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


  SUSTAINABLE HOUSING FINANCE: THE ROLE OF GINNIE MAE IN THE HOUSING 
                             FINANCE SYSTEM

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

                                 HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         HOUSING AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 29, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-59
                           
                           
 
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


                               __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
31-286 PDF                  WASHINGTON : 2018                     
          
-----------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, 
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected]. 




                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

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

                  Kirsten Sutton Mork, Staff Director
                 Subcommittee on Housing and Insurance

                   SEAN P. DUFFY, Wisconsin, Chairman

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

                              ----------                              
                                                                   Page
Hearing held on:
    November 29, 2017............................................     1
Appendix:
    November 29, 2017............................................    29

                               WITNESSES
                      Wednesday, November 29, 2017

Bright, Michael R., Executive Vice President and Chief Operating 
  Officer, Government National Mortgage Association..............     5

                                APPENDIX

Prepared statements:
    Bright, Michael R............................................    30

 
                      SUSTAINABLE HOUSING FINANCE:
                       THE ROLE OF GINNIE MAE IN
                       THE HOUSING FINANCE SYSTEM

                              ----------                              


                      Wednesday, November 29, 2017

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:06 a.m., in 
room 2128, Rayburn House Office Building, Hon. Sean Duffy 
[chairman of the subcommittee] presiding.
    Present: Representatives Duffy, Ross, Royce, Hultgren, 
Rothfus, Zeldin, Trott, MacArthur, Budd, Hensarling, Cleaver, 
Clay, Sherman, Beatty, Kildee, and Gonzalez.
    Also present: Representative Kustoff.
    Chairman Duffy. The Subcommittee on Housing and Insurance 
will come to order. Today's hearing is entitled, ``Sustainable 
Housing Finance: The Role of Ginnie Mae in the Housing Finance 
System.''
    Without objection the Chair is authorized to declare a 
recess of the subcommittee at any time. Without objection, all 
Members will have 5 legislative days within which to submit 
extraneous materials to the Chair for inclusion in the record.
    Without objection, Members of the full committee who are 
not members of the subcommittee may participate in today's 
hearing for purposes of making an opening statement and 
questioning our witness. The Chair now recognizes himself for 4 
or 5 minutes.
    I want to thank our members and our witness for 
participating in our fourth hearing on housing finance reform. 
I look forward to hearing from Mr. Bright.
    Now while both Ginnie and the GSEs (government-sponsored 
enterprises) have enjoyed the backing of the Federal 
Government, Ginnie finds itself in a different position today 
than Fannie Mae and Freddie Mac.
    I understand that part of that is because there is a 
difference between the implicit and explicit guarantee, but I 
also believe it is because of the structure in which Ginnie 
provides mortgage-backed securities versus the system employed 
by Fannie and Freddie.
    Since the financial crisis, Ginnie has seen a significant 
amount of growth, yet has still been able to put the private 
sector in a first dollar loss position.
    I hope to hear today how Ginnie has been able to manage 
their growth, which has been significant, and the 
responsibilities to the American taxpayer. I also want to 
explore the Ginnie model more in-depth as we look to reform the 
housing finance system and bring more private skin back into 
the game.
    Mr. Bright himself has authored a proposal with former FHFA 
(Federal Housing Finance Agency) Acting Director Ed DeMarco to 
stand Ginnie up further in its role in the housing market.
    With now time at the helm to evaluate Ginnie's inner 
plumbings, he is in a unique position as to whether the 
suggestions made in that paper would actually work. Do the 
logistics make sense?
    Exploring a model in which the Federal Government is in the 
fourth dollar loss position and whether there can be more 
levels before the Federal Government is expected to pay out 
should be a primary goal of any housing finance reform endeavor 
undertaken by this committee.
    Another area that has been highlighted in the written 
testimony, and I hope to discuss today, is the Ginnie Mae 2020 
initiative. While we know that a large investment has been made 
in the common securitization platform, Ginnie has successfully 
employed its own platform that hundreds of private sector 
participants have been able to utilize.
    While the GSEs' common securitization platform was 
originally intended to be utilized by more market participants 
than Fannie and Freddie, it has changed direction since Mr. 
Watt has been in charge of the FHFA.
    Are there similarities between the two platforms, and can 
one be utilized by both Ginnie and the GSEs? As I have said in 
previous hearings, I think we need to move forward with housing 
finance reform in a bipartisan manner. I hope today's hearing 
will help inform members on both sides of the aisle what 
Ginnie's future role is in the housing finance space.
    I would just note that Mr. Cleaver and I have had a number 
of meetings and are trying to move forward in a bipartisan 
fashion and we are painting off the same picture, at least to 
begin with, which I think is a pretty good start.
    So with that, I now recognize the Ranking Member, Mr. 
Cleaver, the gentleman from Missouri, for 3 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman, and thanks for the 
hearing, and thanks for the interest and time that you have 
given this issue.
    And I want to welcome you, Mr. Bright, to this hearing, 
``The Role of Ginnie Mae in the Housing Finance System.'' The 
Housing and Insurance Subcommittee has held, as you probably 
know, a number of hearings this year on the state of our 
housing finance system.
    As these conversations continue, and some of them continue 
out of sight, just so that we can get down into the nitty 
gritty on where we stand on these issues, I think it is 
important to hear from you on the role of Ginnie Mae in our 
current housing system.
    Ginnie Mae has a large footprint in a small office because 
you are connected inside HUD (Housing and Urban Development), 
you have less than 200 employees, and I think that we 
appropriate funding for the salaries in Ginnie Mae and the 
expenses, the claims, and the capital reserve fund. I am 
assuming that they are funded through your fee revenues.
    But given the small amount appropriated to the agency, it 
is important, I think, for us to determine if Ginnie Mae is 
sufficiently funded or whether or not there is a need for some 
adjustments.
    Additionally, Ginnie Mae is engaged in a modernization 
initiative which I appreciate, and I am interested to hear more 
about this during the course of the hearing.
    Any plan to reform the GSEs must include an explicit 
government guarantee, preservation of the 30-year fixed 
mortgage, and strong affordability goals. That is what I have 
shared.
    Chairman Duffy and I have talked about that as well. And so 
getting a bit better understanding from you today will help us 
understand proposals that might be forthcoming.
    Thank you, Mr. Chairman.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from Florida, the 
Vice Chair of this subcommittee, Mr. Ross for 2 minutes.
    Mr. Ross. Thank you Chairman, thank you very much for 
holding this hearing, and I commend you on your dedication for 
finding a better way for taxpayers and homeowners alike.
    I would also like to thank Mr. Bright for being here with 
us today to share his insights from his current role as Acting 
Director of Ginnie Mae and years of experience in the field.
    The United States has been a beacon of freedom in the world 
and a big part of that freedom has been the freedom to take 
risks. An entrepreneur has an idea that involves a bit of risk, 
the American system has replied go forth and God bless. Risk 
taking and the entrepreneur spirit is a fundamental part of our 
tradition of free market competition.
    Unfortunately these days some of the risky, big ideas 
aren't coming from entrepreneurs. They are coming from 
bureaucrats and policymakers. That means that the collateral 
isn't one person's house or his credit. It is the taxpayers' 
dollars and our children's future.
    Rather than say go forth and God bless, it is the duty of 
this body and the House of Representatives and, in particular, 
this committee to say, in the words of Lee Corso, ``Hold on, 
not so fast.''
    Right now our housing finance policies are exposing 
taxpayers to a level of risk that cannot be justified or 
tolerated. With Fannie Mae and Freddie Mac on track to have 
their capital reserve deleted by year's end, and nearing a 
decade of conservatorship, it is high time for this body to 
produce solutions that pave the way for a sustainable future.
    This brings me to Ginnie Mae, whose experience in the years 
following the financial crisis, I believe, to be invaluable in 
informing our reform effort.
    As a governmental agency, Ginnie Mae has a political 
mandate to help people achieve the dream of homeownership, but 
it also has a fiduciary duty to protect taxpayers against 
precarious risks that will lead to bailouts.
    With regard to achieving that balance, Ginnie Mae has done 
relatively well given the restrictions and directives that have 
complicated its missions. My hope is that this hearing will 
provide members of the subcommittee with additional insight as 
to how we can build upon Ginnie Mae's strengths and address its 
weaknesses.
    I believe as members of the House we have a responsibility 
to make sure the taxpayer is protected. I believe that this 
hearing will get us closer to a plan for protecting taxpayers 
against unnecessary risks so we can better stabilize our 
housing market.
    I yield back.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 2 minutes.
    Mr. Sherman. Thank you. I don't buy the idea that if it is 
not broke don't fix it because sometimes you can make things 
better, but if it is not broke, don't break it. We now have a 
system of 30-year, fixed rate, pre-payable mortgages available 
to ordinary Americans on good terms. Let us not break that.
    We have a system where the Federal Government can earn a 
profit in most years, put that profit aside, and be sure that 
it will more than cover losses that could be expected. If it is 
not broke, don't break it.
    Now, we were traumatized, not just economically, but in 
terms of our social fabric by the bailouts. That is when you 
bail out a private enterprise. We have to avoid creating 
enterprises that on the one hand are private and on the other 
hand expect a bailout, whether that be AIG or Lehman Brothers, 
Goldman Sachs or Fannie and Freddie.
    That is why I think we should strip the veneer of saying 
that Fannie and Freddie are somehow independent, non-government 
agencies under conservatorship and acknowledge what they are.
    They are government agencies and should be treated as such. 
If they produce a profit in a good year that should accrue to 
the taxpayers, and of course the taxpayers are taking the risk. 
I look forward to learning how Ginnie Mae can be improved, but 
I am not looking for some radical and disruptive change.
    And finally, I would like to look at the servicing rights 
of loans because I know a number of small banks have a good 
relationship with the individual borrower. They are not just a 
portfolio, and we will want to talk about that.
    I yield back.
    Chairman Duffy. Very well, the gentleman yields back.
    We now welcome our one witness today, Mr. Michael Bright, 
the Acting President of the Government National Mortgage 
Association or Ginnie Mae. Mr. Bright, you will in a moment be 
recognized for 5 minutes to give an oral presentation of your 
written testimony. Without objection the witness' written 
statement will be made part of the record following his oral 
remarks.
    Once the witness has finished presenting his testimony, 
each member of the subcommittee will have 5 minutes within 
which to ask Mr. Bright questions.
    You are well aware of this, but on your table you have 
three lights. Green means go, yellow means you have a minute 
left, and red means that your time is up, pretty common sense. 
Your microphone is sensitive so please make sure you are 
speaking into it.
    With that, Mr. Bright, you are now recognized for 5 minutes 
for an oral presentation of your statement.

                 STATEMENT OF MICHAEL R. BRIGHT

    Mr. Bright. Thank you. Thank you. Good morning Chairman 
Duffy, Ranking Member Cleaver, and distinguished members of the 
subcommittee. My name is Michael Bright, and I am the Executive 
Vice President and Chief Operating Officer of the Government 
National Mortgage Association, or Ginnie Mae. Thank you very 
much for inviting me here today to discuss our mission and our 
work.
    Established in 1968, Ginnie Mae is a federally chartered 
corporation responsible for applying and administering a full 
faith and credit government backstop on qualifying mortgage-
backed securities.
    In exchange for this backstop, Ginnie Mae charges lender 
fees and a six-basis-point guarantee fee, which is currently 
set in statute. The benefit of the Ginnie Mae model is that, 
through a well-defined and limited government role, global 
capital is attracted to the U.S. housing finance system through 
our market cycles.
    This reliable flow of low cost capital purchasing Ginnie 
Mae mortgage-backed securities provides affordable mortgage 
financing for millions of borrowers.
    The easiest way to understand Ginnie Mae's mission is that 
we oversee a process for ensuring the success of the 
government's guarantee, often referred to as the government's 
wrap.
    Specifically, Ginnie Mae manages technology and 
infrastructure designed to track the payments of principal and 
interest coming from borrowers, going through the lenders, and 
making sure it ultimately flows into our common security on 
time and in full every single month.
    At its core this is what a government guarantee means. An 
agency such as Ginnie Mae has regulatory authority over the 
process of ensuring the timely payment of principal and 
interest on securities.
    To ensure that Ginnie Mae MBS (mortgage-backed security) 
remain liquid, we have extensive relationships with large 
investors across the globe. This helps maintain low interest 
rates for loans backed by the USDA (United States Department of 
Agriculture), the V.A. (United States Department of Veterans 
Affairs) and the FHA (Federal Housing Administration), which 
ultimately get securitized into our program.
    A government wrap on MBS does not alone ensure success. I 
think this is an important point. At a very high level, the 
Ginnie Mae wrap works because we do two things effectively.
    First we are transparent about our rules and our processes 
with our investors, and second, we work hard to police our 
program. Both work streams are vital to meeting our statutory 
missions of providing liquidity and protecting taxpayers.
    We are also successful, in part, because we have a nimble 
staffing model. Ginnie Mae was designed to have a relatively 
small core staff leveraging specialized support from 
contractors where appropriate.
    Far from being a weakness, we actually believe that our 
outsourcing model, in some ways, has allowed Ginnie Mae to be 
scalable and to expand or contract as market conditions change. 
In our mandate to protect taxpayers against loss, we are helped 
by the fact that in the Ginnie Mae model, the government 
backstop is in a so-called fourth loss position.
    In front of Ginnie Mae are multiple layers of capital, 
including the balance sheets of our issuers. Mechanically 
speaking, Ginnie Mae's primary risk is that a lender fails to 
remit timely payment of principal and interest on a security. 
If this occurs, Ginnie Mae must make the payment for them.
    And similar to the FDIC (Federal Deposit Insurance 
Corporation) receivership process, Ginnie Mae moves the lender-
servicing book to another lender. Missed payments or issuer 
failures are always a risk, but in practice they are, in fact, 
quite rare. This was true even during the financial crisis.
    Right now, Ginnie Mae typically remits to the Treasury 
somewhere between $1 billion and $2 billion annually, which is 
reserved in an account at Treasury against future losses. To 
date, we have never needed emergency Federal assistance to 
perform our jobs.
    We are always working to align our rules and our procedures 
with the shifting landscape of risk. In recent years, our 
issuer base has evolved from large banks toward smaller 
monoline mortgage banks that do not have significant balance 
sheets themselves. For Ginnie Mae, this poses the risk that 
multiple issuer failures could occur during a liquidity run of 
the markets.
    To protect against this, in late 2014, Ginnie Mae issued 
minimum cash liquidity requirements for all of our issuers. 
While that was a necessary first step, we are currently 
examining ways to further enhance taxpayer protections.
    Looking forward, Ginnie Mae is engaged in long-range 
planning for the future. As noted, we are calling this 
initiative Ginnie Mae 2020, and it is the next wave of 
strategic modernization for Ginnie Mae.
    While we will be officially unveiling the effort next year, 
the initiative focuses on technology modernization and 
enhancements to our counterparty risk management policies.
    One other recent development that I would like to quickly 
mention is our effort to curb aggressive and potentially 
abusive marketing by some V.A. lenders.
    We have recently formed a task force with the V.A. designed 
to bring a stop to abusive behavior that puts veteran borrowers 
at risk and raises the cost of financing for everyone who 
relies on the Ginnie Mae program.
    In conclusion, let me say that Ginnie Mae has proven 
itself, adapted administering a government backstop on MBS 
since the agency began operating 50 years ago. With that in 
mind, Ginnie Mae is here to help policymakers implement 
whatever housing finance system that you deem appropriate for 
the future.
    Thank you, and I am happy to answer any questions.
    [The prepared statement of Mr. Bright can be found on page 
30 of the appendix.]
    Chairman Duffy. Thank you, Mr. Bright, for your oral 
statement.
    The Chair now recognizes himself for 5 minutes. I just--in 
response to Mr. Sherman's comments in regard to if it is not 
broken, don't break it, I come at this with the premise that 
the system was broken, and it broke our whole economy. It broke 
American families.
    There is a problem with the structure of that old system 
that continues today. And thinking through reforms to make sure 
that we don't break the American family again, I think is smart 
for policymakers.
    And the thought that we would, and I am not saying that 
anyone is proposing this, but we are going to put politics and 
political decisions in front of market discipline I think would 
be foolish because in the end you get a very bad result which 
doesn't actually help the American people, the American family. 
It actually hurts them, which is what we saw in the 2008 
crisis.
    But Mr. Bright, you and Mr. DeMarco wrote a paper. You now 
sit in a unique position to maybe analyze the conclusions of 
that paper.
    Any thoughts or insights that you want to give us? Does 
your paper still work based on your knowledge today? Could 
Ginnie Mae be the model that we stand up for your paper?
    Mr. Bright. Sure. Well, yes, I definitely am not walking 
away from the paper. In fact, I would say my experience so far 
at Ginnie Mae, I believe in the conclusions and the model even 
more than I did potentially when we wrote it.
    I would say that when Ed and I started talking about that 
and, it would have been 2014, 2015, the idea of using Ginnie 
Mae as a full faith and credit backstop, as opposed to creating 
a new one, so the genesis of the idea was that the Ginnie Mae, 
maybe, the security was already out there.
    They are $2 trillion in size. They are very transparent-
priced, so we don't have to have all kinds of back and forth 
about how much is the full faith and credit wrap worth in terms 
of lowering rates.
    Because in most reform proposals, you wrap mortgages with a 
full faith and credit wrap and everybody says rates go down. 
Then you bring in private capital, which costs some amount of 
money, and so rates go up. There is this debate over what is 
the net impact.
    We said, hey, let us just use Ginnie Mae because we can see 
what the price is. So you actually take that argument off the 
table. And that was the reason that we did that.
    What I have learned since being at Ginnie is that there is 
even more to it, which is that a wrap doesn't just exist 
because we wave a magic wand and say all these mortgages are 
now guaranteed by the government. An explicit wrap, if it is 
going to work, needs people to oversee and administer it to 
make sure that money is flowing.
    If there isn't P&I (principle and interest) calculated 
properly, and it is not on the account at the right time, you 
can go to your explicit account at the Treasury and put money 
in there and then go back to the system and say, who messed up 
and why?
    And that is a process. It is an administrative process. 
That is what the folks at Ginnie Mae do.
    And that has really been, I think, a little bit of a 
lightbulb moment about how using not only a brand that exists, 
but a set of processes and administrative functions that exist, 
would probably make it easy, easiest way to transition to 
something.
    Chairman Duffy. Do you note any operational infrastructure 
challenges since you have been there?
    Mr. Bright. We have to do some modernization. The mortgage 
market is moving toward this new mortgage type process. And our 
architecture has some upgrades to get there. We have that 
slated, actually, for next year. We are procuring a contract to 
get that done. So we want to be able to do e-mortgage.
    There are some pool splitting capabilities that a lot of 
issuers said that they would like to have, which we are 
actually procuring as well. But they are pretty nuanced and 
technical.
    There is no sort of big picture, anything major, that I 
would say that Ed and I missed that I have seen since I have--
    Chairman Duffy. So the Chairman and I, who is here for this 
hearing, have been talking to a number of different groups 
trying to get their feedback and input on if we are going to do 
a reform, what should reform look like.
    And there are a number of different models--
    Mr. Bright. Yes.
    Chairman Duffy. --And including the one that you helped 
author, and we are soliciting feedback and input from all 
different players in the market.
    I think there has been a consistent concern by the smaller 
institutions having equal access to the secondary market. Can 
you address those concerns? Should they be concerned under your 
model?
    Mr. Bright. It is housing reform, so everybody is always 
concerned, and they want to make sure that they get it right 
and all these things. Ginnie Mae does have 450 issuers. Most of 
them are small. We do have standards for whether or not you can 
be an approved issuer.
    There is a process to it, but the vast majority of our 
issuers are small issuers. And in a Ginnie Mae security you 
actually get all the benefits of cross-subsidization from the 
large institutions because every month, every loan that is 
originated and put into a Ginnie pool, all gets aggregated into 
the same CUSIP (Committee on Uniform Security Identification 
Procedures).
    So small lenders you can deliver one loan, you get the 
exact same price execution as if you were the largest mega-bank 
delivering millions of loans. And so we think that that is the 
advantage of a single CUSIP security based on the way that we 
have it.
    So we don't have specified pay-up trading, which the GSEs 
do, which I think disadvantages small lenders. We have a single 
CUSIP, like I said, which aggregates all the loans every single 
month. Most of our issuers are small lenders. We work very hard 
to make sure that small lenders have access.
    So to the extent that there are concerns, we are certainly 
here to work through them, but on a macro level we think we 
have something that should work for them.
    Chairman Duffy. Thank you. My time has expired.
    I now recognize the gentleman from Missouri, the Ranking 
Member, Mr. Cleaver for 5 minutes.
    Mr. Cleaver. Thank you. Thank you, Mr. Chairman.
    Mr. Bright, I wanted to talk to you a little about actual 
differences in risk. And pardon me, I am unable to use my 
beautiful voice as usual.
    But you are significantly different, maybe not, maybe 
significant is not a good word, but different than Fannie and 
Freddie. And can you concisely just give me the differences as 
you would see it?
    Mr. Bright. Sure, very different, actually. We have the 
similar-sounding names, but very different functions. We 
administer a full faith and credit wrap on a security. Full 
stop.
    That is an administrative function, making sure that the 
bondholders know they are going to get paid and that the 
issuers know the rules for participating in our program in 
terms of when they have to remit P&I, what data they need to 
give us.
    But it is an administrative function that ensures that a 
full faith and credit guarantee, both makes investors confident 
in buying security and taxpayers confident that there are risk 
controls in place that we are not going to have to ask Treasury 
for a bailout. That is Ginnie.
    Fannie and Freddie, they buy loans from lenders. They pool 
them together. They put them into a security.
    They issue their own securities and they have cash windows 
to buy loans for smaller lenders and Fannie, who does the 
issuance for them as well. And finally, they have balance 
sheets where they buy delinquent loans out of pools.
    They are really secondary marketing aggregators, credit 
enhancers, and cash window providers. So in some sense, their 
role is almost analogous to what the FHA does in the GMA 
program.
    Now, they don't operate within an explicit full faith and 
credit guarantee, they operate with what we all know is an 
implied credit guarantee.
    And mechanically the way that implied guarantee works is 
that Fannie and Freddie can buy loans out of pools when they go 
delinquent by issuing debt into the capital market at very 
cheap rates, rates that are subsidized almost explicitly.
    They raise that capital, and they buy loans out of pools 
and put them on their own balance sheet. In our program, our 
private issuers actually do that, and we just guarantee the 
NBS.
    Mr. Cleaver. How does Ginnie Mae approve issuers? What is 
the process?
    Mr. Bright. Yes. It is about a 4- to 6-month process that 
involves examination of management capabilities; examination of 
business plan; examination of an issuer's commitment to being 
in the servicing business; examination of an issuer's access to 
capital, liquidity, and financing; history of this issuer's 
occupational capacity.
    So it is not entirely dissimilar in some ways to the way a 
bank would be approved in that there is a very thick dossier 
of--look through it of--
    Mr. Cleaver. But it takes about 6 months?
    Mr. Bright. About 4 to 6 months. We go as fast as we can 
being as diligent as we can. That is right.
    Mr. Cleaver. Now, Fannie and Freddie take on risk. I guess 
with Ginnie Mae, who is taking on the risk?
    Mr. Bright. Yes. So in Ginnie the risk is bifurcated or it 
is split very neatly into three different parts. Our issuers, 
which are private lenders, so think of mortgage lending 
institutions, have the risk that they have to remit timely 
principal and interest every month no matter what.
    So if you are a lender and you issue a Ginnie Mae mortgage-
backed security and some of the borrowers to whom you have made 
loans to don't pay you on time, you as the lending institution 
are responsible for getting P&I to us and into our MBS.
    So that is risk number one, and that is with the lending 
institution. Once that borrower goes more than 90 days 
delinquent, the lending institution files an insurance claim 
with the FHA, the V.A., or the USDA.
    Those institutions then look and say, are the documents in 
order? Is this a conveyable property? They have a series of 
checklists that they do like any insurance claim. And if 
everything is good then the FHA writes a check to the lender 
and says here, we owe you this money for the loan. This is what 
you had insured.
    So that is the FHA's risk, which is basically the credit 
risk and the risk that loans that were underwritten properly go 
delinquent, a claim gets filed and you have to give them an 
insurance claim.
    Ginnie Mae's risk is that the process doesn't work somehow, 
that a lending institution has a liquidity situation and can't 
remit P&I or delinquencies spike and there is a time lag 
between when an insurance claim can be filed and when the cash 
is actually there.
    In that case, the explicit wrap kicks in, Ginnie Mae remit 
puts P&I into the investor account and then would kick an 
issuer out of the system because they missed the fundamental 
premise of our program.
    But it is worth noting that even in the financial crisis, 
we didn't really get to that layer. That layer of Ginnie 
actually having to dip into our reserve account at Treasury in 
order to pay a bondholder really only happens in the case of a 
fraud or something sort of exogenous because there are many 
reasons that you can get removed from the Ginnie Mae program as 
an issuer.
    Missing a payment, even by a day, is instant. You are no 
longer a participant. So that doesn't happen very often.
    Mr. Cleaver. Thank you.
    Mr. Bright. And I would be happy to go through this.
    Mr. Cleaver. Yes, thank you.
    Chairman Duffy. The gentleman's time has expired.
    The Chair now recognizes the Vice Chair of the 
subcommittee, Mr. Ross, for 5 minutes.
    Mr. Ross. I thank the Chairman.
    And thank you Mr. Bright for being here. I am very 
intrigued and even more encouraged by the DeMarco-Bright theory 
in your paper, and as you talk about the last layer of 
responsibility under Ginnie Mae and how it has rarely, other 
than an instance of fraud been tapped, is it when we look at 
the Fannie and Freddie and transforming them under the DeMarco-
Bright plan that this would also be the same?
    That this would be the level--that the same tiers of 
responsibility, the private or the mortgage insurance or the 
equity then the mortgage insurance and then last would be 
Ginnie Mae?
    Mr. Bright. That was what the basis of the proposal was.
    Mr. Ross. And my concerns are--and not from me necessarily 
but from some of those that are very concerned about something 
like this working is--one is the capacity for private sector 
involvement with credit enhancements.
    Is there capacity out there to do this on the level that 
DeMarco-Bright suggests through the Fannie and Freddie 
transformation?
    Mr. Bright. Well, I--not tomorrow.
    Mr. Ross. Right.
    Mr. Bright. But yes, over time there certainly would be.
    Mr. Ross. How much time would you say, just to--everything 
I understand when we have the government providing and 
subsidizing forever, you can't go cold turkey overnight.
    Mr. Bright. That is right.
    Mr. Ross. You have to transition. It doesn't matter whether 
it is flood insurance. It doesn't matter what it is.
    Mr. Bright. Right.
    Mr. Ross. If we are going to do that in order to build a 
market, we have to give the path and then let the market 
develop as market forces do. So--
    Mr. Bright. Yes.
    Mr. Ross. --5 years?
    Mr. Bright. And that is the number I was thinking, which 
actually corresponds to the average tenure of a mortgage. So 
maybe that is a good way to target it.
    That would be about the amount of time that a loan that was 
originated today under an old system, maybe under a new system 
would be getting insurance from Fannie and Freddie as opposed 
to doing all the issuance and stuff through Fannie and Freddie 
that has been going through Ginnie.
    Mr. Ross. And then let us say 5 years from now we have the 
private sector capacity where we are minimizing any exposure to 
the taxpayers, let us go to the big question, and that is 
affordability.
    Are we going to be able to have affordable mortgages under 
this particular type? And if not, I would like to know that, 
but if so, why would you say so?
    Mr. Bright. Well, there is a critical boundary constraint I 
think both politically and on policies that mortgages be 
available. There are a couple of things here, crossvaling 
currents.
    The first is that the advantage of wrapping the market with 
an explicit wrap as opposed to an implicit wrap--
    Mr. Ross. Right.
    Mr. Bright. --Is you absolutely bring in--
    Mr. Ross. You give the guarantee.
    Mr. Bright. Yes. So you have an explicit guarantee which 
brings in a whole set of global capital that--
    Mr. Ross. That is at a lower risk, less return and so there 
should be more availability. Would you not agree?
    Mr. Bright. Yes. No, and that is--
    Mr. Ross. If there is more availability would there not be 
more affordability?
    Mr. Bright. That is the idea. That is correct, yes.
    Mr. Ross. And then within 5 years we could create this type 
of market and significantly reduce the trillions of dollars of 
exposure the taxpayers presently have under Fannie and Freddie?
    Mr. Bright. I believe that that would be true, yes.
    Mr. Ross. Let me ask you with regard to flood insurance, 
because there are certain properties with a 100-year flood plan 
that are backed by both Ginnie and Freddie and Fannie that have 
to have flood insurance, but yet we know that flood isn't 
abiding by the law and only go where there is a 100-year flood 
plan, as is evidenced in this last storm season.
    Do you know how many properties have been affected under 
Ginnie Mae by damage due to flood that were not covered in the 
100-year plan?
    Mr. Bright. I am being told 150,000 properties.
    Mr. Ross. A hundred and fifty thousand properties that did 
not have flood insurance, so what impact does that have? How 
does that affect, one, the liquidity and the solvency of Ginnie 
Mae?
    Mr. Bright. That is not an insignificant problem because if 
you have a property that has been damaged through a flood and 
the property cannot get into a conveyable condition to file an 
insurance claim with FHA, it does raise the risk that the 
issuer, if they are concentrated in that particular geographic 
location, could have an insolvency situation.
    Mr. Ross. Correct.
    Mr. Bright. In which case Ginnie Mae has to take that book 
and either put it on our own balance sheet or transfer it to 
somebody else, which is what we would normally do.
    It is important to note that in the current flooding, the 
disasters from this past summer, we are analyzing with very 
sharp pencils and all kinds of models and everything--
    Mr. Ross. With everything, but--
    Mr. Bright. Yes. We don't see a problem for ourselves and 
we are in constant--
    Mr. Ross. Imagine what it is like for Freddie and Fannie?
    Mr. Bright. Right.
    Mr. Ross. That is compounded exponentially I would imagine.
    Mr. Bright. So it is something that poses a problem. There 
is--
    Mr. Ross. And I guess my suggestion would be that we need 
to look at an all lines policy that is somehow or another 
offered throughout this country that includes flood, especially 
for those that can be more than affordable if they are not in 
the 100-year plan.
    I am just concerned that we don't have the capacity to 
insure as a Federal Government, which we shouldn't be doing in 
the first place, but even if we are able to structure the 
market to where we have private sector through credit 
enhancements taking the bulk of the risk, we still have other 
risks out there that could impact us, such as flood and other 
national disasters--
    Mr. Bright. I think that is right.
    Mr. Ross. --Natural disasters.
    I yield back.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. Mr. Chairman, you point out that the system 
broke in 2008. I want to stress that isn't the system we have 
now. What we know fails is an implicit Federal guarantee for 
privately run, profit-oriented institutions.
    That is why Fannie and Freddie, when they were run by 
private enterprise but guaranteed by the taxpayer, led to 
failure. We have that current situation now with the too big to 
fail banks.
    They are run for private profit. Their executives are 
focused on stock options and yet there is an implicit Federal 
guarantee because the very words too big to fail imply that we 
will not allow them to fail.
    Two systems we know do work. One is to keep it as if the 
Federal Government is not in a certain private sector area, 
such as technology. That works.
    And then in specialized areas where we want to benefit the 
consumer, where we want to achieve national and especially 
financial purposes, you may have government agencies. That also 
works.
    So the current system did not break. The system we had in 
2008 did and we shouldn't go back to it.
    Under your proposal, Mr. Bright, Ginnie Mae acts as a 
standalone corporation that issues explicit government 
guarantees to mortgage-backed securities with proper credit 
enhancements. The first 4 percent of the loss is absorbed by 
the private sector, as I understand it.
    Where did you get the number 4 percent? And more 
importantly, because I know you had to pick some number, under 
this proposal will homebuyers be paying more?
    Mr. Bright. Thank you, Congressman. So I apologize to 
taking a caveat, but my day job is incredibly busy right now. I 
haven't read Ed's and my paper in a little bit of time.
    My recollection is that the 4 percent capital that we had 
proposed was somewhat analogous to what the Basel standards 
were for banks and so we were looking to try and not create--
    Mr. Sherman. But more to the point, if we went with your 
approach would we be paying a few basis points more when we 
financed our new home?
    Mr. Bright. Our analysis, which had Ginnie Mae MBS trading 
about 1 1/2 to 2 points above Fannie's on par coupons showed 
that rates would be roughly the same under the proposal, as 
where they are today.
    Mr. Sherman. Now, Ginnie Mae has experienced dramatic 
growth in your MBS issuance. Do you have--and as I understand 
it you are charging a fee so money is coming in, but that money 
goes to Treasury. You can't spend it on salaries.
    Mr. Bright. That is correct.
    Mr. Sherman. So you are doing a lot more. Do you need more 
appropriations, at least to appropriate back to you the fees 
you are charging? Or do you think that there is no risk in 
spending $23 million in salaries with a half trillion 
portfolio?
    Mr. Bright. A $2 trillion portfolio, not to answer your 
point--
    Mr. Sherman. Oh.
    Mr. Bright. --But--
    Mr. Sherman. Oh, wait. That was--no, excuse me, not 
portfolio, half a trillion dollars issuance in 2016.
    Mr. Bright. That is correct. That is--yes.
    Mr. Sherman. Portfolio of 2016.
    Mr. Bright. That is right.
    Mr. Sherman. Yes.
    Mr. Bright. Well, so I don't know of any head of an agency 
that wouldn't say that they would like both more money and more 
flexibility in how they spend their money. So that is just a 
baseline.
    Because there are a couple of caveats to that. The first is 
that we do actually have a reasonable degree of autonomy in--
actually quite a bit of autonomy in the terms of how much we 
spend on contractor resources.
    So our fees come from two sources. There is a six basis 
point ongoing guarantee fee so that is in rate. And then there 
is the 10 basis point upfront commitment fee that our lenders 
pay.
    Mr. Sherman. So you are in a position where you can't have 
employees but you can have contractors. Does that bias you 
toward using contractors rather than employees?
    Mr. Bright. It does have that effect.
    Mr. Sherman. OK. And then finally I do want to sneak in, 
since you have the small originators who want to maintain that 
personal relationship with the borrower, is it wise to require 
them to sell their servicing fees? That is a point I brought up 
toward the end of my--
    Mr. Bright. No. We want servicers who originate, service, 
and have responsibility for that loan all the way through in 
relationship with the customer. That is the best position for 
Ginnie.
    Mr. Sherman. OK. So originators are not required to sell 
their servicing, right?
    Mr. Bright. Oh, no, definitely. Definitely not, no.
    Mr. Sherman. Thank you.
    Chairman Duffy. The gentleman's time has expired.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Trott, for 5 minutes.
    Mr. Trott. I thank the Chairman.
    And I thank you, Mr. Bright, for your time this morning. 
And I think your proposal and your solution regarding housing 
finance reform is attractive in part because of its simplicity. 
So I would like us to spend more time considering it.
    But one aspect of the solution that is a reality is that it 
is hard for us to get things done. And so given the political 
realities, another simple solution that I have been advocating 
for is just to get the Federal Government out of the refi 
business, and don't really see any reason why Fannie and 
Freddie and FHA should be involved in refinancing loans.
    If someone has a mortgage and they are paying and it is a 
performing loan and they want to get a lower interest rate, 
they are enjoying the dream of home ownership and the 
government doesn't need to have a role in that. What are your 
thoughts on that statement and that solution?
    Mr. Bright. Well, I haven't thought about that a lot in my 
current role. I think I hear you. I understand entirely the 
case that you are making. I suppose, and I am thinking off the 
top here, I suppose the middle ground, if that, to consider 
would potentially be cash out refinancing.
    That might be something where you say why is the government 
incentivizing the removal of equity from someone's house? That 
would probably be where I would consider starting. But, no, and 
I understand what you are saying.
    Mr. Trott. But let us assume it is not a cash out refi. It 
is just a straight up refi for a lower interest rate. Do you 
think FHA has a role in that? Is that something you think FHA 
and similarly, along the same lines, do you think the private 
sector would be interested in security that had just refis in 
it?
    Mr. Bright. Well, so I do think that certainly there is 
bank capacity to do more lending and would like to see more of 
that happen. I think it is better if we could figure out what 
barriers there are to having banks make loans and hold them on 
their balance sheet.
    That is something I think you all have been working on. And 
I applaud that work and encourage you to continue doing that. 
It is better for everybody.
    The reason I think I distinguish between the cash out 
refinance and the refinance is that because if there isn't, let 
us say, a bank take out for a loan, if you are in an FHA loan 
and rate, you are paying 6 percent and you are paying on time 
and you refinance 3 or 4 percent, the likelihood of your 
default actually has gone down because your monthly payment has 
gone down.
    That changes if you take cash out. So that is where I would 
start to think about potentially a distinguishing factor from 
where I sit now, which is just to look at the risk in the 
system.
    Mr. Trott. Well, but again, yes, I appreciate what you said 
and I agree with everything you just said, but again, if you 
start with the goal of reducing the footprint of the Federal 
Government in housing finance, a simple solution would be just 
to get them out of the refi business.
    Two-thirds of Fannie and Freddie's portfolio is refi or 
refis. And if you look at the FHA program and allowing first 
time homebuyers to realize the dream of home ownership, that is 
not a refi.
    That has already been taken care of and now the only 
argument I have heard that really resonates is in discussing 
this with my friend from Massachusetts, who is not here, he 
strongly opposed that suggestion of taking the GSEs and FHA out 
of the refi business.
    I can make an argument for our veterans that maybe we don't 
go there, but his argument was basically you look at someone 
who is a low to moderate income family and that refi is their 
solution to how to make ends meet.
    And so the counterargument to that point is basically, and 
this is my question, perhaps you can speculate on what the 
impact on rates would be if the proposal I have outlined came 
to fruition?
    Mr. Bright. That you could not refinance?
    Mr. Trott. Right, if you go to the private sector for a 
refi, what do you think they--
    Mr. Bright. Well, if you couldn't do that I would say MSR 
(mortgage servicing right) values would certainly go up quite a 
bit because the repayment risk is the biggest challenge in MSR 
valuations. So that would certainly have a very large economic 
impact.
    What may be, since I haven't thought about this I could get 
back to you, maybe we have this conversation and I would be 
happy to give it a little bit more thought--
    Mr. Trott. All right. Well--
    Mr. Bright. --On the numbers on it and I hear your point 
for sure.
    Mr. Trott. And I am out of time here, but again, if the 
impact on the refi rate is de minimis then my friend from 
Massachusetts' argument is not compelling either.
    And with that I will yield back, but I sure appreciate your 
time and insight because I have great respect for your 
knowledge. Thank you.
    Mr. Bright. Thank you.
    Chairman Duffy. Now, the gentleman yields back.
    The Chair now recognizes the gentleman from Texas, Mr. 
Gonzalez, for 5 minutes.
    Mr. Gonzalez. I pass my time.
    Chairman Duffy. The gentleman passes.
    The Chair now recognizes the gentleman from New Jersey--or 
no, from Illinois, Mr. Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you, Chairman.
    Thank you so much Mr. Bright for being with us today. Your 
testimony, you mention that Ginnie Mae does not have many tools 
or dials it can turn to determine how big we are. I wonder do 
you have any immediate concerns about the recent or expected 
growth of Ginnie Mae? If you could talk about that a little 
bit?
    And then what tools are there? You said there aren't many, 
but what tools are available to control its size and overall 
risk exposure? And then do you believe any other tools are 
necessary to protect the longevity of the Ginnie Mae model, and 
do these require action by Congress?
    Mr. Bright. Yes, thank you for the question. The growth 
number itself isn't, on its own, concerning, per se. I think 
you want to understand why it is growing and what you are doing 
about it.
    So there is no doubt that there is a confluence of factors 
taking place at Ginnie where we have had this growth and we 
have had a shift in our issuer base at the same time.
    A lot of this occurred before I came here, but I will 
commend the Ginnie Mae staff. We have an incredible group of 
senior managers at Ginnie who have really instituted a series 
of sophisticated risk management tools.
    We have something called Corporate Watch, which brings in 
all kinds of data about our issuers. We kick the tires on these 
issuers all the time. They have instituted a liquidity rule 
which was not without controversy or kicking and screaming or 
whatnot when it happened.
    We are looking at additional sets of liquidity requirements 
that, in tailoring the liquidity requirements, and we have a 
list of additional issuer risks that we are making part of our 
2020 proposal.
    So we are very aware that with greater size comes greater 
risk, especially when your issuer base is shifting.
    Mechanically speaking, our systems are volume agnostic and 
so they can do 20 million borrowers or they can do 20,000 
borrowers and it is the same process.
    So it is not on its own a risk. What we really need to do 
more work on, and I think where we are going to focus a lot of 
our energy over the next few years, is do our issuers have 
access to the liquidity that they need so that if there is a 
hiccup they can continue to make payments?
    And how good is the collateral that Ginnie Mae has, because 
our collateral as the MSR as an asset so that if an issuer 
fails to live up to their obligations or worst case scenario 
miss a payment, we go and we take that MSR and that asset has 
value. So it is a strip of 35 basis points of I.O. for some 
number of years and they just got a net present value even if 
there are high delinquencies.
    And we go to another lender and say would you take this 
book? And often you can sell it to the highest bidder. 
Sometimes the value is zero and so you just transfer it. And 
worst case scenario that is what our reserve account is for at 
Treasury. We can transfer book with a check.
    So what we really need to do is, regardless of the size, we 
need to know what the value of that MSR is, how it is being 
divided, how it is being serviced, the operational capacities 
of the servicers that are doing it, and what we would do with 
it in the event of an issuer default. And that is really where 
our energy is.
    It is not so much volume as it is quality of your 
counterparty that matters.
    Mr. Hultgren. Yes. Well, I think if I can dig into that a 
little more? You touched on it, but I wonder if you could 
discuss that reserve account that Ginnie Mae keeps at the 
Treasury Department?
    How is the size of that account determined? Do you believe 
the $20 billion in the account right now is sufficient and do 
you believe that $20 billion would still be sufficient if we 
encountered a housing crisis or an economic downturn like the 
one that we saw 10 years ago?
    Mr. Bright. So all that happens is the six basis points 
that we collect on an ongoing basis on guarantee fees produces 
about--right now it produces between $1 billion and $2 billion 
a year. It certainly produced less when Ginnie was smaller.
    That money just goes directly to the account. It is just 
there and it builds up, and so it is currently sitting at about 
$19.5, I think, billion.
    It is a misleadingly small number in the sense that the 
only thing that that money is there for would be to augment the 
value of a book if we needed to transfer it.
    So it is like if a bank went insolvent, the FDIC doesn't 
buy the bank for the total value of the assets of the bank. The 
FDIC transfers that bank which has some amount of value, and if 
the value is negative it has to dip into its DIF to do it. 
There are a lot of analogies with the Ginnie Mae fund.
    I don't see any situations where there would be anything 
like $20 billion needed to transfer a 35 or 40 basis point 
thick MSR strip. I will caution that in 2007 no one saw any 
situations where housing prices would decline nationally 
either.
    So I am very professionally and personally aware that just 
because it has never happened doesn't mean it can't ever 
happen. We try and look at every downside conceivable risk 
possible, even ones that we don't have empirical evidence have 
happened recently in the past.
    Mr. Hultgren. I have a few more questions. My time has 
expired. I may follow up in writing if that is all right?
    Mr. Bright. Yes, of course. Yes.
    Mr. Hultgren. With that I yield back. Thanks, Chairman.
    Chairman Duffy. The Chair now recognizes the gentlelady 
from Ohio, Mrs. Beatty, for 5 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman and thank you Ranking 
Member.
    And thank you to our solo witness here, Mr. Bright. And let 
me just tell you I have been watching you from our cloakroom 
and you are doing a great job. So we appreciate your service 
and all of the information that you have provided.
    As we know in November 2016 under the leadership of the 
former director, Richard Cordray, of the Consumer Financial 
Protection Bureau, that there was a report on servicemembers' 
complaints. And in that report it highlighted approximately 
1,800 servicemembers' mortgage complaints concerning 
refinancing through the V.A.'s housing program.
    As you know, Ginnie Mae guarantees the MBS for these 
programs. Specifically, many of these complaints concerned 
aggressive solicitation, misleading advertisement, and failed 
promises to the lenders.
    In your written testimony, you recognized the rapid 
refinance and loan churning occurring with the V.A. refinances 
created downward pressures on Ginnie Mae securities, ultimately 
harming veterans by increasing borrowing cost.
    I was encouraged to see that Ginnie Mae and the V.A. 
announced a joint task force just last month to address these 
issues. I would like to ask you to keep this committee informed 
on your progress and inform us of any legislative reform needed 
to stamp out this abusive and predatory behavior.
    In my district, 3rd Congressional District of Ohio, just 
last week I had an opportunity to participate in a field 
hearing with Senator Sherrod Brown from Ohio, and it was with 
veterans.
    And of course one of the things--that we heard was what 
happens to them in the whole industry of housing in coming back 
home, trying to relocate, trying to get a house financed.
    And we heard some very compelling stories that weren't good 
about how they were treated. So I have been a huge advocate 
with legislation on housing, financial literacy with veterans.
    So one of the things I would like you to do is to tell us 
how we can do a better job or what are some of the things how 
you would respond to this criticism?
    Mr. Bright. Well, thank you very much for bringing up the 
issue and the question. It is definitely a bad problem. It is a 
situation that needs attention from Ginnie, from the V.A., and 
from Congress.
    And some of your colleagues in the Senate have reached out 
and want to address this issue, and we very much appreciate any 
help that we can get, both, moral suasion, public pressure on 
lending institutions, all of the above legislation if it is 
deemed necessary.
    So this is a long conversation--and what would be great is 
if we could sit down and I would love to talk to you about some 
ideas. But basically Ginnie Mae can control the access to 
Ginnie Mae MBS and we are going to be--I don't want to promise 
before Christmas, but I am pretty confident that this is going 
to happen.
    We are going to be announcing a series of steps that limit 
the ability for lenders to access the Ginnie Mae security if 
they are shown to clearly be churning loans. There is no 
justifiable reason with interest rates not dropping that we 
would have pools of loans that would pre-pay in 5 months.
    There is no economic explanation for that. There is gaming 
of the system that is taking place on the part of the lender. 
And that kind of stuff needs to stop.
    It does have the effect of making MBS investors less 
willing to buy Ginnie MBS, which lowers the price, which 
increases the interest rates for veterans, V.A., and USDA 
borrowers.
    Mrs. Beatty. Let me reclaim my time because we only have a 
few seconds. One of the biggest criticisms of the Bright-
DeMarco GSE reform proposal is that it could disadvantage small 
banks and community banks and credit unions, which I have a lot 
of in my district.
    How would you respond to that in that proposal?
    Mr. Bright. Well, I would certainly want everybody to hear 
their concerns and I make sure that there is nothing that was 
missed in the paper. And if there was, then address it.
    There were a few features, too, that I think should have 
been community bank friendly. The first is that, like I said in 
the Ginnie Mae program, we have 450 issuers. Most of them are 
small and they get the value add of every month every single 
loan gets in the same CUSIP.
    So you don't need to produce large volume in order to get 
access to the security that is highly liquid. You just need to 
be approved to be in the program, whereas when you have GSEs 
there is a difference in terms of the way pricing can be, some 
treatment can be done, terms and conditions can be done. Ours 
are flat for every lender.
    And then a feature of that paper that I recall, I think we 
suggested that new Fannie and new Freddie or whatever you want 
to call them, would have to have cash windows for small lenders 
and that they would be issuers of the Ginnie Mae security on 
behalf of those loans.
    And I think that was part of the idea there was to help 
address those concerns. But certainly it is a paper. It was 25 
pages and it goes into a multi-hundred page piece of 
legislation. There would be more amendments, but glad to work 
with you on that as well.
    Mrs. Beatty. Thank you, and my time is extinct.
    Chairman Duffy. The gentlelady's time has expired.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
MacArthur, for 5 minutes.
    Mr. MacArthur. Well, thank you, Chairman.
    I am most interested not so much in reducing government 
involvement but in the nature of government involvement in the 
housing sector. And I, like others, I have read your paper and 
I hear you loud and clear that you are not looking to put a 
bill number on your paper and turn it into law today. I hear 
that.
    But one of the concepts that you flesh out that I think is 
pretty helpful is that you have a private primary market, like 
you do today. You have a mutualized secondary market that is 
also controlled by the banking sector. That alone would be 
different from what we have today.
    And then you have what I would call a government 
reinsurance model, not unlike what Ginnie does maybe the 
mechanisms are different, but that would apply across the 
entire platform of Ginnie, Freddie, Fannie. Is that fairly 
stated?
    Mr. Bright. Yes, that is correct.
    Mr. MacArthur. So I am most interested today in the third 
part, and I just would like to talk about, I guess, the moral 
hazard issue. One of the concerns I think I have and certainly 
I think the Nation should have is we don't create a system 
where bad actors can write bad loans, make money today and 
others can pay the cost of those bad loans tomorrow and they 
are long gone.
    And so I wanted to hear your thoughts on how would a 
government backstop potentially function, a reinsurance model, 
however it is structured, how would we do that in a way that 
mitigates that moral hazard, that doesn't allow people to not 
pay for their own errors?
    Mr. Bright. So recognizing that it is the mortgage market 
and so I understand that market is almost in quotations 
sometimes in this industry for a lot of reasons. But within the 
context of what we have, the best, I think, attempts to 
eliminate moral hazard would be twofold.
    The first would be the explicit guarantee needs to do two 
things. It needs to have some regulatory and policing 
authority, and it needs to be run well.
    And I can't promise that an agency will always have good 
policing and be run well, but whatever controls and processes 
and boards and governance structure we could come up with to 
help ensure that there are policing mechanisms so that you have 
the ability to take bad actors or people who don't look like 
they are in it for the long haul out of the game, that would be 
one thing.
    The second thing is that this guarantee it does have this 
feature of actually serving as a traffic director between any 
reform system between the interest rate investor and the credit 
investor.
    So you would need both investors and you want both 
investors to be in the system. And, in some sense, if properly 
structured the guarantee is just splitting who is who.
    And so the interest rate investors are worried about 
prepayment risk and bringing capital there, but you still would 
want credit investors who are on the hook for the losses of the 
loans that are made.
    And I think most of the reform proposals that have been out 
there have this idea that there would be folks investing in 
credit risk and there would be folks investing in interest rate 
risk and they could be the same but they don't necessarily have 
to be the same.
    It is just making sure that there is enough there, there is 
enough of them, that they have enough skin in the game, that 
the capital is sufficient and that there is punishment for when 
you make bad mistakes. And that is the problem of taking that 
out.
    Mr. MacArthur. Well, I think that is the critical point. 
And I agree there has to be a regulatory framework but fraud by 
its nature is hidden until it is not.
    Mr. Bright. Yes.
    Mr. MacArthur. And the fraud will always overcome 
regulatory frameworks because there are always going to be some 
people that find a way to hide it until they get caught.
    So I think you have to have--and in the business I came out 
of, insurance, we would have attachment points that always left 
the one who wrote the business on the hook up to some 
meaningful level.
    Enough of a level to drive them out of business if they 
made real mistakes. And I think that is the key here--
    Mr. Bright. Yes.
    Mr. MacArthur. --Is the attachment points either on a per 
risk basis or on an aggregated basis, however it is defined, 
they have to attach at a high enough level that all of the 
market participants at the primary level, the lending level, at 
the secondary level, they all have to be primarily responsible, 
it seems to me.
    And the third part, the reinsurance part, is really just 
meant to protect our economy from a meltdown, like we had in 
2008. Thanks very much. I look forward to exploring it more 
with you.
    And I yield back.
    Mr. Bright. Absolutely, thank you.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Clay, for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman.
    And thank you Mr. Bright for being here. Ginnie Mae's 
guarantee fee is capped in statute. Should Congress be 
considering legislation to raise or eliminate the cap? What 
would that do to--
    Mr. Bright. If Congress eliminated the cap and gave Ginnie 
Mae the authority to operate a little bit more like other 
regulators where we could set the price and use those funds for 
risk management, Ginnie Mae would likely have the effect of 
being an even more sophisticated risk management operation than 
it is now.
    Mr. Clay. I see. Let us shift to another subject. I am 
looking at the intersection of housing and student loan debt. 
That is a barrier to a lot of young Americans who are strapped 
with student loan debt.
    Was wondering would Ginnie Mae have any interest in backing 
mortgages that, say--and it has been tried on a small scale in 
the country as far as folding student loans into 30-year 
mortgages. Would you all have any interest in that?
    Mr. Bright. Well, I have not--
    Mr. Clay. Are you familiar with that concept?
    Mr. Bright. Yes. I would say this. Student loans are not my 
personal forte. I have heard--
    --The idea of explicit backing on ABS (asset-backed 
security) being something that folks have talked about. And if 
that were to be the case we would be glad to explain to you the 
mechanisms for how our backstop works and whether it can be 
applied to ABS.
    I would make the point that an explicit guarantee 
fundamentally changes the way the market views an asset class. 
It changes everything.
    And so I would be very happy to help explain to you the way 
it shifts the way global investors look at an asset class and 
the way that that has downstream effects to the economy.
    It doesn't just have the effect of lowering rates. It is a 
fundamental shift and in how goods and services are allocated 
inside of an economy. So we would want to talk through all of 
that.
    Mr. Clay. Yes. Perhaps we can have that conversation 
offline someday.
    Mr. Bright. Yes, sir, any time.
    Mr. Clay. One more question, the PATH Act would reduce the 
FHA's guarantee from 100 percent to 50 percent. The CBO has 
reported that this would seriously impair the value and 
liquidity of Ginnie Mae securities. Can you elaborate on how 
this would detrimentally impact Ginnie Mae?
    Mr. Bright. Well, let us see. I guess I am not--
    Mr. Clay. Are you--
    Mr. Bright. --I wouldn't--yes. It has been a while, but it 
is worth noting that in the V.A. loan program the guarantee is 
only 25 percent.
    So FHA guarantee is 100 percent of the loan. The V.A. loan 
program is 25 percent of the loan. And in Ginnie Mae securities 
right now about 40 percent of our loans are V.A.-backed. They 
are all fungible. They all are blended. When you buy an MBS you 
get some V.A., some USDA, some FHA. And the V.A. loans do have 
a cap at 25 percent.
    I will also say that Ginnie Mae knows that this presents 
additional risk to Ginnie--
    Mr. Clay. Yes.
    Mr. Bright. --Because if there were--for example, we were 
looking at this in Texas. If you have an issue where that is 
V.A. concentrated and we have a lot of issuers that are V.A. 
only, and they are concentrated in one area that gets 
particularly hit, that guarantee goes away after the top 25 
percent of loss.
    And so the likelihood of an issuer insolvency is greater. 
So we do a program that does pose additional risk.
    Mr. Clay. I see. All right. Well, thank you very much--
    Mr. Bright. Yes, Congressman.
    Mr. Clay. --For your response.
    Mr. Chairman, I yield back.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from California, Mr. 
Royce, for 5 minutes.
    Mr. Royce. Thank you, Chairman, very much. Appreciate it.
    This discussion that we are having here on reshaping Fannie 
and Freddie and that we also hear this talk about reshaping 
them into utilities. And that given history is concerning in 
that obviously we had a moral hazard problem there.
    Wouldn't that approach simply bless the entities then as 
too big to fail? And wouldn't it also crowd out private capital 
thus making it a lot harder also to price risk?
    Mr. Bright. Well, I would definitely say that, yes, it does 
depend on--some of the proposals I do think would probably not 
eliminate implied guarantees because the enterprises--it would 
still perform a lot of the functions that they do now.
    And so in the Ginnie model we have issuer and master 
servicer and credit risk taker and they are separate. They are 
disaggregated functions.
    If those functions are all with one entity, the likelihood 
of being able to resolve that entity is substantially more 
difficult, so yes.
    Mr. Royce. And as an alternative approach, some have been 
critical of the idea of Ginnie Mae playing a larger role in 
housing finance, as you know. But that is the other direction 
to go here. The two concerns that we have heard are, first, 
because Ginnie is within HUD it doesn't have the capacity to 
play a bigger role.
    The second argument you hear is that the False Claims Act 
comes into effect, so banks' potential legal liability 
therefore is in play. How would you respond to those concerns?
    Mr. Bright. Yes. It is interesting because when I came to 
Ginnie I had heard some folks say, well, we don't like the 
Ginnie model.
    And so one of the things we did was say, well, we want to 
run this agency well and we want to be a good counterparty. We 
want to have a good counterparty so let us figure out what it 
is folks don't like about it.
    When you start to peel the onion back a lot of the concerns 
were really FHA-related concerns. And so the False Claims Act 
are really FHA-related, technology upgrades turned out to 
actually be FHA-related.
    And so there are some things that Ginnie needs to do in 
technology modernization, like every institution. And we are 
doing them. And I think we are right where we need to be on 
that. But, some of the initial concerns were really more FHA 
than Ginnie.
    Mr. Royce. But you think you have the capacity to handle 
it?
    Mr. Bright. Yes. I think it would be nice to be able to--I 
would like to talk to you if we are going to do that about S 
sellers and expenses and whether appropriated or we can set 
those ourselves and all that kind of stuff. That would be--
    Mr. Royce. OK.
    Mr. Bright. --Part of the conversation. But certainly 
technologically there is no impediment to it whatsoever.
    Mr. Royce. Well, let me ask you a 3-part question here. Do 
you think that credit risk transfers at the GSEs is bringing 
more private capital into play? Would be the first question I 
would ask you.
    Mr. Bright. Yes.
    Mr. Royce. All right. Do Ginnie, Fannie, and Freddie have 
the legal authority to do more, including increasing the front 
end risk sharing?
    Mr. Bright. I believe so, yes.
    Mr. Royce. You think all three? And finally, have you seen 
the legislation that Gwen Moore and I have introduced that 
would call on the GSEs to increase the amount and the type of 
credit risk transfer transactions to the maximum level that is 
economically and commercially viable?
    Mr. Bright. Yes, I am familiar with it.
    Mr. Royce. And do you support that legislation?
    Mr. Bright. I think credit risk transfer is the biggest 
success story in the secondary mortgage market over the last 5 
years. And so anything that you can do to lock in those gains I 
think would be smart.
    Mr. Royce. Now, let me ask you on the topic of common 
securitization platform, as we look at potential reforms, is a 
bigger role for the CSP and the Ginnie mutually exclusive, I 
would ask you? Or can these two working in tandem?
    Mr. Bright. They can absolutely work in tandem. They are 
not--
    Mr. Royce. Explain how you would do that.
    Mr. Bright. That is right. I have 39 seconds. So the CSP--
there was a vision for what it was going to be in 2012, and I 
am very familiar with the vision because I had the pleasure of 
working next to Ed DeMarco for over a year.
    I don't even think FHFA, they say that that vision is not 
really what it is right now, and that was intentional. So it 
has evolved into being a bond administration platform for use 
by Fannie and Freddie. So that is not a CSP. That is a dual 
bond administration platform.
    We use Bank of New York Mellon for government insured loans 
as our bond administration platform. It would be very 
operationally not difficult to say we will have a Ginnie II 
that is bond administered by BNY and a Ginnie III that is bond 
administered by CSS (common securitization solutions) and that 
exists for a little while, but they are both full faith and 
credit, no problem.
    Then the next step would be how do we blend them? And to 
blend them you would align day count conventions so that 
everybody pays on the same date.
    You would align disclosures so that everybody gets the same 
disclosures. And you would pick one of the two bond 
administration platforms, and that could be a decision that 
would make sense to do 5, 10 years down the road because CSS is 
barely even--it is brand new.
    Mr. Royce. And you would have a lot more room for private 
capital to go back in. Thank you, Mr. Bright.
    Thank you, Chairman.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Mr. Bright, the 2014 Ginnie Mae paper, ``An Era of 
Transformation,'' described the changing mortgage lending and 
servicing market and its implications for the corporation.
    The author wrote, quote, ``The retreat of commercial banks 
from mortgage lending and servicing and the replacement of this 
capacity by non-depository institutions with more complex 
financial and operational structures, represents a 
significantly different operating environment than that for 
which the program was originally designed.''
    Mr. Bright. Yes.
    Mr. Rothfus. A 2016 research report from Ginnie Mae 
cautioned that the use of non-bank lenders and servicers were 
riskier than traditional banks. The author warned of a worst 
case scenario in which, quote, ``a rise in delinquencies could 
threaten multiple non-bank firms at the same time causing 
industry-wide panic.''
    What has Ginnie Mae done to address this shift in the 
industry?
    Mr. Bright. Yes, thank you. I don't agree with everything 
in that paper as on one level. And number two, for what it is 
worth, and we will be happy to talk about that; number two, we 
have taken many, many steps and are going to be taking more to 
address the concerns that I think are valid.
    So the first is that are non-banks riskier? That is not 
really the right--I don't know that I fundamentally buy the 
premise. Both banks and non-banks have a servicing strip that 
is the same size.
    And there are some non-banks that are simply more 
operationally adept at servicing than some banks are because 
they are legacy free. This is what they do. They are very good 
at what they do.
    And so a balance sheet lending institution is not a panacea 
to risk. And we should not treat a large balance sheet as a 
panacea to risk. So I think that the entrance of non-banks can 
actually be good if we get it right.
    The second step is risk management of those institutions. 
And so Ginnie has put in place a liquidity requirement, which 
is quite substantial in terms of the amount of liquidity that 
the issuer needs vis-a-vis the size of their balance sheet. And 
that is a very important step in preventing any sort of 
liquidity run where Ginnie Mae would face risk.
    And then the third step, and this is one that I think has a 
lot of excitement and ongoing promise, and we are working on it 
next year, is that there are a lot of large money center 
institutions or large asset managers that have an interest in 
financing or in having the economics of the MSR, but they don't 
want to be in the operational business of servicing delinquent 
loans, which is fine.
    And then there are a lot of non-bank servicers that want to 
be in the high touch business of servicing delinquent loans, 
nonperforming loans, but they don't have large balance sheets.
    And so we are looking at marrying these two investor 
classes in some structures so that we can have lots of capital 
standing behind the operational efficiencies at a non-bank 
servicer.
    We have taken some steps and we are releasing something 
called an acknowledgment agreement which allows issuers to take 
their MSR and get financing on it.
    That is a first step. There are improvements that we are 
going to make to it, but it is interesting. I actually have a 
line of large asset managers and money center institutions out 
the door that want to be in the business but they don't want to 
be in the operations business. And so we are kind of working to 
blend the two.
    Mr. Rothfus. How would you respond to the HUD OIG report 
from September 2017 saying that Ginnie Mae did not respond 
adequately to the changes in its issuer base?
    Mr. Bright. I think that is a little unfair. I think that 
is the--
    Mr. Rothfus. The I.G. was unfair?
    Mr. Bright. I am sorry?
    Mr. Rothfus. The I.G. was unfair?
    Mr. Bright. I think so. I think that Ginnie Mae is--it is 
important to remember we are a taker of volume from V.A. and 
FHA, so there is some amount that we do not actually control.
    We can police the program but we can't set G fees. Ginnie 
Mae can set entry requirements for the program, but they need 
to be universally applied, right. You can't be arbitrary and 
capricious on that.
    So there is some level of unfairness in the report, but 
that doesn't mean that I don't think Ginnie should have waived 
in everybody that it did.
    And so we do have a lot of issuers right now who came in 
the time period between 2013 and 2016 and Ginnie spent a lot of 
time and a lot of money going through the application and 
through the process and the issuer was all hot on being an MSR 
owner and it was a big interest rate trade and they thought it 
was the trade of the day.
    And then, oh, they get in and realize that it is actually 
really hard work and dirty work and operational work and so 
they are not so interested in it and now they have a legacy 
runoff book that just sits there. In hindsight probably some of 
those issuers shouldn't have been allowed in the program.
    And so going forward when we look at allowing issuers into 
the program you really ought to be someone who is committed to 
being a servicer committed to the long-term business of being a 
mortgage servicer, not just servicing I.O.s, the hot trade of 
the day and so we are going to go be a Ginnie issuer.
    And I do think some of that took place and those concerns 
are probably accurate and valid.
    Mr. Rothfus. Thank you.
    I yield back.
    Chairman Duffy. The gentleman yields back.
    That concludes our questions today. Mr. Bright, thank you 
for your testimony and your insight. 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, which we then forward to 
you, Mr. Bright. We would ask that you respond as promptly as 
possible.
    Mr. Bright. Yes.
    Chairman Duffy. Again, I want to thank you for taking your 
time and providing your insight to this committee, and we look 
forward to continually working with you--
    Mr. Bright. Same.
    Chairman Duffy. --As we go through this process.
    Also, without objection, Members will have 5 legislative 
days to submit extraneous materials to the Chair for inclusion 
in the record.
    With that, and without objection, this hearing is 
adjourned.
    [Whereupon, at 11:23 a.m., the subcommittee was adjourned.]

                            A P P E N D I X



                           November 29, 2017
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]