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




                               BEFORE THE

                            SUBCOMMITTEE ON
                         HOUSING AND INSURANCE

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES


                             FIRST SESSION


                            NOVEMBER 7, 2017


       Printed for the use of the Committee on Financial Services

                           Serial No. 115-55                


 30-774 PDF            WASHINGTON : 2018      


                    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
TED BUDD, North Carolina

                  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
TED BUDD, North Carolina
                            C O N T E N T S

Hearing held on:
    November 7, 2017.............................................     1
    November 7, 2017.............................................    43

                       Tuesday, November 7, 2017

Lea, Michael, Cardiff Consulting Services........................     8
McCargo, Alanna, Co-director, Housing Finance Policy Center, 
  Urban Institute................................................    10
Tozer, Hon. Theodore ``Ted'', Senior Fellow, Center for Financial 
  Markets, Milken Institute......................................    12
Wallison, Peter, Senior Fellow and Arthur F. Burns Fellow in 
  Financial Policy Studies, American Enterprise Institute........     5
Zandi, Mark, Chief Economist, Moody's Analytics..................     6


Prepared statements:
    Lea, Michael.................................................    44
    McCargo, Alanna..............................................   103
    Tozer, Hon. Theodore ``Ted''.................................   122
    Wallison, Peter..............................................   132
    Zandi, Mark..................................................   145

              Additional Material Submitted for the Record

Beatty, Hon. Joyce:
    Article from Politico Pro entitled, ``Tax Plan Would Cut 
      Affordable Housing Supply by 60 percent''..................   154
Zandi, Mark:
    Written responses to questions for the record submitted by 
      Representative Sherman.....................................   155



                       Tuesday, November 7, 2017

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The Housing and Insurance Subcommittee met, pursuant to 
notice, at 10:05 a.m., in room 2128, Rayburn House Office 
Building, Hon. Sean Duffy [chairman of the subcommittee] 
    Present: Representatives Duffy, Ross, Royce, Posey, 
Luetkemeyer, Stivers, Hultgren, Rothfus, Zeldin, Trott, 
MacArthur, Budd, Cleaver, Capuano, Sherman, Beatty, and Kildee.
    Also present: Representative Green.
    Chairman Duffy. The Subcommittee on Housing and Insurance 
will come to order. Today's hearing is entitled ``Sustainable 
Housing Finance, Part Three.'' We have already had two 
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee meeting at any time.
    Without objection, members of the full committee who are 
not members of this subcommittee, may participate in today's 
hearing for the purpose of making an opening statement and 
questioning our witnesses. The Chair now recognizes himself for 
3 minutes.
    I first want to thank the panel, our distinguished panel, 
for coming in today and offering their insights into housing 
finance. We have already heard from stakeholders that represent 
several aspects of the housing finance system. We have heard 
from those who finance purchases of homes, those who build 
homes and those who help sellers and buyers meet for that 
buyer's slice of the American dream.
    And before us, we have those who have done extensive work 
in this space, have policy ideas, probably have some 
recommendations for the must do's and must don'ts for this 
committee, and I look forward to all of your testimony as you 
advise our committee.
    But for us, we recognize that the home purchase, is 
probably one of the largest, biggest financial and most 
important decisions that a person makes. Probably besides what 
ring you buy and who you decide to marry, this is the biggest 
decision that you will make in your financial life.
    And making sure that we have a system that actually works 
for all Americans is incredibly important because we have seen 
when things go wrong--back in 2008. It doesn't only impact 
those who purchased a home. It wreaks havoc throughout the 
whole economy.
    People in the industries that involve home purchases and 
home sales, they get ravaged. We have heard from many of those 
sectors where many of their colleagues and friends have lost 
their jobs. We have seen what it does to an economy as a whole.
    But what we are focused on is what it does to actual home 
buyers, people who purchased homes and couldn't afford them, 
how that devastated their financial future, crushed their 
families. We don't want that to happen again.
    And make no mistake that we are, what, almost 10 years on 
from the crisis, reforming housing finance is not easy. If we 
thought tax reform was tough, as we have seen right now play 
out in the House, housing finance I think is equally as 
    And I think after the crisis that there has been no reform 
in this space is unacceptable. I think we have an opportunity 
to work across party lines to get an American solution to 
housing finance. We want to make sure we bring in more private 
    We want to bring in more market discipline. We want to make 
sure people can still get a mortgage that they can afford. Some 
might argue that should be a 10-year mortgage. Some are going 
to argue for a 30-year mortgage.
    But what we want to do is have a system that works for 
homeowners to get their slice of the American dream and the 
American experience, which is home ownership.
    So as we look to all of you, I don't know if we want to 
classify you as think tank world, but those of you who have 
worked on policy for a very long time, to give us your insight 
into the opportunity that presents itself to us today, and 
again, the advice that you have on how we can make the system 
work better for the American family.
    With that my time has expired. I now recognize the 
gentleman from Missouri, the Ranking Member, Mr. Cleaver for 5 
    Mr. Cleaver. Thank you Mr. Chairman. Let me thank all of 
you for being here today.
    This is our third in a series of housing finance reform 
hearings, which I hope you and others realize that because we 
are going through the third hearing that we are serious about 
trying to do something that would keep our mortgage financing 
system functioning at a high level or higher than it is now.
    And so over the last few weeks we have had the opportunity 
to hear numerous stakeholders regarding their suggestions and 
proposals for housing finance reform. At these previous 
hearings there has been a general consensus that housing 
finance reform must preserve the 30-year fixed mortgage by 
including explicit government guarantee. And I believe this is 
an essential component of our conversation.
    As I have mentioned in the past, housing affordability must 
also remain at the forefront of this discussion. Homeownership 
rates have been in decline, especially among minority 
populations where families have yet to recover from the 
financial crisis.
    The path toward GSE (Government Sponsored Enterprise) 
reform must include a very strong plan to make homeownership 
options more available for qualified borrowers and to address 
the rental affordability crises.
    Our discussion on housing finance reform should not take 
place in a vacuum. Currently, the Ways and Means Committee has 
been marking up the tax plan put forth by the majority that 
would make changes to the mortgage interest deduction. 
Specifically that bill would cap deductions for mortgages on 
new homes over $500,000, which is an issue we will get into a 
little later.
    But a number of groups have already raised concerns that 
this change could have a detrimental impact, not only on the 
housing market, but on the middle class. Home ownership is one 
of our most important tools for households to accrue wealth, 
and we should be concerned with proposals that would make this 
more difficult.
    And so as our witnesses today, you may have a variety of 
proposals that can solve this problem today. We can solve it 
before we have the recess with the members of the housing 
intellegencia here. There is no question in my mind that you 
have the solution. We want you to give it to us before noon.
    Thank you, Mr. Chairman, I yield back.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the Vice Chair of this committee, 
the gentleman from Florida, Mr. Ross, for 2 minutes.
    Mr. Ross. Thank you Chairman, and I thank the witnesses 
again for being here. The Federal Government's involvement in 
housing finance is predicated on the idea that it is not only 
helpful but it is also necessary.
    Take a working class family, folks who are scraping by with 
a modest income, they are deciding that it would be best to 
purchase a home rather than to continue to pay rent. How are we 
helping that family?
    Reasonable people will disagree, but what is most striking 
to me is that we don't ask a different question. Is it possible 
that we are hurting that family? Let us recognize that a family 
may not be able to afford a home. The prices may be too high 
and the family's income may not rise with those prices.
    So the Federal Government says don't worry. We will make 
you a loan. This will be easy. We already know that the family 
can't afford the home.
    That loan isn't a loan, it is an albatross. It is a moral 
hazard. We are inducing them to take on a risk that is 
unsustainable. Yet time and again we do it.
    Why? Because we are told we are trying to broaden access to 
home ownership and to achieve wealth accumulation for low and 
moderate income home owners. That was the argument made during 
the three decades between 1964 and 1995, during which home 
ownership remained relatively static despite government 
    Perhaps we just need to try harder. Actually we did. The 
following 10 years saw an aggressive increase in the Federal 
Government's efforts to support homeownership for low and 
moderate income families. We placed mandates on the GSEs, first 
requiring that 30 percent of all mortgages they acquired be 
ones made to borrowers below medium income.
    From 1996 on, we continued to increase the artificial 
ratio, until 2008 it reached 56 percent. And for a brief 
moment, home ownership reached new heights of 70 percent.
    Then came the crash and now we are at 63.9 percent. And for 
those at home keeping score, that is just under where we 
started when we kicked off this project of increasing taxpayer 
exposure to risky lending. With little to show for it, this 
project has taken on enormous costs, not just to taxpayers but 
through bailouts.
    For that family I mentioned earlier, the system has raised 
prices and reduced affordability of homes. The entire point was 
to help that family purchase a home. We have harmed it. The 
entire point was to help families keep their homes. I am afraid 
the current system makes that even harder. Let us find a better 
    Thank you, and I yield back.
    Chairman. Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 2 minutes.
    Mr. Sherman. As I think the other hearings have 
established, we need a government agency to provide the 
guarantee if we are going to have 30-year fixed rate mortgages 
available to regular working families in the United States.
    We had a bad program about a decade ago where we had 
entities that had an implicit Federal guarantee, but were 
private companies seeking private profit--socialized the risk, 
privatized the profit.
    We have now a much better system where we basically have 
government entities, and these government entities are not 
losing money for the Federal Government. They are, in fact, 
making money for the Federal Government.
    We are also dealing with the tax cut. Up at the board we 
have behind the witnesses, the total national debt. That clock 
will be going much more quickly if we pass $1.5 billion in tax 
    I should point out that this tax bill will certainly make 
it more difficult for Fannie and Freddie because, as I think 
our witnesses have written, this is going to adversely affect 
home prices, particularly in high cost areas where homes could 
sell for $500,000, $600,000, $700,000.
    In addition, we are talking about a larger national debt, 
which will cause the fed to give us higher interest rates, 
again, making it tougher for Fannie and Freddie and the home 
market in general.
    So I realize that the jurisdiction of this committee is on 
housing finance, but our purpose is to make sure that homes are 
affordable on the one hand and that people who have their nest 
egg invested in their homes do not see that wiped out on the 
other. And the tax bill, as well as some of the issues before 
us, pose real risks to that average homeowner and that average 
home buyer.
    I yield back.
    Chairman. Duffy. The gentleman yields back.
    We now welcome and recognize our panel of witnesses. First 
we have Peter Wallison, a Senior Fellow and Arthur F. Burns 
Fellow in Financial Policy at the American Enterprise 
    We next have Dr. Mark Zandi, Chief Economist at Moody's 
Analytics. Third witness, Dr. Lea, is Principal of Cardiff 
Consulting Services.
    Next we have Ms. McCargo, Co-director of Housing Finance 
Policy Center for the Urban Institute. And finally, we have Mr. 
Ted Tozer, Senior Fellow for the Center for Financial Markets 
at the Milken Institute.
    In a moment, the witnesses will be recognized for 5 minutes 
to give an oral presentation of their written testimony. 
Without objection, the witnesses' written statements will be 
made part of the record following remarks.
    Once the witnesses have finished presenting the testimony, 
each member of the subcommittee will have 5 minutes within 
which to ask the panel questions.
    On your table, most of you all know this, but you have 
three lights. Green light means go, yellow light means you have 
a minute left and the red light means that your time is up. The 
microphones are sensitive so please speak directly into them.
    And with that, Mr. Wallison, you are now recognized for 5 


    Mr. Wallison. Thank very much, Chairman Duffy and Ranking 
Member Cleaver. Thank you for this opportunity to testify on 
housing policy reform.
    My view, as detailed in my written testimony, is that the 
best U.S. housing policy in the future would eliminate the 
Government role in housing finance, beginning with the GSEs.
    I take this position for the following reasons. First the 
GSEs do not reduce interest rates. Our analysis at AEI 
(American Enterprise Institute) shows that since 2014, after 
controlling for mortgage interest characteristics, the private 
market, primarily banks, has been offering mortgages with lower 
interest rates than the GSEs.
    In addition, the private sector mortgages we compared to GS 
mortgages with 30-year fixed rate loans, which are readily 
available from private sector lenders without a government 
guarantee. Many Members of Congress have been told for years 
that there would be no 30-year fixed rate mortgages without 
government backing. But our research shows that this is false.
    Second, the GSEs' lending policy increases housing prices, 
making homes less affordable. Mortgage interest standards, not 
interest rates, are the key to housing prices.
    Today the GSEs are willing to acquire mortgages with 3 
percent down payments or less, so the buyer will be buying 97 
percent of the price of the home. What this really means is 
that the buyer reaches for the most expensive house that the 
loan puts within reach. This exerts strong upward pressure on 
home prices, which are now again rising faster than wages. This 
particularly hurts first time homebuyers.
    Third, GSEs do very little to help low and moderate income 
families buy homes. I think everyone would agree that if any 
families need help to buy homes, it would be families taking 
out loans for less than $250,000.
    Half of these households have estimated income below 
$66,000, which is 120 percent of the U.S. median income, yet, 
only 11 percent of the GSEs' activities are helping these 
families buy homes. An additional 27 percent of GSE activities 
are home purchase loans greater than $250,000 with a median 
borrower income of $122,000.
    These loans could easily be made by the private sector, 
especially when the GSEs, as noted above, do not reduce 
interest rates. The rest of the GSEs' activities, about 60 
percent, is refinancing old mortgages, financing second homes 
and financing investor purchases of houses for rental. None of 
this contributes to home ownership by families that want to buy 
a first home.
    Fourth, the GSEs cost the treasury billions of dollars each 
year. The GSEs and their supporters often argue that because 
many investors, including foreign central banks, are required 
to invest only in sovereign guaranteed debt, the GSEs have a 
ready market around the world.
    However, because the GSEs' debt pays slightly more than 
treasury securities, it is often a substitute for treasury 
securities. This means that when the GSEs sell debt abroad, or 
even in the U.S., they are reducing the demand for U.S. 
Treasuries and thus increasing what treasury has to pay. We 
estimate these costs at about $17 billion to $29 billion a 
    For the reasons I have described, government housing 
policies and particularly the GSEs, have been a failure. They 
are not reducing interest rates on mortgages. They are not 
necessary for 30-year fixed rate mortgages. They are increasing 
the prices of homes, especially for first time buyers. And they 
do not increase home ownership.
    In 1964, as Mr. Ross mentioned, the home ownership rate in 
the United Sates was 64 percent. It was still 64 percent in 
1994. After HUD's aggressive increase in the affordable housing 
goals using the GSEs, the homeownership rate almost reached 70 
percent in 2004. Then came the crash and the homeownership rate 
today is 64 percent.
    The housing finance market, home owners, home buyers and 
the treasury would be better off without the GSEs. The private 
sector is fully capable of handling mortgage finance, just as 
it currently handles the financing of automobiles, credit cards 
and other assets through a combination of banks and asset-
backed securitization.
    Thank again for this opportunity to testify.
    [The prepared statement of Mr. Wallison can be found on 
page 132 of the appendix.]
    Chairman. Duffy. Thank you, Mr. Wallison.
    Dr. Zandi, you are now recognized for 5 minutes.

                     STATEMENT OF MARK ZANDI

    Dr. Zandi. Thank you, Chairman Duffy, Ranking Member 
Cleaver, and the rest of the committee. Thanks for the 
opportunity. And thank you for engaging in this conversation. I 
think, as you say, it is a very important one that is much too 
long to address this particular issue.
    In addition to being the Chief Economist of Moody's 
Analytics, you should know I am also on the board of directors 
of MGIC, a private mortgage insurer. And I am also on the board 
of a CDFI (Community Development Financial Institutions) based 
in Philadelphia. And we do a lot of affordable housing through 
the CDFI, one of the largest in the country.
    Let me make three quick points, maybe two. First, the 
future housing finance system that replaces the GSEs, in my 
view, must have an explicit catastrophic government guarantee 
that is fully paid for by borrowers. I think this is a 
necessary ingredient for any future housing finance system.
    An explicit guarantee stands in contrast to the implicit 
guarantee that Fannie Mae and Freddie Mac enjoyed prior to the 
crisis. This is important. Catastrophic in that the government 
should not step into the system unless we face scenarios that 
are darker than the Great Recession, the 2008, 2009 financial 
    I do think it needs to be paid for by the borrowers in this 
part of the system that enjoy that government guarantee. I do 
think there has been a lot of work done, including some of my 
own, that shows we can do this and still maintain current 
mortgage rates.
    In my view, without this explicit catastrophic government 
guarantee that is paid for, mortgage rates would be measurably 
higher than they are today.
    Some of the work I did with regard to the PATH Act that was 
before this committee a few years ago showed that mortgage 
rates for the typical borrower would be as high as 100 basis 
points higher today than they would have been otherwise. That 
is for the typical borrower.
    For those that are less credit worthy, toward the edge of 
the credit box, the impact on mortgage rates would be 
measurably higher, and thus, the ability of the system to 
provide affordable loans to these borrowers would be 
significantly impaired.
    They would not be able to get loans. They would not be able 
to become homeowners. So point No. 1, we need that explicit 
catastrophic government guarantee that it is paid for.
    Point No. 2, there has been a lot of work done in thinking 
about how we should reform the system. I thought about all of 
them. I have gone down all of the different paths.
    And in my view the most viable proposal for reform, both 
from an economic perspective and given the current political 
environment, if we want to get this done anytime soon, is a 
multiple guarantor system.
    So what that means is that Fannie Mae and Freddie Mac would 
only be reprivatized until the system was able to maintain a 
number of--several other viable guarantors, similar guarantors, 
that meet the same requirements as Fannie Mae, and future 
Fannie Mae and Freddie Mac would be required to hold as well.
    This will ensure that the future system will promote 
competition. I think competition is key in the secondary market 
to make sure that borrowers get the best mortgage rates and, 
perhaps more importantly, we get innovation in the provision of 
mortgage credit because the demographics of the country are 
changing and the way people will access credit will change. And 
we need a system that will be able to keep up with that.
    This multiple guarantor system will also ensure that we do 
away with too big to fail. Obviously the pre-crisis system with 
the duopoly, Fannie and Freddie, they were too big to fail, and 
thus, the Government had to step in and the resulting costs 
were enormous.
    With multiple guarantors on equal footing competing in the 
marketplace, we will do away with too big to fail and that 
particular problem.
    All of this can be done and ensure that there is plenty of 
private capital in front of taxpayers and we meet all of the 
access that we need for small lenders and for underserved 
communities, and we can maintain the current mortgage rates.
    So it is very doable and even if you don't think that the 
multiple guarantor path is the right path, again, I think it is 
applaudable that you are thinking about this.
    This is the time to do it. Do it now when, the economy is 
in good shape, house prices are rising, and so that way we 
don't have to do this in the next crisis. Thank you.
    [The prepared statement of Dr. Zandi can be found on page 
145 of the appendix.]
    Chairman. Duffy. Thank you.
    Dr. Lea, you are now recognized for 5 minutes.

                    STATEMENT OF MICHAEL LEA

    Dr. Lea. Chairman Duffy, Ranking Member Cleaver, and 
members of the subcommittee, thank you for the opportunity to 
be here today. I have an extensive background both in U.S. 
housing finance and mortgage markets abroad, having worked in 
more than 30 countries over the last 25 years.
    In addressing the subcommittee today, I have been asked to 
discuss how housing is financed in other major developed 
markets. My remarks will focus on five countries whose housing 
finance systems differ significantly from that of the U.S.: 
Australia, Canada, Denmark, Germany, and the United Kingdom.
    I will cover what is common amongst those systems, what is 
different, and what the U.S. might learn from how housing is 
financed in different countries.
    I begin with what is common. Current U.S. rates for 
adjustable and fixed-rate mortgages are comparable to mortgage 
rates in other countries. Recent house price increases are 
similar to those in the U.S. A third commonality is home 
ownership rates, which range between 62 percent and 67 percent, 
with the exception of Germany at 52 percent.
    There are significant differences in the size of country 
markets relative to the size of their economy. The mortgage 
markets of all the comparable countries, say for Germany, are 
larger than the U.S. with mortgage debt-to-GDP ranging between 
65 percent and 94 percent.
    The U.S. has been as high as 73 percent in 2009, but is 
only 55 percent today, reflecting the effects of the mortgage 
crisis. Notably, of these countries, only Denmark and the U.S. 
have a mortgage interest tax deduction.
    There are significant differences across countries as to 
which entities provide mortgage loans. In Europe, mortgage 
lenders must be regulated banks. Banks originate and hold a 
vast majority of mortgages in Australia, Canada and the UK.
    This contract with the U.S., where banks originate only 40 
percent of mortgage loans and most debt is held or backed by 
government entities. There are significant differences in the 
predominant mortgage instruments across countries.
    The U.S. is unique in the dominance of mortgages with rates 
that are fixed over the entire term of the loan and where the 
loan is pre-payable without penalty.
    Denmark uses this instrument with one significant 
difference. While both Danish and U.S. mortgages allow pre-
payment at par if rates fall, in Denmark, borrowers can 
repurchase the bond that funds their loan at a discount of rate 
rise. In this way, the borrower can deleverage as rates rise, 
reducing the likelihood of negative equity.
    The standard product in Canada, Germany and many European 
countries is a short- to medium-term fixed-rate mortgage. The 
rate is fixed for a 1- to 10-year period over a longer 
amortization, after which the rate is reset at current market 
interest rates.
    The borrower can select the same or a different fixed-rate 
term at reset, which allows them some protection against 
potential interest rate shock.
    Australia and the UK are primarily short-term variable rate 
markets. Policymakers in both countries credit the predominance 
of variable rate loans for cushioning the impact of global 
    Mortgage rates fell close to zero when base rates were 
lowered. Borrower payments fell without having to refinance, 
unlike in the U.S. where many borrowers who were unable to 
lower their mortgage rates and payment due to limited or 
negative equity.
    Mortgage funding is also different across countries. The 
U.S. is unusual in the dominance of securitization. 65 percent 
of mortgage debt outstanding is securitized in the U.S. This 
reflects two factors, the domination of the fixed-rate mortgage 
and the presence of government-backed entities that guarantee 
the securities.
    The only country that comes close to the U.S. is Canada at 
31 percent. The main capital market funding instrument in 
Europe is covered bonds.
    These are corporate bank-issued bonds backed by a ring-
fenced portfolio of mortgage loans. They represent over 1.7 
trillion in outstanding mortgage covered bonds, covering 
approximately 25 percent of European mortgage debt.
    Mortgage underwriting is usually stricter in most other 
countries as well. In Europe, a typical down payment 
requirement is 20 percent. Canada tightened its underwriting 
requirements after the crisis. Purchase loans are required to 
have a minimum 10 percent down, refinance 20 percent.
    Mortgage loans are recourse obligations in all countries 
surveyed, and default rates have been or are significantly less 
than the U.S. So what can the U.S. learn from housing finance 
systems in other countries? There is no ideal housing finance 
system. Individual arrangements reflect history, market 
structure and government policy.
    No other country's housing finance system evolved with 
extensive reliance and securitization of GSEs. Lenders are 
subject to prudential regulation, but none are subject to 
mission regulation or housing goals.
    Importantly, there is skin in the game in housing finance 
systems in most other countries. Banks are subject to domestic 
and international capital rules and hold considerably more 
capital than that held by mortgage agencies in the U.S.
    In no other country is the 30-year fixed rate mortgage the 
dominant instrument. As we learned from the savings and loan 
crisis, the fixed-rate mortgage is not a suitable product for 
bank lenders. Rather, it requires capital market financing, 
which in the U.S. is achieved through the U.S. Government 
    Guarantees lower the relative cost of the fixed-rate 
mortgage, sustaining its dominance and that of the entities 
backing them. The result is the government, and thus taxpayers, 
backs the majority of mortgages in the U.S.
    The experience of other countries shows that high rates of 
home ownership, stable well developed mortgage markets can be 
achieved with less systemic risk than found in the U.S. In that 
respect, the U.S. clearly learned from international housing 
finance systems.
    Thank you for the opportunity to appear today.
    [The prepared statement of Dr. Lea can be found on page 44 
of the appendix.]
    Chairman Duffy. Thank you, Dr. Lea.
    Ms. McCargo, you are recognized for 5 minutes.


    Ms. McCargo. Good morning, Chairman Duffy, Ranking Member 
Cleaver and members of the committee. Thank you for the 
opportunity to testify.
    My name is Alanna McCargo and I am the Co-director of the 
Housing Finance Policy Center at the Urban Institute. The views 
I express here today are my own and should not be attributed to 
the Urban Institute, its trustees or its funders.
    In 1968, President Lyndon B. Johnson founded the Urban 
Institute to help solve the problems that weighed heavily on 
the hearts and minds of America, by bringing sound research, 
evidence, and perspective that could inform effective 
    At the time, the problem was the American city and its 
people and the declaration of the war on poverty. Johnson 
signed the Fair Housing Act into law that same year, making 
housing discrimination against blacks and other protected 
groups for renting and owning homes illegal.
    I mention this history as a reflection for this Congress as 
you consider the future, as we are facing some of the very same 
inequities that are plaguing not only our cities, but our 
suburbs and rural areas all over this country 50 years later.
    I will focus on the serious issue surrounding the housing 
finance system and the ways Congress can address those issues 
with comprehensive reform.
    Our country has changed as has its needs. Huge demographic 
shifts in race, age, income, and education are all significant 
drivers of what our future housing system needs to contemplate.
    First, there is a growing wealth gap, and it is hurting low 
and middle income families. The gap persists both between races 
and between owners and renters.
    We know that home ownership creates wealth through equity 
and asset building and it continues to be the primary way that 
many middle class and working families build wealth and achieve 
economic stability, especially for families of color.
    As an example, to emphasize this problem, the overall home 
ownership rate today for blacks is just below 42 percent, back 
to levels we have not seen since the 1960's before the Fair 
Housing Act was put in place.
    Major housing policy changes are needed to address systemic 
constraints for people of color and avoid dire consequences for 
the financial security and generational wealth prospects of 
millions of Americans.
    Second, we have insufficient affordable housing available 
for a growing number of diverse households. Over the next 
decade, there will be as many as 16 million new households 
formed and an overwhelming majority of that growth will be non-
    Our housing inventory, rental and owner, is already 
deficient, continues to age, and is not being built or 
preserved to keep pace with demand for affordability.
    Third, consumers have insufficient access to mortgage 
markets, hampering home ownership opportunity. This issue has 
its roots in underwriting standards and the lack of willingness 
from market participants to take on any default risk.
    Urban Institute's research finds that more than 6.3 million 
mortgages would have been made between 2009 and 2015 to credit 
worthy borrowers under reasonable lending standards.
    In the current system, mortgages are only being made to 
people with pristine credit quality, despite their overall 
credit worthiness. A systemic view of underwriting systems and 
credit scoring models should be considered.
    Our country deserves a housing finance system that serves 
the people and communities that need investment and that 
provides access to sustainable and affordable credit.
    I am going to highlight three critical elements for this 
reform. To start, consumers must have access to sustainable 
affordable mortgages. Long-term fixed-rate products allow 
access to credit with affordable monthly payments and without 
the risk of interest rate volatility.
    This is essential in market stability and gives homeowners 
the ability to build equity. Ensuring the availability of these 
mortgages requires the explicit backing of the Federal 
    Next, taxpayers must be protected. Private capital in the 
first loss position will protect taxpayers without undermining 
access to credit for credit worthy borrowers and access to the 
secondary market for lenders of all sizes. There must be a 
mechanism to ensure capital is available throughout the 
economic cycle to a broad set of financial institutions.
    And finally, improvements are needed to FHA (Federal 
Housing Administration) so that it can work to fulfill its 
mission. Because FHA provides a critical source of financing to 
historically underserved renters and homeowners, and plays a 
pivotal role for low income renters, first-time home buyers and 
for seniors, we should ensure that FHA and Ginnie Mae have 
clarity and certainty in any housing finance reform.
    FHA must work in a coordinated and efficient way in the 
housing finance ecosystem. In particular, FHA needs resources 
to significantly modernize its technology and operations in 
order to meet the needs of today's consumer.
    We have one U.S. housing market, and we should have one 
housing finance system and a national housing policy that 
safely and efficiently serves all communities and all 
demographics and is accessible at all times.
    Thank you for the opportunity to testify. I look forward to 
your questions.
    [The prepared statement of Ms. McCargo can be found on page 
103 of the appendix.]
    Chairman Duffy. Thank you.
    Mr. Tozer, you are recognized for 5 minutes.


    Mr. Tozer. Good morning, Chairman Duffy, Ranking Member 
Cleaver, and members of the subcommittee. My name is Ted Tozer, 
and I appreciate the opportunity to testify today on behalf of 
the Milken Institute Center for Financial Markets where I am a 
Senior Fellow in the Housing Finance Program.
    My background gives me a unique look into the question of 
housing finance reform. Prior to joining the Milken Institute, 
I spent 7 years running Ginnie Mae as its president. Prior to 
that, I spent 25 years running capital markets for a top 10 
mortgage banker.
    Any industry could find itself with the complacent status 
quo leaders. The challenge is when competitive disrupters are 
not able to break in. This is the situation in the mortgage 
    The GSE duopoly of Fannie Mae and Freddie Mac is 
restricting credit and slowing down innovation. A key 
chokepoint is restriction on the type of loans the GSE will 
allow to be sold into the capital markets.
    A reformed housing finance systems should focus on 
fostering innovation driven by competition. I will give you an 
example to demonstrate the positive impact of competition.
    When I joined Ginnie Mae in 2010, approximately 70 percent 
of the new Ginnie Mae guaranteed MBS (Mortgage Backed 
Securities) were issued by four large banks that had put in 
place credit overlays that prevented many low to moderate 
income borrowers from obtaining FHA financing.
    The average credit score for an FHA loan was around 720, 
limiting FHA's ability to be a countercyclical force to support 
housing. Starting in 2011, smaller lenders instead became 
issuers themselves. This meant they could bypass the big banks 
and set their own credit standards within the limits prescribed 
by FHA.
    Today, Ginnie Mae has approximately 440 approved issuers. 
And no issuer has more than a 7 percent market share of new 
issuance. The average FHA credit score is about 675, meeting 
the aim of the program in responsibly expanding access to 
    Adding the competition of lenders was key. This goes to the 
heart of the difference between the various housing finance 
proposals. Should it be one, two, six or hundreds of 
guarantors? I believe the most advantageous approach was put 
forward by the Milken Institute, that hundreds of guarantors 
should be allowed.
    The mortgage industry faces the challenge of changing 
demographics as minority borrowers become the major homebuying 
group in the future. And lenders need to have the flexibility 
to create loan programs to meet the needs of these unique 
    The strength of Ginnie Mae's structure is the guarantors 
have skin in the game, even while the U.S. backs the MBS. That 
is because the issuer is responsible to advance delinquent 
payments MBS whole owners and use their own funding sources to 
buy delinquent loans out of pools.
    Competition also means that the firms that do not perform 
well can fail without hampering the whole housing finance 
system. That is a huge advantage over the previous or current 
system centered around the GSEs.
    During my 10 years at Ginnie Mae, every issue we had to 
shut down was due to the lack of liquidity to make required 
payments to bond holders, not their exhaustion of capital.
    The goal with Ginnie Mae was to spread the counterparty 
risk among hundreds of issuers to enable Ginnie Mae to transfer 
failed issuers' portfolios to other Ginnie Mae issuers, similar 
to the way that the FDIC (Federal Deposit Insurance 
Corporation) transfers deposits and assets from a failed bank 
to another FDIC-insured bank.
    A future system must assure that small lenders and 
guarantors have equal access to credit enhancers. If not, the 
potential base of hundreds of issuers will reduce 
substantially, and the competition and community banks' lending 
will be minimized.
    Ginnie Mae must make sure credit enhancement is equally 
available and credit enhancers are working with issuers to 
develop customized solutions to support the communities.
    We need to look at other options that will increase 
underserved markets' access to housing finance. Having hundreds 
of guarantors will allow community-based solutions, not 
solutions that are just for a national level.
    We need to build off the gains made by the GSEs' affordable 
national housing mandate at the national level and build an 
environment where lenders embrace affordable lending, not as a 
box that has to be checked, but as an economically viable part 
of their business model. I look forward to your questions.
    [The prepared statement of Mr. Tozer can be found on page 
122 of the appendix.]
    Chairman Duffy. Thank you, Mr. Tozer.
    The Chair now recognizes himself for 5 minutes. I am going 
to cut to the chase on an issue that I know is going to come up 
today because we are talking about tax.
    Miss McCargo, do you have a definition of kind of how much 
money someone makes to be middle income?
    Ms. McCargo. We have a definition. Standard area median 
incomes and it is all depending on what part of the country you 
live in.
    Chairman Duffy. Could it--if you make $100,000 are you 
middle income?
    Ms. McCargo. You can be middle income at $100,000 in--
    Chairman Duffy. What about 200?
    Ms. McCargo. --Part of the country.
    Chairman Duffy. How about $200,000?
    Ms. McCargo. Yes.
    Chairman Duffy. Three hundred?
    Ms. McCargo. I am not sure. I don't think so.
    Chairman Duffy. And if you are making $300,000 a year, can 
you get a $1 million mortgage? Pretty tough, wouldn't it be, to 
get a $1 million mortgage? And I would agree with that. And I 
just want to make this point that when we have a conversation, 
which I am off topic, I am going to get back on topic in a 
    When we have folks who say I don't want tax breaks for the 
rich but they want to argue for a $1 million mortgage interest 
deduction, they are not really focused on middle income 
Americans per your point, Miss McCargo. They are focused on 
rich Americans.
    I don't have a problem with mortgage deduction at $1 
million. But it is interesting how rhetoric and policy all of 
sudden clash when a lot of my friends have very rich 
constituents, who they start fighting for in some of these 
loopholes and write-offs.
    And I have to make sure my time is running. If you want to 
give me another full 5 minutes, I guess?
    Mr. Sherman. Will the gentleman yield?
    Chairman Duffy. If I get all whole 5 minutes, yes, I will 
    Mr. Sherman. Come to my district. I will show you the 
middle class, hardworking Americans, whose homes require--sell 
for many hundreds of thousands of dollars more than--
    Chairman Duffy. But a million? A million dollars.
    Mr. Sherman. Unindexed. A few years from now, absolutely.
    Chairman Duffy. We could talk--
    Mr. Sherman. Remember that million is not indexed, neither 
is the half million. But yes, even--
    Chairman Duffy. I am going to reclaim my time.
    Mr. Sherman. --Even a million dollar home with two 
hardworking--a nurse married to a police officer--
    Chairman Duffy. I am going to reclaim my time. They 
actually took off a minute. But I just think that is an 
interesting point that we can't forget in this rhetoric is one 
thing, but when your constituents start to get hit by loopholes 
that benefit the wealthy, they start to go away. It is 
interesting to see people squirm. But I am not here for that.
    Mr. Tozer, we are having a conversation about the MBA 
proposal, to DeMarco-Bright, Urban Institute. Have you reviewed 
those plans and do you have an opinion on what would be the 
best path forward for this committee?
    Mr. Tozer. Yes, sir. I have looked at all of them, and 
again, I think the issue it comes down to is basically how many 
guarantors or issuers you want to have. That is really what it 
comes down to if you compare the MBA and the other programs.
    I think they are all basically very similar, but it comes 
back to how many guarantors or issuers we should have. And 
again, like I mentioned in my statement, I think the concept is 
having as many as possible that can be successful. So more 
lenders getting back to community lending is really important 
to be able to respond to market conditions.
    Chairman Duffy. It is important that lenders have some skin 
in the game?
    Mr. Tozer. I think it is really important for the 
institutions that are being backed up by the government to have 
skin in the game. I think they should be aligned with the 
government and their interests.
    Chairman Duffy. I am interested in the panel's opinion 
because right now, Q.M. (qualified mortgage) has a debt-to-
income (DTI) ratio of 43 percent. But Fannie and Freddie has 
bumped their own standard up to 50 percent debt-to-income 
ratio. I am wondering if lenders throughout America would be 
making a lot of loans at a debt-to-income ratio of 50 percent?
    Mr. Wallison do you have an opinion on that? Or if they 
have some skin in the game might think, well, I might want a 
little different debt-to-income ratio if I actually am one of 
the first dollar losses here.
    Mr. Wallison. Lenders throughout the United States would be 
making these loans if they can sell them to the government.
    Chairman Duffy. But if they had to keep some skin in the 
    Mr. Wallison. If they had to keep skin in the game, they 
would not be making those loans.
    Chairman Duffy. At 50 percent debt-to-income.
    Mr. Wallison. 50 percent debt-to-income. But if they do 
make the--
    Chairman Duffy. Why not, Mr. Wallison?
    Mr. Wallison. One of the reasons they would not be making 
those loans is that it is exceedingly risky. These loans are 
exceedingly risky. These people, by definition, with a DTI of 
50 percent will have a lot of obligations in addition to their 
mortgage obligations.
    And that kind of borrower is someone who has a high risk of 
failure, especially if housing prices should fall.
    Chairman Duffy. I heard a stat that half of Americans are a 
$400 financial crisis away from being in financially hard 
times. And it seems like it is this very person who has a debt-
to-income ratio of 50 percent that we are allowing to get into 
a home that maybe they should take a little more time.
    Maybe they should write their debt or make some more money 
before they actually get a mortgage because, as Ms. McCargo 
indicated, you get people who their main investment is their 
home. And the government is subsidizing or incentivizing people 
to get mortgages that they probably shouldn't get, and when 
things go wrong for them it financially devastates them.
    Mr. Zandi, I appreciate your testimony. I guess we have had 
a lot of agreement today. It was great. Do you--of the plans 
that you have evaluated, which one do you like the best in your 
    Dr. Zandi. I think the most viable is the multiple 
guarantor system, which is similar to the MBA proposal. I agree 
with Mr. Tozer that it is not dissimilar for the DeMarco-Bright 
proposal, but the multiple guarantor system, I think, is just 
more doable. It is--
    Chairman Duffy. Why?
    Dr. Zandi. Because you are using the existing 
infrastructure, the common securitization platform, the risk 
transfer process, all those other things that the GSEs have 
been doing since they have been put into conservatorship.
    So you are leveraging all of the work, the good work, that 
they have done to get private capital into the system and make 
sure that you can have entry of other guarantors into the 
    So I don't think we want to throw that away. I think that 
is very valuable and useful. And if we go down the DeMarco-
Bright path, the sort of expanded Ginnie issuer system path, 
that is just a wholly different system and you are not using 
all the work, all the good work that we have done.
    And it will be very hard to get, to be frank, from a 
political economy perspective, all of the stakeholders involved 
here to sign onto that. They just can't get their mind around 
    Chairman Duffy. Right.
    Dr. Zandi. The multiple guarantor system, they can't--and 
you get a lot of the benefits that you want, the competition, 
the getting rid of too big to fail, a lot of private capital in 
front of the government guarantees. So I think that is just the 
most viable approach.
    Chairman Duffy. My time has long expired, but I look 
forward to more lengthy conversations with all of you as we go 
through this process.
    The Chair now recognizes the Ranking Member, Mr. Cleaver 
for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. Just a point of the 
average cost of a home in my State in Missouri is $169,000. The 
median price of a home here in D.C. is $551,000, and most of 
the people who live in those homes are not rich. They are 
    I look at many of our staff members will just rent an 
apartment with four of five people living in their apartment 
together because even the rental rates are very high. But I 
just mention that to speak to the mortgage cap being capped at 
    Mr. Zandi, thank you for being here again. In your opinion, 
why would the disadvantages of a private GSE system largely 
outweigh the advantages?
    Dr. Zandi. I am sorry, can you--
    Mr. Cleaver. But why would the disadvantages of a fully 
private GSE system--
    Dr. Zandi. Right. Right.
    Mr. Cleaver. --Largely outweigh the advantages?
    Dr. Zandi. So to go to a fully privatized system without a 
government backstop, without an explicit catastrophic guarantee 
that is paid by a borrower, that would result in my view, in 
significantly higher borrowing costs for everyone, everyone in 
that part of the system.
    For the typical borrower, kind of in the middle of the 
distribution in terms of credit characteristics, the average 
mortgage rate would rise about 1 percentage point. So instead 
of 4 percent today, it would be 5 percent.
    For those that have credit characteristics that are not as 
good as the typical borrower, their rates would be even higher 
than that.
    So if you get toward the end of the credit box where the 
GSEs are able to make a loan or insure a loan, mortgage rates 
would be so high that these folks couldn't afford to buy a 
loan, so they would be locked out of the market.
    So I think that is the most significant--
    Mr. Cleaver. Right.
    Dr. Zandi. --Disadvantage. And I will make another point, 
another second point. I am not sure it is even viable because 
if you get into the next crisis--think about it.
    You get into the next Great Recession. The financial system 
is imploding. Hopefully, that is not in our lifetime, but it 
will be in someone's lifetime, do we really think the 
government won't step in? It will.
    Mr. Cleaver. Yes.
    Dr. Zandi. And so let us just recognize that, acknowledge 
it, and pay for it up front instead of waiting for that to 
happen and just taking our chances. So let us just be honest 
here about the reality of this.
    Mr. Cleaver. Yes. I agree. I was here. Mr. Chairman, and I 
don't want to get into it because I got too--time.
    Because Mr. Wallison, you had mentioned earlier that in 
your opinion we could make it without the GSEs, and so if you 
could answer briefly because I want Ms. McCargo to also deal 
with it.
    So Mortgage Company A in Kansas City, Missouri is financing 
all of these mortgages. Aren't they going to be limited if 
there is no secondary market?
    There are just so many mortgages that a local mortgage 
company could handle. Aren't they going to face a problem which 
eventually falls on the whole population of our city?
    Mr. Wallison. No, because there is a private securitization 
system that will grow up to take those mortgages that the banks 
do not want to hold in portfolio.
    Mr. Cleaver. What do you base that on?
    Mr. Wallison. The existence of a private mortgage. The 
private mortgage system that we had before--the mortgage 
securitization system that we had before the financial crisis 
and the existence today, and before the financial crisis, of 
securitization systems for credit cards, for auto loans and for 
many other assets.
    So the private sector is well able to handle all of these 
things, and there is no reason to have the government involved. 
And as I said in my testimony, the government causes higher 
prices so your constituents, as well as everyone else's 
constituents here, cannot afford even the entry level homes 
because of the way the government is driving up housing prices.
    Mr. Cleaver. Yes.
    Ms. McCargo?
    Ms. McCargo. Thank you, Congressman. The privatization of 
the GSEs: We have come out of an era when they were operating 
as both private and public under a dual mission and we learned 
a lesson from that. And that is something that I don't think we 
want to go back to.
    Having the GSEs available to ensure that there is a 
guarantee, provide certainty, and protect taxpayers with others 
and with other private support in a first loss position is a 
healthy way to sort of move us forward.
    I think the lack of an explicit guarantee takes away the 
opportunity for markets to open up--for lenders to participate 
in small communities, in rural communities--in a way that is 
    And I think that, if we had a private market that was 
willing to take all these risks without anything we would have 
a much healthier situation right now.
    No one is making--these loans are not being made without 
some sort of catastrophic loss guarantee from the government, 
and I think we need to make sure we keep that preserved for any 
future system.
    Mr. Cleaver. My time is up.
    Chairman Duffy. The gentleman's time has expired.
    The Chair now recognizes the Vice Chair, Mr. Ross.
    Mr. Ross. Thank you, Chairman. 33 years ago, my wife and I 
purchased our first home. We did it under FHA, and we put 5 
percent down. And at the time we also paid, what I learned, was 
co-PMI, private mortgage insurance.
    And the reason we had to pay that is because unless we put 
20 percent down and financed 80 percent, we had to have the 
guarantee in there just in case of a default.
    And it led me to believe then I needed skin in the game, 
but more importantly, also to this day, shows me that there was 
capacity in the market from the private sector to take some of 
that risk.
    And I guess what we have seen over the last two panels that 
appeared before you on this topic is that a government backstop 
is absolutely necessary because apparently the private sector 
cannot accurately price or set aside reserve for deep in the 
tail risk of a severe turndown on the housing market.
    Is that something that each of you agrees with?
    Mr. Wallison? Are we losing? Is the private sector so inept 
that we can't allow them to have confidence in their pricing in 
the event that we have another crash like we had in 2008?
    Mr. Wallison. One of the reasons we had the crash in 2008, 
or the major reason we had the crash in 2008, is that the 
government had driven up, through its policies, a housing 
crisis beyond the level where they made any economic sense 
because the government was buying those mortgages. And so, when 
we had the crash, the housing prices fell and a lot of people, 
especially low-income people, lost their homes.
    Mr. Ross. To that end, let us assume that back then we had 
a viable private market of buying these mortgages, would it not 
almost self-regulate because it wouldn't take the risk that was 
being purchased then by the GSEs?
    Mr. Wallison. One of the things that we have to understand, 
and what doesn't seem to be understood here, is that there is a 
tradeoff between underwriting standards and housing prices.
    And if you reduce down payments to a very low level, you 
increase the amount of debt that the homeowner takes on. When 
the homeowner takes on a lot of debt not only does that 
homeowner become a riskier credit, but in addition, that drives 
up housing prices and so fewer people can afford houses.
    So in other words, when we reduce underwriting standards, 
especially down payments, we make it harder for people to enter 
the homeownership system because housing prices have risen much 
faster than wages are rising.
    As a result, we are stuck at 64 percent. We could have a 
much more viable and a higher homeownership system in the 
United States if we allowed prices to go to a level that the 
private sector would produce, and that would be through using 
solid underwriting standards including solid down payments.
    Mr. Tozer. Can I answer your question?--
    Mr. Ross. Please.
    Mr. Tozer. --Real quick. Basically, that is at the heart of 
our proposal because we look at the facts, and there are two 
sets of investors. There are investors that will invest in 
credit risk and investors in interest rate risk.
    Mr. Ross. Right.
    Mr. Tozer. The proposal of Milken Institute is that the 
government will backstop the investors that invest in interest 
rate risk because they need to have a commodity that they can 
trade to manage their interest rate risk.
    But our proposal is to let the private sector hold all the 
credit risk in the form of the issuer's holding the tail risk 
and the people who hold the credit risk in front of the issuer. 
You mentioned PMI.
    Mr. Ross. Right.
    Mr. Tozer. I think PMI is the natural in a future state 
where the PMI companies can begin to take on, not only up to 20 
percent down payment, but maybe let us go to even 40 percent. 
And that way the issuers are protected, but the government is 
simply stepping in to support interest rate investors the same 
way the FDIC protects depositors--
    Mr. Ross. Right.
    Mr. Tozer. --Like depositors are protected by FDIC. FDIC 
does not guarantee the loans that are in the banks' portfolio--
    Mr. Ross. And there is enough capacity waiting to do this, 
isn't there?
    Mr. Tozer. And that is exactly how Ginnie Mae works. Ginnie 
Mae does not guarantee any loans. We guarantee the issuer's 
    Mr. Ross. Right.
    Mr. Tozer. --To handle their bond payments. And that is the 
heart of the Milken proposal is to say that we have hundreds of 
issuers. It doesn't mean we have hundreds of banks. And they 
are able to all go and get interest rate protection in the 
capital markets, but the credit risk is held by the private 
    Dr. Zandi. Congressman, the--
    Mr. Ross. Yes.
    And Dr. Zandi, I am going to you.
    Dr. Zandi. Just to make clear, Mr. Tozer's proposal, 
though, has an explicit--
    Mr. Ross. Backstop.
    Dr. Zandi. --Has catastrophic government backstop as 
    Mr. Ross. Right.
    Dr. Zandi. And that is the point. If you want--
    Mr. Ross. But you seem--they can offload these credit 
relationships with incentives to the private sector?
    Dr. Zandi. They can offload all of the risk except the 
catastrophic risk. You need a government backstop to take the 
catastrophic. And if you don't, then mortgage rates will be 
higher in long-term fixed-rate loans.
    Mr. Ross. How much--
    Dr. Zandi. Thirty-year loans--
    Mr. Ross. How much--
    Dr. Zandi. Fifteen will--
    Mr. Ross. How much higher? Are we talking in terms of 
    Dr. Zandi. For the typical borrower, and I am just going 
back to the PATH Act. That was the last attempt at this.
    Mr. Ross. Right.
    Dr. Zandi. So let us take that as our benchmark. That would 
have raised mortgage rates for the typical borrower by almost a 
full percentage point without that government backstop.
    So now, of course, there is a lot of other moving parts in 
PATH and that could be mitigated--
    Mr. Ross. Right.
    Dr. Zandi. --But that is what you are talking about. And 
that is the person in the middle, right, not--
    Mr. Ross. But that is the elimination of a taxpayer bailout 
for that extra point.
    Dr. Zandi. That is you have no government backstop.
    Mr. Ross. Right.
    Dr. Zandi. That is what you were giving up. And then if you 
did that, then basically you are saying we don't--30-year fixed 
rate loans, 15-year fixed rate loans, there would still be some 
out there like there are some in other systems--
    Mr. Ross. Some of them are--
    Dr. Zandi. --But they will be a very small piece of the 
    Mr. Ross. I see my time has expired. I yield back.
    Chairman Duffy. The gentleman's time has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. And Mr. Chairman, you paint a picture of 
luxury if someone has a mortgage of over a $500,000 in 
California. I welcome you to go to the average home in your 
home State, knock on the door, say you have so many bedrooms in 
that most average home, you are living in luxury, because I 
assure you that the average home on the average lot in the 
State of Wisconsin would cost over a $1 million if located 
within commuting distance of Silicon Valley.
    Those are the prices. And perhaps we need to organize--we 
go on CODEL (congressional delegation) to strange and foreign 
countries. Perhaps we need a CODEL to California so that you 
will see that things are different in my State than they are in 
    As to our housing finance system, we currently have a 30-
year fixed rate, non-recourse--
    Chairman Duffy. Can we go in January or February?
    Yes or no?
    Mr. Sherman. Yes. Maybe when the Grammys, the Emmys, we 
will talk. It is about time. On foreign affairs, I never 
thought of a CODEL from this committee, but I think it would 
make sense.
    We have the 30-year fixed rate, non-recourse, pre-payable 
loan. That is the best deal homebuyers have anywhere in the 
world, and oh, by the way, with a 10 percent down payment.
    In so many countries, if you don't have parental help, if 
you don't--you can't buy a home. You can't get the down 
payment. The tradition in Iceland was that you work for many, 
many years on ships in order to get the down payment. And so I 
think we have a system that is good for homebuyers.
    It has also been profitable over the last few years for the 
government. It is not true that back in the 1960's we didn't 
have government involvement. What we had then was savings and 
loan institutions with enormously high leverage. All supported 
by the government. That provided good mortgages until it 
collapsed at government cost.
    Ms. McCargo, you are absolutely, right. We need to build 
more homes.
    Mr. Zandi, a lot of people in my district, which the 
Chairman will be visiting this winter--
    Dr. Zandi. Can I come too?
    Chairman Duffy. Absolutely.
    Mr. Sherman. They have saved all their lives. They have put 
their kids through school, and what they have is about a 20 
percent equity in a home that is worth between $500,000 and $1 
    So let us say we limit the home mortgage deduction to 
$500,000, we limit the property tax deduction at $10,000, and 
they go to sell their home.
    The buyer is going to know that those limits exist. And oh 
by the way, the buyer is going to know that the limits aren't 
indexed. So 10, 20 years from now when they go to sell their 
home, the word half a million dollars will mean a very 
different thing than it means now.
    What happens to the value of that $500,000 to $1 million 
home if the tax law changes?
    Dr. Zandi. The analysis I have done is to take the entire 
House bill and that includes all the things you mentioned plus 
the increase in the standard deduction--
    Mr. Sherman. Yes.
    Dr. Zandi. --Which reduces the value of the MID (mortgage-
interest deduction), as well as the impact the larger budget 
deficits would have on interest rates, which matter for the 
housing market.
    Mr. Sherman. Right.
    Dr. Zandi. So in that context, with all of those moving 
parts, including the $10,000 cap on property tax and the 
$500,000 cap on MID, nationwide all else being equal, house 
prices would decline by 3 percent to 5 percent.
    In districts like yours, I don't know yours specifically, 
but I can guess--
    Mr. Sherman. OK.
    Dr. Zandi. --In areas around where I live in suburban 
Philly, New York, New Jersey, the price declines will be 
double-digit, 10 percent, 12 percent.
    Not that I am a fan of the MID. I am not. And we can talk 
about how you might want to do this is a better way. It is very 
costly, and I don't think it is as effective in promoting 
homeownership as it should be. So I am not a fan.
    But I think it is important to recognize that if this plan 
were adopted, those are the kind of HPI (House Price Index) 
house price declines you should expect in those. And that is 
obviously, going to be a lot of stress for those people--
    Mr. Sherman. Yes.
    Dr. Zandi. --For the lenders that made those loans. It is 
meaningful. The economy will--
    Mr. Sherman. Or the Federal Government that has ensured 
those loans. And if you have 20 percent equity and your home 
goes down 12 percent in value and then you have some 
transactions cost to sell, you are just not going to be able to 
retire to Wisconsin after you sell your home.
    And finally, there is this--oh, well, I have run out--I 
yield back.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman. Thank you all for 
being here. I appreciate your time and your expertise on this 
important discussion.
    First, I would like to address my first question to Dr. 
Zandi. With respect to the concept of recap and release, you 
make the point that this might be the most politically feasible 
option, but I also think there is plenty of agreement that this 
would have its drawbacks. Can you please speak to the economics 
of recap and release?
    Dr. Zandi. Sure, and I don't think it is politically 
viable. You could argue it might be the least disruptive to the 
system because you are just basically going back to the future. 
In a sense, it is no reform at all. So I think there are a 
couple of very significant problems with it.
    Most importantly, we are not changing anything. We are 
going to go back to a too big to fail duopoly that dominates 
the system.
    And, yes, maybe the GSEs in the future system will be at 
higher levels of capitalization, regulatory oversight, but you 
are still left with a system that is very vulnerable to the 
thing that got us into this mess in the first place. Why would 
we do that?
    Second, these institutions are going to be released into a 
system they are going to have to capitalize. It is systemically 
important because they are too big to fail.
    They do have costs that they have agreements with treasury, 
and taxpayers paid a lot of money to bail them out. And I think 
taxpayers deserve some compensation for that.
    If they have any kind of backstop, they will have to pay 
for that. So when you consider all of the costs that they will 
face as reprivatized institutions, in my view, it will mean 
that mortgage rates will be higher than they are today. So why 
would we do this exactly? So in my view, recap and release is a 
pretty bad idea.
    Mr. Hultgren. Yes, yes, OK. That is helpful. Let me drill 
in a little bit more, if I could, Dr. Zandi? Your testimony 
notes--and you kind of referenced this, and I will quote from 
your testimony.
    ``The GSEs would likely owe the government for the 
taxpayers' financial support,'' end quote. How much do you 
believe they owe to the taxpayers or would owe to the 
    Dr. Zandi. I don't know the exact number. And in fact, that 
is a matter of significant debate and discussion. It is in the 
legal system. Let me put it this way. I am an economist. This 
is at a higher pay grade than I have. It is a real thorny 
    I would say that the taxpayers bail these guys out and 
taxpayers should be repaid for that. And in the way they bailed 
out--this is an important point--the way they bailed out the 
Fannie Mae, Freddie Mac was not a loan.
    This was equity. We took equity in these institutions and 
that is at a higher cost. And I think taxpayers should be 
reimbursed for that cost. What that number is, I am not sure.
    Mr. Hultgren. OK.
    Dr. Zandi. That is, again, a thorny question. I don't know. 
But I think that should be part of the calculation.
    Mr. Hultgren. That is helpful, thank you.
    Mr. Wallison, your testimony points out that the United 
States is the only developed country with a housing finance 
system completely dominated by the government.
    Why do you think that is? Do you think other countries have 
observed the lessons of U.S. policies?
    Mr. Wallison. I doubt it. I would like to believe that was 
true, but I think we really have a case of path dependency here 
and that is that the United States began to have a role in 
housing back in the 1920's. And we continue to grow that system 
using, for example, the S&L system.
    When that failed, Fannie Mae and Freddie Mac came up to 
pick up their activities. So it is something that has grown in 
the U.S. system over time. And once that happens, it becomes 
very difficult to change--
    Mr. Hultgren. Right.
    Mr. Wallison. --As I am sure everyone here is finding. That 
there are a lot of people who have come to rely on this system, 
especially those like realtors and homebuilders who enjoy the 
fact that housing prices rise as a result of this government 
involvement. But then again, from time to time, we have these 
crashes which we had in 2008 as a result of these government 
    So we really have to look at this whole thing again from 
the beginning and start talking about whether it makes any 
sense to have the government involved in the housing finance 
    And in my testimony, I have shown that all of the things 
that we are talking about here, the 30-year fixed rate loan, 
lower housing prices, or what we should have as lower housing 
prices, lower interest rates, helping the people who want to 
buy first homes, does not occur with a government program.
    So we start all over again with a private system, which 
will produce, as the private system always does, the things 
that the American people want at a price they can afford.
    And I would point out, in my testimony, I show what happens 
in the auto market, which is also a gigantic market. The prices 
there have been stable for 40 or 50 years in terms of the 
median income in the United States. And the reason for that is 
simply that this is a fully, private market where people, 
consumers, negotiate with the producers.
    We don't have that in the United States for housing prices 
because we have the government inserting itself and requiring 
lower underwriting standards as a result of which we have much 
higher housing prices.
    Mr. Hultgren. My time has expired. I may follow up with 
some other written questions, if that is all right?
    I yield back. Thank you.
    Chairman Duffy. The gentleman's time has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Capuano--
    Mr. Capuano. Thank you, Mr. Chairman.
    Chairman Duffy. --For 5 minutes.
    Mr. Capuano. Mr. Chairman, I was in my office doing very 
important work until I decided to come over and have some fun.
    First of all, Mr. Zandi, I appreciate your comments that 
without a government backstop the rates really wouldn't change 
a whole lot, but rates are only one factor in determining 
monthly expenses.
    I am a homeowner, and to be perfectly honest, I own a two-
family home because I needed the rent to be able to meet the 
mortgage when I first bought the home. And for me, and most 
homeowners, it is how much do I make every month and how much 
can I afford every month, monthly payment, not the general. All 
the other stuff works into it.
    And if you are going to talk about the rates without a 
government backstop, we have only had this experience. We 
haven't had it since the 1930's.
    Prior to the 1930's, it was a fully private market. There 
was no government backstop, no government involvement, and the 
rates were about the same as the rates today, pretty much. But 
it was a 50 percent down payment, 5-0 percent down payment.
    I don't know anybody in any market who has 50 percent to 
pay down on a home. And it was a 5-year payback period which 
effectively takes the average monthly principal and interest 
and doubles or triples it, depending on the math you do, 2.5 
    Tell that to the average American they love. You can keep 
your 30-year mortgage, if you can get in. And the answer is, 
most of us could never get in. We have done the purely private 
market before, it didn't work. We are not going back. Period.
    And those of you who want to go back, I dare you--I dare 
you to put it on the floor of the House for a vote. It would be 
a wonderful debate, and it would be a wonderful result in the 
next election for those of you who thought that was a good 
    I also want to talk quickly about the tax bill that we are 
all debating, this million-dollar number. Sounds like a lot. 
Before I came over, in all of 10 seconds I looked up average 
home prices in Boston. And like most Americans that search 
brought me to Zillow.
    Here is what Zillow says the average home price in Boston 
is $561,400, just the city of Boston. That does not include our 
expensive suburbs. And by the way, Boston is geographically one 
of the smallest cities in the country--$561,000 average median.
    By the way, it sounds like well, gee, that must be a 
problem. That home price has increased 9.3 percent in the last 
12 months, and it is expected to increase 3.9 percent more in 
the next year. That is a pretty good market, the way I look at 
it, even though it is expensive.
    And by the way, I also looked it up, as of this very 
moment, as of right now, there are 428 homes for sale in Boston 
that are for $1 million or more--428. I can't afford that.
    But a $500,000 mortgage is not out of the norm for most 
people in places like Boston and California and New York and 
Chicago and many places in Florida and on and on and on. And I 
just happened to purely circumstantially look up another town, 
a nice town. I have been there, actually.
    Matter-of-fact, I did very well. I went there for John 
Kerry and they liked me there. I went to this town, and I 
looked up their average price. Purely circumstantially, I 
looked up Wausau, Wisconsin. It really is a nice town, and they 
did like me.
    The average home in Wausau, Wisconsin is $100,000, 20 
percent of the cost in Boston. Now, I am sure it is a great 
home, but that is the difference. The geographics makes a 
difference. And that home has increased 5.4 percent, half of 
the increase in Boston--
    Chairman Duffy. Will the gentleman yield?
    Mr. Capuano. --And is expected to increase 2.5 percent. It 
is not the same. And the bottom line is people in Boston make a 
little bit more, but not that much more.
    Chairman Duffy. Will the gentleman yield?
    Mr. Capuano. Sure.
    Chairman Duffy. I appreciate you bringing up my hometown, 
but I would note that the $500,000 of mortgage deduction which 
is included in the bill would include then the median income in 
    Mr. Capuano. On a median income--
    Chairman Duffy. --So you are covered.
    Mr. Capuano. --But median is made up by people that are 
over it as well.
    Chairman Duffy. But you advocated that--
    Mr. Capuano. --Because there are lots of homes in Boston 
that are at $700,000, $800,000, and they are not big expensive 
homes. For that kind of money--I have always known. I watch 
    Chairman Duffy. Me, too.
    Mr. Capuano. For the amount of money I can get for a home 
in Boston, I can get the greatest home in the world in Waco, 
Texas, according to what they show on HGTV. I am shocked.
    You cannot buy a parking space in my district for the 
amount of money you can get 40 acres in Waco. And that is not 
good or bad or indifferent. It is not a statement. It is just a 
    And it doesn't make any good things about Boston or bad 
things about Waco or Wausau. It just means if we are going to 
make national policy it has to be adjusted to regional cost, 
No. 1, No. 2, and I appreciate the extra time.
    As far as the 30-year year mortgage goes, it is not just 
one factor. There are multiple factors that lead into the 
decision that the average American makes, and those factors are 
totally played against them without a government backstop.
    Mr. Chairman, I really appreciate the extra time, and I 
can't wait to get back to Wausau.
    Chairman Duffy. I might differ with you on that point.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman. Mr. Wallison, in your 
written testimony you debated the merits and the necessity of 
the 30-year fixed mortgage. You also discussed the role that 
the government has in insuring that this product exists.
    Does the 30-year fixed rate jumbo loan mortgage market have 
a Federal backstop?
    Mr. Wallison. No.
    Mr. Rothfus. Why has the jumbo market thrived without a 
Federal backstop?
    Mr. Wallison. Because we don't need a Federal backstop to 
have a 30-year fixed rate mortgage.
    Mr. Rothfus. Dr. Lea, in your testimony, you compared the 
housing finance systems in similar developed markets. I was 
interested to see that Australia, Canada, Denmark, the UK and 
the U.S. all have fairly similar homeownership rates despite 
significant differences in the housing and finance systems in 
each country.
    We are often told that the 30-year fixed rate mortgage is 
essential to ensuring that our homeownership rate remains high, 
yet you point out that, quote, ``In no other country is the 30-
year fixed rate mortgage the dominant instrument.''
    Of course, without the government support that we currently 
offer, this product likely would not be as ubiquitous as it is 
today. How important do you think the 30-year fixed-rate 
mortgage is?
    Dr. Lea. As you can see, from the data, and I go beyond the 
countries that I specifically referenced, is that you don't see 
this instrument around because it has a lot of interest rate 
risk associated with it. So you have credit risk and interest 
rate risk that is inherent in mortgages, and you have to 
distribute that some way.
    And other countries that have decided that customers can 
take or be exposed to a bit more interest rate risk, and as a 
result you don't need the government backstop in order to 
ensure that you get sufficient amounts of credit and high rates 
of homeownership.
    So the fact that we use and built a system around the 30-
year fixed rate mortgage has, by definition, almost meant that 
we have to provide this government support. And I would point 
out that this didn't work with the savings and loans.
    We crashed the system back in the 1980's, and we crashed 
the system again in the mid-2000's. So the question is do we 
have to build a system based on the 30-year fixed rate 
mortgage? And if that requires government guarantees, you have 
a self-fulfilling prophecy.
    Mr. Rothfus. Mr. Tozer, in your testimony you wrote, quote, 
``With their protected government advantage status and the 
powerful economic benefits that accompany it, the GSEs have 
achieved gains at the cost of crowding out a potentially 
significant measure of market competition and additional 
    Assuming that the government provided advantage to the GSEs 
was diminished or abolished altogether, what would some of the 
other impediments to private sector competition be?
    Mr. Tozer. Again, the issue gets back to this whole 
concept, like Dr. Lea said, you have interest risk and you have 
credit risk.
    And so the big impediment to this concept is that you need 
the government guarantee to support the interest rate investors 
who are able to take on the credit interest risk, like Mr. Lea 
said. Banks really can't do it. And the question is do 
borrowers continue to avoid interest rate risk or do you shift 
interest rate risk to the borrowers with an adjustable 
    And that is the big question.
    So again, the impediment is that once you take Fannie and 
Freddie out of the mix and their duopoly, then you need to make 
sure that you have access to credit enhancement from all the 
various issuers that enables them to be able to compete on an 
even playing field with all of the other issuers so we have a 
well-functioning market for small to medium-sized lenders.
    Dr. Zandi. Congressman, can I make a quick point about the 
jumbo market?
    Mr. Rothfus. Yes.
    Dr. Zandi. The jumbo market is dominated by large, banking 
institutions. Those banks are classified as systemically 
important financial institutions.
    By definition, they are backstopped by the government, so 
there is a backstop there. It is not like they are operating in 
a vacuum without the government back there.
    Mr. Rothfus. So there is no bank out there that is making a 
jumbo loan?
    Dr. Zandi. No, there are, but the--
    Mr. Rothfus. OK.
    Dr. Zandi. --The market is dominated--
    Mr. Rothfus. Yes.
    Dr. Zandi. --The vast, vast majority of those are--
    Mr. Rothfus. Mr. Wallison, do you want to comment on that?
    Mr. Wallison. Yes. Those banks and other banks, not 
necessarily the too big to fail banks, are also making these 
loans. And the point is that we studied this market very 
carefully. We can provide a memorandum on what we found in this 
market, and in every case where a bank was making a loan since 
2014, a mortgage loan, it was lower cost than a GSE loan.
    Mr. Rothfus. If I can--
    Mr. Wallison. What we did was compare the jumbo market to 
the GSE market saying--just a little bit below the GSE market, 
a little bit higher than the GSE market for the jumbo loans and 
we found that those loans that when they were being made were 
being made at a lower interest rate.
    So it is not necessary to have a government backing of any 
kind in order to keep the interest rate at a competitive level.
    Dr. Zandi. One other quick point--
    Mr. Rothfus. My time is expired. I would like to go on, but 
my time is expired--
    Dr. Zandi. Oh, I am sorry.
    Mr. Rothfus. --So I yield back.
    Chairman Duffy. The gentleman's time has expired.
    The Chair now recognizes the gentlelady from Ohio, Mrs. 
Beatty, for 5 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and thank you to our 
Ranking Member, and thank you to our witnesses here today. 
Before I go into my questions, I would like to make a few brief 
    But first, I would like to say to my colleague, Congressman 
Sherman next to me, I would like to be included in that 30th 
Congressional District CODEL along with Duffy and Cleaver.
    So I just want that entered into the record, Chairman 
Duffy, that I want to go on the CODEL.
    Now to the witnesses--
    Chairman Duffy. Without objection.
    Mrs. Beatty. Thank you. To the witnesses here, thank you 
for being here. And certainly while we are here today to talk 
about sustainable housing finance part three, I noticed that we 
have certainly not been absent of talking about tax reform.
    And I was very pleased to see in your written statement, 
Ms. McCargo, that you addressed the potential impact of the 
House Republicans' tax plan and the effects it can have on 
affordable housing.
    As a matter-of-fact, Mr. Chairman, I would like to submit 
an article for the record from Politico entitled, ``Tax Plan 
Would Cut Affordable Housing Supply by 60 percent.''
    Chairman Duffy. Without objection.
    Mrs. Beatty. Thank you. Let me just take a few seconds of 
my time to quote from that article. And that article states 
that builders, local governments, and other housing advocates 
are rallying against a provision of the House Republican tax 
plan that would eliminate a key funding source for affordable 
    As a matter of fact, it says the tax proposal would do away 
with private activity bonds, which we all know is a growing 
source of financing for low cost housing.
    The cuts would reduce the supply of new affordable rentals 
by more than 85,000 units a year or more than 60 percent, 
according to an analyst from the Novogradac and Company.
    One last thing, private activity bonds are issued by local 
or State governments and are designed to attract private 
capital funds to large projects. They have evolved into a 
common financing mechanism for housing as the supply of low-
income housing tax credit, the primary source of financing and 
it has been outpaced by the need of low rentals.
    So with that and hearing from the articles, can you briefly 
describe the problem you see with regards to the affordable 
housing when it comes to the Republicans' tax cut bill?
    Ms. McCargo, do you want to start?
    Ms. McCargo. Certainly, thank you, Congresswoman. The 
fundamental concerns, even without the tax plan, the affordable 
housing issue is a significant issue both on the rental and buy 
side, on both sides the issue.
    The Low Income Housing Tax Credit has already seen a lot of 
pressure going into this, and I think that one of the most 
important things as a houser, and thinking about what is 
happening with the tax plan, is that the fundamental decisions 
that are made--whether it is the mortgage interest deduction, 
low-income housing tax credits or other plans--is that we are 
continuously looking at how we can put money that is taken from 
one part of the plan back into housing.
    One of the concerns in particular is for example the 
mortgage interest deduction. If we are looking to really spur 
home ownership and move forward we might want to look at how we 
might be able to take--if that was to be reduced--those dollars 
and how do you put those back in the housing in the form of a 
tax credit, for example?
    So I think affordability is a critical issue whether you 
are renting a home or owning a home across the Nation today. 
And that the tax plan and the decisions that are made to make 
cuts or any revisions that affect housing needs to be thought 
about in terms of how do we make sure that we are enabling 
affordable housing and finance?
    Mrs. Beatty. Thank you. My time is about to run out, but I 
would like to make a brief comment as we talked about earlier 
when you were asked the question of what is middle class. We 
all know the numbers that we are given, but I think it is 
important to say it depends on where you live.
    Ms. McCargo. Right.
    Mrs. Beatty. If you take my district, I have the entire 
city of Bexley, and we have $10 million homes there and $2 
million homes, and some of those individuals would probably 
call themselves middle class that own a $1 million home.
    So I think to Mr. Sherman's point, it definitely depends on 
where you live. But also, I was elected to represent rich 
people and poor people.
    So I don't think you could make it an either/or or say to 
her that it is unfair if people want a tax deduction on a $1 
million or a $2 million house. So I think we have to figure out 
how to do both. Not to take away those things for those who are 
less than middle class, but not to punish others.
    My time--
    Chairman Duffy. The gentlelady's time has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Budd, for 5 minutes.
    Mr. Budd. Thank you, Mr. Chairman. I am also interested in 
Mr. Sherman's CODEL California. My only fear is that I would 
check in but never leave.
    So Dr. Lea, in your testimony you noted that Canada has a 
government guarantee, correct? Right. So what percentage of the 
Canadian mortgage market is covered by this guarantee?
    Dr. Lea. The Canadian system is similar or pretty much 
modeled after the FHA-Ginnie Mae combination. So in Canada all 
loans over 80 percent loan-to-value ratio have to be insured, 
regardless of whether they are held by banks or in securitized 
    So the CMHC is providing most of that mortgage insurance, 
and I think roughly about 50 percent of all mortgages have 
government mortgage insurance.
    The second element of that is, like Ginnie Mae, they 
provide a timely payment guarantee on securities, mortgage-
backed securities that are issued and the market share there is 
about 31 percent.
    Mr. Budd. So that is a separate guarantee, the timely 
payment guarantee?
    Dr. Lea. Correct. It is a layered guarantee. So if you hold 
the loan in portfolio you don't have that second guarantee, but 
if you sell the loan then they put that timely payment 
guarantee on that.
    Mr. Budd. So by contrast, about what percentage of the U.S. 
market is guaranteed by Ginnie, Fannie, and Freddie?
    Dr. Lea. 61 percent is the number there that is the 
    Mr. Budd. OK.
    Dr. Lea. Oh, no, I am sorry--no. It is 65 percent. It is 31 
percent in Canada, 65 percent and then looking around the rest 
of the world there is no other country that has more than 10 
percent of loans securitized and almost all of those are 
private label. You don't see government guarantees in most 
other countries.
    Mr. Budd. So what are the credit characteristics of the 
loans that are covered by the Canadian government? For 
instance, what is the down payment requirement or the debt-to-
income ratio of the borrowers? And you did mention an 80 
percent number earlier, but if you would describe those 
    Dr. Lea. Right. So after the crisis they used to have 95 
percent loan-to-value ratio maximums. They lowered that to 90 
percent for purchase loans and 80 percent for refinance loans. 
They have since relaxed that a little bit and for loans under 
$500,000 you can go back to 95 percent there.
    Importantly, loans are recourse in Canada. So that also 
provides a significant deterrent against mortgage default.
    Mr. Budd. So is there a limit on the amount of a loan that 
is covered under Canada's guarantee?
    Dr. Lea. Yes there is. And that was actually lowered after 
the crisis. I am trying to remember what the maximum is. There 
is a maximum cap. I think it is maybe something like $400,000 
or so, but I would have to actually check that. I don't 
remember off the top of my head.
    Mr. Budd. About $400,000 then. So does Canada have a 
conforming loan limit?
    Dr. Lea. No, because they don't distinguish between 
government and non-government loans.
    Mr. Budd. OK. And how about any limits on borrower income 
    Dr. Lea. They also have that and the most recent numbers I 
think they will allow that to go up to 45 percent.
    Mr. Budd. Very good. Thank you Dr. Lea.
    Mr. Chairman, I yield back.
    Dr. Zandi. I think it is important to point out that they 
are willing to move those standards up and down on a regular 
basis. Unlike here, once we make a change we generally don't 
change it. They are moving those thresholds all the time. It is 
a macro prudential tool they use.
    Mr. Budd. Yes, very good, noted. Thank you.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from--
    Mr. Royce. Thank you, Mr. Chairman. We have a very 
    Chairman Duffy. So the gentleman from California, Mr. 
Royce, for 5 minutes.
    Mr. Royce. Thank you very much, Chairman. And you have put 
together a very distinguished panel here of witnesses today.
    And I wanted to ask Mr. Tozer, given your past experience, 
and this is an issue we have spoken about it in L.A. at the 
Milken Institute out there. But given your expertise, again, if 
we wanted to explore what the risk transfer deals at Fannie and 
Freddie and NFIP (National Flood Insurance Program) have taught 
us thus far, if we look at risk transfer.
    We have had some deals through the bond and reinsurance 
market. My understanding is that they could be doing a lot more 
than they are doing already. Gwen Moore and I have legislation 
to encourage them to do that.
    In addition, I have recently been briefed that in light of 
the damage caused by the hurricanes, the contracts that the 
NFIP purchased will pay $1 billion of reinsurance. And that 
would return to the taxpayers 85 cents on the dollar as a 
consequence of those reinsurance contracts.
    So given these and other examples, is there any reason why 
the Federal Government as an entity should not seek to maximize 
the transfer of credit risk and the transfer of insurance risk 
and other taxpayer exposures to the capital markets and 
reinsurance market when practical?
    Mr. Tozer. I agree. I think you should transfer as much of 
the expected credit loss as you can. The question you run into 
is diminishing returns.
    Most analysis I have seen shows that if you transfer 40 
percent of the loan amount, for example, you have a $100,000 
loan and you transfer $40,000 of risk to a third party, you are 
going to cover 99.9 percent of the chance of issuer having to 
cover a loss.
    So the question we run into is when does the cost become 
prohibitive? It is like buying too much insurance for 
    Mr. Royce. I understand the concept, but let me ask you, 
are we currently approaching, in your opinion, the point 
    Mr. Tozer. The thing we need to realize is with the GSEs 
and when they have a loan that has private mortgage insurance, 
they are insured down to 65 percent exposure right there.
    The borrower is paying to get the issuers exposure to 65 
percent, so the big area that they are concerned about are the 
loans with a 20 percent down payment. So I think the concern is 
making sure the loans that only have a 20 percent down payment 
are credit enhanced up to at least the 65 percent or 60 percent 
    The loans secured with private mortgage insurance are 
probably close to proper level of credit enhancement because 
they are at 65 percent coverage level. But I think you need to 
look at this whole concept what is a tipping point of the cost 
versus the benefit to the taxpayer.
    So the question becomes between all of those layers, I 
think the question is the government should make sure that all 
the losses are absorbed by the private sector.
    Mr. Royce. Right. And in your testimony you state that many 
have cited deficiencies and weaknesses in PLS (private-label 
securities) contracts, governance structures, and collateral as 
a leading cause of many billions of dollars of misallocated 
    The misallocated losses spurred a crisis of confidence and 
the resulting trust gap on the part of the institutional 
investors who bore them. So we heard similar concerns at our 
hearings last week, right?
    Mr. Tozer. Right.
    Mr. Royce. My question is a straightforward one here to 
you. What reforms could we make to help prepare the trust gap 
and reignite the PLS market here?
    Mr. Tozer. The key is I think we have to have an active 
master servicer, because what has happened is, for example in 
the Ginnie Mae world, if an issuer hires a servicer they are on 
the hook for the losses. So they are going to keep them honest 
to make sure there is no misallocation. If a servicer messes 
up, they pay the losses.
    The same thing Fannie and Freddie are acting as a master 
servicer to make sure the servicers are held accountable, if 
the servicers mess up they lose. In the private label 
securities it was kind of like trust me. The servicer was the 
fox that kind of, guards the hen house.
    So the key thing is having a layer of someone there to do 
the oversight over the servicers to make sure that if they make 
a mistake that causes losses, that those losses are absorbed by 
the servicer and not passed on to institutional investors by 
making stronger contracts, but also having an organization that 
actually has the teeth to enforce those contracts versus 
letting the servicers police themselves.
    Mr. Royce. Anything else that could reignite the PLS 
    Mr. Tozer. The PLS market, in general, I think it is always 
going to be relatively small, not so much because of the credit 
side. I think there is tremendous appetite for credit 
    The problem is interest rate investors want the homogeneity 
of being able to have a government-backed security that they 
could trade. They could trade large amounts in the TBA market. 
So I think the concept is--I think the PLS market as far as the 
credit side, through the support CRTs (credit risk transfer), I 
think it is critical to develop a PLS CRT market because if we 
can move to the point where more and more credit transfer is 
occurring, especially if we get to the point where we have more 
and more issuers that we talked about in the Milken proposal, 
we need to have a good working private sector credit transfer 
process. And I think that is what we need to make sure we have 
in place.
    Chairman Duffy. The gentleman's time has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank the Ranking 
Member as well. Thank the witnesses for appearing today.
    Please permit me to ask a question that was a burning 
question some time ago. Was the CRA (Community Reinvestment 
Act) a cause of the 2008 downturn? If you believe that it was, 
the CRA created the 2008 economic debacle, would you kindly 
extend a hand into the air?
    Thank you. Now do this for me, and I want you to be as 
terse as possible, but this is really important. I need for the 
record to reflect just who you are.
    So if you would, let us start to my far left and just give 
your name and the company that you represent. Would you do so 
please, sir, at my far left. Your name and the company you 
    Mr. Wallison. My name is Peter Wallison, and I am appearing 
for myself. I am an employee, however, of the American 
Enterprise Institute.
    Mr. Green. Thank you, sir.
    Next please?
    Dr. Zandi. Yes, I am representing myself, but I am the 
Chief Economist of Moody's Analytics a division of the Moody's 
Corp. I am on the board of directors of MGIC, one of the 
Nation's largest private mortgage insurers and I am also soon 
to be the chair of the Board of Reinvestment Fund, which is a 
CDFI headquartered in Philadelphia that does affordable 
    Mr. Green. Thank you, sir.
    Dr. Lea. I am Michael Lea. I am a self-employed consultant 
in Sand Diego, California.
    Mr. Green. Thank you, sir.
    And ma'am?
    Ms. McCargo. Allana McCargo, I am representing myself. And 
I work for the Urban Institute as the Housing Finance Policy 
Center Co-director.
    Mr. Green. Thank you.
    Mr. Tozer. I am Ted Tozer, and I am a Senior Fellow at the 
Milken Institute and basically representing myself as my 
background, as well as the Milken Institute.
    Mr. Green. Thank you. This has been a concern that the 
committee has had to address. I just marvel at how we have gone 
from the CRA being the genesis of the crisis, and we really did 
have that debate in this committee.
    I remember Mr. Frank talking to Ranking Member Cleaver and 
I about this. And if you recall Mr. Cleaver, we went to the 
floor because there was the widespread belief that it was the 
CRA that caused the economic downturn. And this is going to be 
of benefit to me as I go forward, dear friends. I just want to 
cite that it is Tuesday, November 7th, 11:43 a.m.
    All of these noted experts, persons who have some degree of 
knowledge in this area have indicated to us that it was not the 
CRA. Now let us move onto something else before I come back to 
    The jumbos, Mr. Zandi, you wanted to say more about the 
jumbos and you didn't get the opportunity to. I would like for 
you, if you would, to be as pithy as you can but please speak 
on it.
    Dr. Zandi. Yes. I think the other point about the jumbo 
market is that it is to very high quality borrowers with very 
high credit scores, low loan-to-value ratios, low DTIs. So that 
isn't the market we are talking about here when we talk about 
housing finance reform. So it is a very, very different market.
    Mr. Green. And you also mentioned that there is a backstop 
for it. While it may not be direct, there is an indirect 
backstop. Would you comment on that please?
    Dr. Zandi. I would say it is very direct. These are 
systemically important financial institutions that dominate 
this market and they have a backstop.
    And I would also point out in the case of Canada and in 
most other countries across the world, the lending is done by 
large systemically important institutions and there is no 
debate about it. And they have a government backstop. So the 
system is backstopped by the government explicitly.
    Dr. Lea. But it is not a mortgage-specific backstop. So 
banks are diversified and aren't concentrated just in 
mortgages. What differs in the U.S. is we do that for mortgage-
specific institutions.
    Mr. Green. Thank you. Let us move to one other area 
quickly. Is there anyone who believes that there should be 
absolutely no government involvement at all? Remove the 
government completely, no backstop anywhere involved in this 
process at all? If so, will you kindly extend a hand in the 
air? I believe there is at least one.
    All right sir, I would appreciate your comment. Would you 
tell me, Mr. Zandi, why you are of the opinion that there has 
to be some backstop, some government backstop?
    Dr. Zandi. I think if we want long-term, fixed rate, pre-
payable mortgages to be the mainstay of our system, 30-year 
fixed rate, 15-year fixed rate loans, we need a catastrophic 
government backstop. It has to be explicit and it has to be 
paid for.
    The borrowers have to pay for it. And that is a very doable 
thing, and we should do it because that is the system that we 
believe is the appropriate one and that provides the best 
service to the American citizen.
    Mr. Green. Thank you very much.
    I will put a to be continued, Mr. Chairman, on the CRA.
    Chairman Duffy. The gentleman yields back.
    The committee is now going to go into a second round of 
questions, but we are not going to do 5-minute questions. We 
are going to do 2-minute questions.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus, for 2 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman. I am just--during 
this hearing, really and hearing from all of you and thank you 
for being here.
    Mr. Zandi, I just want to go back, and then we talked a 
little bit about this concept of a catastrophic backstop. Can 
we quantify that in any way?
    Dr. Zandi. Yes. I think that the system, the entire 
financial system is now coalescing around a capital standard 
for private capital that takes the first 5 percent of loss. 
After that, that would be considered catastrophic, just to put 
that in context.
    Mr. Rothfus. 5 percent of loss of what? How would that play 
    Dr. Zandi. Yes, just to give you context. In the Great 
Recession financial crisis, the Fannie Mae and Freddie Mac had 
total realized losses of not quite 3 percent. And you have to 
recognize that prior to the crisis, there was no Q.M. rule. 
There was no governor on the kinds of underwriting they were 
    Post crisis we now have this governor and so the quality of 
the loans that they are able to purchase and to ensure is 
measurably higher. So even under the Great Recession scenario 
where unemployment would get 10 percent, house prices would 
decline to 30 percent.
    The stress tests that are being required by all banks and 
financial institutions, including the Fannie Mae and Freddie 
Mac are being required to engage in, the losses would be 
measurablly lower than that, probably if you did the 
arithmetic, 1.5 percent to 2 percent.
    Mr. Rothfus. Yes, and my--
    Dr. Zandi. So 5 percent is a lot of capital.
    Mr. Rothfus. I might want to follow up with you on that 
question just to again, get in some parameters--
    Dr. Zandi. That is it, it is 5 percent. After that it is 
catastrophic. That is--
    Mr. Rothfus. The question I will follow up with in a 
written form is, like, 5 percent of what? That is what I am--
    Dr. Zandi. That is the number of loans that default times 
the loss would be incurred because of that default. That is the 
total loss.
    Mr. Rothfus. If I could, real quick, go to Mr. Wallison? In 
your testimony you explained how reduced underwriting standards 
can actually make housing less affordable. You described our 
existing affordable housing policy as leading to, quote, 
``higher leverage, a lower home ownership rate and reduced 
affordability.'' And I would guess higher home prices, too?
    Mr. Wallison. Yes. In fact that is the whole problem, that 
    Mr. Rothfus. And I guess, Ms. McCargo, can you respond? 
What is--because it makes sense to me what Mr. Wallison is 
saying, that all these policies have really driven up the cost 
of housing which it makes it a--it is an affordability issue, 
is it not?
    Ms. McCargo. So that we definitely have an affordability 
issue, I just cannot find the way to express that I don't think 
that issue comes from 30-year fixed rate mortgage or from the--
    Mr. Rothfus. I don't think he is saying that.
    Ms. McCargo. Yes, or from the government guarantee or the 
government's involvement in this process.
    Going back to 2008, if you look at the lending that was 
going on, which before 2008 leading up to the crisis, and you 
look at the people, the private label investors that were in 
the market at that time, and you look at the performance on the 
loans that were made prior to that period--I would just say 
2005, 2006, and 2007--loans made prior to that period where you 
had a huge proliferation of risky products that were not 30-
year straight mortgages.
    Mr. Rothfus. But weren't Fannie and Freddie securitizing 
Alt-As and some prime loans, too?
    Ms. McCargo. They were some. They were not all. There was a 
huge market called the private label securitization market that 
was a big market and had much more share at the time than 
Fannie or Freddie and they were holding those loans. And when 
2008 happened, those players disappeared--
    Mr. Rothfus. But the portfolio--
    Ms. McCargo. --From the market.
    Mr. Rothfus. But the portfolio of Fannie and Freddie's 
paper, significant percentage of Alt-A and sub-prime, no?
    Ms. McCargo. There was a percentage of it. And but it was--
    Mr. Rothfus. And my time is way over expired.
    But Mr. Chairman, thank you. I am going to yield back.
    Chairman Duffy. The gentleman yields back. I am going to 
change the rules midstream. We are going to do 3 minutes 
because you did take 3 minutes.
    Chairman Duffy. So the gentleman from Missouri, Mr. 
Cleaver, is recognized for 3 minutes.
    Mr. Cleaver. Thank you, Ms. McCargo. Again, thank you for 
being here. The McKinsey Global Institute put out a study 
recently which says that by 2025, we will have about 1.6 
billion people globally living in homes that are either unsafe 
and decrepit or housing that is unaffordable that would be 
    Do you have any suggestions on ways in which this committee 
and the U.S. Federal Government, can help create the atmosphere 
for a larger stock of affordable housing?
    Ms. McCargo. Thank you. The affordable housing issues have 
exploded since the crisis. We have seen a lower vacancy, less 
construction in the affordable space, a lot of constraint on 
    A regulator and the cost of construction to build housing 
is incredibly high and that makes the building and the ability 
to create affordable housing stock very, very difficult.
    One of the key things--and I am just going to go back to 
the GSEs for a moment--I think that is a good move, is the Duty 
to Serve rule that is requiring that the GSEs look at the 
preservation of affordable housing as part of how can they have 
more of a footprint and an impact on preservation of affordable 
    Most affordable housing stock in America is old. And it 
needs to be preserved. It needs to be renovated. And there 
needs to be investment made there such that folks can afford to 
get into those homes, and we can have more stock brought to the 
    I do believe we have a credit crisis on one side where 
people are having trouble getting into housing. Once this 
Congress fixes that problem, we then have a serious problem of 
there is not going to be enough housing stock available for 
people to buy or rent at this point in time given the 
    Mr. Cleaver. One of the problems when we are talking about 
rehabilitating housing, which I agree with it, we have done 
enough demolition, but the cost is going to exceed the value of 
the home or the property.
    And so, you get criticized by giving a loan on a property 
that is not valued at the level of the money that went into it 
to rehab it. It is a conundrum that many urban areas are 
facing, and if any of you have any ideas on how to solve that 
problem, it would be helpful.
    Ms. McCargo. Can I--
    Mr. Cleaver. Yes?
    Ms. McCargo. One more thing on affordability and again, I 
will go back to Duty to Serve and the focus that has been put 
on manufactured housing, modular housing and different types of 
affordable housing stock.
    I do think we have the opportunity to think about better 
financing structures to support those types of affordable 
housing opportunities is something that, again, the GSEs are 
looking at and exploring.
    And I do think that is another space where in housing 
finance reform and what the GSEs are doing in housing policy 
there could be help for finding more ways to get at that type 
of affordable housing as well.
    Mr. Cleaver. Thank you.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes himself for 3 minutes. Mr. Zandi, 
you have said several times, I believe, that you believe that 
the borrowers should pay for their guarantee. Is that correct?
    Dr. Zandi. Correct.
    Chairman Duffy. How do you set the guarantee? How do we 
know that we are collecting enough money to actually have 
enough resources for that guarantee? I think that becomes the 
context of the million-dollar question. I don't know, and then 
I have to get--
    Dr. Zandi. Yes, it is a great question. I don't think there 
is a good answer. I would set it high enough that I would feel 
very comfortable I am collecting enough money and building that 
mortgage. I would set up a mortgage insurance fund, just like a 
deposit insurance fund--
    Chairman Duffy. Like a contingency fund of some sort?
    Dr. Zandi. --And put the money in there and keep building 
it, and I wouldn't stop. You can do the arithmetic. Go back to 
the multiple guarantor system, and pay a 10-basis point fee.
    Chairman Duffy. If we feel like to raid those kind of 
    Dr. Zandi. Pardon me?
    Chairman Duffy. If we feel like to raid those kinds of 
    Dr. Zandi. No, no. You can't raid the DIF (Deposit 
Insurance Fund). You can't raid the DIF, so don't raid it--you 
can't. Just design it exactly the same way so you can't raid 
the MIF (Mortgage Insurance Fund). It is there to backstop that 
system if it ever gets in trouble, and just let it build. And 
it will, it will build.
    If you put a 10-basis point fee on every mortgage that is 
insured by the future guarantors that take over for Fannie and 
Freddie, that will raise a boatload of money, and we will be 
fine. We will be very conservative.
    Chairman Duffy. Mr. Wallison, do you agree with that? I 
know you have thrown all these policies to the side--
    Mr. Wallison. Yes.
    Chairman Duffy. --I know, but--
    Mr. Wallison. The private system would work anyway, but 
just talking about mortgage insurance, the FHFA has required 
that all mortgage-backed securities be backed by mortgage 
insurance and has required the mortgage insurance industry to 
have sufficient tangible assets behind its insurance. So it 
would be the private system that would set mortgage insurance 
    The problem with that, of course, and Mr. Zandi didn't 
address it, is that very risky mortgages with low down 
payments, with low FICO scores, et cetera, are going to be very 
expensive under any system where you have a private mortgage 
    Chairman Duffy. And therefore should you have a one-size-
fits-all or do we have to have a guarantee fee that meets the 
risk of the mortgage?
    Is that your position, Mr. Zandi?
    Dr. Zandi. For the catastrophic backstop, no. I wouldn't do 
    Chairman Duffy. One-size-fits-all?
    Dr. Zandi. Yes. And what the other thing I would do, 
though, is that I would have a clawback ability so that if you 
ever got into the MIF and you blew away the MIF, and I can't 
even imagine that scenario, but let us--who could imagine the 
Great Recession, then you have the ability to claw that back 
with higher fees in the future to future borrowers on that 
    Chairman Duffy. And I only have 30 seconds left. And Mrs. 
McCargo, I want to chat with you later. We have a housing issue 
in rural America that is very challenging for us that we aren't 
able to get our hands around.
    Ms. McCargo. Absolutely.
    Chairman Duffy. I am concerned we only focus on urban 
America and because rural is sparsely populated we don't get 
the same resources and effort. And it is just as devastating 
for our communities.
    I am sorry that we had a conversation about taxes today, 
but we have seen tax policy and housing policy intersect 
especially in the conversation of the day.
    I would just say this. I think when we use economic warfare 
and talking points, but then we accommodate the talking point 
with tax policy, all of a sudden we see people get really 
squeamish. And we start saying that million-dollar homes are 
for poor people or middle-income people, and it is a head-
scratcher for me.
    Maybe we are better off not playing that economic warfare 
and go what is the best policy? Let us stop bludgeoning each 
other, because when you bludgeon each other, you might not get 
the best policy. And when you see that policy accommodates 
rhetoric, it doesn't end up being the best policy.
    With that, my times has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 3 minutes.
    Mr. Sherman. Mr. Chairman, I wish not to bludgeon you but 
to invite you to southern California for critically important 
committee business in January or February.
    Chairman Duffy. I have already agreed to come. I am there.
    Mr. Sherman. Yes.
    Ms. McCargo, you are absolutely right. We need to build 
more housing. In my area, the problem may be local government 
and land use planning as much as anything else.
    We are told that we ought to blame Fannie and Freddie and 
the Federal guarantee. I would say that perhaps Fannie and 
Freddie are so pernicious that they caused the meltdown in 
2008, 2009 in Iceland, Ireland, the United Kingdom and Denmark 
and that they have a pernicious effect on home affordability so 
great that they have made homes unaffordable in London, Tokyo, 
and Vancouver.
    So we have meltdowns. Other places have meltdowns. We have 
some areas with high home prices that are difficult for people 
to afford. So do other places.
    What is unique to the United States is that we have the 30-
year fixed rate, pre-payable, non-recourse loan very often with 
a 10 percent down payment. And people whose parents can't 
afford to help them can still buy a home.
    Mr. Zandi, the takeaway for me at this hearing is double-
digit loss of value of homes in my district.
    Dr. Zandi. If you give me your address--no, only kidding.
    Dr. Zandi. In fact, I will send you, if you are interested, 
a worksheet that shows by county the HPI decline I would expect 
at--the peak HPI I would expect as a result of the bill.
    Mr. Sherman. Yes. I need that.
    Dr. Zandi. I will give that to you.
    Mr. Sherman. I will look forward to getting that from you 
and to sharing it with my colleagues from the variety of 
counties in California.
    One, we have now, Mr. Tozer, is we have the GSEs. They have 
seller servicing guidelines. They both have underwriting 
    It is not a race to the bottom in the underwriting 
standards. You can't have one guarantor cutting its 
underwriting standards to gain marketing share.
    One could imagine that if there were a different system, 
that there would be a race to the bottom, and then many of the 
mortgages wouldn't have title insurance, wouldn't have 
insurance to say that it is, indeed, a first priority lien.
    What are the ways we can prevent a race to the bottom in 
terms of lien quality if we have more than two guarantors or 
    Mr. Tozer. The key is that you need to make sure that 
guarantors transfer the credit risk to a third party because 
that way that third party will play policeman to make sure that 
you don't get out of control.
    I think the best place to start is the private mortgage 
insurance companies because they are taking on all the credit 
risk now. If you don't put 20 percent down, the PMI companies 
take on the credit risk.
    So I think credit investors are the good policemen to put a 
floor in there because they are on the hook for the losses. And 
then as far as when it comes to the issue of mortgage insurance 
for it, it gets back to the point again that the guarantors 
have to take on the catastrophic credit risk because if the 
mortgage insurances aren't there, it affects them.
    The government only steps in when the issuer completely 
fails, because it is a huge incentive to be viable financially 
before the government steps in. This will avoid the race to the 
bottom, because the government is not going to bail you out if 
you survive financially.
    Mr. Sherman. I believe my time has expired.
    Chairman Duffy. The gentleman's time has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green, for 3 minutes to talk more about CRA.
    Mr. Green. Yes, the CRA, and other things. Let us start 
with the other things quickly. Is there anyone who believes 
that there won't be a government backstop regardless of the 
plan if we find that the economy is about to go under? I don't 
believe in government backstops. I would rather not have one.
    It is better to plan one than to have to develop one when 
you find the economy about to go under, as we had to do after 
2008 and 2009. Seems like we ought to look at having an orderly 
process as opposed to something that we have to do on the fly.
    I remember when the Secretary came in and explained to us 
that we were about to have a crisis unlike we have seen in our 
lifetimes, a good many of us. I don't want a government 
backstop. I just don't know that there is any other choice 
because we want our economy to continue.
    And we could have refused to bail out the banks as we see 
it, but the results would have been catastrophic. If there is 
anybody who thinks that it wouldn't have been catastrophic, 
raise your hand, please?
    You don't think that it would have been catastrophic? I am 
going to give you 10 seconds on that, maybe 20. Go ahead.
    Mr. Wallison. I am just saying it wouldn't have been 
catastrophic. We caused that problem.
    Mr. Green. But let us talk about the point where the 
problem had to be dealt with. If we had not bailed them out, 
what would have happened?
    Mr. Wallison. Probably nothing because--
    Mr. Green. Probably nothing?
    Mr. Wallison. Probably nothing.
    Mr. Green. And banks wouldn't lend to each other?
    Mr. Wallison. The banks were lending to each. By the time--
    Mr. Green. No, no, no, no. By the time of the--when we got 
involved, the banks were not lending to each other.
    Mr. Wallison. That is not correct.
    Mr. Green. It is correct.
    Mr. Zandi, would you give your commentary?
    Dr. Zandi. Yes, it would have been catastrophic. The system 
was shutting down. The commercial paper market wasn't working. 
The large non-financial corporates couldn't get funding. We 
were on the verge of a complete meltdown.
    The loss--remember back, January 2009, we lost over a 
million jobs. In my book, that is catastrophic.
    And it would have been much, much worse if we had not 
stepped in aggressively through the TARP. Yes, no one likes 
bailing out big banks or banks in general.
    Mr. Green. I am one of those.
    Dr. Zandi. We actually had to do it.
    Mr. Green. Yes.
    Let us go to Mr. Tozer. Sir, would it have been 
    Mr. Tozer. Yes, it would have. I was a mortgage banker back 
then, and just to put an example, I had mortgage trade on where 
I had sold a Ginnie Mae or a Fannie Mae security to Goldman-
    And I had bought one from Morgan Stanley, and they wouldn't 
even take each other's trades. Normally, I would assign the 
trades. They wouldn't let me assign the trades.
    Mr. Green. I hate to interrupt you, but I have to say this. 
This is the problem that we run into. We run into this problem 
of persons who still believe that the CRA caused the crisis, 
and that if we had done--you are not one of them, sir.
    You are not one of them. But there are those who do believe 
this. And this is a part of the problem that we have in 
resolving the crisis that will come forward at some point in 
the future.
    Trying to find a way to get beyond some of these fallacious 
arguments that dealt with the crisis that we had to encounter.
    Look, thank you, Mr. Chairman. I have gone beyond my time.
    Chairman Duffy. The gentleman--
    Mr. Green. I will yield to you time to respond.
    Chairman Duffy. You have no time left to yield, but I 
appreciate that.
    Mr. Green. I will yield the time that I don't have to you.
    Chairman Duffy. But I thank the gentleman for yielding 
back. I want to thank our witnesses for their testimony today. 
I would just note that this is, as we can see, a complicated 
and involved process. I look forward to, and I think the 
committee does, to have more in-depth and longer conversations 
with all of you to make sure we get it right.
    Thank you for taking the time today and providing your 
insight and expertise to the committee.
    Hopefully, the panel will respond in a prompt and timely 
manner, so you get questions from the committee. With that, and 
without objection, our hearing is now adjourned.
    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.
    [Whereupon, at 12:05 p.m., the subcommittee was adjourned.]

                            A P P E N D I X

                            November 7, 2017