[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


                      SUSTAINABLE HOUSING FINANCE:
                      PRIVATE SECTOR PERSPECTIVES
                       ON HOUSING FINANCE REFORM

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         HOUSING AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 25, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-49
                           
                           

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
                 Subcommittee on Housing and Insurance

                   SEAN P. DUFFY, Wisconsin, Chairman

DENNIS A. ROSS, Florida, Vice        EMANUEL CLEAVER, Missouri, Ranking 
    Chairman                             Member
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
STEVAN PEARCE, New Mexico            MICHAEL E. CAPUANO, Massachusetts
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
STEVE STIVERS, Ohio                  STEPHEN F. LYNCH, Massachusetts
RANDY HULTGREN, Illinois             JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DANIEL T. KILDEE, Michigan
LEE M. ZELDIN, New York              JOHN K. DELANEY, Maryland
DAVID A. TROTT, Michigan             RUBEN KIHUEN, Nevada
THOMAS MacARTHUR, New Jersey
TED BUDD, North Carolina
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 25, 2017.............................................     1
Appendix:
    October 25, 2017.............................................    42

                               WITNESSES
                      Wednesday, October 25, 2017

Bailey, Nikitra, Executive Vice President, Center for Responsible 
  Lending........................................................     8
Chavers, Kevin, Managing Director, BlackRock, on behalf of the 
  Securities Industry and Financial Markets Association..........    10
Hughes, Brenda, Senior Vice President and Director, Mortgage and 
  Retail Lending, First Federal Savings Bank, on behalf of the 
  American Bankers Association...................................     5
Stafford, Richard, President and Chief Executive Officer, Tower 
  Federal Credit Union, on behalf of the National Association of 
  Federally-Insured Credit Unions................................    12
Vallandingham, Samuel, President and Chief Executive Officer, The 
  First State Bank, on behalf of the Independent Community 
  Bankers of America.............................................     7

                                APPENDIX

Prepared statements:
    Bailey, Nikitra..............................................    42
    Chavers, Kevin...............................................    68
    Hughes, Brenda...............................................    75
    Stafford, Richard............................................    86
    Vallandingham, Samuel........................................   106

              Additional Material Submitted for the Record

Stafford, Richard:
    Written responses to questions for the record submitted by 
      Representative Sherman.....................................   114
Vallandingham, Samuel:
    Written responses to questions for the record submitted by 
      Representative Sherman.....................................   115

 
                      SUSTAINABLE HOUSING FINANCE:
                     PRIVATE SECTOR PERSPECTIVES ON
                         HOUSING FINANCE REFORM

                              ----------                              


                      Wednesday, October 25, 2017

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.

    The subcommittee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Sean Duffy 
[chairman of the subcommittee] presiding.
    Present: Representatives Duffy, Ross, Royce, Pearce, Posey, 
Luetkemeyer, Stivers, Hultgren, Rothfus, Zeldin, Trott, 
MacArthur, Budd, Hensarling, Cleaver, Capuano, Sherman, Beatty, 
and Waters.
    Also present: Representative Hill.
    Chairman Duffy. The Subcommittee on Housing and Insurance 
will come to order. Today's hearing is entitled, ``Sustainable 
Housing Finance: Private Sector Perspectives on Housing Finance 
Reform.''
    Without objection, the chair is authorized to declare a 
recess of the subcommittee at any time. And without objection, 
all members will have 5 legislative days within which to submit 
extraneous materials to the chair for inclusion in the record.
    Without objection, members of the full committee who are 
not members of the subcommittee may participate in today's 
hearing for the purpose of making an opening statement and 
asking our great panel of witnesses questions.
    The chair now recognizes himself for 3 minutes for an 
opening statement. I first want to thank the panel for taking 
the time out of your busy lives to come in and testify for us 
today, to dispense great wisdom and insight for us as we look 
at housing finance reform. This is one of many hearings that we 
are going to hold on this very topic.
    If you look at the panel today, you will notice that there 
is a common theme, and that is finance. Well, the most 
important person reforming housing finance system are home 
buyers, it is vitally important that the way we reform the 
housing finance system allows for a transition that provides 
certainty to those that are involved in making the dream of 
home ownership come true, the dream of a family of finally 
being able to own a home.
    We have seen a number of principles and proposals in the 
last decade on reforming the housing finance system and they 
have come from academics and think tanks and the private 
sector. Even Members of Congress have put out ideas and 
principles on how this reform should look.
    What I hope for today is to hear from all of you on which 
of those principles and proposals you believe would be best for 
us to focus on. I want to hear from the panel about what we can 
preserve in the current system.
    But more importantly, what isn't working? And how do we 
incentivize more of the private sector development? Many of you 
have called for an explicit government guarantee on mortgage-
backed securities. And we should explore your proposals.
    But can we also structure a system in which private capital 
comes in and bears that frontal risk where we also have that 
catastrophic government backstop? How do we deal with the 
duopoly of Fannie and Freddie to limit taxpayers' exposure on 
losses?
    How do we expand the pool of eligible investors for credit 
risk transfers? Is it appropriate for the GSEs to continue to 
own the common securitization platform, or can we utilize that 
structure for all housing finance reform stakeholders?
    We need a system that will allow for consumers to have a 
variety of options in mortgage products. One of our top goals 
should be a system that promotes affordability, choice, and 
innovation.
    While incentivizing the development of options, we must 
also ensure that people are not entering into mortgages they 
cannot afford. They can't maintain because we see how 
disastrous this is for our economy, but also for the very 
families who have mortgages and they go in default and then 
foreclosure. So I look forward to our panel's testimony today.
    And with that, I yield to the ranking member, the gentleman 
from Missouri, Mr. Cleaver, for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. Thank you for the 
hearing today on private sector perspectives on housing finance 
reform. And thank you to the witnesses for joining us today.
    Today's hearing will focus on the private sector's 
perspective regarding housing finance reform. And earlier this 
month, we had the opportunity to hear from Director Mel Watt on 
his assessment on the current state of FHFA.
    I welcome Dr. Watt's update on FHFA's effort in developing 
the common securitization platform, as well as his opinion on 
the significance of the housing trust Fund and capital magnet 
fund. It is important to remember that we are in the midst of 
an affordable housing crisis, and this funding plays an 
important role in developing and creating affordable housing in 
our country.
    The national low income housing coalition released a report 
recently, and in that report I pulled out something that I 
probably will not forget while I am here in Congress. And they 
wrote, and I quote, ``There is no State, city or county where a 
minimum wage worker can afford to rent a modest two-bedroom 
apartment.'' And that is tragic.
    There is some work to be done. And many of my constituents 
are still recovering from the financial crash of 2008 and to be 
sure, our entire economy is still trying to recover.
    The recession greatly exacerbated the wealth gap, 
especially for vulnerable communities, including African 
Americans, Hispanics and low income individuals. Home ownership 
has historically been an important piece of the puzzle in 
building wealth in this country, a critical component of the 
American Dream I would add.
    The recession devastated decades of accrued wealth, leaving 
many in dire situations with foreclosed homes as rampant 
unemployment plagued the communities. As we move forward in 
discussing GSE reform, it is important to ensure that the 
housing finance system is inclusive.
    Though congressional efforts on housing finance reform 
stalled in the 113th Congress, I am hopeful that the committee 
will be able to work together on a bipartisan basis this 
Congress.
    I believe that any attempt to reform the GSEs must preserve 
the 30-year fixed rate mortgage. And I look forward to hearing 
our witnesses' perspective on this.
    Additionally, reform to our housing finance system must 
focus on preserving affordability in the housing market, 
protecting taxpayers, providing stability and liquidity in the 
market, and ensuring access to smaller lenders. I look forward 
to hearing from our witnesses.
    And thank you, Mr. Chairman.
    Chairman Duffy. The gentleman yields back. And I do look 
forward to working with him.
    The chair now recognizes the vice chair of this 
subcommittee, the gentleman from Florida, Mr. Ross, for 2 
minutes.
    Mr. Ross. Thank you, Chairman Duffy, and thank you for 
calling this hearing. As this subcommittee prepares to address 
one of the most intractable, complex and, indeed, divisive 
policy matters facing Congress, it is important that we talk to 
those who work in this field day in and day out. So I thank you 
all for being here and joining us for this hearing.
    Notwithstanding the many questions that obstruct our path 
forward on housing finance reform, one thing is absolutely 
certain: the status quo is unsustainable. Congress needs to 
allow Americans to have a better housing finance system rather 
than continue to support the endless boom and bust cycles in 
real estate.
    Americans deserve a competitive marketplace that provides 
choice and opportunity to the hardworking men and women of this 
country. The financial crisis of 2008 was not that long ago. We 
should not forget that at its core, the Federal Government had 
created a system that was unsustainable.
    According to Peter Wallison of the American Enterprise 
Institution, ``By 2008, 19.2 million of the total 27 million 
sub-prime and other weak loans in the U.S. financial system 
could be traced directly or indirectly to U.S. Government 
housing policies.'' We saw what came of that.
    The two biggest players in the housing finance world, 
Fannie Mae and Freddie Mac, required a taxpayer bailout in the 
amount of $200 billion. And yet in the flurry of new laws that 
followed the crisis, nothing, next to nothing was done to 
address the underlying structural failings that played such a 
large role in the financial crisis.
    When Dodd-Frank was passed, legislators argued it would 
prevent another crisis. But much of what it did only seemed to 
add greater layers of bureaucracy, incentivize greater 
consolidation, and further obscure the weaknesses of our 
housing finance system.
    The fact is we are doomed to repeat history unless we take 
the time and hearings like this one to dig into those difficult 
issues that our constituents sent us here to address.
    I think we all know why the Federal Government is involved 
in housing finance. It is because we recognize that home 
ownership is a fundamental part of the American Dream. But 
today I am looking forward to hearing about ways people can 
achieve that American Dream without fear of another economic 
collapse that turns the dream of home ownership into a 
nightmare.
    Thank you, and I yield back the balance of my time.
    Chairman Duffy. The gentleman yields back.
    The chair now recognizes the gentleman from California, Mr. 
Sherman, for 2 minutes.
    Mr. Sherman. One problem is the availability of affordable 
housing. We need to build more apartments, condos, and homes. 
That is in significant degree a local decision because you 
cannot build if they don't let you build.
    The 2008 crisis came because we allowed the bond rating 
agencies to give AAA to Alt-A. They get paid by the issuer and 
if they give a good grade they get another contract. I think 
the market has been spooked, correctly, so much that this is 
unlikely to happen again until we forget that it happened.
    But to blame this on Fannie Mae and Freddie Mac is absurd. 
The problem was the tendency to invest in bad mortgages just 
because they yield an extra quarter percent.
    The current system works spectacularly well. Ordinary 
working families are able to borrow. Now, there are some 
problems, but compared historically, when in history have 
ordinary working families been able to borrow $300,000, 
$400,000, $500,000 at fixed rate, low rate, from people they 
have never met?
    This is a system that ought to be preserved. The failure 
was when we tried to have Fannie and Freddie be both government 
agencies in terms of their downside and private corporations in 
terms of their upside. That is called crony capitalism, 
socialism for the wealthy, whatever term you use. It is a bad 
system.
    So we now have a system that generates a substantial profit 
for the Federal Government and no one on this committee has 
offered the tax increase legislation to replace that profit. So 
we have a system that creates profit for the Federal 
Government, allows ordinary families to borrow huge amounts at 
low interest rates, and I don't know why we are talking about 
throwing the whole thing away.
    Thank you.
    Chairman Duffy. The gentleman yields back.
    We now welcome our panel and our witnesses. Our first 
witness is Mrs. Brenda Hughes--welcome--senior vice president 
of First Federal Savings on behalf of the ABA.
    Our next witness is Mr. Samuel Vallandingham--I hope I got 
that right--president and CEO of First State Bank on behalf of 
Independent Community Bankers of America.
    Next we have Ms. Nikitra Bailey, executive vice president 
at the Center for Responsible Lending. Welcome.
    Next we have Mr. Kevin Chavers, managing director of 
BlackRock on behalf of the Securities Industry and Financial 
Markets Association or SIFMA. Welcome.
    And finally, last but not least, we have Mr. Rick Stafford, 
president and CEO of Tower Federal Credit Union on behalf of 
the National Assessment of federally Insured Credit Unions. To 
all, welcome.
    The witnesses will in a moment be recognized for 5 minutes 
to give an oral presentation of their testimony. Without 
objection, the witnesses' written statements will be made part 
of the record following your oral remarks.
    Once the witnesses have finished presenting their 
testimony, each member of the subcommittee will have 5 minutes 
which they can ask all of you questions.
    You will note on the table in front of you there are three 
lights. The green light means go, the yellow light means you 
have 1 minute left, and the red light means your time is up. 
Your microphones are sensitive so please make sure that you are 
speaking directly into them.
    And so with that, Ms. Hughes, you are now recognized for 5 
minutes for your presentation.

                  STATEMENT OF BRENDA K. HUGHES

    Ms. Hughes. Good morning. Chairman Duffy, Ranking Member 
Cleaver, my name is Brenda Hughes.
    Chairman Duffy. And Ms. Hughes, if you would just pull your 
microphone up so we can all--
    Ms. Hughes. OK.
    Chairman Duffy. Or pull it directly--yes.
    Ms. Hughes. OK. Thank you.
    Chairman Duffy. We want to hear your testimony. Thank you.
    Ms. Hughes. I serve as senior vice president and director 
of Mortgage and Retail Lending for First Federal Savings of 
Twin Falls, Idaho. We are a $622 million asset savings 
association founded in 1915. I appreciate the opportunity to be 
here to present APA's views on GSE reform and community bank 
access.
    This issue is a critical one for our country. Americans 
have relied on access to long-term fixed rate mortgages for 70 
years.
    Fannie Mae and Freddie Mac have facilitated access to this 
product by providing access to the capital markets for primary 
market lenders. These GSEs have been a conservatorship for 
nearly 9 years. We should not delay reform any longer.
    Absent aggregation and securitization, access to long-term 
lower rate funding would be far more difficult to come by for 
most primary lenders. The government backstop provided to 
mortgage-backed securities, guaranteed by the GSEs make them 
attractive to the capital markets, ensuring liquidity.
    As we consider reform, these elements must be preserved and 
remain available to support all primary market participants, 
regardless of size or location. First Federal relies on this 
access and actively delivers loans directly to Freddie Mac, 
retaining servicing on these loans. We currently service 
approximately 5,100 loans.
    Like so many banks, both large and small, access to the 
secondary markets or federally guaranteed secondary market is 
essential to our ability to meet the mortgage needs of our 
customers.
    ABA has worked with bankers from institutions of all sizes 
and from all parts of the country to develop shared principles 
which should guide reform of the GSEs.
    For my testimony today, I would like to highlight a few key 
principles. More detail on these principles can be found in my 
written testimony.
    We believe that the following principles should form the 
basis for legislative reform efforts. First, the GSEs must be 
strictly confined to a secondary market role, providing 
stability and liquidity to primary mortgage market for low to 
moderate income borrowers.
    They must be strongly regulated, thoroughly examined and 
subject to immediate corrective action for regulatory 
violations. In return for their GSE status, and the associated 
benefits, entities must agree to support all segments of the 
primary market in all economic environments and provide 
equitable access to all primary market lenders.
    This includes the preservation of the to-be-announced 
market and both servicing and retained and sold options. 
Mortgage-backed securities issued by the GSEs should carry an 
explicit guarantee from the Federal Government. These 
guarantees should be fully paid for through the guarantee fees 
equitably assessed.
    The GSEs must be capitalized appropriately. Capital 
requrements must be tied to sound underwriting practices to 
ensure that it reflects the risk borne by these institutions.
    Expanding affordable housing is also an important component 
of the GSEs' mission. The FHLB Affordable Housing Program is a 
strong model that has delivered over $5.4 billion in funds to 
expand affordable housing, and we believe it should be used as 
a model in a reformed GSE system.
    Credit risk transfers required by FHFA should be continued 
and expanded. The vital role played by the Federal Home Loan 
Banks, not to be confused with the roles played by Fannie Mae 
and Freddie Mac, is working today, and must not be impaired.
    Congress has an essential role in providing the certainty 
necessary to ensure long-term stability of the housing finance 
system. Without legislative reform, past abuses may be 
repeated.
    Some will argue that this can be accomplished via 
regulation, and FHFA has done an admirable job in recent years 
ensuring equitable treatment and addressing other past abuses. 
However, regulators and other regulatory approaches can change 
over time. While a strong regulator must be part of reform, so 
too, must be clear statutory guidance.
    Reform not need be radical or extreme, but comprehensive. 
Legislation need not create an entirely new secondary market 
structure. In fact, guided by these key principles we believe 
that relatively tailored legislation that takes a surgical 
approach to making necessary alterations to the current system 
is desirable and can achieve the needed comprehensive reform.
    These legislative reforms are critical. Just as the Federal 
debt market provides a bellwether that makes all private debt 
markets more efficient and liquid, an explicit, fully priced, 
fully paid for Federal guarantee for a targeted portion of the 
mortgage market will be a catalyst for broader market growth 
and development.
    Congress should not defer action any longer. 9 years of 
conservatorship is more than enough. Thank you for the 
opportunity to share our views with the subcommittee, and I am 
happy to answer any questions you have.
    [The prepared Statement of Ms. Hughes can be found on page 
75 of the appendix.]
    Chairman Duffy. Thank you.
    Mr. Vallandingham, you are now recognized for 5 minutes.

              STATEMENT OF SAMUEL A. VALLANDINGHAM

    Mr. Vallandingham. Thank you, sir. Chairman Duffy, Ranking 
Member Cleaver, members of the subcommittee, I am Samuel 
Vallandingham, president and CEO of the First State Bank, a 
$200 million asset bank in Barboursville, West Virginia.
    As a fourth generation community banker, I am pleased to be 
here today on behalf of ICBA and more than 5,700 community 
banks. ICBA strongly sports GSE reform, but it is critical to 
borrowers in the broader economy that the details of reform are 
done right.
    Community bank mortgage lending is vital to the strength 
and breadth of America's housing market. Community banks 
represent approximately 20 percent of the mortgage market, but 
more importantly, our mortgage lending is often concentrated in 
rural areas and small towns, which are not effectively served 
by large banks.
    For many rural and small town borrowers, a community bank 
loan is the only option for buying a home. Through a 
correspondent network of 60 community banks, First State Bank 
serves over 60 rural and suburban communities in the eastern 
United States.
    Our bank survived the Great Depression and numerous 
recessions, as have many ICBA member banks by practicing 
conservative, commonsense lending and serving our community 
through good times and bad.
    Today I would like to talk to you about my bank's mortgage 
lending and the importance of secondary market access. The 
First State Bank has been selling mortgages in the secondary 
market since 1980 to access additional funding.
    Today we have a nearly $600 million servicing portfolio, 
consisting of approximately 5,500 loans, many of which are 
purchased from other community banks. Most of these loans are 
held by Freddie Mac and a smaller number are held by Fannie 
Mae. First State Bank and our customers depend on secondary 
market access.
    The secondary market allows me to meet customer demand for 
fixed rate mortgages without retaining the interest rate risk 
these loans carry. As a small bank, it is not feasible for me 
to use derivatives to manage interest rate risk.
    Selling in the secondary market frees up my balance sheet 
to serve customers who would prefer adjustable rate mortgage 
loans, as well as small business loans, which play a vital role 
in our community.
    ICBA's approach to GSE reform is simple. Use what is in 
place today and is working well and focus reform on aspects of 
the current system that are not working or that put taxpayers 
at risk.
    ICBA has developed a comprehensive set of secondary market 
reform principles. First, community banks must have equal and 
direct access. They must have the ability to sell loans 
individually for cash under the same terms and pricing 
available to larger lenders.
    Second, there can be no appropriation of customer data for 
cross-selling of financial products. We must be able to 
preserve our customer relationships after transferring loans.
    Third, originators must have the option to retain servicing 
at reasonable cost. Servicing is a critical aspect of the 
relationship's lending business model vital to community banks.
    Finally, an explicit government guarantee on GSE mortgage-
backed securities is needed. For the market to remain deep and 
liquid, government catastrophic loss protection must be 
explicit and paid for through GSE guarantee fees at market 
rates.
    This guarantee is needed to provide credit assurance to 
investors, sustaining robust liquidity even during periods of 
market stress.
    Without these principles, we could see further 
consolidation of the mortgage market, which would limit 
borrower choice and disadvantage communities. Any version of 
reform that effectively transfers the asset's infrastructure or 
functions of the GSEs to a small number of megafirms could 
devastate the housing market in thousands of small communities 
and put our financial system at risk of another financial 
collapse.
    Finally, ICBA believes that the GSEs must be allowed to 
rebuild their capital buffers. Though Fannie Mae and Freddie 
Mac have returned to profitability, the quarterly sweep of 
their earnings to the Treasury has seriously depleted their 
capital buffers.
    Absent a change in policy, they are on track to fully 
deplete their capital by year-end. A draw from the Treasury 
could trigger a market disruption. This self-inflicted crisis 
can and must be avoided.
    While Congress debates the reform the FHFA should protect 
taxpayers from another bailout. ICBA urges FHFA to follow the 
Housing and Economic Recovery Act of 2008 and require both GSEs 
to develop and implement a capital restoration plan.
    ICBA is pleased to see a robust debate emerging on housing 
finance reform and hopes to have a seat at the table on behalf 
of the communities we serve as these discussions continue.
    Thank you again for holding this hearing and for the 
opportunity to testify.
    [The prepared Statement of Mr. Vallandingham can be found 
on page 106 of the appendix.]
    Chairman Duffy. Thank you.
    Ms. Bailey, you are recognized for 5 minutes.

                   STATEMENT OF NIKITRA BAILEY

    Ms. Bailey. Good morning, Chairman Duffy, Ranking Member 
Cleaver and members of the House Committee on Financial 
Services Subcommittee on Housing and Insurance. Thank you for 
the opportunity to testify regarding our Nation's housing 
finance system, an issue that profoundly affects American 
families and is critical to the overall housing industry, which 
is nearly 20 percent of the United States' economy.
    I am executive vice president of the Center for Responsible 
Lending, a nonpartisan, nonprofit research and policy 
organization dedicated to protecting home ownership and the 
family wealth that it creates.
    We are an affiliate of Self-Help Credit Union, local 
community economic development lender that is based in Durham, 
North Carolina, that has provided over $7 billion of financing 
to borrowers, homeowners, small community organizations such as 
health facilities and nonprofits and charter schools across the 
Nation.
    We also have a credit union network that serves over 
130,000 people in the States of North Carolina, California, 
Chicago, Florida and Wisconsin.
    Reforming the housing finance system presents Congress with 
the chance to make America as good as its promise. For most 
families, the secondary market's purpose is simple. It is about 
providing opportunity to pursue homeownership and the security 
that homeownership offers.
    Homeownership is the engine that drives the economy by 
creating jobs that stabilize communities all across our Nation. 
The jobs created by homeownership are HVAC installers, tile 
layers, plumbers and clerks at local home improvement stores. 
Homeownership has been the primary vehicle that most families 
use to build wealth and remain in a stable middle class.
    Sadly, our housing finance system is rooted in lending 
discrimination. Several policies created as a response to the 
1930's' Great Depression were designed to help spur economic 
growth and appear to treat everyone the same.
    However, these policies provided affirmative benefits to 
white families of European ancestry, while denying mortgage 
credit to African Americans and people of color.
    The Federal action prevented families of color from 
building wealth through homeownership. And I want to give you 
two examples of the impact of this.
    In the first 35 years of the FHA's administration, 98 
percent of loans went to white families, with only 2 percent of 
loans going to families of color.
    In the State of Mississippi in the V.A. program two out of 
3,229 loans went to black servicemembers who served our country 
in the first 3 years of the program's implementation. As a 
result, white families had a leg up and an ability to build 
wealth faster.
    Borrowers of color entered into a market that was 
redlining, subject to predatory lending, and they were often 
pushed into loans that made foreclosure more probable. These 
families lost $1 trillion of wealth as a result of abusive 
lending practices.
    The African American homeownership rate today is the exact 
rate that it was in 1968 when this Congress passed the Fair 
Housing Act in response to the death and assassination of one 
of our country's great leaders, Dr. Martin Luther King, Jr.
    The Federal Government's role in perpetuating housing 
discrimination in the housing finance system must be addressed 
because the families stymied by the millstone of racism deserve 
a chance to succeed.
    Future reforms must build on HERA and the new great 
protections offered by Dodd-Frank and the Consumer Financial 
Protection Bureau that has stabilized the mortgage market as it 
is on a path to receiving steady returns.
    The duty to serve provisions that began in the GSEs' 
charters and remain in HERA, require that credit is available 
all across the Nation in all communities.
    This directive creates liquidity for loans in every 
community, and especially in rural communities, and helps small 
lenders gain access to credit because oftentimes they are the 
ones serving the mortgage needs of those communities that are 
left behind.
    We must make sure that small lenders are on equal footing 
with large lenders, and we must preserve the affordable housing 
goals.
    I will end today by thanking you for your great work that 
you have already done. Please build on this existing reform.
    And contrary to varies that Dodd-Frank stifled the market, 
in 2006, financial institutions had total annual profits of 
$171 billion, the highest level since 2013. Community bank 
profitability rebounded as well, and by the end of 2015, over 
95 percent of community banks were profitable.
    Thank you for the opportunity. I look forward to answering 
your questions.
    [The prepared Statement of Ms. Bailey can be found on page 
42 of the appendix.]
    Chairman Duffy. Thank you, Ms. Bailey.
    Mr. Chavers, you are recognized for 5 minutes.

                   STATEMENT OF KEVIN CHAVERS

    Mr. Chavers. Good morning. Chairman Duffy, Ranking Member 
Cleaver and members of the subcommittee, thank you for the 
opportunity to testify today on the important topic of housing 
finance reform.
    My name is Kevin G. Chavers, and I am the managing director 
at BlackRock focusing on public policy issues, testifying today 
both on behalf of BlackRock and the Securities Industry and 
Financial Markets Association, better known as SIFMA.
    BlackRock manages assets on behalf of individual and 
institutional clients across equity, fixed income, real estate, 
and a host of other strategies. Our clients include pension 
plans, charities, foundations, endowments, financial 
institutions, as well as individual savers around the world.
    The assets we manage represents our clients' futures and 
the investment outcomes they seek, and it is our responsibility 
to help them better prepare themselves and their families for 
their financial goals.
    SIFMA and its member firms appreciate the attention being 
paid to housing finance reform and believe it is timely for 
Congress to move forward with meaningful reforms that protect 
taxpayers, ensure access to affordable housing and maintain 
deep and liquid markets, including the preservation of a highly 
TBA market.
    Since the financial crisis, policymakers have contemplated 
an array of proposals for what the next iteration of the 
housing finance system could look like. While SIFMA believes 
that some of these proposals are certainly worthy of 
consideration in whole or in part, we would like to take this 
opportunity to discuss a few key principles that SIFMA believes 
Congress should consider when developing any housing finance 
reform legislation.
    At a high level, our guiding principles for reforming 
housing finance are the need for clearly defined and limited 
government role to facilitate liquidity yet protect taxpayers, 
transparency at all levels, and a framework to attract private 
capital.
    The primary focus of SIFMA has been and will continue to be 
the preservation of a highly liquid TBA market which provides a 
number of important benefits to consumers, lenders and the 
economy. The TBA market is roughly a $5 trillion market that 
helps borrowers by facilitating the advance sale of conforming 
loans.
    The forward nature of this market allows originators to 
offer borrowers interest rate locks well in advance of the 
closing, and the TBA market also offers benefits to end 
investors, including 401(k) plans, pensions and mutual funds, 
by allowing them to buy MBS with clear, predictable terms on a 
regular basis and to meet their own portfolio diversification 
needs.
    Because the TBA market is so liquid over $200 billion of 
securities trade on an average day. And end investors do not 
demand steep liquidity premiums which further drives down the 
cost to borrowers.
    Homogeneity is what makes the TBA market succeed. Because 
securities are sold in advance, buyers and sellers agree on 
terms of a trade, but buyers do not know, and nor do they need 
to know all the characteristics of the securities they have 
purchased.
    These standards mean that investors can purchase MBS in the 
TBA market with confidence that these securities will meet a 
certain minimum standard of quality regardless of who 
originates these mortgages.
    SIFMA and its members believe that to retain high levels of 
liquidity in today's market and protect and preserve the TBA 
market, any housing finance reform legislation should establish 
an explicit and appropriately priced government guarantee for 
qualifying MBS.
    The guarantee promotes homogeneity by allowing investors to 
look beyond idiosyncratic credit risk and instead focus on the 
risk that loans will pre-pay at a faster or slower rate than 
expected, behavior which is in large part driven by changes in 
the interest rate environment.
    These investors that are so-called rate investors may not 
have an interest in nor appetite for credit risk that is 
required for investments in, for example, the non-agency MBS 
market. Without a guarantee, large swaps of investors, both 
U.S.-based and indeed globally, would look to other products 
for investment opportunities.
    In addition, Congress should encourage the return of 
additional private capital to the mortgage market through the 
establishment of policy certainty. Today the private label 
securities market is but a small corner of the market and we 
believe that any long-term, holistic solution must address 
this.
    Housing finance legislation should also aim to involve new 
sources of private capital while being careful not to repel 
private actors or generate uncertainty for investors. 
Regulatory policies that recognize and respect the rights of 
investors are critical to attracting private capital to the 
housing markets.
    Finally, any legislative reforms to the housing finance 
system should be undertaken in an orderly and thoughtful way, 
including an orderly transition from the current system to the 
new system and fungibility between existing GSE MBS and any 
future MBS.
    There is tremendous downside risk of a disorderly 
transition and in our view, policymakers focused on creating a 
new system should be just as mindful of how we transition to 
the new system and what that will look like.
    In conclusion, the circumstances that we find ourselves in 
today are very different than 2008 when the GSEs were first 
placed into conservatorship. The housing markets have largely 
recovered. Financial conditions of the GSEs have stabilized and 
the GSEs have undertaken a number of important reforms.
    That said, the importance of reform is paramount. Thank 
you, Mr. Chairman, and I would be happy to answer any 
questions.
    [The prepared Statement of Mr. Chavers can be found on page 
68 of the appendix.]
    Chairman Duffy. Thank you.
    Mr. Stafford, you are recognized for 5 minutes.

                  STATEMENT OF RICHARD STAFFORD

    Mr. Stafford. Good morning, Chairman Duffy, Ranking Member 
Cleaver and members of the subcommittee. My name is Rick 
Stafford, and I am testifying today on behalf of NAFCU. I am 
president and CEO of Tower Federal Credit Union in Laurel, 
Maryland. Thank you for the opportunity to appear before you 
today and talk about the important issue of housing finance 
reform.
    As you consider reform, we urge you to narrowly tailor 
changes. At Tower, our relationship with Fannie Mae is working 
fine. With technologies deployed by Fannie Mae in recent years, 
it is easier today in some ways for credit unions to sell a 
loan than it was 5 years ago. The current system is working for 
credit unions.
    However, we recognize the challenge to the current model 
that exists and appreciate the opportunity to offer our 
thoughts on reform.
    Without the GSEs, our capacity to lend in our communities 
would be outstripped by demand. Our ability to sell loans 
ensures liquidity, mitigates long-term interest rate risk, 
reduces concentration risk, and keeps rates competitive.
    Without access to GSEs, our capacity to meet local demand 
would be greatly diminished. Consumers would suffer from higher 
rates and fees, more stringent credit requirements and fewer 
overall options. A viable secondary market is vital to our 
success.
    NAFCU has been active in the housing finance reform debate 
and does not believe any previous proposals adequately protect 
the needs of community-based lenders. There are certain housing 
finance reform principles that are important to credit unions 
and should be considered in any reform effort.
    I outline these in detail in my written testimony, and I 
would like to highlight a few key points here today. It is of 
the utmost importance that a healthy, sustainable and viable 
secondary mortgage market for credit unions is maintained. To 
achieve this, credit unions must have guaranteed access to the 
secondary mortgage market.
    Efforts to fund any system must be done in a way that 
limits the cost to small lenders and is not a barrier to 
access. NAFCU wants to stress that it is critical that large 
institutions not be given control of the market.
    Their market dominance would have negative consequences for 
small lenders. Congress must ensure this does not happen in a 
reformed system.
    Any new system must recognize the high quality of credit 
unions' loans through a fair pricing structure. Credit unions 
originate comparatively fewer loans than others in the 
marketplace.
    Thus, we do not support a pricing structure based upon loan 
volume, institutional asset size or any other issue that will 
put our member-owners at a disadvantage. Credit unions must 
have access to pricing that is focused on quality, not 
quantity.
    NAFCU believes that there should be a continued role for 
the U.S. Government to issue an explicit guarantee on the 
payment of principal and interest on mortgage-backed 
securities. The explicit guarantee will provide certainty and 
stability to the market and investors and facilitate the flow 
of liquidity.
    One of the first steps in housing finance reform should be 
to ensure that the GSEs are in a safe and sound condition. We 
do not think the GSEs should be fully privatized at this time. 
NAFCU supports allowing the GSEs to rebuild capital slowly over 
time as part of a broader reform discussion.
    The transition to a new system should also be as seamless 
as possible. Credit unions should have uninterrupted access to 
the GSEs and the secondary mortgage market, in particular 
through the cash window and small pool options.
    Our partnership with Fannie Mae is critical to Tower's 
mortgage lending function. Our use of Fannie Mae's desktop 
underwriter on all mortgage loans that we originate ensures 
conformity and consistency across our portfolio, whether we 
sell the loan or not. Access to such technology must be 
preserved in any reforms.
    Additionally, any new housing finance system must ensure 
credit unions can retain servicing rights to the loans that 
they make to their members. At Tower, we retain servicing 
rights on all of our loans. Our members turn to us because they 
want to work with an organization that they trust. And they 
know that we will provide exceptional member service.
    Finally, we appreciate the committee's ongoing focus on 
regulatory relief and encourage you to continue to look for 
ways to reduce regulatory burdens that hamper access to 
mortgage credit. I have outlined a number of ideas for relief 
in my written testimony.
    In conclusion, credit unions exist to provide provident 
credit to their members. It is vital that credit unions 
continue to have legislatively guaranteed access to the 
secondary market and fair pricing based upon quality of the 
loans.
    Thank you for the opportunity to provide our input on this 
important issue. I welcome any questions.
    [The prepared Statement of Mr. Stafford can be found on 
page 86 of the appendix.]
    Chairman Duffy. I thank you, Mr. Stafford, and thank you 
for the panel's testimony.
    The chair now recognizes himself for 5 minutes. 
Homeownership is oftentimes the single largest investment a 
family makes in their lives. Homeownership is part of the 
American Dream, being able to have your own house.
    And making sure that we get this right is incredibly 
important because when we get it wrong, we saw what happened in 
the 2008 crisis, not just to homeowners but to a whole economy 
that was taken down when this system doesn't work.
    And making sure we have a thoughtful conversation on how 
reform can make the system work better and safer and still well 
for the American family is what I think our focus should be.
    So many of you know we are talking about how do we offload 
credit risk? How do we have a catastrophic government backstop? 
And so I want to focus my first questions on those issues. In 
regard to catastrophic government backstop, how do you price 
the backstop?
    Ms. Hughes, do you know how do we look at a government 
backstop and price it? Or anyone from the panel if you want to 
take that?
    Ms. Hughes. Sorry. They are through the guarantee fees that 
we currently pay through our rate system.
    Chairman Duffy. No. Right, but how do we know that that is 
the correct price?
    Ms. Hughes. I think if you look at what is the market 
sustainability of those and under the current system and the 
losses and you balance that against the guarantee fees, I think 
they are appropriate.
    Chairman Duffy. Anybody else want to? You don't have to if 
you don't want to jump in.
    Mr. Vallandingham. I would also support the use of 
guarantee fees to support the government backstop. The reality 
is that we have historical information to support that. We have 
monitoring.
    The GSEs have improved their monitoring of collateral 
values and the reassessment of those values as the market 
dynamics change. And so they are better able to understand the 
changes of values through booms, busts and the period which is, 
I think, giving us a better insight into the risk associated 
with holding those MBS'.
    And so I think that as we move forward, the technology that 
we have and the information that we are providing as lenders, 
is going to better enable the GSEs to assess the risk inherent 
in those portfolios.
    Chairman Duffy. And I bring it up because I don't think 
there is a good answer to it. It is challenging. Without a 
market to price the backstop we are trying to do our best 
analysis to pull the right number out of a hat. And again, 
markets are the only one that efficiently price.
    To the panel, what percent of the credit risk can we 
offload do you think? What will the market bear?
    Mr. Chavers, any idea?
    Mr. Chavers. Mr. Chairman, I think the question of what 
percent the market will bear should be preceded by what 
outcomes would you like to see on the front end? At its height, 
extrapolating from the jumbo private label market, it was $213 
billion of issuance I believe in 2003, which was the height of 
the size of the prime jumbo market.
    But I believe the question is more one of what do you want 
the downstream implications to be? And that is, what is the 
cost ultimately to the borrower of the credit protections that 
you put in place before the taxpayer and what the implications 
are downstream.
    As policymakers, you are in the position to make that 
determination of what market you ultimately hope to serve, 
balancing it against how much the appetite is in the 
marketplace. But the current GSE marketplace is supported in 
the rates market, right, and that market dwarfs the size of the 
private mortgage credit market ultimately.
    Chairman Duffy. Anyone else? I want to get all up in the 
record quickly. So there is the Mortgage Bankers Association 
that has a proposal creating a mortgage insurance fund to 
provide the government backstop. There is also the DeMarco 
Bright proposal, taking Ginnie Mae out of HUD and using Ginnie 
to provide the government backstop.
    Any thoughts on either of those plans? Do you favor one or 
the other or some other plan that has been put out or principle 
that is put out?
    Mr. Stafford?
    Mr. Stafford. Thank you. My position and NAFCU's position 
is that the current system is working today. It is not perfect. 
It needs reform. It needs to be removed from conservatorship.
    But the current system I think is appropriate for what 
credit unions need today both in the rural market and for us in 
more of an urban market.
    Chairman Duffy. I would just note that before 2008 there 
was great testimony that said, ``It works. This system works. 
We don't need to change it. There is nothing wrong with it.''
    We had a great history, and it works until it doesn't work. 
And I would make the point that private capital at the front 
end reforming the way this system works, they brought us one of 
the greatest crisis of our time, is important for this 
committee to look at how we reform it and make it work better. 
And my time is expired.
    And now I recognize the Ranking Member Mr. Cleaver for 5 
minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Ms. Bailey, I am going to tell you what bothers me at night 
when I wake up--well, a lot of things--but among them the 
homeownership rate is falling.
    There are about 1.2 million mortgages that are turned down 
annually and builders are moving toward more and more luxury 
home building and so we are ending up just kind of pushing 
aside the issue of affordability and so that troubles me.
    And when you consider the rental market, it is in crisis. 
And are any of those or other things related to this 
troublesome to you?
    Ms. Bailey. Indeed, sir. Access and affordability need to 
be central tenants of the house and finance system and we 
really need to pay attention to how mortgage loans are priced.
    The pricing of the mortgages will determine who actually 
gets a mortgage and that is a fundamental question. Right now 
what we are experiencing in the market is market 
overcorrections that are pushing out creditworthy borrowers who 
have a history of being successful in homeownership.
    Urban Institute estimates that 5.2 million loans since 2010 
have not been made in the market so that means people in 
communities all over the country who would do well with home 
ownership and the opportunity to build wealth that home 
ownership presents, aren't given that chance and the time where 
our market is relatively affordable, interest rates are at 
historic lows, the actual cost of housing in some communities--
I won't go to some of our outliers like places in California, 
are still relatively low.
    So when we have things that are excessive risk instruments 
come in the market they stop borrowers from getting credit. One 
example of these are loan level price adjustments that the FHA 
allows. These are additional fees that borrowers pay based on 
credit scoring and ability for down payment.
    These fees have a disproportionate impact on borrowers of 
color and they are drying up credit opportunities all over the 
Nation. They must be abolished, and we need to think about 
every proposal that is going to come before you during this 
discussion on housing and finance reform in how it relates to 
pricing. Pricing, ultimately, determines who gets the loan.
    Mr. Cleaver. Thank you. My follow up question I think Mr. 
V.--because I am not going to struggle with it--Mr. V and Mr. 
Chavers, I would like the both of you to deal with the issue 
and tell me if I am right or wrong.
    I don't believe that we have a housing market. I believe 
that we have two, one for the rich, and then one for the rest 
of us. Do you disagree or agree and why?
    Mr. Vallandingham. My community bank serves low to moderate 
income people. I mean, we are in West and West Virginia and 
very much serve that market and we serve it through the 
secondary market. And even with loan level pricing adjustments, 
we are able to price those in and make those loans work.
    Typically, where we see barriers to home ownership it comes 
to either financial education or down payment. Those seem to be 
the biggest challenges in our marketplace and so when you say 
that there isn't a market for the low to moderate income buyer, 
I would say the 60 plus markets that I serve every day are low 
to moderate income environments that we make secondary market 
loans in and we are serving those constituents that you are 
concerned about.
    Mr. Cleaver. OK. I wanted to respond, but Mr. Chavers, my 
time is going to run out.
    Mr. Chavers. Congressman, I think your point is well-taken, 
though I would submit that as you think about housing finance 
reform it is important to think about it on a holistic basis 
and that is it is important to not only think about the 
implications for what loans that have traditionally funneled 
through the GSE channel, but to also include the FHA, V.A., 
Ginnie Mae component of the system as part of how you think 
about the solution.
    I had the honor and the pleasure of serving at an earlier 
time in my career as the president of Ginnie Mae and I know for 
a fact that the FHA market, for example, tends to 
disproportionately serve the low to moderate income markets and 
first-time homebuyers.
    I think it is a mistake. However, to look at them in sort 
of disparate tracks and instead to look at housing finance 
reform, indeed, on a holistic basis.
    I would also submit that both of those markets are 
supported, ultimately, in the capital markets by the presence 
of a government guarantee on the securities so that the funding 
from the global capital markets is somewhat indifferent as to 
which channel it comes in through the front end.
    Mr. Cleaver. Thank you.
    Chairman Duffy. The gentleman yields back.
    The chair now recognizes the vice chair of the 
subcommittee, the gentleman from Florida, Mr. Ross, for 5 
minutes.
    Mr. Ross. Thank you, Chairman. And as I talked about in my 
opening, since 2008 we have seen a recovery from the housing 
market and we made changes, but yet what we have done in regard 
to the GSEs is essentially put a veneer over a chasm that 
exists that is going to probably implode again if we don't do 
something about it.
    And as I pointed out in Mr. Vallandingham's testimony, that 
Fannie and Freddie have less capital today than were placed in 
conservatorship 8 years ago in absent of the change in policy 
are on track to fully deplete their capital by year-end so my 
questioning goes to capital retention.
    Several groups, including the Housing Policy Council, 
American Bankers Association, Habitat for Humanity, National 
Association of Homebuilders also a letter on September 21 to 
Director Watt and Secretary Mnuchin stating, ``Key structural 
reforms must be implemented by Congress before a decision is 
made regarding the GSEs and capital retention and that Congress 
should decide the final resolution of the conservatorship.''
    So my question to each of you is what is your take on 
capital retention for the GSEs?
    Ms. Hughes?
    Ms. Hughes. I believe that the legislative reform should be 
completed and the capital restrictions or the requirements set 
and allow the GSEs to work toward those capital requirements.
    Mr. Ross. Mr. Vallandingham?
    Mr. Vallandingham. We too support the recapitalization of 
the GSEs. When you look at the broader markets and you--
    Mr. Ross. And if they are able to recapitalize, then we can 
reduce their line of credit, too--
    Mr. Vallandingham. We should.
    Mr. Ross. --Couldn't we?
    Mr. Vallandingham. Absolutely.
    Mr. Ross. OK.
    Mr. Vallandingham. Even as a financial institution, we are 
required to have capital so it is no different for the GSEs.
    Mr. Ross. Absolutely.
    Mr. Vallandingham. And when you look at the overall 
function of the market and the international investors, they 
want to see recapitalization of those GSEs so that we maintain 
the liquidity and the viability of that market internationally 
as well.
    Mr. Ross. Ms. Bailey?
    Ms. Bailey. We believe that they need to continually be 
reformed and then recapitalized specifically highlighting the 
reforms that we discuss today.
    Mr. Ross. Gotchya.
    Mr. Chavers?
    Mr. Chavers. I think the concern about recapitalization is 
that it somehow sends a message to the market that it is an 
adoption of the recapitalization and release proposal which 
would be problematic in terms of supporting the guarantee, 
explicit government guarantee at the MBS level.
    Whether you recapitalize them in the short term for 
operating purposes so they don't have to take a draw or whether 
they take a draw, it is actually sort of left pocket, right 
pocket.
    There is not a material difference. In both instances, 
right, it is funding to support them on the short-term basis by 
the taxpayer.
    Mr. Ross. Gotchya.
    Mr. Stafford?
    Mr. Stafford. We fully support and NAFCU fully supports the 
capitalization of the program modestly, maybe one-quarter 
worth, but again we truly--
    Mr. Ross. Prudent.
    Mr. Stafford. Excuse me?
    Mr. Ross. It is just prudent.
    Mr. Stafford. I think it is prudent. I think it allows them 
to not have to go to the Treasury as there are changes in their 
financial condition.
    Mr. Ross. OK, and thank you. And let me follow up on the 
chairman's earlier question regarding the Mortgage Bankers 
Association's proposal to create a mortgage insurance fund to 
provide the government backstop.
    Specifically, the DeMarco Bright proposal last year 
proposed taking Ginnie Mae out of HUD and using Ginnie to 
provide that government backstop.
    Between the two, do any of you have a position between the 
MBA's proposal for a backstop and the DeMarco Bright?
    And Ms. Hughes, I will start with you.
    Ms. Hughes. I have not reviewed either of those plans you 
just mentioned, so I don't have a real opinion on either of 
those.
    Mr. Ross. Mr. Vallandingham?
    Mr. Vallandingham. The form of which we take that create 
the backstop I don't think is as important as doing it and that 
really points back to the previous question of adding capital 
back to the GSEs.
    Mr. Ross. Right.
    Mr. Vallandingham. Essentially, that is the same thing so 
we can talk about doing it in multiple ways. But the reality is 
we have to form some type of backstop to help deal with credit 
losses and down in stress markets.
    Mr. Ross. Ms. Bailey?
    Ms. Bailey. I believe a backstop is important.
    Mr. Ross. Mr. Chavers?
    Mr. Chavers. There is no official statement of position and 
I don't believe there is actually a difference between the 
substance of the two approaches. In one instance--
    Mr. Ross. They accomplish the same.
    Mr. Chavers. They accomplish the same thing and they are, 
in effect, the same thing just with a different name. They have 
more in common than they don't.
    Mr. Ross. OK.
    Mr. Stafford?
    Mr. Stafford. NAFCU does not have a formal position.
    Mr. Ross. Mr. Chairman, you talked earlier in your opening 
about a framework to provide private capital. Could you kind of 
further expand on what that framework would look like?
    I mean, are we looking at front end risk being by the 
private sector or back end or how would you consider that to be 
structured?
    Mr. Chavers. So I think the way to think about the private 
capital stack that stands in front of the taxpayer is 
multifaceted. I think it is important to acknowledge that the 
primary housing markets have largely recovered--
    Mr. Ross. Yes.
    Mr. Chavers. --So literally the first lost piece of capital 
is the equity in an individual borrower's home.
    You then move to at the instance where that particular 
borrower has mortgage insurance, you then move to the mortgage 
insurance, you then transition to whatever the guarantee fee 
for that particular security.
    And then you look to, in the case of backend credit risk 
transfer, whatever the intermediary is, aggregating and laying 
off some of that in the capital markets through credit risk 
transfer, pool insurance, senior subordinated securitization 
structures or alternatively that aggregator doing sort of front 
end credit risk transfers. We support both.
    Mr. Ross. I appreciate that analysis. Thank you very much. 
My time is expired.
    Chairman Duffy. The gentleman's time has expired.
    The chair now recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. Mr. Chairman, every Republican speaker in this 
committee has always had the debt chart up there and suddenly 
it disappeared in the same week in which the Republican budget 
offers us an opportunity to blow another $1.5 trillion, maybe 
$2 trillion, hole in our deficit so I have taken the liberty of 
putting up the Republican debt chart in the upper half of that 
graphic behind our witnesses.
    And then I have added the fact that the Republican tax cut 
adds another $150 billion to $200 billion a year and the 
abandonment of quantitative easing adds another $80 billion to 
$100 billion a year to that deficit.
    And I might add that getting rid of Fannie and Freddie and 
spreading them off would also add to that deficit as well. I am 
told that the regular Republican graphic is somehow technically 
not available this week, but I invite speakers on both sides of 
the aisle to choose to have this graphic up during their time 
as is consistent with the history of this committee 
particularly this year.
    I praise the present system in my opening remarks. It is 
not a great system compared to what we aspire too. It is a 
great system when compared to other lending systems that have 
existed through history.
    One of the bad systems that existed in history was the one 
we had in 2008. It was working well until it didn't. It didn't 
because we had Fannie and Freddie as government guaranteed 
private corporations. We need to never go back to that.
    And I agree with the chairman that that system failed in 
2008. It is the system we adopted since then where Fannie and 
Freddie are basically government entities that is working very 
well especially on a historical basis.
    The ranking member points out the need for affordable 
housing and we need to build it both rental and for purchase, 
but I might also add that proposals to eliminate the property 
tax deduction and/or the home mortgage deduction raise the cost 
of homeownership and makes some perspective borrowers, 
therefore, ineligible for loans.
    Mr. Chavers, the homebuyer once I think needs a 30-year 
fixed rate pre-payable mortgage. Could that possibly be 
achieved without a government guarantee? I won't say--I 
overstated it. Is it likely to be achieved in the absence of a 
government guarantee?
    Mr. Chavers. I do not believe so, Congressman, not in the 
scale we currently enjoy.
    Mr. Sherman. Thank you. Is there anyone on the panel that 
thinks that we can have 30-year fixed rate pre-payable 
mortgages in the absence of a guarantee?
    Mr. Stafford. NAFCU's position to ensure that there is an 
explicit guarantee.
    Mr. Sherman. OK. Is there anyone on the panel that wants to 
argue the other way? The record should report that no one came 
forward.
    On recapitalization, we have this situation where we want 
to transfer money out of Fannie and Freddie to the Treasury to 
avoid the capitalize and release that you, Mr. Chavers, brought 
up, but at the same time we don't want the political 
embarrassment of Fannie and Freddie ever having to draw on its 
Treasury line.
    What can we do to take away any stigma that and any of it 
is transferred money to the Treasury year after year for the 
last several years may occasional draw and then go back?
    One way to eliminate that stigma would be to have the money 
paid in dividends to the Treasury earmarked in the Treasury as 
a special money received from Fannie and Freddie account and 
then it would be more obvious if money was drawn from the 
Treasury that it was coming from money that had previously been 
deposited in the Treasury.
    Mr. Chavers or anyone else, can you think of another way in 
which we on the one hand make sure that Fannie and Freddie can 
in a bad year get some of the money that they previously 
generated, but at the same time prevent the capitalize and 
release?
    Mr. Chavers. Congressman, I can't opine on the level of 
potential political concerns about the draw one way or another. 
As a practical matter, I think it is very important if there 
were to be a limited funding of a capital buffer on a limited 
basis that that is communicated very clearly to the markets 
that it is not intended to signal the end of the 
conservatorship.
    Mr. Sherman. I think you bring that up and that is instead 
of dealing with the politics of having to draw, deal with the 
politics of some capitalization and make it plain that 
capitalization is there to prevent a draw, not to really--
    Mr. Chavers. And I would suggest the concern there is not, 
at least not from the markets standpoint, not so much a 
political one, but one of transparency, such that investors are 
able to understand in the global capital markets that this does 
not signal some other type of activity and that, in fact, it is 
a very limited intended for this purpose recognizing that this 
market is supported on a global basis and so that will have to 
be understandable to investors around the world.
    Chairman Duffy. The gentleman's time has expired.
    The chair now recognizes the chair of the Subcommittee on 
Financial Institutions, the gentleman from Missouri, Mr. 
Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I thank all of you for being here this morning. An 
interesting discussion. One of my first questions or concerns 
is, what are the biggest impediments to getting private capital 
back in the mortgage market?
    We seem to have transitioned to a system where more and 
more government involvement, more and more government 
backstops, more and more government rules and regulation, what 
does it take to get more private capital involved? Anybody?
    Ms. Bailey?
    Ms. Bailey. I will answer that. The only time where the 
market was purely private was at the time leading us up to the 
housing crash so any private capital that returns to the market 
has to really be responsible and it can't be toxic private 
capital that leads us on a chase or excessive profits that puts 
American taxpayers and homeowners at risk so I will answer in 
that form.
    And I will also remind the committee that FHA and the GSEs 
played a very important role following the housing crash. They 
actually sustained the market when private capital withdrew so 
we have to be very careful as we are making these decisions 
about house and finance reform to do it in a way that doesn't 
jeopardize the modest recovery we have experienced.
    Mr. Luetkemeyer. Mr. Chavers, you made a comment long ago 
about a new system and you have talked and served general 
terms, but can you get specific of what you would see with a 
new system what it would look like? What you would see it--how 
it would transition to what our view would have an idea that it 
can be down the road?
    Mr. Chavers. So I think in any new system I think I have 
indicated it is important if we are going to serve a market 
with the features and size that is currently served, that is 
important that there is an explicit government guarantee at the 
MBS level, at the security level.
    I think it is also important that in that transition from 
current system to any new system that the outstanding existing 
MBS are, in fact, fungible with the new MBS.
    Mr. Luetkemeyer. OK. Many of you have talked about 
maintaining government guarantee. What do you mean when you say 
the government guarantee? Are you going to guarantee the entire 
loan, 95 percent, 50 percent?
    Mr. Chavers. Well, actually, Congressman, in fact--
    Mr. Luetkemeyer. Or just the GSE security?
    Mr. Chavers. It is just the security.
    Mr. Luetkemeyer. What are you--you are talking about the 
GSE security as a whole.
    Mr. Chavers. That is correct.
    Mr. Luetkemeyer. Not individual loans.
    Mr. Chavers. That is correct.
    Mr. Luetkemeyer. OK. So the individual loans would be 
independent loans that would not be guaranteed individually?
    Mr. Chavers. I believe that is correct.
    Mr. Luetkemeyer. So security would be guaranteed--
    Mr. Chavers. The security, the timely payment of principal 
and interest at the security level would be explicitly 
guaranteed.
    Mr. Luetkemeyer. OK. I know a number of you talked about 
the servicing of the assets being important to you. Can you 
explain why that is important? I know the banking guys and the 
credit union guys both made a comment on that.
    Both of you, if you can give me a response both of you, Mr. 
Stafford and Mr. Vallandingham?
    Mr. Stafford. It is absolutely critical in a credit union. 
Being able to retain the servicing is allowing us to build that 
relationship and when our members down the road are stressed 
financially and they need options they come to us. We work with 
them one-on-one because we have the relationship.
    If we didn't retain the servicing, we wouldn't be able to 
help them. So servicing to us is an absolutely critical 
component of any future reform.
    Mr. Luetkemeyer. Mr. Vallandingham?
    Mr. Vallandingham. I would echo his comments as well. The 
relationship is critical and maintaining that relationship with 
a customer is catamount to our franchise. Ultimately we do a 
better job, I mean, just flat-out. As a small servicer we have 
closer relationships with our borrowers.
    We better understand the markets in which we serve. And 
when there is something that happens whether it be a hailstorm 
or a flood, we have a better understanding how to make that 
customer correct the situation and make it right, and we serve 
them better. So at the end of the day it is a win-win for both 
sides.
    Mr. Luetkemeyer. One of the comments that has been in some 
discussions that have already been had with regards to 
capitalization of the GSEs, you know we had Director Watt in 
here the other day and he is concerned about that. And I think 
the decision has to be made at some point.
    Do the GSEs recapitalize so they can absorb losses or do we 
continue to just take the profits, funnel it to the Treasury? 
And whatever a loss occurs just have the Treasury write a check 
back. I mean can you guys give me some thoughts on that, see 
where we need to go?
    Mr. Vallandingham. I would say that if we recapitalize and 
reform then it will build a robust mortgage market that private 
investors will want to invest in. And you will see the 
inclusion of private capital at that point, but right now there 
is a little bit of limbo and that is why you are not seeing the 
re-entry of private capital.
    Mr. Luetkemeyer. Do you believe that if we had a capital 
account there that had to be touched, that had to be gone to in 
order to absorb losses that the GSEs would be more responsible 
with where they lend money?
    Mr. Vallandingham. Well, obviously having capital is going 
to help. And maintaining a capital level is going to help them 
maintain responsibility, and it also directly impacts the size 
of the balance sheet in which they hold. I mean, you have to 
have enough capital to support the risk in which they bear. And 
that is one of the things--
    Mr. Luetkemeyer. That would be the key right there.
    Mr. Vallandingham. --That is one of the things that we 
didn't do in 2008.
    Mr. Luetkemeyer. I hope everybody listened to that last 
comment that is key to what is going on here. Holding capital 
to be able to curtail or to be able to really settle what is 
going on with a number and an amount of loans that are made. 
Thank you.
    Chairman Duffy. Gentleman's time has expired.
    The chair now recognizes the ranking member of the full 
committee, the gentlelady from California, Ms. Waters, for 5 
minutes.
    Ms. Waters. Thank you very much. I appreciate that and I 
would like to thank our witnesses for being here today.
    As I have sat here listening it appears that everyone on 
this panel agrees that an explicit government guarantee is a 
necessary component of housing finance reform. Is that right?
    Ms. Hughes. Correct.
    Ms. Waters. OK. And I would ask you about the PATH Act, but 
Mr. Chavers has already told us he wishes not to opine in the 
political aspects of this discussion. So what I will ask you is 
from each of your perspectives what harms would result if we 
eliminated the government guarantee? Yes, we can start.
    Mr. Vallandingham. I will be glad to answer first. If you 
take away the explicit government guarantee the cost to the 
consumer is going to go up point blank. And so less borrowers 
are going to be able to afford homes and our housing market is 
going to decline. I mean it is direct correlation.
    Ms. Waters. All right, everyone agree with that?
    Ms. Hughes?
    Ms. Hughes. For us, if that path were to go away we would 
not be able to serve the number of borrowers that we serve.
    So we are a small community bank. We did just under 1,300 
loans to mortgages last year. That is a huge amount in our 
market and without the path that we have we would not be able 
to deliver that.
    Ms. Waters. Ms. Bailey?
    Ms. Bailey. Yes, the cost of credit would go up, and 
regions around the country that actually rely on credit like 
rural communities would definitely not have access to credit.
    Ms. Waters. Thank you.
    Mr. Chavers?
    Mr. Chavers. Congresswoman, yes. I also agree that the cost 
of credit would go up. You would not be able to support a TBA 
market which means the size of the 30-year fixed rate freely 
repayable market would likely be diminished.
    Ms. Waters. Mr. Stafford?
    Mr. Stafford. I also concur with that. There would be a 
loss of confidence. Fees would go up and it would detrimentally 
hurt the rural market that credit unions serve.
    Ms. Waters. Ms. Bailey, I would like to ask you if you have 
any thoughts on the reform proposal that was put forward by Mr. 
Gene Sperling, are you familiar with that one?
    Ms. Bailey. I am.
    Ms. Waters. I think Mr. Sperling, Mr. Parrott, Mr. Zandi 
and Mr. Ranieri and Barry Zigas, and it is also similar to a 
proposal that I put forward. Could you tell me what is it that 
you feel is attractive in those proposals? What is it you like 
about them?
    Ms. Bailey. So we are evaluating every proposal by how it 
impacts the cost of credit. So we are being very careful to 
figure out how much additional fees would result from how 
mortgages are going to be priced. We disagree with that 
proposal as it is currently written and we have tried to 
negotiate with them and share some of our perspectives around 
some of those core concerns.
    We have to be very careful not to allow fees that are going 
to drive up the cost of mortgages that have a disproportionate 
impact on borrowers of color and that don't firmly speak to our 
country's affordable housing goals.
    We need to be very careful as we are moving the levers of 
the market not to dry up credit access in important communities 
all across the Nation and we don't think that proposal, as it 
is written, will help the borrowers that I mentioned earlier in 
my testimony access the mortgage market in a more equitable 
manner.
    Ms. Waters. You are referring to--
    Ms. Bailey. The proposal by Zandi and Mr. Parrott, not your 
proposal ma'am.
    Ms. Waters. I see. Anyone else familiar with that proposal?
    Mr. Chavers?
    Mr. Chavers. I am, Congresswoman, and actually I would 
submit that SIFMA and myself evaluates those proposals based on 
the implications that each have and its ability to be supported 
by the capital markets. And I would submit that the Zandi 
proposal as well as your earlier bill from the prior Congress 
and the mortgage bankers and frankly the Milken Institute 
proposal have more in common than they do in distinction.
    That is they all support an explicit government guarantee, 
they all support an orderly transition from the current state 
to the future state, and they all look to the capital markets 
to provide some support in front of the taxpayer.
    And so rather than say opine on one proposal versus the 
other, the position is to look at their ability to achieve the 
principal such that the capital markets can support ultimately 
the primary market.
    Ms. Waters. Do you have any thoughts about fees?
    Mr. Chavers. I think the fees are more actually dials, if 
you will. And both policymakers and the implementers have the 
opportunity to make the adjustments when those fees relative to 
the amount of risk and where that risk should fall in the 
system, so how much ultimately falls on the front end in terms 
of what the borrowers pay, how much gets laid off into the 
capital markets either through risk sharing or how much gets 
laid off through mortgage insurance or other forms of credit 
enhancement.
    So I don't have an opinion on a fee specifically, just 
being sure that the apparatus is in place to appropriately 
allocate those.
    Ms. Waters. But you do agree that if the fees are 
disproportionate it could have a negative impact on low income 
borrowers, right?
    Mr. Chavers. Yes. So as you adjust the fees up the, now 
this is me speaking in my individual capacity, I don't think 
SIFMA has a view, but obviously if you adjust the fees across 
the ecosystem is has an impact on the eligible universe of 
borrowers.
    Chairman Duffy. The gentlelady's time has expired.
    Ms. Waters. Thank you.
    Chairman Duffy. The chair recognizes the gentleman from 
Illinois, Mr. Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you, Chairman. Thank you all for being 
here. I appreciate your input into these important issues.
    I wanted to address my first question to Mr. Vallandingham 
if I could?
    One of the primary tenets I know of your testimony is that 
any changes to the housing finance system should, and I quote, 
``preserve equal and direct access to the secondary market to 
safeguard the role of community banks providing mortgage credit 
in the communities we serve,'' end quote. I absolutely agree 
with that.
    Small financial institutions are integral to providing 
access to mortgage credit across my district and every district 
in the country, especially the more rural areas where larger 
lenders do not have a presence.
    What do you see as some of the risks for diminishing the 
role of community banks in the housing finance system and do 
you have any specific examples or concerns you can sight with 
any of the proposals that have been discussed here in 
Washington?
    Mr. Vallandingham. What I see is community banks if they 
were to become less involved in the housing finance system than 
those segments of the population, the low to moderate income 
and the rural communities, would be less served.
    And one of the things that we are able to do in our 
underwriting is really customize the loan and make sure that we 
understand the property and the marketability and make sure 
that while it does meet the GSE requirements that it does match 
the communities in which the property exists.
    And a lot of times what you see or what we have experienced 
as we have dealt with other investors is that larger financial 
institutions that don't participate in those communities don't 
really understand the markets and so it is easier to turn that 
loan down than it is to make that loan work. And what we would 
see is less availability of credit in those markets and that 
would be a negative consequence nationwide.
    Mr. Hultgren. Thank you.
    Mr. Stafford, I know credit unions play a similar role in 
rural communities. Do you have any thoughts to add about how 
credit unions might not be able to as easily participate in the 
housing finance system if certain changes are made.
    Mr. Stafford. I would echo many of those comments. Again, 
many of the rural areas are not served appropriately by the 
larger financial institutions and so those credit unions need 
access to the secondary market or liquidity to support those 
communities. It is at the foundation of what credit unions do.
    Mr. Hultgren. Thanks.
    Mr. Chavers if I could address a couple questions to you?
    In its June 2017 report on the banks and credit unions the 
Treasury Department found that the exemption that the GSEs have 
been granted from the CFPB's qualified mortgage rule has 
resulted in a concentration of the mortgage market and 
government supported mortgage programs because the exemption 
allows the GSEs to securitize loans that private institutions 
cannot.
    As the Treasury Department put it, the exemption creates an 
asymmetry and regulatory burden for privately originated loans. 
Do you agree with this assessment and is the exemption an 
impediment to bringing private capital back to the market?
    Mr. Chavers. I don't fully agree with that assessment. I 
think it is part of a larger challenge for return to the 
private market. That includes concerns about confidence in the 
infrastructure that supports the private market. That also 
frankly includes the prevailing economics of the execution of 
private label securitization. Does the definition contribute to 
that? Perhaps but it is certainly not the entirety.
    Mr. Hultgren. OK. Also Mr. Chavers, if I could I am 
supportive of the concept of making significant reforms to our 
housing finance system that will protect taxpayers without 
diminishing access to credit.
    However given the large role currently being played by 
Fannie and Freddie, how would you imagine such a transition 
taking place and what steps should Congress working with FHFA 
and the administration, what would or should we take to avoid 
any significant market disruptions?
    Mr. Chavers. I think a couple of things come to mind. One, 
assuming that the future system is very clear about maintaining 
an explicit government guarantee at the MBS level, it is also 
important that it is communicated that the existing outstanding 
GSE MBS will be freely fungible with whatever the future state 
of MBS. That is important.
    Number 2, that it be done in a very deliberate fashion and 
that it be adequately and accurately communicated with full 
transparency to the marketplace in the transition period and 
effective date and be very clear about that communication.
    Mr. Hultgren. Thank you. Just have a few seconds left here 
but Ms. Hughes if I can address quickly page 90 of your 
testimony points out that the so-called treasury sweep has 
actually cost taxpayers money because it does not account for 
the interest obligations of the investments made on behalf of 
the taxpayers. Isn't this fact on its own enough to justify 
significant reform?
    Ms. Hughes. Yes. I mean we do need to have significant 
reform, but loans that are underwritten appropriately and if 
the capitalization is there the system should work as it needs 
to.
    Mr. Hultgren. Thank you again.
    My time is expired I yield back. Thanks, Chairman.
    Chairman Duffy. The gentleman's time has expired.
    The chair now recognizes the gentlelady from Ohio, Mrs. 
Beatty, for 5 minutes.
    Ms. Beatty. Thank you, Mr. Chairman, and thank you to our 
ranking member and certainly to the panelists. Thank you.
    In response to a question posed by my colleague and Ranking 
Member Cleaver, Mr. Vallandingham you stated that two of the 
biggest barriers to homeownership are financial education, and 
down payment. Well, let me just say thank you, and I agree with 
that statement.
    And that is why I introduced a bill entitled The Housing 
Financial Literacy Act which is co-sponsored by more than 20 
Members of Congress and even from this committee, Congressman 
Stivers who sits on the the other side of the aisle.
    And what this bill does, it will provide a 25 basis point 
reduction on the annual mortgage insurance premium paid by FHA 
borrowers who take a HUD certified home buying financial 
literacy class. And so I want to urge my other colleagues here 
on this committee to take a look at that bill.
    That is a plug, Mr. Chairman, that I am giving to you. Or 
maybe I should use a challenge. So thank you for your comment 
on that, Mr. Vallandingham.
    Now, the question I have, first I would like to start with 
you, Ms. Bailey, and maybe you, Mr. Stafford, in responding to 
this. The Federal Housing Administration is critically 
important to first-time homebuyers in minority populations.
    In Fiscal Year 2016, first-time homebuyers represented 82 
percent of all FHA purchase originations. More importantly, in 
2015, while FHA loans were used for 25 percent of all home 
purchases, it was used for 47 percent of purchases by African 
American households and 49 percent of home purchases by 
Hispanic households.
    So can either one of you, and we will probably have enough 
time for others to be on deck, can you describe how the reforms 
of the past act would transform the FHA and its potential 
impact on minority homeownership?
    Ms. Bailey. The act actually designs to take away and 
abolish the FHFA housing mortgages, and that would just be a 
wrong choice for consumers all over the country. As you stated, 
it is the way most working families enter into the housing 
finance system. And it is the way that many families have built 
home equity and wealth over time.
    So it would be a very poor choice to take away that option 
for families. And we need to be mindful that FHA actually 
rescued the market. It was part of the support to the market 
when private capital retreated and withdrew from the market. So 
the FHA and the GSE-insured mortgages actually sustained the 
market at a time when we actually needed it.
    So we have to make sure it is modernized and it has the 
resources that it needs to fully function and to function well, 
but we have to be very careful to have a whole total approach 
and not move in a way that will create real lack of opportunity 
in the housing sector.
    Ms. Beatty. Thank you.
    Mr. Stafford?
    Mr. Stafford. Tower doesn't officially do FHA mortgages. We 
actually have another customized program that we use, and they 
are non-Q.M. loans so we have the option to customize those 
products specifically for the members.
    However with that, as far as the PATH Act, NAFCU doesn't 
have an official position. I would be more than happy to follow 
up with one after this hearing.
    Ms. Beatty. OK. Anyone else like to comment?
    Thank you, Mr. Chairman, and I yield back.
    Chairman Duffy. The gentlelady yields back.
    The chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Ms. Hughes, in your testimony you discussed the importance 
of the Federal Home Loan Banks and the role that they can play 
in providing liquidity in times of crisis. I am certainly 
familiar with these institutions, especially the Federal Home 
Loan Bank of Pittsburgh, which is based in my part of the 
commonwealth.
    You expressed concerns that changes to Fannie and Freddie 
as part of our overall housing finance reform effort may 
inadvertently impact negatively the FHLB system. You also 
suggested that the FHLBs may have the potential to play an 
expanded role in a revised secondary market system.
    In your opinion, what is the most appropriate or ideal role 
for the Federal Home Loan Banks going forward?
    Ms. Hughes. The Federal Home Loan Banks function very well 
as they are. They are in partnership with their member banks, 
and we actively utilize them for acquisition of affordable 
housing programs through their Home Start Grants. We utilize 
them for delivery of mortgage loans that we service on behalf 
of the Federal Home Loan Bank. And we obviously use them for 
advances as needed.
    Again, the process that we have with the Federal Home Loan 
Banks works as it is today.
    Mr. Rothfus. Let us see, Mr. Stafford, in your testimony 
you wrote that, quote, ``to date we do not believe that any 
housing finance reform solution suggested in previous 
Congresses fully accounted for the needs of small lender 
access.'' What are some of the major issues that impede 
participation by smaller institutions?
    Mr. Stafford. Price and access to the market. Small credit 
unions in rural areas need unfettered access to the GSEs in the 
secondary market. That will provide them the appropriate 
liquidity. They can't hold that type of volume of loans on 
their balance sheet because of interest rate risk and 
concentration risk.
    So if we can provide in a reformed environment dedicated 
access, guaranteed access, those are the markets that need it 
the most.
    Mr. Rothfus. Mr. Vallandingham, can you comment on that?
    Mr. Vallandingham. Yes. I would also point out that the 
onslaught of compliance and regulatory burden that came on 
after the mortgage crisis has eliminated many participants in 
this market space. The reality is that many financial 
institutions elected to step away from mortgage lending because 
they couldn't deal with the compliance costs or the 
complexities of the compliance that came on after that crisis.
    In addition to that, when you look at Q.M. and non-Q.M. 
loans, the additional litigation risk that hasn't really fully 
been understood at this point keeps many of those players out 
of the market and they have decided that it is just much easier 
to do something else.
    Mr. Rothfus. Let us talk about Q.M. for a minute, and I 
want to follow up with Mr. Stafford on the same questions. I 
know Mr. Stafford expressed concern about Q.M. being the 
standard for loans eligible for the government guarantee.
    Do you have thoughts, Mr. Vallandingham on why that is 
problematic and can you recommend a more appropriate 
underwriting standard?
    And I am going to get the same answer from Mr. Stafford, or 
same question.
    Mr. Vallandingham. I will say that community banks, we did 
it right. We did it right the entire time, and now we are 
burdened with an additional layer of regulatory oversight and 
testing and cost, so the actual cost of producing a loan has 
gone up. The cost of servicing the loan has gone up.
    And so when you look at things like Q.M. and ATR, we now 
have these multiple tests that we go through in the origination 
process that it takes us longer to produce the loan. And at the 
end of the day, we weren't the ones that did it.
    In fact, if you want to go back, Freddie and Fannie weren't 
really the cause of this crisis. It was the option ARMs and the 
interest-onlys and they were all the products, the exotics, 
that we aren't talking about that really created that.
    Now, it snowballed later. I get that.
    Mr. Rothfus. So Fannie and Freddie didn't buy any Alt-As?
    Mr. Vallandingham. They did buy Alt-As, but those were a 
part of the affordable housing initiative, and I am not sure 
that they were necessarily bad credits absent if you had that 
other portion of the market not occurring. If those didn't 
occur--
    Mr. Rothfus. They weren't bad credits. We didn't have to go 
bail out for Fannie and Freddie?
    Mr. Vallandingham. I am just saying that when it started it 
started with a lot of the exotics. And had absent those losses, 
I am not sure the rest of the market would have rolled into 
that.
    Ms. Bailey. Could I interject?
    Mr. Rothfus. No. I want to get Mr. Stafford's response on--
    Ms. Bailey. All right.
    Mr. Rothfus. --On can you recommend a more appropriate 
underwriting standard than Q.M.?
    Mr. Stafford. Yes. I can obviously tell you that the 
regulatory burden is significant. And I will give you one 
perfect example is we saw that our members were being taken 
advantage of by title companies. They did not have our members' 
best interests in mind, so we formed our own title company.
    Now, with Q.M. rules, the expense associated with us 
creating our own title company has to be added to the 3 percent 
Q.M. rule. It immediately makes that mortgage a non-Q.M. We can 
no longer sell it. We have to keep it and hold it on our 
balance sheet.
    So even though we had to do what is in our members' best 
interests, we were actually penalized by the regulation because 
of the way that you have to calculate the expenses.
    Same thing with TRID. This is a pain point for our members 
of why do they have to wait 3 business days to sign a closing 
disclosure and then wait for their funds? And if they don't do 
e-sign it is another 6 days.
    So our members are asking why is the government telling me 
I have to wait 3 or 6 days before I can close a mortgage? Why 
won't they empower me, the consumer, to waive some disclosures 
saying I know and understand the rights, and I wish to move 
forward immediately and not wait 3 or 6 days.
    Mr. Rothfus. Yield back.
    Chairman Duffy. The gentleman's time has expired.
    The chair now recognizes the clapping member from 
Massachusetts, Mr. Capuano for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Vallandingham, thank you. That is what we have been 
saying from day one. I don't think anybody has ever said Fannie 
and Freddie didn't play where they shouldn't have played, but 
they didn't create it. They simply went in where others went 
before them, for the reasons, in my opinion, it is human 
nature.
    Fannie and Freddie worked fine when they were government 
entities, and they worked fine for a long time as non or quasi 
government agencies, until all of a sudden the greed factor 
took over with nobody there to regulate them.
    They had no choice but to provide good returns for their 
stockholders and they loved having their pay scales tied to 
profit. Normal, human nature, should have been foreseen. It 
wasn't. They participated, played hard and hurt all of us. And 
I am glad.
    I am actually wondering, it seems to me and again correct 
me if I am wrong, everybody here agrees that we need to do 
something with the GSEs, specifically preferably explicitly 
state the government backing of the GSEs. So I think everybody 
seems to agree on that.
    And I think everybody seems to agree that the GSEs, 
whatever is left after any reform we do, have sufficient 
capitalization. So if we all agree on that, could somebody tell 
me what the heck we are doing here?
    I mean, you are all very smart and capable people and you 
have been very good, but all the issues that were brought up 
today require a lot of details, exactly where the limits are 
and all that kind of stuff. Those are details. That is not for 
a public hearing. Those are for discussions to have and push 
back and forth.
    We are having, I don't know, the 400th hearing on housing 
market, and yet we all agree it has to be done, but we can't 
get it done. The only bill that this committee has passed out 
is the PATH Act, and no one here likes it. No one here on this 
side would have voted for it, and I daresay very few on the 
other side would have voted for it.
    In the 20 years I have been here, I have never seen a 
committee put out a major piece of legislation that then never 
made it to the floor, except for the PATH Act, because nobody 
thought it could work and would destroy the housing market. 
Thank you for all coming to basically the same exact agreement.
    I would also want to ask if any of your banks would have 
given me a loan and then after I repaid the loan, plus any 
reasonable amount of interest, you kept taking all my wages? Do 
you think any of your bankers would not be put in jail? And yet 
that is exactly what the Federal Government is doing to Fannie 
and Freddie.
    In 2016 $15 billion was taken from homeowners who didn't 
know it, and taken and put into the general fund every quarter, 
a total of $15 billion. By the way, I would just like--curious 
since I don't have too many questions in here, because I am not 
sure what we are doing here, especially those of you who 
represent banks.
    One of the things I have always been interested in is 
getting banks back into local mortgages, preferably by 
incentivizing you to hold the mortgages. My personal opinion is 
that a held mortgage should be counted toward your 
capitalization requirements, and maybe a few other incentives.
    I like the idea of keeping local banks tied to their 
communities that they serve having a vested interest in not 
taking my house because you know me. And because the truth is 
no small bank, no medium size bank, really is equipped to get 
rid of a whole bunch of houses. It is not what you want.
    So how would you like us to be able to provide you some 
incentive to hold your mortgages? Would that incentivize your 
banks to start making their own home mortgage loans in their 
own communities?
    Ms. Hughes?
    Ms. Hughes. We currently service about 5,100 loans, and 
part of those, about 2,800 of those are on behalf of Freddie 
Mac, and then we have a small pool for Federal Home Loan Bank. 
Servicing our own loans is paramount for our ability to serve 
our consumers' needs.
    We actually in our partnership with Freddie Mac on those 
servicing, because of the constraints under the regulation on 
how we have to manage those loans if those borrowers go into 
default, we have actually purchased loans back from the agency 
because we could work with our borrowers at a deeper level than 
the regulations allowed.
    And back to Sam's point of the regulatory oversight, is 
pushing community banks out of the market. It is continuing to 
push the community banks out of the servicing platform. And as 
we add those additional layers we are adding additional reasons 
for banks to get out of mortgage lending because it costs--
    Mr. Capuano. I appreciate that. My time has run out and I 
would love to hear from all of you, but my chairman is going to 
knock me out. But at the same time I want to tell you that I 
don't hate regulation. These are regulations in my opinion that 
are wrong-ended. And I would love to work with you to 
straighten those out if we could ever be allowed to do so.
    Thank you, Mr. Chairman.
    Ms. Bailey. Community bank profitability is at 95 percent, 
so it is very important that as we have this discussion that it 
is rooted in the facts. We had 7.8 million foreclosures in this 
Nation, and we responded. This Congress responded with sensible 
rules that provide abilities for lenders and community members 
to have safety in the market.
    So it is very important that as we have this discussion, 
that it is rooted in the fact that we have actually returned to 
the levels of lending that we did for our community banks 
across the country.
    Chairman Duffy. The gentleman's time has expired.
    The chair now recognizes the gentleman from Michigan, Mr. 
Trott, for 5 minutes.
    Mr. Trott. Thank you, Chairman. I want to thank the panel 
for their time this morning. I want to also echo some of the 
comments that have been made regarding the ability to retain 
servicing. That has got to be part of any solution for the 
credit unions, the community banks.
    And really people don't talk about it much, but the crisis 
in 2008 was really exacerbated by the inability of large 
servicers to deal with their borrowers in an appropriate 
manner.
    Communication oftentimes was very poor and really made loss 
mitigation nearly impossible for a lot of borrowers, which led 
to quite a bit of frustration and some bad results. So I just 
want to echo that.
    Ms. Hughes and Mr. Chavers, I want to talk about an idea I 
have because my friend in Massachusetts says this is our 400th 
hearing on housing finance reform.
    I haven't been here that long, so this is probably only my 
20th, but one of the reasons why we keep struggling with this 
is it is hard to get an agreement, not only among Republicans, 
but in certainly any kind of bipartisan solution on GSE reform.
    And one of the issues I have found is, two-thirds of the 
book of the business for Fannie and Freddie are refis and 
second home mortgages. Why are they in that business? I agree 
with Ms. Bailey's comments. The dream of home ownership is an 
important part of our American values.
    Why should Fannie and Freddie be involved in helping 
someone buy a second home? Why should Fannie and Freddie be 
involved in helping someone realize a lower interest rate?
    I understand one of the concerns would be for low and 
moderate income folks, but Ms. Hughes, what do you think about 
simplifying our approach on GSE reform by just getting Fannie 
and Freddie out of refis and second home mortgages?
    Ms. Hughes. I have really not thought about the second home 
mortgages.
    Mr. Trott. How simple would that be, right?
    Ms. Hughes. It would be simple, yes. On the investment 
property space, that is another space that they are actually 
very active in, and we are limited in what we can deliver to 
that market. But there are opportunities in the past for loans 
that are not investors that we could look for other options to 
make that happen.
    Mr. Trott. Mr. Chavers, what do you think it would do to 
the rate on a refi if we took them out of that part of the 
market?
    Mr. Chavers. Well, Congressman, I am pretty sure that SIFMA 
has not taken a position on excluding the refi or second home 
market. and so I would submit that that is a policy 
determination, obviously best left to the Congress.
    I would submit, though, that it is important to recognize 
any of the downstream implications of the changes that you 
make. One of the other reasons that I believe as a policy 
matter we support an orderly housing finance system is its 
implications for the broader economy.
    And typically one of the mechanisms by which we have 
historically sought to spur economic activity has been through 
monetary policy and the adjustment of interest rates 
nationally. And one of the industries that communicates that 
most directly to the marketplace has historically been the 
housing market, so just recognizing the implications 
downstream.
    Mr. Trott. But there would be a way to phase it in over 
time. And in your earlier comments you said any kind of reform 
has to have transparency and certainty and adequate notice.
    So there would be a way for us to adopt a policy, wouldn't 
there, such that if Fannie and Freddie were going to get out of 
the refi market, we could do it and phase it in over time such 
that the private sector would fill that need and not create any 
kind of turmoil.
    That would be the goal, and we are not great at executing 
on some of that sometimes, but that would be the goal.
    Mr. Chavers. Congressman, I was just referring to sort the 
macroeconomic implications and the implementation of monetary 
policy and--
    Mr. Trott. Right. I understand.
    Mr. Chavers. --the housing markets. So in its current 
configuration with estimates being somewhere between 12 and 15 
percent of GDP being impacted by the housing market, taking 
away the refi or the second home market would have some 
downstream implications for that impact is all I was 
suggesting.
    Mr. Trott. Well, a different question for you, sir. What 
issues would you consider if you were to enhance Ginnie Mae's 
role in providing a guarantee in the conventional loan space, 
as proposed in the DeMarco Bright solution?
    Mr. Chavers. I think a couple of things come to mind, and 
again, am speaking for myself in this instance because I don't 
believe that SIFMA has opined on this. As the DeMarco Bright 
proposal contemplates, there is the need for some 
administrative reforms at Ginnie Mae.
    It has been simplified as being characterized by removing 
it from the Department of Housing and Urban Development, which 
I understand placing it on sort of independent footing. But it 
is important to recognize the strengths of Ginnie Mae is that 
it is a globally recognized brand in the capital markets. And 
so the ease of execution is appealing.
    The challenges of Ginnie Mae is Ginnie Mae has, at least, 
probably has less than 200 employees with managing a 
significant amount of counterparty risk in the marketplace. And 
it historically has not had the tools to bring in the kind of 
capacity internally.
    What it has been able to do is to leverage it through 
outside vendors in order to perform its functions. If you were 
to expand its role, it seems to me that it needs some 
operational enhancements in order to do so.
    Mr. Trott. Thank you.
    I yield back.
    Chairman Duffy. The gentleman's time has expired.
    The chair now recognizes the gentleman from North Carolina, 
Mr. Budd, for 5 minutes.
    Mr. Budd. Thank you, Mr. Chairman, and thank the panel.
    Mr. Chavers, the common securitization platform was 
originally intended to broaden participation in the 
securitization market by allowing new entrants to come into the 
market and compete with the GSEs. However, it seems that the 
platform's development in recent years has focused on being 
solely used for Fannie and Freddie.
    How important is it that the platform's role in bringing 
private capital back to the mortgage market?
    Mr. Chavers. So I believe that the common securitization 
platform could be expanded to be an option for private market 
participants to provide standardization and to provide more 
confidence in that infrastructure.
    One of the challenges in the private label market coming 
out of the crisis is that investors have lost a lot of 
confidence in the infrastructure having the proper alignment 
and incentives of the intermediaries between the end investor.
    And so the ability to leverage the platform to bring that 
standardization to provide the sort of marketplace utility 
merits exploration. Now, I am also mindful, I have heard the 
comment that the common securitization platform is a bit of a 
Rorschach test in that everyone sees in it what they hope to 
see.
    And so I don't have any transparency into its current 
functional application and to appreciate how accessible it 
would be to sort of migrating to make it a utility for the 
private market, but it certainly bears exploration.
    Mr. Budd. Thank you. So are you concerned that a platform 
as it is currently being developed will be used exclusively by 
the GSEs?
    Mr. Chavers. I don't know that it gives rise to concern. My 
understanding is that the way it is currently configured that 
is the intention. It is also facilitating the transition to the 
single TBA, which is something that potentially offers 
additional liquidity, which I think is a desirable objective. 
So--
    Mr. Budd. So how realistic do you think it is that a 
platform will be open to other industry participants, aside 
from Fannie and Freddie, if it continues to be a joint venture 
of Fannie and Freddie?
    Mr. Chavers. I don't know that answer. I haven't heard any 
indication of the intention for it to migrate as we sit today. 
The focus, as I understand it, has been on it coming fully to 
market and providing the underpinnings to deliver the single 
security.
    Mr. Budd. Sure. So a slight variant of that same question, 
how critical is it for the platform to be spun off from Fannie 
and Freddie?
    Mr. Chavers. Excuse me. Congressman, I would like to give 
that some more thought and--
    Mr. Budd. Certainly.
    Mr. Chavers. --Get back to you.
    Mr. Budd. Certainly. Thank you.
    Mr. Vallandingham, thank you again for being here. Is it 
your view that the GSE expansion into the single family rental 
market is consistent with their charter as entities in a 
conservatorship?
    Mr. Vallandingham. To answer your question, I think that 
their participation in the investment property and rental 
market makes homeownership affordable, whether it be through 
actual ownership or through rental. And so that makes the 
market--I mean, we had one of the previous commented that the 
rental market was a disaster and that there wasn't affordable 
housing in that segment.
    Without that investment property avenue, it would be even 
worse because the cost of financing for those particular 
properties would go up, which means the cost of rental payments 
would have to go up in order for that to be a profitable 
investment.
    Same thing with the refinance. So many times I see my 
borrowers come in and we are shoring up their balance sheet. We 
are taking equity out of their home and paying off higher cost 
debt and moving it to lower cost so that their balance sheet is 
better-positioned and they can withstand problems in their own 
financial environment.
    And if we take that away, I think it would be disastrous, 
both for the housing market and to the consumer.
    Mr. Budd. OK.
    Ms. Bailey. We think that their increasing involvement 
there is something to really be critically examined. They have 
a robust multi-family portfolio that is really designed to 
impact the rental market space.
    And we have to be very careful that as they consider moving 
into that space that they are not ignoring their obligations to 
ensure that more homeowners are entering into the single family 
space so that we can actually expand homeownership, which is 
part of what those obligations actually speak to.
    Mr. Budd. Thank you, Miss Bailey.
    Chairman, I yield back my time.
    Chairman Duffy. The gentleman yields back.
    The chair now recognizes the gentleman from New Jersey, Mr. 
MacArthur for 5 minutes.
    Mr. Macarthur. I thank you, Chairman. I would like to step 
back a little bit. You each expressed in your opening remarks 
some concerns about reforms going too far and maybe disrupting 
the marketplace, at least that is how I heard it, each from a 
different perspective.
    And I would just like to ask one or two of you to take a 
stab at what do you see as the primary benefits of the current 
system? And what do you see as the one or two primary drawbacks 
of the current system?
    Mr. Stafford. I can start. The benefits of the current 
system are numerous; one, its competitive with pricing. There 
is confidence in the system.
    It is an easy flow of liquidity. The technology used by 
Fannie and Freddie, for example, is significant. And we use it 
to even hold the loans internally.
    So there is a great sense of confidence that the system is 
working well, at least for credit unions, and we feel 
comfortable with that.
    The things that obviously we are concerned about is 
conservatorship is temporary. It--by definition. And so we do 
and are in favor of reforms to remove it from conservatorship.
    Mr. Macarthur. And one other?
    Ms. Hughes?
    Ms. Hughes. For us without the opportunities in the path 
that exists currently, we would not be able to deliver the 
number of loans that we deliver to the secondary market. We 
cannot afford to hold loans on our books at market rate 
interest rates for our consumers long term.
    So that is the definite need that we have for us to 
continue to be able to service our marketplace.
    Mr. Macarthur. Yes, and that kind of leads me to my second 
question.
    Mr. Stafford, you mentioned easy flow of liquidity and you 
are talking about the limitation of holding loans if you can't 
offload them to a secondary market.
    This balance of catastrophic risk and how to deal with 
that, that is one model, versus I guess what I would call a 
smoothly flowing market aside from catastrophic risk, just a 
normal ebb and flow, smooth market that facilitates housing 
starts and facilitates an orderly real estate market. How would 
you balance those two issues?
    Mr. Vallandingham?
    Mr. Vallandingham. Well, I think that we got away from 
prudent underwriting standards. And if you do a good job on the 
front end you are not going to have a repeat of what happened 
in 2008. And therein lies the basis.
    And I think community banks proved that time and time 
again. I mean, our portfolio has outperformed national averages 
across the board. And so in reality it is an ounce of 
prevention is worth a pound of cure.
    So in reality I think that we have to be prudent up front 
and make sure that we do a good job and that we don't allow the 
non-bank participants, who really, I think in my opinion, 
created a lot of the problem.
    Access to the market and the way that they had it where 
they were just doing anything they wanted in any way they 
wanted, and ultimately created the risk that we weren't 
comfortable with today.
    Ms. Bailey. And I would echo that point, and I would also 
go back to your original questions about some of the real 
benefits of the market. One of the things that the market does 
really well is pool loan risk so that there isn't a 
specialization where we are only serving borrowers with 
pristine credit profiles in certain regions of the market.
    We actually have a system that allows us to have credit 
availability because of the duty to serve requirement across 
the country, specifically in rural areas. And this is really 
something that the market does well that must be preserved 
going forward. And the affordable housing goals along with the 
duty to serve are very critical.
    Mr. Macarthur. So just balancing those two, and I am going 
to end, Mr. Chavers, with you because I would like you to sort 
of look at this from the perspective of those who invest in 
these securities ultimately.
    This balancing of--I agree with you. We need to consider 
those without pristine credit and making sure that a broad 
group of Americans can have some hope at the American Dream.
    But when that goes too far, which it did in the period in 
the run up to 2008 where the Federal Government is encouraging 
people to borrow money that they don't reasonably have a hope 
of repaying, and I think that was a big part of the run up to 
the housing crash. How do we reform that?
    How do we make sure, Mr. Chavers, that the Federal policy 
is encouraging lending that is responsible, that there is every 
hope of it being repaid, that the private market will 
ultimately want to invest in those loans as they are 
securitized? What reforms would you see that would allow us to 
achieve that?
    And again, I am out of time, so answer briefly.
    Mr. Chavers. OK. So Congressman, I think your question runs 
at the beginning of the continuum, prudent underwriting. And I 
don't think there is any substitute for prudent underwriting 
for the product that ultimately goes through the system and 
ends up in the securitized space.
    Now, relative to what we think of as the traditional GSE or 
TBA market, the benefit of the government guarantee is it opens 
up the global capital markets, who have no interest, frankly, 
in taking on credit risk, and bring that capital to support the 
primary housing market.
    As it relates to the private label market, it begins with 
prudent underwriting and appropriate transparency and 
intermediaries who act in the ultimate interest of the investor 
and the borrower and transparency and appropriate disclosure 
throughout the process.
    Mr. Macarthur. I thank you. My time has expired. I 
appreciate all of you being here.
    I yield back.
    Chairman Duffy. The gentleman's time has expired.
    The chair now recognizes the gentleman from New Mexico, Mr. 
Pearce, for 5 minutes.
    Mr. Pearce. Thank you all very much for your testimony.
    Thank you, Mr. Chairman.
    Ms. Bailey, I appreciate the testimony and the work of your 
group in going in the areas that are very underserved. Second 
District of New Mexico is 60 percent minority and also one of 
the poorest districts in the country. 50 percent of the houses 
are manufactured housing, so I am a little bit familiar with 
the circumstances they talk about.
    Do you hold almost everything or almost nothing in the 
portfolio on your loans? Or do you sell them to the secondary 
market?
    Ms. Bailey. We actually have a robust secondary market 
program that allows us to actually buy loans from banks. So how 
it is designed is--
    Mr. Pearce. So you are a little bit of a secondary market 
yourself then?
    Ms. Bailey. Yes. We actually buy certain loans from banks 
to actually help them make more Community Reinvestment Act 
loans.
    Mr. Pearce. Do you all have different rates for different 
borrowers based on credit worthiness?
    Ms. Bailey. I would have to check with our team over at 
Self-Help to make sure I answer that correctly, so I would--
    Mr. Pearce. OK.
    Ms. Bailey. --Like to get back to you on that.
    Mr. Pearce. Yes, if you wouldn't mind I would appreciate 
that.
    Mr. Vallandingham, do you have any rules of thumb when 
people are coming in and they are wondering about the 15 or 30-
year mortgage that if you have 15 years you pay this much, 30 
years? What kind of is that rule of thumb?
    Mr. Vallandingham. In clarification, are you asking about 
debt-to-income ratio or how we counsel them about the products?
    Mr. Pearce. No. No, I am just talking about if somebody is 
wanting to know what am I paying over the 15-year for--if I do 
a 15-year loan versus 30-year loan? Do you have a rule of 
thumb?
    Mr. Vallandingham. Well, in terms of what their total cost 
would be?
    Mr. Pearce. Yes, the total cost, that is--
    Mr. Vallandingham. No. I really don't. We provide them with 
a truth-in-lending statement that shows in that. Generally--
    Mr. Pearce. Just generally I would look at it and I think 
it is fairly accurate, 15 years you are going to double the 
price of the house, so a $150,000 house you will pay about 
$300,000. 30 years you will pay $450,000, about three times. 
And so--
    Mr. Vallandingham. Well, and I am going to argue that it 
depends on what rate environment we are in. And one of the 
things that--
    Mr. Pearce. Yes. I mean, yes, it will.
    Mr. Vallandingham. At the current market and when we ask 
what it does well, is it brings very low cost financing to the 
borrowers. I mean, 4 percent over 30 years, that is an 
incredibly low rate and something that consumers are benefiting 
from. When I started, and I know I--
    Mr. Pearce. Yes. If I could take my time back here I would 
appreciate it. So we have heard the statement today many times 
that the 30-year mortgage will be dead if we don't have the 
secondary market. What percent--you say in your testimony that 
many of our banks, community banks, choose to hold their loans 
in the portfolio.
    So by what percent is that? Because we really do want to 
get a sense of how much we are going to penalize the market if 
we change this GSE structure?
    Mr. Vallandingham. Well, currently my community bank is 
$200 million and we service over $600 million in mortgages. We 
have about a $30 million internal portfolio of loans. We 
generally use those loans to--
    Mr. Pearce. How much do you put out? In other words, I am 
more interested in percents than sizes, so what percent do you?
    Mr. Vallandingham. When you say ``put out,'' sir?
    Mr. Pearce. Yes. Yes, so that you put to the secondary 
market?
    Mr. Vallandingham. Well, not only--
    Mr. Pearce. Thirty of 600? That is what you are telling me? 
That is all of it?
    Mr. Vallandingham. We portfolio about 30 and we have 600 
that we service. Now, in a given year we might have originated 
a couple hundred million and I would say probably--
    Mr. Pearce. So it is a very small percent is actually held 
in portfolio?
    Mr. Vallandingham. Yes, sir.
    Mr. Pearce. OK.
    So Miss Bailey, the ability to repay rule that CFPB puts 
out, have you all taken a position on that?
    Ms. Bailey. Yes. We strongly support the ability to pay 
rule.
    Mr. Pearce. You strongly support the 43 percent, even 
though that is going to be very punitive on the lower income. 
You support the 43 percent because I know in our district it is 
going to be very punitive, but you support it?
    Ms. Bailey. We support it because we think that it gives 
guidelines for lenders and consumers to have safety in the 
marketplace. We think Dodd-Frank, like any other piece of 
legislation or any other regulation, can be fixed, but we think 
that they present us with a really good starting place for it.
    Mr. Pearce. OK.
    Ms. Bailey. And they return credit to the market.
    Mr. Pearce. I just wanted to know if you support the 43 
percent.
    So Ms. Hughes, do you all track the--
    Ms. Hughes. We--
    Mr. Pearce. --Underwriting standards of--do you track the 
underwriting standards of the GSE pretty closely?
    Ms. Hughes. Yes.
    Mr. Pearce. Yes. So when Mr. Johnson began to diminish the 
underwriting standards, again, I am addressing the fact that 
the GSEs had no responsibility in 2008. And when I look at it 
they began to change the underwriting standards dramatically 
and it began to get loans into the system that probably never 
were going to be repaid.
    If they had never changed the underwriting standards then 
that great downward pressure in the system probably would not 
have occurred. And so I accept the fact that there were greedy 
people out there working in the finance market, but to simply 
say that underwriting standard in the GSEs have no part in it, 
is something I just, at the end of the day, won't buy.
    I see my time has expired, Mr. Chairman, and thank you very 
much.
    Chairman Duffy. The gentleman yields back.
    Did you want to respond to that?
    Ms. Hughes. I can.
    Chairman Duffy. Sure.
    Ms. Hughes. On the underwriting standards we do follow them 
very closely. I personally, and I am not speaking on behalf of 
the ABA, I am personally speaking to you at--the ACR was a non-
issue for our institution. We underwrote loans on the 
borrowers' individual ability to repay from the onset.
    So through the housing crisis we had very limited issues 
against our peers against national averages. We were very low 
in our defaults because we tried to underwrite them to begin.
    Mr. Pearce. Yes. I was just trying to say that you, even 
though the underwriting standards deteriorated, you all chose 
not to internally.
    Ms. Hughes. Right.
    Mr. Pearce. A lot of institutions did not make that choice. 
If they could go ahead and make the bonuses based on getting 
rid of the loans, somebody else got the problem, they jumped 
into that. But if they could not have gotten rid of the loans 
because they didn't meet the underwriting standards, then much 
of the downward pressure in the system wouldn't have occurred.
    So I appreciate the fact that you all chose to implement it 
differently, but my point was actually to the national 
pressures on those institutions that chose just to walk 
straight with the underwriting standards, creating an 
instability in the system.
    And that, I think, is a great concept that is a piece of 
the equation that must be brought into play as we are looking 
at the entire GSE question.
    And again, I yield back Mr. Chairman. Thank you.
    Chairman Duffy. For the second time the gentleman yields 
back.
    I want to thank our witnesses for their testimony and time 
today.
    The Chair notes that some Members may have additional 
questions for this panel, 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.
    Without objection, this hearing is now adjourned.
    [Whereupon, at 11:58 a.m., the subcommittee was adjourned.]


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                            October 25, 2017
                            
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