out of the committee. I would hope that 
we wouldn't be marking up this bill until we have a chance to 
spend August reviewing it.
    The old system had a lethal combination of private sector 
objectives for Fannie and Freddie where there were stock 
options, large compensation plans, pressures from the stock 
market, and a desire for market share combined with government 
credit guarantees and then finally, combined with inadequate 
oversight. And as the gentleman from Colorado, Mr. Perlmutter, 
pointed out, when we tried to have oversight and passed it in 
this committee, Chairman Oxley saw the bill die in the Senate 
and attributed that to the one-finger salute that he received 
from the Bush Administration. To this day, Mr. Oxley has not 
indicated which finger was involved.
    What we need is a new system that continues the government 
guarantee but eliminates the private ownership with stock 
market pressures, stock options, and enormous compensation 
plans, and that has adequate oversight and an adequate fee to 
make sure that the taxpayers are reimbursed for the risks that 
they are taking.
    Now, I realize you can read everything Ayn Rand ever wrote, 
and you won't see any mention of Fannie, Freddie or the FHA, 
but just because it is not in ``The Fountainhead'' doesn't mean 
it should not exist.
    The Chair was here saying that for $729,000, $750,000, you 
could buy a mansion in his district. I don't know what the 
houses sell for in Coffman, Texas, but in my area, that is a 
middle-class home. And I would like to, for the record, point 
out that there are 10 million Californians who live in counties 
where the median home price is over $525,500. And I assure the 
chairman, whom I know will take an interest in reading this 
transcript, that for $729,000, $750,000, you do not get a 
mansion in America's best named city, which, of course, is 
Sherman Oaks, California.
    As to auto loans, they were referenced by one of the other 
Members. You can't get a 30-year fixed-rate auto loan. The 
private sector will not take both the credit risk and the 
interest rate risk.
    Mr. Zandi, we have been told how well the jumbo loans are 
working, but let's say you are getting a conforming loan. You 
are putting about 5 or 10 percent down. Imagine what the 
interest rate would be. Now, to get that same interest rate on 
a jumbo, how big a downpayment would you need?
    Mr. Zandi. It depends on all of the other circumstances. I 
can't answer that question. It would be large. Larger.
    Mr. Sherman. Does someone else--professor, do you have a 
comment?
    Mr. Levitin. No.
    Mr. Sherman. Doesn't it typically take a 20 percent 
downpayment on a jumbo, or aren't the vast majority of jumbos 
at 20 percent downpayment?
    Mr. Wallison. I don't know the answer to that, but whenever 
you have a mortgage, you have a balancing of the 
creditworthiness of the borrower, the collateral, the 
importance of the collateral, as well as the downpayment. So 
there can be a lot of bargaining over that.
    Mr. Sherman. Without the government guarantee, and 
expecting a fixed-rate loan for 30 years, you are going to be 
putting at least 20 percent down.
    Finally, I would like to be concerned about the effect this 
is going to have on home prices. Keep in mind we have 
guaranteed $5 trillion worth of mortgages, and if they go 
underwater, we, the Federal Government, are going to lose a lot 
of money. What happens, and I will ask Dr. Zandi, if you take 
20 or 30 percent of the potential buyers out of the market? 
What happens to home prices?
    Mr. Zandi. All else being equal, they will decline.
    Mr. Sherman. Yes. And wouldn't we have at least 20 or 30 
percent of the home buyers today unable to put up a 20 percent 
downpayment or having a 750 FICO score?
    Mr. Zandi. Almost certainly, yes.
    Mr. Garrett. Mr. Duffy is recognized for 5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman. I appreciate the panel 
staying here and working so hard, staying so late.
    I just want to take a look back to 2008 to Mr. Calabria. Do 
you know what the cause was of the 2008 financial crisis? Do 
you have an opinion as to what caused it?
    Mr. Calabria. I think you have, at minimum, a dozen 
different factors. It would be nice if there was one thing you 
could point to and say, fix that, and that was it. So I would 
certainly put a number of things. According to my opinion, what 
I think was absolutely reckless monetary policy. I don't think 
you could have a real Federal funds rate negative for 3 years. 
You had a situation where because of the Fed, we were paying 
people to take money. That is all you need to have for a bad 
situation.
    Mr. Duffy. Did the housing bubble have an impact on the 
financial crisis of 2008?
    Mr. Calabria. Absolutely. And I think to really distinguish 
part of the discussion here and maybe differences between Adam 
and Mark and myself is the real question of how much of the 
current system is procyclical versus countercyclical. If you 
assume that this sort of crisis just happens, and then, of 
course, you want to say we want a backstop because a crisis 
happens. So our argument is, how much of the backstop caused 
the crisis?
    Mr. Duffy. I hear you. And one of the main drivers of the 
housing bubble, we are talking about monetary policy, but also 
Fannie and Freddie had a role in that too, didn't they?
    Mr. Calabria. Absolutely. They helped inflate the housing 
bubble, and just as importantly they helped transfer losses to 
the taxpayer, which is the difference between, say, the office 
market bubble, the hotel market bubble. All of these things 
bubbled, but you and I did not pick up the check for them in 
the same way.
    Mr. Duffy. I want to move along a little bit more quickly 
here, but you would agree in the financial crisis of 2008, we 
had a housing bubble, and Fannie and Freddie played a role in 
it. Right? You would agree?
    Mr. Calabria. Absolutely.
    Mr. Duffy. And have you had a chance to review the Dodd-
Frank legislation that passed a number of years ago?
    Mr. Calabria. I am afraid to say I have actually read it 
several times.
    Mr. Duffy. Section by section, title, the whole thing?
    Mr. Calabria. Yes.
    Mr. Duffy. Could you give me the section where Dodd-Frank 
addresses Fannie and Freddie?
    Mr. Calabria. I think it is pretty clear that was left out.
    Mr. Duffy. That was left out, that is right. So that is why 
we find ourselves here today, right, having a conversation 
about how do we fix one of the main drivers of the 2008 crisis?
    Mr. Calabria. Right.
    Mr. Duffy. Does anyone on the panel disagree with this? Mr. 
Levitin?
    Mr. Levitin. I would say Fannie and Freddie played a role 
in the crisis, but they were not the leading edge of the 
housing bubble. The leading edge of the housing bubble was 
private label securitization--in 2006, over half of mortgages 
originated ended up getting securitized in private label 
securitization. I don't think that can be ignored. Fannie and 
Freddie played a role in creating demand for private label 
securitization. They are not guiltless. But it I don't think it 
is quite right to say that they were the main driver of the 
crisis.
    Mr. Duffy. But my point is they were left out, and that is 
why we find ourselves here today. And I think that is important 
to note. We are having a big conversation about this because 
this wasn't addressed and it should have been addressed, and 
that is why we are here today having a conversation about what 
are the right steps forward to make this system work.
    I want to talk about the 30-year fixed. We have had a lot 
of conversation about that. So obviously we have, in our 
traditional system that exists today, we have the investors in 
mortgage-backed securities. They take the rate risk, and we 
have the government take the credit risk, right? And, Mr. 
Zandi, is it your position that if the investors have to take 
the rate risk and the credit risk, that they are not going to 
invest in these products? Is that your position?
    Mr. Zandi. No, they will, it will just be much diminished. 
So the share of the market that is 30-year fixed would decline 
significantly.
    Mr. Duffy. How much?
    Mr. Zandi. I think the rest of the world would be a good 
benchmark. In the rest of the world, 30-year fixed, say Europe 
probably is the best market, it is about 20 to 25 percent of 
the market. I would say that is about right.
    Mr. Duffy. Mr. Holtz-Eakin, do you agree with that?
    Okay. So we are still saying there is going to be a 30-year 
fixed-rate. That product will be available, yes?
    Mr. Holtz-Eakin. And can I make the point, I think it is an 
important one, that if we do nothing, we are going to see rates 
go up, and about 20 percent of mortgages taken off the market 
by Basel III and QM-QRM, and if we do the hybrid system that 
Mark designed, there is going to be an explicit charge built 
into interest rates for the backstop. It is going to raise 
rates. It is going to lower home prices. It is going to lower 
the homeownership rate. The notion that there is a freebie out 
there where we have a better system and these things don't 
happen is wrong.
    Mr. Duffy. There is no free lunch, right. I think it is a 
good question for you all. You look at the moderate- and low-
income constituents that I have in central and northern 
Wisconsin, or in any of our districts, were they helped when 
they lost their home because they were encouraged to buy homes 
they couldn't afford? Were they helped in that process?
    Mr. Wallison. That was the point that I made in my opening 
statement, that the people who really got hurt by the policies 
that we followed during the 1990s and into the 2000s were the 
people who were induced to buy homes even though they had very 
low credit scores, and very low financial capabilities, who 
then found when the market turned that they lost their homes. 
That was a tragedy.
    Mr. Duffy. Right. And so the status quo of not fixing the 
system isn't helping poor and moderate-income families--
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. Duffy. So close. I yield back.
    Chairman Hensarling. The Chair wishes to make a process 
announcement. Again, my apologies. Due to starting 3 hours late 
in votes, the hour is much later than anticipated. I 
understand, Mr. Wallison, you need to be excused at this time. 
My apologies to the second panel as well. We currently have two 
more Members to ask questions of this panel, in which case we 
hope to excuse this panel, take a short break, and impanel the 
second panel, although votes are anticipated sometime within 
the next 30 to 40 minutes.
    So the Chair now recognizes Mr. Stutzman of Indiana.
    Mr. Stutzman. Thank you, Mr. Chairman, and thanks to each 
of you for being here and thank you for your testimony and for 
your answers and for your expertise on this very complex issue.
    I would like to touch just quickly, I guess my question 
kind of maybe comes more from a position of where and why 
should government be helping. I want to touch on a comment that 
Mr. DeMarco made: ``One thing I would say about 30-year 
mortgages, it is not necessarily the best mortgage product for 
a home buyer, especially a first-time home buyer. If you look 
at statistics and see that the first-time home buyers in this 
country tend to own their first home for 4 years or 5 years, it 
may not be the best for their circumstance if they buy that 
house with that kind of timeline.'' He goes on to say, ``There 
may be a different mortgage product in which they can build 
equity at a faster rate than a 30-year fixed-rate mortgage.''
    I want to ask any of you on the panel, where is the best 
place for government to guarantee mortgages? Is it a first-time 
home buyer? Is it a lower- to medium-income household? Where do 
we start picking, or why do we start picking and choosing who 
does and who shouldn't? And if you look at the statistics, 
obviously we are backing a lot of them.
    Dr. Calabria?
    Mr. Calabria. Let me preface with, I wouldn't back any of 
them. But I do think you have to ask yourself the question of 
if you are going to have a government intervention, and you 
have decided to have a government intervention, it should be 
helping people who would not be helped otherwise. A very large 
segment of the subsidies that Fannie and Freddie deliver are 
people who would have become homeowners otherwise, would have 
gotten a mortgage otherwise. So if you are going to have that 
subsidy, I would focus it on families who, but for the subsidy, 
would not be homeowners.
    Mr. Stutzman. Dr. Holtz-Eakin, go ahead.
    Mr. Holtz-Eakin. I think it is important to recognize, and 
Mark made this point earlier, that we care about people having 
access to shelter, but a lot of this belongs in the 
appropriations process where you explicitly have a social 
program to help low-income Americans.
    The second thing I would say is remember there is also a 
private mortgage insurance market too, so it is not like the 
government is the only one who can provide guarantees.
    Mr. Stutzman. Because in the bill, from my understanding, 
where we are addressing FHA and what FHA's mission really is, 
it is designed or targets FHA's mission specifically to first-
time home buyers, and they are eligible--the eligibility is 
regardless of their income nationwide. We are helping people 
out there get into a home.
    Mr. Calabria. I think that is the right approach, to have 
an income-based approach where you are making sure that you are 
targeting somebody who is middle-class or not necessarily 
having all these subsidies go to the rich.
    Let me say as an aside, my approach to public policy 
questions is often the first thing to ask, is this problem a 
problem for rich people? If it isn't, then it is an income 
problem. Rich people have no problem getting housing. I don't 
care about subsidizing rich people. And if what we care about 
is that the poor people are poor, the best thing to do is try 
to give them direct subsidies so they are not poor rather than 
feed it through all sorts of industries.
    Mr. Stutzman. Dr. Zandi or Professor Levitin, any comments 
on that? Isn't that a good approach and shouldn't that be our 
primary focus?
    Mr. Levitin. If you started with a blank slate, I think 
that is a very reasonable approach. The problem is we are not 
starting with a blank slate. And if you start tinkering with 
the guarantee too much, it risks pushing down housing prices, 
and for lots and lots of families, their house is their most 
significant asset. If housing prices fall, the family's net 
worth falls, it has a real impact on their financial stability.
    Mr. Stutzman. But it is a good goal, isn't it?
    Mr. Levitin. To push down housing prices?
    Mr. Stutzman. No. No, no, no, I'm sorry. To focus on first-
time borrowers--
    Mr. Levitin. That is definitely an appropriate role.
    Mr. Stutzman. How much to you--from FHA-guaranteed GSEs, 
more than 85 percent of all new mortgages originated and were 
responsible for 99 percent of all mortgage securitizations in 
2012. How much is too much? Where is that line? Is it 100 
percent? Would you say that should be 100 percent?
    Mr. Levitin. Not at all. I think I take a position pretty 
similar to what Dr. Zandi has articulated, which is that there 
is a role for a government guarantee, but a limited one, and it 
should be focused on catastrophic risk.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair recognizes the gentleman from Virginia, Mr. Hurt.
    Mr. Hurt. Thank you, Mr. Chairman. I certainly appreciate 
the chairman's leadership on this issue and I certainly thank 
the members of the panel for spending the time with us this 
afternoon.
    I wanted to follow up on something that Ms. Velazquez was 
talking about in terms of the national mortgage market utility 
during her line of questioning. Dr. Zandi concluded and stated 
that he did not think that there would be much uptake on the 
securitization platform.
    I was wondering if we could hear from Dr. Holtz-Eakin and 
Dr. Calabria on their take on the platform itself. Do you 
believe that it will attract the private sector and why? And 
then the second thing that I was hoping you could address is, 
do you believe that platform will also have a place there and 
encourage smaller institutions to be a part of it?
    Mr. Holtz-Eakin. I think the utility is an important 
question and I don't have a bright line answer. I have a couple 
of thoughts on it. First, I don't see any particular problem 
with access from the smaller institutions that needs to be 
fixed. That has come up a couple of times today.
    Second, it clearly reflects a problem, which is that 
currently, Fannie and Freddie have platforms and the FHA is 
developing another platform, and if you were to simply 
privatize that, you would give someone a deeply unfair 
competitive advantage. You can't do that. So this seems so be a 
halfway house where you turn into a government utility. I am 
not particularly happy with that approach.
    And third, and what I think is the most important aspect, 
is the degree to which the utility is the mechanism by which 
you impose standardization, data collection, and some 
transparency on this market. Those are all absolutely admirable 
goals, and if you can do that without creating the utility, do 
it.
    Mr. Hurt. I want to hear from Dr. Calabria, but on that 
point, that was my follow-up question, had to do with, as you 
said earlier, talking about the importance of scrutinizing risk 
and how vital that is to strengthening, strengthening 
homeownership in this country and preventing future crises, are 
you satisfied with the way the bill is laid out in terms of 
providing the transparency and disclosure that will allow 
investors what they need to be able to get on to the platform 
or use the platform?
    Mr. Holtz-Eakin. I won't pretend to have read every line of 
it, but it seems to be in the right ballpark. No question about 
that.
    Mr. Hurt. Thank you.
    Mr. Calabria. Let me start from the observation, and it is 
important to keep in mind, that Fannie and Freddie and the 
Federal Home Loan Banks all, in my opinion, clearly increase 
consolidation among originators. They charge different G fees 
by size. At one point Countrywide was almost one-third of 
Fannie Mae's business. So it is hard for me to look at the 
previous and somewhat existing model and think that was good 
for small institutions. It wasn't. It drove consolidation in 
the industry.
    I also will say as you are well aware there are estimates 
across the board, but there are certainly concerns that 1,000 
or more small banks will be driven out of business because of 
Dodd-Frank. So there are a number of things that worry me in 
terms of consolidation in the industry.
    That said, I think the utility is a reasonable start. I 
have some concerns. Doug mentioned, I think, hours ago that the 
problem about having a monopoly, I worry about that. I am less 
enamored of standardization than I think anybody else at the 
table is. I tend to like a lot of diversity in our mortgage 
market and lots of different products and lots of different 
players. So I do worry about that.
    I guess to me, the biggest flaw in the previous system was 
the government put its thumb very heavily in favor of one 
system. I think that is a mistake. We need to let 1,000 flowers 
bloom, so to say, and let the market figure that out.
    Mr. Hurt. On the second part of Mr. Holtz-Eakin's answer, 
you talked about scrutinizing risk. Do you have a sense of 
whether or not this bill offers a transparency in the 
disclosure necessary for investors to see what they are buying 
and make prudent decisions in allocating risk?
    Mr. Calabria. I think there is some increased transparency 
there that is a positive. I think it is also important to keep 
in mind that this is a minimum level of disclosure. Investors 
are always free to go back to somebody who is issuing private 
label securities and say we want more information, and 
certainly I think there was a lack of transparency in those 
securitizations pre-crisis. But you are already seeing 
investors, you look at things like what Redwood has done, there 
is far more transparency in the private label market, albeit it 
is a small market, but there is far more transparency today 
there. So I think it is an adequate floor in which the market 
will demand more information to distinguish between players.
    Mr. Hurt. Thank you. I yield back the balance of my time.
    Chairman Hensarling. The gentleman yields back the balance 
of his time. There are no other Members who wish to be 
recognized. I want to sincerely thank the panel for their 
patience and for what they have added. Even the witnesses who 
have difficulty agreeing with the chairman have had much to add 
today. This panel is excused, again, with our gratitude.
    We will take a brief moment as we seat the exceedingly 
patient second panel.
    [recess]
    Chairman Hensarling. If Members could please take their 
seats. Although we are missing two witnesses, in the interest 
of time we will go ahead and start the introductions. Votes 
are, regrettably, expected soon, but perhaps we can start on 
some of the opening statements. Again, if staff could close the 
door, please.
    I do wish to say for the record that with one exception, 
this industry panel was invited by the Majority, and even 
though a number of the witnesses oppose some or all of the 
provisions of the PATH Act, even though we have a disagreement, 
we respect the organizations, we respect their members, and 
their voices need to be heard, and I am glad they took the 
opportunity to accept the invitation to testify.
    Testifying on behalf of the National Association of Federal 
Credit Unions is Ms. Janice Sheppard, who serves as the senior 
vice president for mortgage compliance at Southwest Airlines. 
It is nice to have somebody from back home.
    Testifying on behalf of the Mortgage Bankers Association is 
its president and CEO, David Stevens, who, as most of us know, 
previously served as the Assistant Secretary for Housing and as 
the Federal Housing Commissioner at HUD.
    William Loving, Jr., is the president and CEO of Pendleton 
Community Bank in West Virginia. He will offer testimony on 
behalf of the Independent Community Bankers of America.
    Testifying on behalf of the National Association of Home 
Builders, we welcome its CEO, Jerry Howard.
    We also welcome the testimony of Tom Deutsch, the executive 
director of the American Securitization Forum.
    Our final witness will be Mike Calhoun, the president of 
the Center for Responsible Lending.
    I think most of you have testified in the past. You will 
have 5 minutes to give your oral testimony.
    Mr. Loving, you are now recognized for your testimony.

   STATEMENT OF WILLIAM A. LOVING, JR., PRESIDENT AND CHIEF 
 EXECUTIVE OFFICER, PENDLETON COMMUNITY BANK, ON BEHALF OF THE 
        INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)

    Mr. Loving. Chairman Hensarling, Ranking Member Waters, and 
members of the committee, my name is William A. Loving, Jr., 
and I am president and CEO of Pendleton Community Bank, a $260 
million bank in Franklin, West Virginia. I am also chairman of 
the Independent Community Bankers of America, and I testify on 
its behalf.
    Thank you for convening this hearing on the PATH Act. It is 
critically important to our Nation's borrowers and the broader 
economy that the details of any housing finance reform are done 
right. We appreciate your efforts to advance needed reforms.
    Community banks represent approximately 20 percent of the 
mortgage market, but, more importantly, our lending is 
concentrated in small towns in rural America which is not 
effectively served by large banks. Any mortgage reforms that 
constrain lending by community banks will seriously harm 
communities like mine.
    Access to a robust secondary market is vitally important to 
community banks as we do not have the scale and resources 
needed to effectively hedge the interest rate risk inherent 
with long-term fixed-rate lending. Secondary market sales make 
it possible for community banks to offer these loans without 
risk exposure.
    ICBA has developed a comprehensive set of principles for 
secondary market reform which I will summarize as follows: 
First, community banks must have equal and direct access. We 
must have the ability to sell loans individually for cash under 
the same terms and pricing available for larger lenders.
    Second, there can be no appropriation of customer data for 
cross-selling of financial products. We must be able to 
preserve the customer relationship after transferring loans.
    Third, originators must have the option to retain servicing 
rights at a reasonable cost. Servicing is a critical aspect of 
the relationship lending model vital to community banks.
    Finally, private capital must protect taxpayers. Securities 
issued by secondary market entities must be backed by private 
capital and third-party guarantors. Government catastrophic 
loss protection, which is critical during periods of market 
stress, must be fully and explicitly priced in the guarantee 
fee and loan level price.
    Any reforms that are not consistent with these principles 
could drive further consolidation of the mortgage market, which 
would harm borrowers and communities and put our financial 
system at risk of another collapse.
    ICBA appreciates Chairman Hensarling drafting legislation 
to protect taxpayers, enhance the role of private capital and 
housing finance, and provide needed regulatory relief for 
community banks. These critical areas of reform are reflected 
in the PATH Act. We are encouraged by the bill and believe it 
is something with which we can work.
    With that said, we have questions about how the national 
mortgage market utility, which would serve as a platform for 
the securitization of mortgages, would perform in a live 
marketplace inherently dominated by large lenders. These 
questions include, first, would community banks be forced to 
sell loans to the large aggregator that would appropriate 
servicing rights and valuable customer data? Second, would the 
owners of the utility have the ability to appropriate customer 
data? Third, while we are encouraged that any Federal Home Loan 
Bank would be authorized to aggregate mortgages for 
securitization, nothing in the Act compels them to perform this 
service, if they choose not to, what direct access will 
community banks have to the secondary market?
    Finally, the majority of community banks that now sell 
directly to Fannie Mae and Freddie Mac do so through the GSEs' 
cash window. Can the utility accommodate this option? We hope 
that the utility can be implemented in a way that does not, 
despite the intent of the statute, marginalize community bank 
mortgage lenders or lead to further consolidation of the 
mortgage market. ICBA looks forward to working with you and the 
committee to address these and other questions as the PATH Act 
is debated.
    ICBA sincerely appreciates the chairman's effort to protect 
community banks from Basel III. In addition, the Act's mortgage 
lending regulatory relief, especially the qualified mortgage 
status for portfolio loans and repeal of the new credit risk 
retention requirement, are urgently needed and will facilitate 
community bank mortgage lending. The Capito-Maloney examination 
reforms will go a long way towards improving the oppressive 
examination environment which is impeding the flow of credit in 
our communities.
    Thank you for the opportunity to share our views. We look 
forward to working with the committee and providing ongoing 
input into the process.
    [The prepared statement of Mr. Loving can be found on page 
191 of the appendix.]
    Chairman Hensarling. Votes have been called on the Floor. 
We should have the opportunity to hear two more opening 
statements.
    Ms. Sheppard, you are now recognized.

 STATEMENT OF JANICE SHEPPARD, SENIOR VICE PRESIDENT, MORTGAGE 
COMPLIANCE, SOUTHWEST AIRLINES FEDERAL CREDIT UNION, ON BEHALF 
  OF THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS (NAFCU)

    Ms. Sheppard. Good afternoon, Chairman Hensarling, Ranking 
Member Waters, and members of the committee. My name is Janice 
Sheppard, and I am testifying today on behalf of NAFCU. I 
appreciate the opportunity to share our views with the 
committee on housing finance reform and the PATH Act.
    Credit unions have a solid track record of making safe and 
sound mortgage loans that members can afford. As the committee 
works on housing finance reform, a primary concern of credit 
unions is continued unfettered access to the secondary mortgage 
market, including adequate transition time to a new system. A 
second concern equally as important is recognizing the quality 
of credit union loans through a fair pricing structure. Because 
credit unions originate a relatively few number of loans 
compared to others in the marketplace, they cannot support a 
pricing structure based on loan volume, institution asset size, 
or any other issue that could disadvantage our members.
    Credit union mortgage originations have more than doubled 
between 2007 and 2013 as we helped meet the demand created when 
other lenders cut back. The portion of first mortgage 
originations sold into the secondary market also more than 
doubled over that same period, from 25 percent to 53 percent. 
While credit unions hedge against interest rate risk in a 
number of ways, selling products for securitization on the 
secondary market is vital to our safety and soundness. Small 
lenders must have continued access to secondary market sources, 
including Fannie Mae, Freddie Mac, Ginnie Mae, and the Federal 
Home Loan Banks or any new entity Congress may create. They are 
valuable partners for credit unions who seek to hedge interest 
rate risk by selling their fixed-rate mortgages, as credit 
unions do not have the economies of scale that larger market 
participants enjoy.
    In 2010, the NAFCU board of directors established a set of 
principles that the Association would like to see reflected in 
any reform efforts. These principles are outlined in my written 
testimony. We believe that the unveiling of the PATH Act is an 
important step in the debate on housing finance reform.
    While NAFCU appreciates the serious and comprehensive 
effort put forth by the PATH Act, we have outstanding concerns 
with how the elimination of the GSEs and the government 
guarantee could impact reliable market access for credit 
unions. We believe that any reforms should focus on the 
consumer and not disrupt the recovery under way in the housing 
market. The guaranteed access to the secondary market was a 
critical component for credit unions being able to continue to 
meet the mortgage needs of Americans during this recent 
economic downturn.
    We are pleased, however, to see Section 261, to discourage 
the trend of strategic defaults that some credit unions have 
seen. NAFCU also believes that the regulatory relief found in 
Title IV is a very important aspect of the bill. In particular, 
NAFCU strongly supports Section 403, to address the CFPB's 
definition of points and fees under the ability-to-repay rule.
    Given the tidal wave of new mortgage regulations, we also 
strongly support the 1-year delay of the mortgage rules found 
in Section 406. NAFCU also strongly supports Section 409, which 
exempts from the Qualified Mortgage definition residential 
mortgage loans held in portfolio. We also support Section 411 
that allows 40-year mortgages to be considered for QM and would 
allow consumers to waive the 3-day waiting period before 
closing.
    In addition to the mortgage-related provisions contained in 
the draft bill, NAFCU would like to recognize the important 
changes that would be made with respect to the examination 
process at credit unions. Finally, we would like to know that 
if the bill contains provisions relating to Basel III for 
community banks, we believe provisions implementing risk-based 
capital for credit unions should also be included.
    In conclusion, we appreciate the opportunity to provide our 
input on this important issue. We look forward to working with 
Chairman Hensarling, Ranking Member Waters, committee members, 
and your staff to address our comments as housing finance 
reform moves forward. I thank you for your time today and I 
would welcome any questions that you may have. Thank you.
    [The prepared statement of Ms. Sheppard can be found on 
page 196 of the appendix.]
    Chairman Hensarling. We will go to Mr. Howard's testimony, 
and then we will recess. Mr. Howard, you are recognized.

    STATEMENT OF JERRY HOWARD, CHIEF EXECUTIVE OFFICER, THE 
          NATIONAL ASSOCIATION OF HOME BUILDERS (NAHB)

    Mr. Howard. Chairman Hensarling, Ranking Members Waters, 
and members of the committee, my name is Jerry Howard, and I am 
the CEO of the National Association of Home Builders and I 
appreciate the opportunity to testify here today. NAHB is proud 
to appear here today, Mr. Chairman, and we applaud you for 
finally beginning the debate on housing finance reform.
    The housing finance system has been in limbo for the past 
several years and we strongly believe that the status of the 
system has held back the overall economic recovery. We applaud 
you also for looking at this issue holistically. I have been 
around here long enough to remember several housing bills, 
including the Cranston-Gonzalez Act. And I believe that looking 
at these holistically is a much more effective way of 
legislating than piecemeal. NAHB is eager to be a constructive 
partner in this debate as we move forward. There are elements 
of the PATH Act that we support and there are elements of the 
Act with which we have serious concerns.
    Let me start by touching on provisions that we support. 
First, many of the provisions for building a new market 
structure are consistent with NAHB's policy recommendation for 
reforming the mortgage securitization practices and procedures.
    Second, we are very pleased that you included the Capito-
Maloney bank examination bill which addresses bank examiners 
and their actions with respect to commercial real estate 
lending. We believe that this legislation, if enacted, will add 
consistency to the regulatory processes that banks undertake on 
a daily basis when interacting with our members.
    Third, we are happy to see you address the QM and QRM 
rules, and we support the proposed amendment to the Truth in 
Lending Act for exceptions to the calculation of points and 
fees.
    Finally, addressing the Basel III accords and ensuring that 
Basel III does not apply onerously to community banks, as has 
been feared, will go far toward helping banks free up capital 
that is much needed in the housing finance system.
    These four elements alone are very, very important and we 
are grateful that they are included in the draft legislation.
    With respect to the title that addresses FHA, we have to be 
mindful of the fundamental countercyclical mission of the FHA. 
While NAHB could support moving the FHA out of HUD, we are 
concerned that an independent FHA, with the restrictions 
imposed by the PATH Act, would be ineffective in its 
countercyclical mission, a mission that to date has served us 
so very well during the current downturn, despite the financial 
status of the MMI fund.
    With respect to GSEs, I have to tell you that I have been 
in the game long enough that I remember when President Clinton 
called the housing industry into a room and said, ``Make more 
Americans homeowners.'' I also remember 8 years after that when 
President Bush issued the same edict. I believe that the goals 
of President Clinton and President Bush, to increase America's 
homeowners, are valid public purpose goals. And I believe that 
expending Federal resources to that end is an equally valid 
public purpose.
    Prior to this downturn, which was the fault of the American 
housing industry itself, the housing finance system as a whole 
was working fine. To totally dismantle the housing finance 
system based on this recent short-term though devastating 
crisis we believe would be a shortsighted and a dramatic 
departure from the longstanding American housing policy dating 
back at least to the Housing Act of 1949.
    Most significantly, NAHB believes that the future housing 
finance system must have an explicit Federal Government 
guarantee. NAHB urges the committee to make changes to the PATH 
Act to ensure the Federal Government continues to provide a 
backstop for a reliable and adequate flow of affordable housing 
credit for both single and multi-family housing and in all 
economic and financial conditions.
    NAHB believes that this Federal support is particularly 
important in continuing the availability of a 30-year fixed-
rate mortgage. We believe that the PATH Act as currently 
drafted does not provide the Federal support necessary to 
ensure a liquid and strong housing finance system.
    Mr. Chairman, the National Association of Home Builders is 
eager to begin this debate. We believe that a fundamental goal 
of the American people is still to own their own homes. And we 
believe that an abundance of affordable rental housing must be 
available to provide Americans with housing choice. 
Unfortunately, we believe that the PATH Act as drafted would 
make homeownership unnecessarily expensive for first-time 
homebuyers, reduce homeownership opportunities for middle-class 
Americans, and retard the construction of rental housing. NAHB 
will be a constructive partner in this process. I sincerely 
thank you for the opportunity to testify, and I look forward to 
working with the entire Congress that will enact legislation to 
create a sustainable housing finance system. Thank you, sir.
    [The prepared statement of Mr. Howard can be found on page 
148 of the appendix.]
    Chairman Hensarling. Thank you.
    There are votes on the Floor at the moment. We expect to 
return in approximately 40 minutes. The committee stands in 
recess until such a time.
    [recess]
    Chairman Hensarling. The committee will come to order.
    Mr. Stevens, you are now recognized for your testimony.

  STATEMENT OF THE HONORABLE DAVID H. STEVENS, PRESIDENT AND 
CHIEF EXECUTIVE OFFICER, THE MORTGAGE BANKERS ASSOCIATION (MBA)

    Mr. Stevens. Thank you, Mr. Chairman. Thank you for holding 
this hearing and, more importantly, for jump-starting a debate 
that is long overdue.
    Fannie Mae and Freddie Mac have been in conservatorship for 
almost 5 years now and it is important that policymakers begin 
defining a long-term plan for the future role of the Federal 
Government in the mortgage market. Your legislation, coupled 
with the recent introduction of the Corker-Warner bill in the 
Senate, and the FHA bill unveiled earlier this week by Chairman 
Johnson and Ranking Member Crapo, helped set the process in 
motion and frame the boundaries of this debate.
    Over the course of the last year, MBA reconvened our 
members in two task forces, one for a single family, another 
for multi-family, to discuss the future of the secondary market 
and examine the broad range of issues that will be crucial to 
this debate. Our members identified several key principles 
necessary for a sound secondary market. We believe any new 
structure should rely primarily on private capital but must 
also provide liquidity through economic cycles with an explicit 
government backstop. Additionally, the new structure should 
support the availability of a traditional long-term fixed-rate 
mortgage product with the ability to lock interest rates 
efficiently and at low cost.
    Finally, there must be robust competition supporting 
multiple business models in both the primary and secondary 
mortgage markets. We believe these principles will ultimately 
benefit borrowers and taxpayers through increased competition 
and lower costs. As we begin to work toward a new secondary 
mortgage market end state, we must be mindful that this could 
be a long road.
    To that end, the MBA has also developed a series of 
transitional steps that can be taken now without congressional 
action that can help bring private capital back and help pave 
the road for comprehensive housing reform. Each one of these 
steps, which I outlined in my written testimony, advances 
healthy reforms to the secondary mortgage market in a manner 
consistent with the common objectives shared by the majority of 
GSE proposals. And each one of these steps can be taken by FHFA 
and the GSEs through a transparent process without the need for 
authorizing legislation, thus allowing Congress to focus its 
efforts on developing the end state.
    I want to turn my attention to the FHA. We wholeheartedly 
share your goal of strengthening FHA's fiscal solvency and 
protecting taxpayers from future losses, a process I began when 
I took over as FHA Commissioner at the height of the housing 
crisis. However, MBA has strong concerns with the overall scope 
of the FHA changes contemplated in the discussion draft. Each 
of the policy choices in this bill carries with it the 
potential for reducing affordable credit options for many 
otherwise qualified borrowers in the single family and multi-
family markets. While we share your goal of reducing FHA's 
footprint to a more traditional role, we urge the committee to 
re-examine changes to the single family mortgage insurance 
coverage, repurchase requirements, and loan limit floor as well 
as multi-family income limits. The final bill needs to strike a 
balance between strengthening FHA's fiscal solvency and 
maintaining flexibility to support homeownership opportunities 
for both first-time and working-class borrowers as well as a 
vibrant rental housing market.
    Finally, MBA welcomes many of the improvements to Dodd-
Frank contained in the discussion drafts. The proposal contains 
the provisions of H.R. 1077, the Consumer Mortgage Choice Act, 
which would amend the way points and fees are calculated for 
purposes of determining the eligibility for the Qualified 
Mortgage. This will make these safer loan products more 
affordable and more widely available to qualified borrowers.
    The bill also contains a prohibition on Fannie Mae, Freddie 
Mac, and FHA from purchasing or insuring mortgages in 
jurisdictions that permit using the power of eminent domain to 
seize underwater mortgages out of private label mortgage pools. 
MBA has strongly discouraged local jurisdictions from moving 
forward with this unprecedented and likely unconstitutional 
scheme and supports legislation to ensure U.S. taxpayers do not 
ultimately foot the bill for these unwise programs.
    Mr. Chairman, I want to again thank you for beginning this 
process of reforming our Nation's housing finance system. As I 
have outlined, we believe there are some key changes that are 
necessary prior to this legislation being considered by the 
full House. But we stand ready to work with you, the ranking 
member, and all other members of this committee to improve the 
bill as it moves through the legislative process. Thank you.
    [The prepared statement of Mr. Stevens can be found on page 
212 of the appendix.]
    Chairman Hensarling. Mr. Deutsch, you are now recognized 
for your testimony.

  STATEMENT OF TOM DEUTSCH, EXECUTIVE DIRECTOR, THE AMERICAN 
                   SECURITIZATION FORUM (ASF)

    Mr. Deutsch. Thank you, Mr. Chairman. I very much 
appreciate the opportunity to testify here today on behalf of 
the hundreds of ASF member institutions. We issue, structure, 
trade, service, and invest in trillions of dollars of 
outstanding and newly originated mortgage, residential 
mortgage-backed securities, and asset-backed securities in the 
United States, including those entirely backed by private 
capital as well as those guaranteed or insured by public 
entities such as Fannie Mae, Freddie Mac, and Ginnie Mae.
    ASF strongly supports the introduction of the PATH Act as 
its proposal should continue to fuel what we hope to be a 
tangible, constructive dialogue to resolve the future of U.S. 
housing finance reform. For the 5 years since the onset of the 
GSE's conservatorship, the mortgage reform dialogue has been, 
in our opinion, far too theoretical. While ASF and others will 
propose changes to this discussion draft, we believe this bill, 
along with the recent introduction of the GSE and FHA reform 
bills in the U.S. Senate, serve as concrete steps towards 
comprehensively restructuring the currently misguided U.S. 
housing finance system that relies on the U.S. Government to 
backstop 90 percent of residential mortgages made in America. 
We agree this must be done responsibly so that greater 
dislocation does not occur within our Nation's housing market, 
the materially reduced access to credit, and/or impairment of 
the value of outstanding agency and private label RMBS. We 
believe there are many aspects of the PATH Act that would help 
achieve this goal.
    In our submitted written testimony, we provide substantial 
detail on seven key views we have on different parts of this 
proposed bill. One, we are strongly supportive of ratcheting 
down in the near term the Federal Government's involvement in 
the U.S. housing finance system, the gradual reductions in GSE 
loan limits, appropriate increases in guarantee fees, and the 
GSEs issuing material amounts of their securities that expose 
investors to credit risk of the underlying mortgages. I point 
you to a recent White Paper we also issued in April of this 
year for substantially more detail and steps the Congress, FHA, 
and all regulators can and should take to increase private 
capital in the near term regardless of how long or in what form 
housing finance reform takes.
    Two, as many of these near-term steps take effect, the 
credit risk investor base is rebuilt, heavier competition 
returns to the RMBS issuance market in the private sector, and 
crisis era regulations are finalized. Congress and FHFA should 
push additional volume loans outside of the government 
guarantees through its various levers in the form of either GSE 
risk sharing deals and/or privately issued transactions.
    Let me take a point here to note that we believe that the 
30-year fixed-rate note will by no means disappear at any 
future state with or without a government guarantee. In our 
opinion, there is no real debate about the 30-year fixed-rate 
mortgage disappearing or not existing. Currently, in the 
existing market, RMBS deals entirely backed by private capital, 
ones being just issued last month included 30-year fixed-rate 
collateral. That is not something that is necessary to have a 
government guarantee to backstop. As I think Mr. Garrett had 
indicated earlier, the real debate is about filling the entire 
pie of the outstanding agency asset-backed mortgage-backed 
securities market out there, is effectively bringing credit 
interest rate risk investors in to fill this credit risk 
volume. And that is where a number of the aspects of the PATH 
bill will look to fill.
    Let me go to my third point, which is that ASF is strongly 
supportive of the FHFA securitization platform and/or any 
subsequent utility that all market stakeholders have an 
appropriate say in creating those standards of development that 
will increase the standardization. The point of that 
standardization is to create more fungible and liquid 
securities that will in part attempt to achieve and replicate 
some of the agency market that exists right now. By creating 
that fungibility and that standardization, those securities--
the hope is that they will trade in a liquid and deep market. 
But you can't have a liquid and deep market of private label 
capital when the government guarantees approximately 90 percent 
of existing mortgages.
    Fourth, ASF has supported, and continues to support, a 
strong legislative covered bond market in the United States 
that will help create even more demand and more product for 
these rates investors that are not necessarily looking to 
create credit risk.
    Five, ASF is strongly supportive of targeted corrections to 
the Dodd-Frank Act, Basel III, and other regulations to remove 
impediments and better facilitate the origination and capital 
market sales of mortgages and other securities backed by them. 
As an example, eliminating the premium cash capture reserve 
account that many people have noted, if people are concerned 
that 90 basis points is too much by eliminating the government 
guarantee, losing 100 to 400 basis points by just one of the 
aspects of Dodd-Frank seems to be a pretty obvious answer to 
us.
    Sixth, ASF is extremely supportive of the PATH Act's 
prohibition of the GSEs and FHA from guaranteeing any mortgage 
out of a jurisdiction that seized mortgages through eminent 
domain.
    And finally, ASF offers some key amendments that would fix 
some of the Dodd-Frank Act related to swap and margin 
requirements that got some of the same impacts as the premium 
cash capture reserve account.
    Thank you very much, Mr. Chairman. I look forward to 
answering questions.
    [The prepared statement of Mr. Deutsch can be found on page 
126 of the appendix.]
    Chairman Hensarling. And finally, Mr. Calhoun, you are now 
recognized for your testimony.

  STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, THE CENTER FOR 
                      RESPONSIBLE LENDING

    Mr. Calhoun. I may be popular today as the last witness of 
the day.
    Thank you, Chairman Hensarling, and members of the 
committee who have stayed for this important hearing. And thank 
you for your work to address the future of the critically 
important housing finance system.
    The PATH bill raises numerous ideas that add to this 
important discussion. We are concerned though that as currently 
drafted, it would lead to unnecessarily more expensive and 
riskier home loans, reduction of borrowing options for the 
popular and safe 30-year fixed-rate mortgage, more 
concentration in what is an already too concentrated banking 
and mortgage industry with harm to community banks, and 
disruption of the housing industry and harm to the overall 
economy.
    Let me first address comments to the quality of U.S. 
mortgages leading up to the housing crisis because I think it 
is instructive to look back at those, and it addresses several 
questions today. Let me start with recognizing the work of the 
chairman emeritus to try to address that quality issue back in 
2006.
    Loans in this country were unaffordable without constant 
refinancing that depended upon unsustainable home price growth 
and the musical chairs game came to an end when house prices 
slowed down and then declined. It is important that the quality 
of our mortgages was very low compared to other countries where 
there was a housing bubble and prices reduced but people were 
not in mortgages that they couldn't afford just the basic 
payments. It is also notable that quality was lowest and 
defaults and losses were by far the highest on private label 
security mortgages. They were more than double the defaults, 
for example, in the severity that you saw for the GSE 
portfolio.
    Ultimately, our housing finance system depends on the 
quality, transparency, and predictability of our mortgages. And 
those mortgages were driven by the fee incentives up and down 
the chain. Those mortgages, for example--people ended up in no-
doc loans. Well, those loans carried higher interest rates than 
a full-documentation loan. So if a borrower walked in, the 
broker or the lender could earn twice as much money putting the 
person in a no-doc loan as giving the same borrower a fully 
documented loan. As we have quoted in previous testimony, one 
CEO of a mortgage company said, ``Wall Street pays me almost 
double for a no-doc loan versus a full-doc loan. Which ones do 
you think I am going to write?'' That is market incentive.
    Importantly, the Dodd-Frank Act has provided incentives and 
standards, commonsense standards that will dramatically improve 
mortgage quality and, indeed, overall in response to the 
crisis, mortgage quality right now is at its highest and, 
indeed, I think there is consensus if you ask that credit is 
too tight at this time.
    Going forward, the Qualified Mortgage ability-to-repay will 
prevent the return of the exotic unsustainable mortgages that 
went from being small niche products to dominating the whole 
market leading up to the crisis.
    I will address quickly a couple of questions that came up. 
First of all, there have been cites to the CoreLogic data about 
what is the size of this QM market. Let me clarify again for 
the record. It has been cited that 50 percent of current loans 
would fit the QM market, that is, if you do not take into 
account the compensating factors that the rule explicitly 
allows. When you do that, depending upon whether you look at 
2010 or 2011, 90 to 95 percent of mortgages fit the QM box with 
no adjustment. There has been talk about the fee level. The fee 
level for QM loans is 3 points. The average fee on a GSE loan 
today is less than one point. That was an intentional part 
because the idea is to align that lenders make money not from 
the fees, prepayment penalties, and things like that made at 
closing, but rather from the performance of the loan. It 
realigns a sustainable loan with a lender's model.
    Let me address also very quickly just with community banks. 
We must preserve the TBA market and the cash window. As the 
bill is written out, it is very difficult for community banks 
to compete against the larger banks and we are going to see 
further concentration in the market.
    Thank you for the opportunity to testify. I look forward to 
your questions.
    [The prepared statement of Mr. Calhoun can be found on page 
119 of the appendix.]
    Chairman Hensarling. Thank you. And I thank all of the 
panelists for their testimony.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. I was kind of 
interested that the last panel--I had a lot of comments with 
regards to some of the things that they were saying. But it 
would seem to me that back in the 1980s and 1990s, we were able 
to have a marketplace without a tremendous amount of 
government-backed securities, yet we had everybody getting into 
houses that they could afford. And in the interim here, we have 
had a large run-up of loans which are guaranteed by the 
government, and yet we haven't increased homeownership. I think 
1 percent was one of the statistics that I saw. Which is kind 
of interesting to see that all we have done is transfer risk 
basically from the financial institution individuals to the 
Federal Government and the taxpayers. So, it is just a comment.
    Mr. Deutsch, you deal with a lot of the securitization 
stuff. You mentioned Basel III. How is Basel III going to 
affect the securitization market here?
    Mr. Deutsch. There are multiple parts I think of Basel III 
that are ultimately going to reduce demand for mortgage-backed 
securities. I would first start with what is called the 
liquidity coverage ratio. It is a new aspect of Basel III to 
make sure the banks have sufficient liquid assets to withstand 
a credit crisis, in effect. The liquidity coverage ratio is an 
example that allows RMBS--private label RMBS to be eligible as 
liquid assets. But it says that for nonrecourse States--for 
nonrecourse loans, they can't be included in any RMBS 
securities. So for a committee like this where the chairman is 
from Texas, and the ranking member is from California, I would 
think this would be anathema to this committee because 
California and Texas both are nonrecourse States, which means 
no loans from California or Texas may be included in any RMBS 
security if that security is ultimately then considered to be a 
``liquid asset.''
    Mr. Luetkemeyer. And therefore, they can't be included in 
the capital ratio.
    Mr. Deutsch. Exactly. The United States is one of the few, 
if any, of the countries around the world that has nonrecourse 
statutes. Australia, Canada, England, they are all fully 
recourse. So all of their RMBS will be considered high quality 
liquid asset as private securities.
    Mr. Luetkemeyer. Okay. So this is going to hurt the ability 
of people to get loans, is basically what it boils down to, 
right?
    Mr. Deutsch. Yes. It only applies to private capital 
securities.
    Mr. Luetkemeyer. Okay. Is this going to increase the cost 
then as well?
    Mr. Deutsch. It ultimately will reduce demand by banks to 
purchase these private securities which of course means that 
they are then going to have to charge higher rates to get those 
securities.
    Mr. Luetkemeyer. One of the problems that we are having 
here and we are discussing is kind of getting around the edges 
of it as with the qualified mortgages, qualified real estate 
mortgages here. We have talked about it a couple of times. But 
it really is concerning to me because it looks to me like we 
are having two different markets that are going to be defined 
here by this rule. We are going to have one market with loans 
that conform to the rule and one market with loans that don't 
conform to the rule. How are you going to mesh those two into a 
securitized situation?
    Mr. Deutsch. I think the simple answer is that 
securitizations will include only QM loans generally. You will 
have securitizations with QM. You may eventually see some 
securitizations with non-QM loans but I think those are farther 
down the road compared to--
    Mr. Luetkemeyer. Okay. So, Mr. Stevens, whenever somebody 
comes to one of your folks and wants a loan, the choices are 
going to be limited, are they not?
    Mr. Stevens. Absolutely. Yes. The QM rule does a lot of 
good things. But without question, it is going to limit the 
capital available for anything outside the QM provision. And 
there will be some good borrowers on the margin who are caught 
outside. To Tom's point that common securitizations will be QM 
only, they will be specifieds or story bonds that get done as 
non-QM pools. And we are already hearing about companies being 
started up to enter that space.
    Mr. Luetkemeyer. So there will be somebody that fills the 
void then?
    Mr. Stevens. They will fill the void but in the early phase 
it will be for high-wealth clients. And it will provide 
programs like interest-onlys which are not allowed in the QM 
provisions. But they are just such wealthy borrowers that the 
risk is very low. And those will sell as sort of separate story 
execution--
    Mr. Luetkemeyer. Would you anticipate the rate being higher 
or lower on those?
    Mr. Stevens. I think the rate differential for the high net 
worth borrower could be equal or perhaps in some cases even 
more advantageous. For anybody who is at all on the margin from 
a risk standpoint, it will be much more expensive. So you are 
going to have two different markets. The low-downpayment market 
is going to be much more expensive loans. The high net worth 
borrower will get you products.
    Mr. Luetkemeyer. Very good. I appreciate your answer. I 
don't want to cut you off but I only have about 20 seconds left 
here. And I have one more question I want to ask because I 
don't think anybody has asked it all day, which is kind of 
amazing. Does this bill prohibit innovation? Mr. Calhoun, you 
talked a while ago about all these things are going to go out 
the window. Products are going to be restricted. And yet I 
don't see anything in here that prohibits the private sector 
from coming up with new financial instruments. Do you see 
anything in there that prohibits them from doing that?
    Mr. Calhoun. I think the question is, does it allow for 
innovation that will be widely available? And that is our 
concern.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the ranking member from California for 
5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I would like to direct a question to Mr. Bill Loving of the 
ICBA. Earlier this year, the ICBA released its policy 
resolutions for 2013. In this document, the ICBA stated that to 
ensure the continued flow of credit for housing, some type of 
government tie to the secondary market is necessary. Your 
testimony today notes that government catastrophic loss 
protection would provide credit assurances to investors and 
sustain robust liquidity even during periods of market stress. 
Your testimony does not provide a view of what happens to 
community banks in the absence of such protection, as the 
Republican discussion draft contemplates. Why do you think a 
government tie to the secondary market is necessary? Does the 
Republican proposal have such a tie? And what are the 
consequences of not having this government role?
    Mr. Loving. We believe that there needs to be a 
catastrophic backstop behind the private capital that will 
provide for support in the market during times of stress. We 
haven't changed our position from the earlier policy statement. 
Looking at the bill as it is in draft form today, it does 
provide for liquidity through the Federal Home Loan Bank 
System. And so without the government or the Fannie or Freddie 
model, then we are looking to the Federal Home Loan Bank System 
to support that borrowing role.
    Ms. Waters. Does the Republican proposal have such a tie?
    Mr. Loving. Which tie? To the government?
    Ms. Waters. In your testimony, you did not really give us a 
view of what happens to community banks in the absence of such 
protection, as the Republican discussion draft contemplates. 
Why do you think a government tie to the secondary market is 
necessary? And in looking at this proposal, the question is, 
does the Republican proposal have such a high a tie?
    Mr. Loving. The proposal we do not see has a tie but we 
believe that there does need to be backstop for the 
catastrophic backstop in the plan.
    Ms. Waters. What are the consequences of not having this 
government role?
    Mr. Loving. At this point, there is uncertainty in the 
marketplace about how it will function without that 
catastrophic backstop. Recent history has shown that there has 
been a catastrophic backstop. We are uncertain how it will 
perform without that element.
    Ms. Waters. The ICBA took a strong position criticizing the 
bipartisan policy commission's proposal to reform the market. 
The main argument against the structure was that it would favor 
only a few large institutions because it would require 
community banks to sell their loans to an aggregator in order 
to access the secondary market. Another argument against it was 
that the system would add significant costs, as there were 
several private credit enhancers ahead of the government 
guarantee.
    Given that the Republican discussion draft also appears to 
favor the largest institutions in spite of a few lines in the 
bill about fair access and envisions a completely private 
system, does the ICBA have an equally strong position against 
the Republican plan?
    Mr. Loving. We have concerns with any model that would 
provide for one or a few number of mortgage originators and 
would not allow private access by the community banking 
industry.
    Ms. Waters. Let me turn to Mr. Stevens.
    Mr. Stevens, in your testimony, you explain why the MBA 
opposes Section 237 of the discussion draft which sets income 
and occupancy limitations on FHA multi-family properties and 
requires annual recertifications. It seems to me that the 
Republican discussion draft is trying to make the FHA multi-
family program more like Section 8 and bog it down in the types 
of onerous rules that I have been trying to provide relief from 
as I work on Section 8 voucher programs.
    In your opinion, will this new requirement restrict multi-
family lending? What impact will this discussion draft have on 
the overall production and availability of multi-family 
housing, especially during an economic downturn?
    Mr. Stevens. I appreciate the question. The challenges with 
the multi-family role of FHA--and I respect the concern about 
trying to ensure that as much multi-family lending is done by 
private capital. When I came in as FHA Commissioner, the multi-
family market had all but evaporated. There were 5-year notes 
that were coming due and there was no way for these multi-
family properties to refinance themselves. FHA became sole 
source provider during that period of time and the demand 
became very extensive. And many of you remember that. You 
probably got calls from multi-family owners and originators who 
couldn't get their loans through the FHA because the backlog 
became so strong.
    So having that liquidity there, particularly during times 
when private capital isn't there is extremely important for the 
rental community. As to income limits, I think that is just an 
awkward way to deal with people who are paying their rent and 
market rate finance properties that are profitable to the 
government but all of a sudden have a threshold that says, if 
your income goes above it, you are going to have to relocate 
and move out of this building to another location, creating a 
vacancy for the owner which creates higher risk on the 
transaction in the first place, causing stress again to the 
taxpayer simply as that result. I think there is another way to 
discuss these multi-family limitations that are a concern of 
FHA's extensive role. But it is a profitable program. And I 
think that income barrier, where they would have to ultimately 
move out of the building just doesn't really make sense for a 
market rate property--
    Mr. Neugebauer [presiding]. The gentlewoman's time has 
expired. Thank you.
    The gentleman from Pennsylvania, Mr. Rothfus, is recognized 
for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman. I would like to 
venture into the regulatory burdens imposed by Dodd-Frank and 
how the PATH Act might alleviate some of the barriers to 
capital. We know from previous testimony of Dr. Holtz-Eakin, 
who was actually on the prior panel, but he testified earlier 
this year before the Judiciary Committee about how Dodd-Frank 
had already caused significant compliance costs and paperwork 
burdens. I would like to ask Mr. Loving, Ms. Sheppard, and Mr. 
Stevens whether you would agree that Dodd-Frank has put in 
place significant burdens that if alleviated could improve our 
housing finance system and attract more private capital; 
specifically, in particular, are the credit unions, community 
banks, and mortgage bankers ready to comply with all of these 
impending Dodd-Frank rules?
    Ms. Sheppard. I will take that one first.
    Mr. Rothfus. Sure.
    Ms. Sheppard. No. The answer is no. I just recently came 
back from a nationwide participatory program with a national 
trade association called ACUMA. We spent three different 
sessions in three major cities. And the concern in the credit 
union world out there is, no, they are not compliant with all 
that is expected under the CFPB in January. Everyone is working 
really hard and diligently to work towards that. But there are 
major concerns across the credit union industry nationwide 
about being in compliance in January.
    I do see that some of the protections that are in the PATH 
Act would be beneficial to credit unions regarding the QM 
exemptions. That is a very attractive consideration.
    Mr. Rothfus. Mr. Stevens?
    Mr. Stevens. I would just like to say at the outset that I 
think the CFPB got a lot right in the Qualified Mortgage rule 
and implementing some of the rules. There are still provisions 
that have yet to be implemented. QRM is a perfect example of 
that, that if it is implemented as the proposed rule is 
structured, it would be extremely prohibitive I think not just 
to lending overall but particularly to private capital re-
engaging in the marketplace and would be counterproductive to 
that end. So we are very concerned about ensuring that at a 
minimum, QRM equals QM in the final rule and that would be very 
helpful as a provision in the PATH Act.
    Likewise, the points and fees limitations that came out in 
the final rule get resolved by incorporating the language from 
H.R. 1077, which we think would actually be beneficial 
ultimately to providing access to the market for more 
institutions to compete for American home purchasers' business 
and ultimately make rates even more competitive for homebuyers.
    So those two provisions are examples of how you can 
continue to ensure that what is left in Dodd-Frank creates 
easier access to housing finance.
    Mr. Rothfus. Mr. Loving?
    Mr. Loving. Yes. We share the concern as well with the 
regulatory burden. In particular, we appreciate the parts of 
Title IV that will eliminate QM and provide the opportunity to 
provide capital to many borrowers across America. The rule 
designation is a help but we are still concerned that many will 
not qualify and will be able to meet the requirements of QM.
    Mr. Rothfus. Have any of your respective organizations 
calculated compliance costs under Dodd-Frank for your 
organizations?
    Mr. Stevens. The MBA does a peer group study in which we 
are looking at the cost of compliance in all areas. And it has 
definitely added a significant expense to the process which of 
course we all know gets passed on to the consumer. I would 
stress that there is balance in all things. If the industry was 
processing loans without enough scrutiny, and we were having 
products that were not sustainable in a previous period, that 
needed to be corrected. The question is, has the pendulum gone 
so far as now these costs are overly burdensome, creating less 
competition and transferring too much cost to the consumer? And 
I think ultimately that is what the policy debate needs to work 
on is making sure loans are sustainable, that the process is 
sound, that it is well-managed, but it doesn't add so much cost 
and burden to the marketplace that it creates a new level of 
lack of access for homeownership.
    Mr. Rothfus. Ms. Sheppard, have you calculated the 
compliance costs for your organization?
    Ms. Sheppard. We do not have a specific percentage. But I 
can tell you, we have had to bring on full-time additional 
staff and management to handle our compliance costs. So I am 
sorry I don't have a specific number for you. If you would 
like, I can take that down and answer your question in writing.
    Mr. Rothfus. Yes. Thank you. I would appreciate that. I 
yield back.

    [The following response was received for the record:
        ``We estimate that Southwest Airlines Federal Credit 
        Union directly spends over $259,000 a year on Federal 
        regulatory compliance.'']

    Mr. Neugebauer. I thank the gentleman. Now, the gentlewoman 
from New York, Mrs. Maloney, is recognized for 5 minutes.
    Mrs. Maloney. Thank you, Mr. Chairman. I would like to ask 
Mr. Howard, in your testimony you state that the Home Builders 
oppose the FHA title of the PATH Act. And you urge the 
committee to ``make the changes necessary to preserve FHA's 
vital liquidity mission.''
    Could you elaborate? What changes would you make to Title 
II to preserve FHA's historical role in the mortgage market?
    Mr. Howard. Well, ma'am, I guess the simplest way to answer 
is to say that we believe that the measures that were contained 
in the FHA Solvency Act that the House passed last year were 
much more effective in getting FHA solvent and maintaining its 
ability to respond to the needs in the marketplace. 
Specifically, I think there were provisions in that Act that 
would have called for increased premiums and also would have 
called for a stronger lender indemnification. Those two things. 
And FHA is implementing some of those changes on their own. In 
fact, it is already adding money into the fund already without 
the legislation. But clearly, a regulatory reform bill more 
like the Solvency Act we think would be more effective than the 
provisions in the PATH Act.
    Mrs. Maloney. So basically, you would scrap Title II 
entirely and replace it with the bipartisan bills that we 
passed really on suspension twice in two prior Congresses. 
Would that be what you would say, to scrap it?
    Mr. Howard. Yes, ma'am.
    Mrs. Maloney. What is your position on it, Mr. Calhoun? 
Would you scrap it and go back to what we already passed twice 
in two Congresses?
    Mr. Calhoun. I think everybody agrees that the FHA needs 
some improvements. But I would second the comments there. I 
think it is noteworthy that the largest portion of their losses 
was for loans that they had actually asked Congress to allow 
them to stop taking and Congress had, up until 2009, required 
them to keep doing, a so-called seller-assisted downpayment 
program. Of the $16 billion deficit, about $13 billion of that 
is from that one program which now they did discontinue and 
that is why their book is among the more profitable they have 
ever had at this point going forward.
    So yes, I would support that same substitution.
    Mrs. Maloney. What about you, Mr. Deutsch?
    Mr. Deutsch. I think the existing Act, as you push it out, 
many of the features that are in this Act can be very helpful 
to the market and would push forward with what is being 
proposed.
    Mrs. Maloney. And what about you, Mr. Stevens?
    Mr. Stevens. I think I am consistent with the others. I do 
believe if you were to reintroduce the FHA Reform Act that 
there are some minor nuance provision changes that could make 
it more implementable for the market. But yes, we are in 
agreement.
    Mrs. Maloney. Ms. Sheppard?
    Ms. Sheppard. I can't speak to the FHA reform. Our credit 
union does not do FHA or VA or government loans.
    Mrs. Maloney. Okay. And Mr. Loving?
    Mr. Loving. Yes. We believe that the FHA model does need 
reform. As it is proposed, there are some good elements, but we 
do believe there needs to be some further negotiation on the 
percentage of guarantee, the 50 percent guarantee seems to be a 
low level and needs to be at a much higher level.
    Mrs. Maloney. Okay. So you are all in agreement. Is it a 
fair statement to say to go back to the bill that we passed 
twice in the House? Is that a fair statement?
    Mr. Stevens. If I could add, I think that having worked on 
that--having been FHA Commissioner when the first bill was 
introduced, and this was the body that actually approved that 
bill to begin with and gave us some initial ability to even 
raise premiums, which made it through the Senate without the 
rest of the bill, there are some variables that we would love 
to follow up with you on as to how that bill could be made even 
stronger.
    Mrs. Maloney. Okay. Mr. Stevens, also in your testimony, 
you noted that the government role to provide quality 
regulation of grantors and systems and to provide a clearly 
defined but limited catastrophic credit backstop is an 
important component of this ideal system. And you went on to 
say that it would have a big impact on qualified lower-income 
households and their access to affordable mortgage credit.
    Would you elaborate on how this smaller mortgage market 
with tighter credit would affect the economy and jobs in our 
country?
    Mr. Stevens. Look, it is a well-known fact that housing has 
been actually one of the positive stories of however we view 
the current economic recovery. Mark Zandi, who was on the 
previous panel, has stated publicly the role that FHA had 
played in the housing recovery. The concern I have as we think 
about the complete lack of a backstop is that private capital 
is clearly opportunistic. It comes into markets when markets 
are strong, and when you are in a recovery market, there is a 
lot of private capital, spreads between private mortgage-backed 
securities and guaranteed mortgage-backed securities, narrows. 
And you can talk about how jumbo fixed-rates are priced very 
closely to conventional rates.
    Mr. Neugebauer. I am not picking on you, but we were trying 
to keep our time here.
    Mr. Stevens. Okay.
    Mr. Neugebauer. I will now recognize myself for 5 minutes. 
Again, I thank the panel for your endurance here.
    Mr. Calhoun, you are the president of the Center for 
Responsible Lending. So you believe in using market discipline 
as one of the factors of making sure that everybody kind of has 
a stake in the lending. That is when lending works best, right?
    Mr. Calhoun. Yes. We support--
    Mr. Neugebauer. So the borrowers have responsibilities and 
the lenders have responsibilities, is that correct?
    Mr. Calhoun. Certainly.
    Mr. Neugebauer. Yes. So what about then if a lender can 
transfer all of the risk, what part of market discipline 
interacts with the lender if he is going to transfer 100 
percent of that risk? What would encourage that lender to have 
market discipline?
    Mr. Calhoun. One of the concerns that we have--
    Mr. Neugebauer. No. I am not asking your opinion about the 
bill. I am just saying, is there any market discipline when 100 
percent of the risk is transferred?
    Mr. Calhoun. If the lender has some legal liability as they 
do under Dodd-Frank for writing--
    Mr. Neugebauer. I am not asking about Dodd-Frank. This is 
just a simple question: Is there market discipline when 
somebody can transfer 100 percent of the risk?
    Mr. Calhoun. There may be legal risk. Separate from that--
    Mr. Neugebauer. Obviously, you are not answering the 
question. So the other question here is that I know there is 
some heartburn about 50 percent. Does anybody know what the 
guarantee level is on a VA loan? I think Mr. Stevens knows the 
answer to that question. What is it?
    Mr. Stevens. Yes. It is 90 percent.
    Mr. Neugebauer. I don't believe that is correct. It is 25 
percent.
    Mr. Howard. I thought it was 50.
    Mr. Neugebauer. Yes. So it is not unprecedented. And we had 
a gentleman from the mortgage insurance industry here a while 
back on the last panel. Now there has been a lot of discussion 
about what to do with FHA. And Mr. Howard, I know that you 
mentioned in your testimony that you supported the past 
proposal restructuring FHA. But yet I just heard you say that 
you want to go back to the previous--
    But in your testimony you said you supported restructuring 
FHA and I believe--and allowing it to be a wholly owned 
government corporation. Is that true?
    Mr. Howard. We support FHA--we can support, depending on 
the concept, Mr. Neugebauer, of taking FHA outside of HUD, yes. 
But we would still like to see the provisions of the Solvency 
Act, the FHA Solvency Act be the guiding provisions for its 
regulations.
    Mr. Neugebauer. What is the advantage of having an 
independent FHA, in your estimation?
    Mr. Howard. I believe it could be nimbler.
    Mr. Neugebauer. One of the things that was brought up about 
this bill that was passed on suspension--I would remind 
everybody who was before we knew that they were $16.3 billion 
underwater. And so it became obvious, the disclosure came after 
we passed that legislation, that FHA was in a much deeper hole 
than I think previously folks had represented to us.
    The question is then in this countercyclical role that 
everybody seems to be extremely concerned about, and so the 
concern then is about the borrowers being able to continue to 
access credit, but the question is, if we are going to have a 
balanced housing finance system, we have to make sure that 
everybody's interest is represented in this process.
    So tell me, in this countercyclical role, should we just 
regard the taxpayers and just say, you know what, we are going 
to keep plowing. We may have to have some taxpayer assistance 
here but we are going to keep pushing the ball down the road. 
Is that the countercyclical role that you anticipate? Jerry?
    Mr. Howard. No, sir, I think what we are forgetting in the 
detailed level we are getting in this conversation is it is all 
about the underwriting, Mr. Neugebauer. And in the past when 
FHA got into trouble, when the GSEs got into trouble, it was 
during a time when traditional underwriting standards were just 
being ignored. I believe that the FHA would not be in the 
financial condition it is in now, and I am speaking only of the 
single family fund, had traditional underwriting standards been 
in place throughout the earlier part of this century.
    Mr. Neugebauer. I appreciate that. And I think you are 
exactly right. I think one of the things I want to make sure as 
we address this issue, and I appreciate everybody's feedback, 
is that there is a time to quit lending. If markets are--and 
that is the reason we need that market discipline in there. If 
there are too many apartments units or there are too many 
houses, it doesn't do any good to make a little family a 97 
percent loan in a neighborhood where the prices of those houses 
could be dropping because there is an overbuilt situation. So 
the countercyclical role isn't--necessarily shouldn't be to 
counteract market swings.
    Now, what I think you are trying to say is that market 
should come in, in the event that there is a plumbing stoppage 
in the finance market. Is that true?
    Mr. Howard. Yes, sir, that is certainly part of it.
    Mr. Neugebauer. I see my time has expired. In order to be 
fair here, we will now go to Mr. Capuano from Massachusetts, 
the ranking member of the Housing and Insurance Subcommittee.
    Mr. Capuano. Thank you, Mr. Chairman. I just want you to 
know I don't understand you any more than I understood the full 
committee chairman.
    Mr. Neugebauer. You and I have to have an interpreter when 
we talk to each other.
    Mr. Capuano. I want to thank the panel for being so patient 
and for sticking around on this important issue. I kind of wish 
you had been the first panel because the first panel I am sure 
if you had watched was very thoughtful, very theoretical. You 
guys are the hands-on people, and honestly it is about hands 
on. The theory is wonderful and all that, but I really need to 
know what it does, how it really impacts the building and 
buying and selling of homes.
    I guess, first of all, some of this stuff that has been 
talked about, Dodd-Frank, have any of your organizations ever 
testified in front of Congress to say there was too little 
regulation? I don't think so. If you have, you can raise your 
hand.
    There you go, there is one. And I don't expect that you 
did. I understand, I think it is a fair question where the 
pendulum should be. I think that is a very fair question. We 
are always asking this. But to ask you if there is too much 
regulation is almost setting you up a little too easily. And I 
love you, but not that much.
    So I want to move on to the basis of why we are really 
here, which is to try to figure out what to do with the 
mortgage financing industry.
    Do any of you believe or any of your institutions believe 
that the United States really can get to a fully privatized 
home mortgage system as proposed in the PATH bill? Mr. Loving, 
do you believe we can get to a fully privatized system and 
still provide the kind of opportunities that we have provided 
to so many Americans?
    Mr. Loving. We support provisions of the PATH Act but 
believe there has to be a catastrophic backdrop in the model 
for this period.
    Mr. Capuano. Fair enough. Ms. Sheppard, do you believe that 
we can get to a fully privatized system?
    Ms. Sheppard. No, sir, I don't believe we can get to a 
fully privatized system.
    Mr. Capuano. Thank you. We are having a good time, but 
thank you. Simple question, simple answer. Mr. Howard, do you 
believe we can get to a fully privatized system?
    Mr. Howard. No, sir.
    Mr. Capuano. Mr. Stevens, do you?
    Mr. Stevens. We need more private capital, but not fully 
privatized.
    Mr. Capuano. I agree with that, but we can't get to a fully 
privatized. Mr. Deutsch, do you believe we can get to a fully 
subsidized system?
    Mr. Deutsch. No. We are always going to need FHA to serve a 
role.
    Mr. Capuano. Mr. Calhoun, do you?
    Mr. Calhoun. No, we need a catastrophic backstop. And the 
numbers now show--
    Mr. Capuano. Fair enough. Because I agree. I am no 
different than anybody else. I want more private capital in as 
well, and to me the question is, what is the balance, and again 
simply some regulation. What is the balance? What is too much? 
What is too little?
    As you know, Mr. Deutsch, actually you said there was far 
too much theoretical conversation so far. I couldn't agree with 
you more, even today. But here is my dilemma. We get this bill 
last week, a nice, long, thoughtful, comprehensive bill that 
includes everything but the kitchen sink, more than I thought 
that it would include. That is great. A lot of hard work. I 
think the staff has been properly thanked for that. But we 
don't have time to really comprehensively fully integrate this 
without talking to people like you. I don't get a chance to 
talk about what should and shouldn't be. We are kind of beyond 
that.
    You know how this place works. What is likely to happen is 
that I will soon, within the next week or two, be asked to vote 
on this bill yes or no pretty much in the form that it is in 
now. We might be able to amend a few things around the edges. 
But you all know that to be a fact.
    So the question I have for you, if I gave you my voting, 
come on up, sit up here, next week we go to a markup on this 
bill, it is an up or down vote, not let's talk about I like 
this, I like that. There has never been a bill I have ever 
voted for or against that I didn't like or hate something in 
it. I was a big supporter of the health care bill, but there 
are things in there that I don't like. I was a big supporter of 
Dodd-Frank, but there are things in there I don't like. Though 
with due respect, I am not interested in the things you like or 
things you don't like, I get to vote yes or no.
    Mr. Loving, would your group suggest that I vote yes or no 
on the bill as is?
    Mr. Loving. We believe it is something we can work with, 
but we believe it is an imperfect bill and there still needs to 
be discussion.
    Mr. Capuano. I understand that. I appreciate that. I don't 
mind, but I am going to try again. I think the same thing you 
just said. It is a great thing to have something to begin with. 
I get to vote yes or no. Would you vote yes or no?
    Mr. Loving. Again, as I said earlier, we believe it is 
something that we can support and get behind with additional 
work.
    Mr. Capuano. So, that is a no.
    Mr. Loving. We can support it with additional work.
    Mr. Capuano. I am going to jump to Mr. Calhoun. Would you 
vote yes or no?
    Mr. Calhoun. No.
    Mr. Capuano. Mr. Deutsch, would you vote yes or no?
    Mr. Deutsch. I would vote yes, with changes.
    Mr. Capuano. No, that is not what I said. I would vote yes 
with changes too. My definition of how many changes is a 
different thing.
    Mr. Deutsch. I think the number one rule of sitting here is 
answering a question you would like to have asked.
    Mr. Capuano. I know. And my number one rule is to get you 
to take a position.
    Mr. Stevens, would you vote yes or no?
    Mr. Stevens. I am going to align with Mr. Loving, that I 
that I think this is--
    Mr. Capuano. You can't blame me for trying. My time is up. 
I appreciate these witnesses.
    Mr. Stevens. We have been very clear in our position 
about--
    Mr. Deutsch. Thank you for using the gavel, Mr. Chairman.
    Chairman Hensarling. Saved by the gavel. The time of the 
gentleman has expired. The Chair will recognize himself for 5 
minutes. I did have to step out for a few minutes, so forgive 
me if I am covering some old ground here that might have been 
covered when I was out of the room.
    Sometimes, I think at certain points, we need to step back 
from the trees and look at the forest here. And we have been 
here for many, many hours, you quite patiently, and I want to 
cover a couple of the concerns that I still hear, particularly 
from Members on this side of the aisle.
    One of the concerns is, again, without some form of 
government guarantee, private capital will not come in and fill 
the void and we will not have a 30-year fixed mortgage at 
something approaching affordability, however that is defined.
    So, Mr. Deutsch, will private capital come in, and there is 
very little private capital today, so will it not come in or 
can it not compete under the provisions currently of Fannie and 
Freddie and Dodd-Frank? What is the answer here?
    Mr. Deutsch. I think there is a simple answer that there is 
a fallacy in the market that private capital doesn't want to 
come into the mortgage market. Private mortgage-backed 
securitizations are not going to compete for $200,000 loans 
because each and every one of those loans being made are going 
to be sold to FHA or Fannie or Freddie because it is 
effectively better execution. It is a better deal for an 
originator to sell that to Fannie or Freddie than it is to sell 
it on the open market, in large part many would argue because 
the guarantee fees are too low, which is in effect a subsidy 
for those mortgages.
    So I think the answer to your question is private capital 
does and will come back into the market if there is space for 
it to come back into. But since the crisis, because loan limits 
went up so much, from $417,000 to now $625,000, there are 
effectively very few loans you can originate nationwide that 
are above that $625,000 that private originators then can 
compete and sell to private label mortgage-backed issuers.
    Chairman Hensarling. Mr. Calhoun, you have been a frequent 
witness before our committee. I haven't found anything we have 
agreed on yet, but I haven't lost hope. It may happen one day. 
But here is something I don't quite get.
    I have a 30-year fixed-rate mortgage. I am glad I had the 
opportunity to get it. The truth is as I look at it a little 
bit more closely, I am not completely certain, had I spent more 
time, that it was the right product for myself and my family. I 
know that you have articulated in the past and your 
organization, your great concern about low-income people 
finding themselves awash in debt, and yet I look at the 
figures, and math occasionally can be a little pesky here, but 
just the difference on a 15-year fixed-rate mortgage versus a 
30-year fixed-rate mortgage, this is a hypothetical, $400,000, 
a little bit on the high side for my district, but 7 years into 
a 15-year fixed-rate mortgage you have $143,000 of principal, 
and 7 years into a 30-year mortgage you have $38,000 of 
principal. So if the average American is selling their home 
after 7 years, I want everybody to have the opportunity to have 
a 30-year fixed, but I am not sure I want my government 
steering people into a product that may not be right for them. 
And is it really the purpose of the Federal Government to tell 
people take on the maximum amount of debt possible?
    Then when you talk about concern about homeownership 
opportunities, I know what you are saying, that somehow these 
rules and the CFPB is going to get it right, but it seems to me 
we have gone from extremes here. We have a Federal Government 
on the one hand through their affordable housing goals helping 
put people into homes they couldn't afford ultimately to keep. 
They didn't do them any favors there. And now, it seems like 
the pendulum has swung the complete opposite direction, and we 
are about to tell half of America, you can no longer qualify 
for a home.
    And so I don't understand how you can kind of have it both 
ways. So regrettably, I am leaving you all of 16 seconds to 
comment, but have at it.
    Mr. Calhoun. The record will reflect that when you were out 
we discussed--the CoreLogic data shows that when you apply the 
full QM rule as it exists today, 90 to 95 percent of mortgages 
fit in that box without any restructuring, and then with 
restructuring a huge array of mortgages can fit there. And that 
is what we support.
    Chairman Hensarling. That may be a closely held opinion. My 
time has run out, which means that your time has run out.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. Thank you, Mr. Chairman.
    We all want to see private capital in these markets. In 
fact, what we do see now is private capital. That is to say 
eventually, these mortgage-backed securities are sold for 
private capital. The question is whether private capital is 
going to provide the average American family with a 30-year 
fixed-rate mortgage at a rate they can afford with a 
downpayment that they can come up with.
    The chairman correctly points out that some people might 
prefer a 15-year fixed. I have a 15-year fixed. I saved 50 
basis points. Payments are a bit higher. That is fine. We in 
Congress make 3 times what the average American family makes, 
but it turns out it may be a good deal for people in our 
bracket.
    The question I have is without a government guarantee, how 
much more difficult and how much more expensive are these 
mortgages going to be and what effect is that going to have on 
the number of buyers in the market? Have any of your groups--we 
heard Mark Zandi tell us the 90 basis points, and that is only 
if you have a very high FICO score. Have any of your groups 
analyzed what this bill will do to the average home price in 
the United States?
    Mr. Deutsch. I will take the first shot. I think a quick 
answer is I don't think you can possibly model it to come up 
with a very credible estimate of the basis points.
    Mr. Sherman. Mr. Chairman, I think that illustrates why we 
should not mark up this bill until at least after the August 
break.
    Mr. Deutsch. But I think the second part of that question--
    Mr. Sherman. Yes. We are talking about home values in this 
country totaling between, what, 5 and 10 or 12 trillion 
dollars. We are going to have a dramatic effect on that, and I 
would like another month to figure out whether this bill is 
going to have an acceptable effect. But go on with your answer, 
Mr. Deutsch.
    Mr. Deutsch. I think in the last 5 years since the advent 
of Fannie and Freddie's conservatorship, there has been plenty 
of time to try to model that and figure that out. I don't think 
in another 5 years you could get a bunch of rocket scientists 
in a room who could come up with a credible number as to what 
that rate differential is. Because you have a lot of other 
factors moving, Basel III, $85 billion a month currently being 
purchased right now of mortgage-backed securities by the 
Federal Reserve. Just the mere whisper by the Federal Reserve 
Chairman of moving away from that created an 80 basis point 
jump in one month.
    Mr. Sherman. Okay. Just by show of hands here, who 
represents an organization that feels that we can live, and 
this picks up on Mr. Capuano's question, without a government 
guarantee playing a role in the mortgage market?
    I see no hands going up, and yet that is exactly or pretty 
much exactly what this bill does.
    There has been a lot of discussion of the jumbo market, but 
the person with the jumbo loan is in the top 5 or 10 percent in 
terms of their income. Mr. Stevens, wouldn't almost all those 
jumbo loans involve a 20 percent downpayment, at least?
    Mr. Stevens. Today, they do. We have seen the market shift, 
Congressman, over the years, and as markets are healthier, and 
I think we will begin to see that--Wells Fargo just announced a 
jumbo with a 15 percent downpayment and they are trumpeting 
that in the marketplace.
    Mr. Sherman. Yes, and if you have a FICO score of 950, you 
can probably get that loan.
    Mr. Stevens. I think it goes back and makes the point that 
as markets improve, I think we will see more private capital 
competing to finance mortgages. There will be 30-year fixed-
rate mortgages, but the risk we run, we have to protect 
against--
    Mr. Sherman. Yes. If I could just squeeze in one more 
question. To oversimplify Dr. Zandi's testimony, it was that 
this bill would take say 30 percent or more of the buyers out 
of the market. What effect would that have on not only the 
value of homes, but the value of mortgage-backed securities in 
the market today? Mr. Stevens, any comment?
    Mr. Stevens. We have not had the time to calculate that.
    Mr. Sherman. Would it take you 5 years or 5 weeks?
    Mr. Stevens. I think there are benefits to this bill and 
there are benefits to driving towards a private capital 
solution. But as we have said very clearly, we believe there is 
some work that could be done to make this kind of legislation 
something that would ensure that there is liquidity as well as 
private capital.
    Mr. Sherman. And anybody who thinks we can do that in 5 
days does not understand Congress. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    To announce to all Members, I think I understand this 
right, Ms. Sheppard, you have asked to be excused at 7:30. Is 
that correct?
    Ms. Sheppard. Yes, sir.
    Chairman Hensarling. Okay. So for Members who may have 
questions for her, you don't have too long.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Garrett.
    Mr. Garrett. Thank you, Mr. Chairman. Thank you to the 
panel. I will just digress and follow up with Mr. Capuano's 
question.
    He had asked, Mr. Chairman, who would vote for this 
legislation as it stands right now. I will just ask 
rhetorically--not rhetorically, how many people would vote for 
Dodd-Frank if that bill just came up once again?
    Okay, no one, that is as I thought. Good. Should the record 
reflect that no one on the other side of the aisle raised their 
hand? Oh, one did. Okay. I see.
    So where are we here? Let me just go down this other road 
for one second. The question was also asked as far as a 
government involvement or government backstop and I saw your 
hands or lack of hands on that. Does this panel recognize that 
with this bill as it reads right now, there will be a variable, 
significant government involvement in the housing market with 
FHA, VA, Federal Home Loan Banks, and the Federal Reserve, 
along with some 87 other housing programs as well, that these 
make up some additional backstops in the housing market? Does 
anyone recognize that on the panel?
    I see hands nobody wants to raise. Good.
    I probably shouldn't go with this question. For those who 
think we need an explicit government backstop, is there anyone 
who disagrees with the statement that we also would need, if 
you had something akin to what we have right now, in other 
words, keep going with some sort of a mechanism like we have 
right now, that you need for the government to also therefore 
appropriately deal with the risk, credit risk, deal with the 
risk and price that risk appropriately? Does everyone agree if 
we were to have some other explicit backstop other than what we 
have in the bill, that we have to price that risk?
    Everyone is nodding heads.
    Can someone give me just one Federal program where we are 
currently appropriately pricing risk? I am thinking flood 
insurance. No, I guess that is not it. Is there any program 
that you can look to historically where the Federal Government 
has done an exemplary job of pricing that risk?
    And I see no one raising your hand. So you are suggesting 
that we are going to go forward and create that program going 
forward.
    Do you have a program where we appropriately priced the 
risk?
    Mr. Calhoun. If you look at what has happened with the GSEs 
since the passage of HERA, there was no question you had a 
hamstrung regulator misaligned at center.
    Mr. Garrett. But going back, we haven't seen until the next 
crisis--okay.
    Mr. Calhoun. But going forward, they are generating enough 
revenues to repay the bailout within the next year.
    Mr. Garrett. That is clever. So I will ask Mr. Deutsch, 
here is a question. Is there a benefit, if we were to put 
something akin to this legislation through and we have the 
utility, which I should add that we got some of this idea by 
looking to the Administration where they had three different 
proposals out there and one of their ideas talked about 
somewhat of a utility and we sort of copied some of that idea 
here, if we had this platform set up, is there a benefit to 
using that utility, the securitization on that platform?
    Mr. Deutsch. Fundamentally, a key benefit of the utility is 
the standardization. Investors can go buy a security that has a 
stamp that says this is pretty fungible with a separate 
security that may be issued the next day or the following day. 
That is, I think, the key benefit of any utility that could 
create that fungibility.
    Mr. Garrett. We have put other benefits we thought in 
there. Do you see other benefits with regard to exemption from 
securitization, registration as well, and the QM exemptions as 
well. Do you see them as benefits? They are in the legislation 
for people to say, I am going to go through the utility as 
opposed to the other market?
    Mr. Deutsch. Yes. I think investors in the securities, you 
wouldn't be able to create any kind of TBA without that 
exemption from the securities laws, so that would be critical 
to try to recreate any part of the TBA market.
    Mr. Garrett. If we are able to get that homogeneity in the 
underwriting and the standardization and the securitization, 
what does that do--maybe you have answered this--what does that 
do as far as the depth and liquidity of the marketplace under 
this?
    Mr. Deutsch. Ultimately what you trying to do is create a 
bigger swimming pool, and the more water you have in the pool 
the more liquidity you have, which means that you can 
interchange the securities. People can trade them in the 
secondary market almost as if they were cash.
    Mr. Garrett. Got it. Okay.
    Mr. Deutsch. And the positive impact of that is it 
ultimately ends up lowering rates for the borrowers because 
those securities are that much more valuable.
    Mr. Garrett. And in real simple terms that I can 
understand, what that also means to me as a homeowner is what, 
maybe someone on the earlier panel, I forget, said that that 
means I am able to, what, lock in my rates to the TBA, is that 
right?
    Mr. Deutsch. Correct. If you as a borrower want to be able 
to lock your rate in, the TBA market is critical, so that if 
you go today and say I would like a mortgage, when you actually 
get the mortgage 90 days from now your rate will be as it was 
at the day you asked for it.
    Mr. Garrett. In 9 seconds, does that not also mean that 
through to that depth that you also facilitate the extension of 
the 30-year mortgage as well?
    Mr. Deutsch. Correct.
    Mr. Garrett. Great. Thanks for your answers.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green.
    Mr. Green. Thank you, Mr. Chairman. Also, Mr. Chairman, if 
I may, I would like to thank you for the recognition that we 
showed earlier today to the former President of South Africa, 
Mr. Nelson Mandela. I regret that some of you have been 
detained possibly longer than we wanted you to be detained. It 
was one of those times when there was a really important event 
to many of us that was taking place. So thank you for your 
patience.
    To reward you for being so patient, I am just going to ask 
one question and I will give each person an opportunity to 
respond, a very simple question. Why, in your opinion, is the 
30-year fixed-rate mortgage important? Why is it important to 
your constituents, the people that you serve or represent here 
today?
    Mr. Calhoun, I will start with you, and I do so with the 
understanding that you do have a constituency and I am sure you 
have an opinion.
    Mr. Calhoun. Yes. Quickly, households do not handle 
interest rate risk well. As you see in today's market, if you 
had a variable rate loan, they were down as low as 3 percent or 
less, and within a couple year period we could be easily 
looking at rates of 5 percent. That is more than a 50 percent 
increase in the borrower's mortgage payment. Most households 
don't fully understand that and very few of them have the 
financial reserve and liquidity to be able to absorb that.
    Mr. Green. My friend?
    Mr. Deutsch. I would say what the 30-year fixed effectively 
provides to a borrower is they are buying insurance on their 
interest rate risk. Instead of paying, let's say 4\1/2\ 
percent, you are paying 4\3/4\, and that differential between 
4\1/2\ and 4\3/4\ is effectively an insurance payment, so that 
10 years down the road your interest rate doesn't go up. But 
there is a cost to that and ultimately the capital markets will 
always provide that service, but, of course, for that insurance 
price cross.
    Mr. Green. My friend, Mr. Stevens.
    Mr. Stevens. Congressman, first, not everybody necessarily 
needs a 30-year fixed-rate loan, but for many families the 
confidence of knowing that their rate will not go up over time 
for their shelter is important. But more so as we look forward, 
it is going to be much more important than in decades past. We 
have gone from 18 percent back in 1980 to 3 percent several 
weeks ago. On a forward-looking basis we are going to have 
rates rising, so having that protection is going to be a 
stability factor, not just for the family but for the economy 
overall.
    Mr. Green. Thank you. My friend from the builders, Mr. 
Howard.
    Mr. Howard. In the interest of time, I will associate 
myself with the remarks of the three previous speakers. They 
hit the nail right on the head.
    Mr. Green. All right. And we will move next to my friend, 
Ms. Sheppard.
    Ms. Sheppard. The quick answer is that we have a system of 
long-term fixed-rate mortgages financed through the stable 
securitization, which helps provide stability in the U.S. 
economy on the 30-year mortgage. But in addition to that, I 
would like to mention really quick that this is something our 
membership asks for. They demand or want this product, the very 
members that we serve. So because we serve them, we go to meet 
their demand and we do the 15-year. And it is almost a 50-50 
split now.
    Mr. Green. Thank you. My friend, Mr. Loving?
    Mr. Loving. As well, our customers ask for this product. 
Not all customers want this product. I think the real issue is 
the fixed-rate. Depending upon whether it would be 10 years, 15 
years or 30 years, it is the knowledge of what the payment will 
be from the day of origination to the day that they pay the 
loan off in full.
    So I think the key is the fixed-rate component. Again, the 
30-year product is something that is asked for by our customers 
and is something that allows us as community banks to serve our 
customers' needs.
    Mr. Green. Thank you very much.
    Thank you, Mr. Chairman. I yield back.
    Chairman Hensarling. The gentleman yields back. At this 
hour, Ms. Sheppard, I understand that you wish to be excused 
from the panel.
    Ms. Sheppard. Yes, sir. Thank you very much.
    Chairman Hensarling. Thank you. We will excuse you from the 
panel.
    The Chair now recognizes the gentleman from California, Mr. 
Miller, for 5 minutes.
    Mr. Miller. Thank you, Mr. Chairman.
    I keep hearing from investors that they believe we need a 
vibrant TBA market for the housing finance system. Mr. Deutsch, 
what changes would need to be made in this bill to ensure a 
vibrant TBA market would occur?
    Mr. Deutsch. Currently, the TBA market functions because 
there is a government guarantee. If you go and you try to take 
out a mortgage and you want to rate-lock it on a go-forward 
basis, the originator of that mortgage knows that they can sell 
it. They have a government guarantee behind it. So 
fundamentally, what this bill tries to do is evolve that system 
from being a government guarantee that is a backstop to 
ultimately the capital markets evolving in some fashion through 
the utility, through other methods, to where the capital 
markets will effectively provide that insurance, if you will, 
in that you want as, a borrower, to be insured that from the 
time that you ask for the mortgage until the time you take out 
the mortgage, that that rate doesn't change over time.
    So I think like virtually any other financial product, 
there is always a price that the capital markets will be 
willing to charge and ultimately offer that product to you to 
be able to rate lock over time.
    Mr. Miller. If we end the guarantee, will investors 
continue to buy mortgage-backed securities in the market?
    Mr. Deutsch. If you end the guarantee--
    Mr. Miller. Will they continue to invest?
    Mr. Deutsch. Absolutely, but it will and it does require a 
shift. And I think the first panel hit on it a few different 
points is that currently, you have a significant amount of 
rates investors out there, but you need to shift some of those. 
And not all of them will shift. There will be many investors 
who are rate investors who won't magically turn overnight into 
credit investors. But there will be some who will shift some of 
their product from buying rates products to credit risk 
products. But ultimately, and I indicated this in my oral and 
written testimony, we have to start rebuilding that credit risk 
base to be able to get more investors to buy those credit risk 
products.
    Mr. Miller. Okay. A question for the panel. Would it be 
more appropriate to avoid shocks in the market to tie the wind-
down of the GSEs to the ramp up of the utility with evidence-
based market and structural triggers and milestones? Mr. 
Stevens?
    Mr. Stevens. Congressman, I think this is the question that 
has been debated a lot today, is can there be a TBA market 
without a guarantee. And I think what Tom alluded to is if the 
counterparty ultimately isn't backstopped by the U.S. 
Government, which backs the mortgage-backed security even if 
the originator fails and can't back up their representations 
and warranties themselves, it brings a lot of investment 
capital from around the globe, because then all the investor 
has to worry about is the interest rate risk. They know what 
they are buying from a homogenized product standpoint because 
it is defined, but what they don't know is whether the 
counterparty will be there to back up that loan, and having 
that wrap on it has created that capital flow.
    So I think there is an opportunity as a pilot to determine 
whether you really can create a TBA market without the 
backstop, rather than completely pulling out the supports 
without knowing yet whether that system will work. And given 
the size and scope of it, which has been discussed today, I 
think doing this in a measured way is far more critical to 
making sure the system could support any shift to that kind of 
structure.
    Mr. Miller. That seems to be what I am hearing from a lot 
of sources.
    Mr. Howard, would you agree with that?
    Mr. Howard. I would agree with that, Mr. Miller, and I 
would suggest that there might be a TBA market without a 
government guarantee, but I think it would be very, very 
expensive and it would force a lot of people out of the housing 
markets.
    Mr. Miller. So you think a wind-down tied to a ramp-up for 
verification would be most appropriate?
    Mr. Howard. Yes, sir.
    Mr. Miller. Mr. Calhoun?
    Mr. Calhoun. A real additional concern is the TBA market, 
even if it does exist, is it available to all lenders based on 
size at comparable prices? It is a lot easier for an investor 
to evaluate what the counterparty risk is for Wells Fargo than 
it is for the local community bank. So the real questions are 
if you have a TBA market, which is uncertain, it might be 
available just for the largest lenders, which we think has 
adverse consequences, and if it is available even at all for 
the smaller lenders, there is almost certainly a tremendous 
price penalty that they have to pay.
    Mr. Miller. I don't believe any of us want to see another 
Countrywide machine who sold these mortgage-backed securities 
that couldn't be unwound. They couldn't replace the bad 
mortgages. Investors were just stuck with them. That is why it 
left a lot of bad taste in a lot of investors' mouths today, 
and I think you, Mr. Deutsch, what a lot of people who realize 
that. They thought they were buying mortgage-backed securities 
from a GSE and they weren't, and they lost tremendous amounts 
of money.
    I yield back the balance of my time.
    Chairman Hensarling. The gentleman yields back. The Chair 
now recognizes the gentleman from New Mexico, Mr. Pearce.
    Mr. Pearce. I almost drifted off there, Mr. Chairman. You 
caught me just before I was going away.
    Mr. Calhoun, you had spent adequate time talking about the 
no-doc loans, and I think you articulated the problems with 
them. Do you think that the government had any role in those 
no-doc loans or was that just sheer, greedy capitalism?
    Mr. Calhoun. I think the main role the government had was 
lifting up the rating agencies, because the rating agencies 
gave those no-doc loans a rating that created the arbitrage.
    Mr. Pearce. Okay. Just by point of differentiation from 
that point, I have an article here that talks about Countrywide 
and doing exactly what you are describing. It also talks about 
the GSEs buying them straight from them. And I think that if 
the GSEs had not bought those things, I think when Countrywide 
began to choke on them in their portfolio, I suspect they would 
have quit doing it. But I saw Mr. Franklin Raines make $29 
million in one year cooking the books, doing things like this, 
and James Johnson before him, $100 million in 10 years, and 
they were doing Enron-type stuff, which was cycle the stuff in 
faster, go get everything you can get. So I suspect that the 
government had something to do with Countrywide's decision to 
do that.
    Mr. Deutsch, is there a cost to consumers for a 30-year 
mortgage?
    Mr. Deutsch. Absolutely.
    Mr. Pearce. What would that cost be?
    Mr. Deutsch. It is simply an insurance payment cost. It is 
that if you as a consumer want to lock your rate in for 30 
years, the financial institution of some kind has to be on the 
other side of that. They have to say if rates rise, effectively 
we are going to take a loss, so we want an insurance payment 
for that.
    Mr. Pearce. Let me tell you the cost to me. When I bought 
my first house it was a trailer house for $4,500. My next house 
was a townhouse, brand new for $55,000 when I was about 30. 
They asked me 15 years or 30 and they didn't explain there is a 
difference. I had never considered that question at all. I 
could have afforded it. It was $400 a month for my $55,000 over 
30 years. I could have afforded the $485, but I didn't because 
I just said, well, I don't know. I hadn't thought about it.
    I sold my townhouse 15 years later for $55,000. I owed 
$55,000 still. I would have had it paid clear. So the cost of 
the 30-year mortgage to me was $55,000, cash in hand. And so 
when we are talking about this sacred product, there are 
instances where it is very costly to the consumer.
    Mr. Loving, are there products available in the financial 
market today that weren't available, say, back in 1970 or 
something, financial products available to the consumer?
    Mr. Loving. To the consumer? I would say the products that 
were available then are available today. There has just been a 
greater utilization of the 30-year fixed-rate mortgage.
    Mr. Pearce. Are there investment mechanisms out there that 
couldn't have been dreamed about 4 or 5 years ago, 10 years 
ago, 20 years ago?
    Mr. Loving. I would say there could be, yes.
    Mr. Pearce. Yes. When I look at the problem we got into, I 
can't dream of my banker back when I was borrowing $2,000 a 
year for my 4-H pigs when I was 14, I can't dream of my banker 
having derivatives and stuff like that. Am I correct or maybe--
    Mr. Loving. I think from the community bank perspective, 
you are exactly correct. Derivatives, swaps, certainly were not 
in the vocabulary.
    Mr. Pearce. Yes, there is all sorts of stuff moving just 
like this, because computers make some things available and 
then we as people can design things as long as there is a 
demand. So I just see this tremendous demand out there in the 
private market, and we are being told that the 30-year fixed 
mortgage would go away. If the demand is that strong, I just 
can't visualize that with all the magnificent things we do for 
one-quarter of a basis points for 36 hours that there wouldn't 
be some product developed out there. Maybe I am wrong, but I 
just have trouble seeing it.
    I am going to wrap up with the idea that is there private 
capital that will do what we consider to be government 
functions? And so, I will just take one of the most explicit 
government functions, which is going into space--one giant step 
for mankind or whatever that deal was.
    Do you think that the private market could or would ever do 
that? Just a show of hands altogether. Yes? No? No. No, no, no, 
no, no. So let the record reflect that everybody says no.
    Let me tell you that the X Prize was set up just to do 
that.
    Mr. Calhoun. I would say yes.
    Mr. Pearce. They are all yeses. Okay, I'm sorry.
    The X Prize was set up because most people would think 
there is no way private capital would chase this because there 
is no investment return. Yet the X Prize put in 2 years 
something that NASA has never done.
    Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair recognizes the gentleman from Wisconsin, Mr. 
Duffy.
    Mr. Duffy. Thank you, Mr. Chairman, and again, I appreciate 
the panel staying so late, giving us a long day of your time.
    I want to talk about the 30-year fixed-rate mortgage. There 
has been a lot of focus on that during this hearing. Maybe I 
will have you all walk me through your thoughts on this. And, 
again, just to review right now, we have our investors in 
mortgage-backed securities, they assume the rate risk. The 
American taxpayer assumes the credit risk.
    Is it everyone's position on the panel that if we actually 
have our investors assume the credit risk as well, they are not 
smart enough to price that, and then invest accordingly in our 
mortgage-backed securities? Is that the position of the panel?
    Mr. Deutsch. I wouldn't take the position that investors 
are not smart enough to price the credit risk, no, absolutely 
not representing institutional investors who do it every day.
    Mr. Duffy. All right. Anyone else?
    Mr. Stevens. We do have a history where subprime and no-doc 
lending was promoting to an excess and private investors went 
too far. So there are imbalances you can have in a fully 
privatized market or a fully guarantored market, and it is 
getting those balances right that I think ultimately creates 
sustainability.
    Mr. Duffy. But if we get the balance right, the investors 
can assess that new credit risk, right? If they get a return on 
their investment to assume that risk, they will make that 
investment along with the rate risk they are already assuming, 
correct?
    Mr. Deutsch. Many can.
    Mr. Duffy. Mr. Loving, do you agree with that?
    Mr. Loving. I think they can, but I think the question is 
how broadly available will the 30-year fixed-rate mortgage be 
to the marketplace, and if it is not available, if it is 
demanded, what impact it would have upon the overall housing 
market. So it is not a question of if, it is of how much, and 
how broadly available it would be.
    Mr. Howard. And how much it would cost if it was available 
to the consumer.
    Mr. Duffy. But the point you all made earlier to Mr. 
Garrett, you said should the Federal Government accurately 
assess the credit risk that the government assumes, and you all 
I think you shook your head saying, yes, we should all try to 
accurately assess that risk, and then Mr. Garrett pointed out 
that the government really hasn't done a very good job of it. 
But you all agree that we should try to assess that credit risk 
and pass it on in the form of an interest rate hike, of a G 
fee.
    Why can't the market do the same thing? And why would there 
be a significant price differential, Mr. Howard?
    Mr. Howard. In our conversations with investors and 
potential investors and those that do the securitization, what 
we are told is that absent the guarantee, the product is viewed 
as a riskier product, purely and simply, and therefore it will 
cost more to the consumer to put the product on the market.
    Mr. Duffy. And they are going to price that risk, but those 
are going to start off at a lower rate because they are not 
paying G fees right now, right? They are going to start at a 
lower rate.
    Mr. Howard. Right.
    Mr. Duffy. They will assess the risk.
    Mr. Howard. Not necessarily.
    Mr. Stevens. The guarantee fee is the guarantee on that 
mortgage-backed security that comes where a AAA rating. So the 
guarantee fee reduction is offset by the fact that the value of 
the security is greater. In fact, Tom Deutsch was talking about 
how that is actually crowding out private capital from 
competing. So that execution difference is legitimate.
    Mr. Calhoun. And can I add just very quickly, I have bought 
mortgage pools. It is very complex. Mortgages are not cookie-
cutter all-alike borrower significant. It is hard to assess the 
risk on pools that are relatively small. There are huge 
economies of sale--
    Mr. Duffy. But if you get the standardization right, you 
should be able to, right?
    Mr. Calhoun. In lending by having large issuances that make 
the system work. On small deals, there are tremendous price 
premiums that are added because of the work and the economies 
of scale.
    Mr. Duffy. Very well. And I guess we have a lot of things, 
Mr. Calhoun, we disagree on. I don't know that the panel would 
agree that 95 percent of current mortgages would fit the QM 
rule, but we will leave that alone right now.
    I guess I would just point out, you look at why we are 
here. Again, I am going to make the same point. Dodd-Frank, 
massive financial reform, and it left Fannie and Freddie alone, 
didn't address a significant portion of the cause of the 2008 
crisis. I would argue that it hasn't lowered the cost of 
mortgages, hasn't increased access to credit, and it is causing 
a lot of problems in the market that we are trying to also 
resolve in this bill. So though we are here today, frankly we 
should be reviewing policies that our friends across the aisle 
had included in Dodd-Frank and trying to tweak them instead of 
starting from scratch.
    But, again, I want to be clear to all of you here. I want 
to make sure coming from small town America, rural Wisconsin, 
that our small community banks and our credit unions have the 
ability to aggregate and securitize their loans effectively, 
and I want to make sure we continually work together to make 
sure that we have a process in place that that will absolutely 
work for us.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The ranking member?
    Ms. Waters. I have a unanimous consent request. I would 
like to enter into the record a letter from a number of 
organizations who have indicated some concerns.
    Chairman Hensarling. It will all come in under general 
leave, and without objection.
    I would like to thank all of our witnesses again today for 
their testimony, and for their patience.
    The Chair notes that some Members may have additional 
questions for these panels, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is adjourned.
    [Whereupon, at 7:50 p.m., the hearing was adjourned.]









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                             July 18, 2013


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