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


                      SUSTAINABLE HOUSING FINANCE:
                      PRIVATE SECTOR PERSPECTIVES ON HOUSING
                        FINANCE REFORM, PART IV

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

                                 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

                               __________

                            DECEMBER 6, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-63
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

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

                  Kirsten Sutton Mork, Staff Director
                 Subcommittee on Housing and Insurance

                   SEAN P. DUFFY, Wisconsin, Chairman

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

                              ----------                              
                                                                   Page
Hearing held on:
    December 6, 2017.............................................     1
Appendix:
    December 6, 2017.............................................    23

                               WITNESSES
                      Wednesday, December 6, 2017

Canter, Michael S., Director, U.S. Multi-Sector and Securitized 
  Assets, Alliance Bernstein L.P.................................     4
Krohn, Jeffrey N., Managing Director, Guy Carpenter & Company, 
  LLC............................................................     8
Rippert, Andrew, Chief Executive Officer, Global Mortgage Group, 
  Arch Capital Group, Ltd........................................     9
Sinks, Patrick, Chief Executive Officer, Mortgage Guaranty 
  Insurance Corporation, on behalf of the U.S. Mortgage Insurers.    11
Wachter, Susan M., Sussman Professor, Professor of Real Estate 
  and Finance, The Wharton School, Co-Director Penn Institute for 
  Urban Research, University of Pennsylvania.....................     6

                                APPENDIX

Prepared statements:
    Canter, Michael S............................................    24
    Krohn, Jeffrey N.............................................    35
    Rippert, Andrew..............................................    42
    Sinks, Patrick...............................................    49
    Wachter, Susan M.............................................    66

              Additional Material Submitted for the Record

Beatty, Hon. Joyce:
    Written responses to questions for the record submitted to 
      Patrick Sinks..............................................    72
    Written responses to questions for the record submitted to 
      Susan Wachter..............................................    74
Valazquez, Hon. Nydia:
    Written responses to questions for the record submitted to 
      Andrew Rippert.............................................    76

 
                      SUSTAINABLE HOUSING FINANCE:
                     PRIVATE SECTOR PERSPECTIVES ON
                    HOUSING FINANCE REFORM, PART IV

                              ----------                              


                      Wednesday, December 6, 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 10:08 a.m., in 
room 2128, Rayburn House Office Building, Hon. Sean P. Duffy 
[Chairman of the subcommittee] presiding.
    Present: Representatives Duffy, Ross, Royce, Posey, 
Luetkemeyer, Stivers, Hultgren, Rothfus, Zeldin, Trott, 
MacArthur, Cleaver, Valazquez, Kildee, Delaney, and Gonzalez.
    Chairman Duffy. The Subcommittee on Housing and Insurance 
will come to order.
    Today's hearing is entitled Sustainable Housing Finance: 
Private Sector Perspectives on Housing Finance Reform, Part IV.
    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 this subcommittee may participate in today's hearing 
for the purposes of making an opening statement and questioning 
our great panel of witnesses.
    The Chair now recognizes himself for 3 minutes for an 
opening statement.
    I first want to welcome our panel and thank them for 
participating in today's hearing on housing finance reform. We 
have had many. I don't know if you followed all of them, but 
this is a particular interest to us today on this topic.
    We have witnesses that offer credit enhancement products 
and participate in credit risk transfers. As we look to reform 
the housing finance system, I hope to explore whether they can 
play a larger role in this space as we move forward.
    Expansion of private sector capital into the housing 
finance system should be a key goal of any restructuring of our 
housing finance. We have seen how successful these products 
have been in offloading risk in recent years. And the Federal 
Government has engaged in these products and programs to some 
extent.
    Now, Fannie, Freddie, and Ginnie themselves use forms of 
credit risk enhancements in the present day to offload their 
risk to the private sector. And I look forward to hearing from 
our witnesses about how the various programs work to help 
relieve the burden of our taxpayers should we see another 
malfunction in our housing finance market.
    These programs and products include mortgage insurance and 
credit risk transfer (CRT) programs such as Structured Agency 
Credit Risk, or STACR, and Credit Insurance Risk Transfers, or 
CIRT. I think it is important to note that just yesterday FEMA 
(Federal Emergency Management Agency) announced that, in the 
NFIP (National Flood Insurance Program) program, they will 
recover over $1 billion in reinsurance coverage under their 
2017 reinsurance program. It seems like the program actually 
worked. Wow. Maybe we can learn lessons from what FEMA did and 
apply this in the housing finance space. And it could bode well 
not just for homeowners, for the private sector, but, man, 
would it be cool if it worked well for the taxpayer too. 
Everyone could be a winner.
    Seen as the first reinsurance purchase by the Federal 
Government was--has borne fruit in terms of a successful 
transfer of risk, I am interested in hearing how reinsurance 
already plays and can play an increased role as we look at 
offloading risk in the housing finance space.
    As any private sector capital product, we must look at the 
availability of coverage or capacity and the impact of cycles 
on these products. While I believe these products will 
ultimately help bring in capital to the housing finance system, 
we must make sure taxpayers are protected and not left holding 
the bag in economic downturns.
    And so I want to re-emphasize that we must look at ways to 
make sure that the housing finance system relies primarily on 
private capital and utilizes the tools and products that are 
available. Development in this space is an example of how the 
private sector will react in developing a free market and fill 
the void the Government I don't believe can fill.
    With that, my time just now expired, so I recognize the 
Ranking Member, the gentleman from Missouri, Mr. Cleaver, for 5 
minutes.
    Mr. Cleaver. Thank you, Mr. Chairman, and thank you to the 
panelists for being here in your wide array of stakeholders and 
individuals who can perhaps help us as we deal with this issue, 
because one of the things that is troublesome to me is that we 
are seemingly just holding on in keeping Fannie and Freddie in 
conservatorship, and I don't think that to do so is 
sustainable. I don't think that it is prudent. And as one who 
was here when this was done, I can tell you I don't think there 
was anybody on this committee who believed that that was a 
permanent arrangement, but it is moving along as if it is.
    And so today our hearing is going to focus on private 
capital credit risk and credit enhancement as well as the steps 
that the FHFA (Federal Housing Finance Agency) has undertaken 
in the past few years to transfer the risk and assets and new 
ways to do so as we move toward the end of one year and into a 
new year.
    Right now, according to the most recent progress report 
from FHFA, since 2013, the enterprise transferred a portion of 
the risk on 1.8 trillion of unpaid principal balance with a 
combined risk in force of about 60.6 billion, or 3.3 percent of 
UPB. And so I want to discuss with those of you who have been 
kind enough to come, find out whether or not you believe that 
these steps have and will have a positive impact on the overall 
housing finance system.
    And it would be helpful, at least to me, to hear how 
different kinds of risk transfers, such as the front-end credit 
risk transfers, would affect the housing system.
    Last week we held a hearing. The acting president of Ginnie 
Mae provided testimony. And he proposed a housing finance 
reform plan that would rely on Ginnie Mae as the centerpiece of 
the housing finance system. And this proposal would also 
introduce private credit enhancers to compete with the Federal 
agencies in taking on some of the credit risk.
    And so I am hopeful that you will be willing to share your 
views on the proposal as well as discuss the impact that such a 
proposal would have on small lenders and the issue that I am 
extremely concerned about, affordability.
    The path to housing finance reform may not be easy--well, 
it is not going to be easy. But I am encouraged, and I say this 
interplays, because I think we are having a robust bipartisan 
dialog, and I feel very good about it.
    So thank you for being here today. We look forward to you 
solving most of the problems that we have before us.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the Vice Chair of the committee, 
the gentleman from Florida, Mr. Ross, for 2 minutes.
    Mr. Ross. Thank you, Chairman, and thank you again for 
holding another hearing on this important issue. And also thank 
you to our great panel, the witnesses, for sharing your 
insights with us this morning.
    We want all homeownership to be more affordable, but 
affordability isn't just for home buyers eager to own a part of 
the American Dream. If the Government is involved, we need to 
make it affordable for taxpayers too.
    Today we will examine the financial tools that allow Fannie 
and Freddie to take such a balanced approach. It wasn't long 
ago that Fannie and Freddie took major risks in the housing 
market. Reasonable minds may disagree about the impetus for 
that risk, whether it was overzealous profit seeking or, as I 
believe, misguided Government policy. Regardless, one thing is 
clear, the result was a systemic calamity that reverberated 
throughout the world economy.
    Those homeowners we were trying to help were ultimately 
hurt. Many couldn't afford to stay in their homes, and 
taxpayers could barely afford to bail out Fannie and Freddie. 
Fortunately, there is a smarter way. You see, many Americans 
think of risk as a feeling or a worry, but it is not. It is a 
way of looking at an investment that ensures we consider the 
context of that investment.
    What is the likelihood something will fail? High? Low? If 
we are guessing, we are losing. Thankfully we have inherited an 
intellectual tradition that allows us to calculate our 
likelihood of success and transform the threat of failure into 
a commodity. I bring this up because I think there is something 
to be applauded in the new approach as Fannie and Freddie have 
taken into managing risk.
    During the financial crisis, most lawmakers were taken by 
surprise because they were completely unaware of the risk our 
GSEs (government-sponsored enterprises) took on. They were also 
surprised because there didn't seem to be a way of effectively 
mitigating that risk as it stood. One might even say that the 
risk management strategy was, quote, ``If something goes wrong, 
the taxpayers will pony up,'' unquote.
    This implicit taxpayer insurance was opaque. It was a moral 
hazard, and we are done with it. We are developing new and 
better approaches that take into account the realties we face 
today and pave the way for a better tomorrow. The credit risk 
transfer programs we will discuss in this hearing are a 
remarkable demonstration of how markets and human 
entrepreneurship can solve many of the problems created or made 
worse by the Government.
    I am excited that today we will talk about how your 
organizations participate in that conversation and make it so 
that our housing market continues to thrive and our taxpayers 
aren't on the hook.
    I yield back.
    Chairman Duffy. The gentleman yields back.
    We now welcome our witnesses here today.
    And by way of introduction, our first witness is Mr. 
Michael Canter, Director of U.S. Multi-Sector and Securitized 
Assets at Alliance Bernstein. Welcome.
    Our next witness is Dr. Susan Wachter, Professor of Real 
Estate and Finance at the Wharton School at the University of 
Pennsylvania.
    Next we have Mr. Jeffrey Krohn, Managing Director at Guy 
Carpenter and Company. Welcome.
    Our fourth witness is Mr. Andrew Rippert, CEO of Global 
Mortgage Group at Arch Capital Group. Welcome.
    And finally, last but not least, our fifth witness is Mr. 
Patrick Sinks, the CEO of Mortgage Guaranty Insurance 
Corporation, or MGIC, headquartered in the greatest State in 
the Nation, Wisconsin. Welcome all of you.
    In a moment the witnesses will be recognized for 5 minutes 
to give an oral presentation of their testimony. Without 
objection, the witnesses' written statements will be made part 
of the record following your oral remarks. Once the witnesses 
have finished presenting their testimony, each member of the 
subcommittee will have 5 minutes within which to ask all of you 
questions.
    You will note on your table you have three lights. Green 
means go, yellow means you have 1 minute left, and red means 
your time is up. We will try to be cognizant on our end of the 
time. But please, on your end too, try to be aware of those 
times and lights. Your microphones are sensitive, so please 
make sure you are speaking directly into them.
    And so with that, Mr. Canter, you are recognized for 5 
minutes.

                 STATEMENT OF MICHAEL S. CANTER

    Mr. Canter. Good morning, Chairman Duffy, Ranking Member 
Cleaver, and members of the subcommittee. Thank you for the 
opportunity to testify before you today. My name is Michael 
Canter, and I am the head of Securitized Assets at Alliance 
Bernstein, also known as AB.
    At AB we manage over $500 billion of assets on behalf of 
many different types of investors ranging from individuals and 
retail mutual funds to pension funds, insurers, and global 
corporations. I am appearing here today on behalf of AB and not 
any specific trade group, though we are members of SIFMA and 
the Association of Mortgage Investors. AB is one of the largest 
investors in the credit risk transfer market, and I hope that 
our experience will be helpful to the subcommittee in the 
important work that it is doing.
    Today the CRT market has $40 billion of securities 
outstanding, referencing over 1.3 trillion of mortgages. That 
is 32 percent of the GSE's overall mortgage exposure. In fact, 
50 percent of all GSE mortgages created today go into CRT's 
transactions. So without a doubt, the CRT bond market is 
crucial to how mortgages get financed in the country.
    CRTs also play a prominent role in many GSE reform 
proposals. The fact that the GSEs have multiple ways to hedge 
their risk is important, and all of them have value, but we see 
the fixed income market solution as the cornerstone to any 
system going forward. I will highlight a few reasons why.
    First, a CRT bond is fully funded at issuance, so the GSEs 
do not have any counterparty risk. There is no risk of 
nonpayment. In contrast, there are some proposals that urge 
greater use of mortgage insurance, sometimes called deep MI. It 
is important to remember that the ability and willingness of MI 
companies to pay claims becomes highly questionable in times of 
stress. It certainly did during the crisis.
    The GSEs already have $200 billion of counterparty exposure 
to the MIs. A deep MI would only increase that. Also, once risk 
is in bond form, it can be distributed across a wide swath of 
investors and included in diversified portfolios across the 
globe. This is not the case for mortgage insurers, of which 
there are eight, whose entire levered capital base of 12.5 
billion is exposed to mortgage losses.
    Last, CRT bonds pay claims immediately whereas recouping MI 
payments can be a long, drawn-out process involving negotiation 
and sometimes litigation.
    So what are the key attributes needed to perpetuate the 
success of the CRT market in a new housing finance system? The 
first I will mention is the ability of the GSEs to take risk 
alongside of investors. This alignment of interest has been 
crucial to investors' comfort in buying CRT securities and is a 
must-have in any new system. This is especially true when 
transferring first-loss risk. There is an abundance of capital 
willing to take this first-loss risk with the right structure 
and risk sharing by the GSEs.
    Second, the GSEs are trusted by investors for the power 
they have in not only setting underwriting and servicing 
standards but ensuring that they are enforced. Confidence in 
any guarantor's ability to do this is essential. Such 
confidence, however, may be difficult for new guarantors to 
replicate.
    Third, there has been a healthy competition between the 
GSEs to attract investor dollars. This dynamic allowed for 
innovation and kept the GSEs open-minded to investors' needs. 
In my view, there is no magic number of guarantors for a new 
system, but I think it is probably safe to say that it is 
greater than two.
    Last, I would state that the FHFA has been very effective 
at encouraging risk transfer to protect the U.S. taxpayer. We 
think the lesson learned here is that it may be best for 
policymakers and regulators to avoid being overly prescriptive. 
Instead, a thoughtful capital framework needs to be put in 
place that puts a high value on risk transfer.
    All this being said, I would like to mention two ways the 
CRT market could be improved. First, the broker-dealer capital 
charge for holding and trading these securities is 
unnecessarily onerous at 100 percent or greater. This is 
detached from the risk in these bonds and does nothing to help 
support the housing market.
    Second, the GSEs need to more rigorously evaluate and 
perhaps separate out the natural catastrophe risk that is 
embedded in CRTs. If homeowners default on their mortgages 
because of a flood, hurricane, or earthquake, any resulting 
loss flows through to the CRT structure. This may be good for 
the taxpayer in the short-term, but I would venture to say that 
these risks had been woefully undermodeled and underconsidered 
by the GSEs and the rating agencies.
    In conclusion, I want to thank you all for proceeding with 
this critically important reform effort. And we at Alliance 
Bernstein stand ready to assist the subcommittee in any way we 
can. And I look forward to answering your questions.
    [The prepared statement of Mr. Canter can be found on page 
24 of the Appendix]
    Chairman Duffy. Thank you, Mr. Canter.
    Ms. Wachter, you are now recognized for 5 minutes.


                STATEMENT OF DR. SUSAN M. WACHTER

    Dr. Wachter. Good morning, Chairman Duffy, Ranking Member 
Cleaver, and other distinguished members of the subcommittee. 
Thank you for the invitation to testify at today's hearing. I 
am the Sussman Professor of Real Estate and Professor of 
Finance at the Wharton School of the University of 
Pennsylvania. It is an honor to be here today to discuss the 
future of the housing finance system and the role of credit 
risk transfers in helping to assure a stable and sustainable 
housing finance system going forward.
    In the past crisis, the housing finance system failed 
borrowers and taxpayers, and it is important to understand why. 
We now know but did not know the shift toward unsound lending 
as it happened. The bubble in housing prices at the expansion 
of unsound credit enabled masked the increasing credit risk. 
The failure to identify credit and systemic risk must be 
corrected going forward. Credit risk transfer programs, if 
properly structured, can help. Securities trading can 
discourage excessive borrowing if credit risk is priced 
accurately and in this way counter housing bubbles. 
Securitization markets, including the overcounter market for 
residential mortgage-backed securities failed in this, in the 
run-up to the crisis.
    Beginning in 2013, under the direction of FHFA, the GSEs 
have developed credit risk transfers to share and trade credit 
risk. How CRTs are structured matters greatly to their 
potential role in reducing systemic risk. In addition, the 
eventual reform of the housing finance system will influence 
how well the CRT markets work or even whether the market can 
work at all.
    What is necessary for the structuring of credit risk 
transfers and, more generally, for the reform of the GSEs to 
enable the CRT market to inform on credit risk going forward.
    First is the direct linkage of CRTs' performance of the 
risk of default of the underlying mortgages. This is in place. 
In addition, the use of a reference pool allows the so-called 
TBA market to trade inefficiently priced interest rate risk, 
which is important separately from the pricing of credit risk.
    A second requirement to afford the pitfalls of the past 
mispricing credit risk is transparency and standardization to 
allow the identification of aggregate credit risk. The full 
provision of information on mortgages in the GSE portfolios 
referenced by CRTs does this as well.
    Third, to avoid counterparty risk, credit risk transfers 
must be structured so that, in the event of losses, funds are 
transferred and available to be transferred automatically. This 
is achieved now also in the so-called back-end credit transfers 
by writing down the outstanding principal balance of the CRT 
securities thereby reducing the amount the GSEs are obligated 
to repay to holders of CRT securities.
    Fourth, there needs to be trading of the credit risk 
instruments with open pricing and liquid markets unlike in the 
crisis where credit risk instruments traded over-the-counter 
and infrequently. This too is in place. Currently CRTs provide 
information on how markets price credit risk without mandatory 
linking of GIFIs to credit risk trading pricing and without 
mandating the level of use of CRTs by the GSEs. Both are 
important to market stability.
    While the performance of CRTs should be linked to the 
underlying performance of mortgages in the reference pool as it 
currently is, in back-end credit transfers, the pricing of CRTs 
should not determine GIFIs or mortgage interest rates. In a 
period of market stress, investors and CRTs are likely to pull 
back. If so, interest mortgage rates, if automatically linked, 
would have to rise. And this would cause a decline in housing 
prices. And that would, in turn, cause a pullback in credit and 
a follow-on decline in housing prices and a reinforcing cycling 
as we saw in the crisis.
    The discretionary setting of GIFIs over the cycle is 
necessary to avoid reintroducing market instability. For the 
same reason, the use of CRTs should not be mandatory; that is, 
their use should be discretionary. Mandatory risk sharing is an 
inefficient policy, and it encourages transactions where the 
cost of the risk transfer is greater than the cost of the GSEs 
retaining the risk thus potentially raising the cost of 
mortgage lending.
    Currently, the trading of CRTs provide information about 
what private market capital markets would trade for the credit 
risk generated by the credit guarantee business of the GSEs, 
but it is not automatically linked to GIFIs. GIFI is set 
administratively with significant guidance from the FHA 
(Federal Housing Administration). This should not change. The 
structure of the housing finance system itself is important to 
the functioning of CRTs. If there are many guarantors each with 
its own CRT market, such markets would not be liquid. Moreover, 
with many entities each setting its own standards and its own 
GIFIs, even with the guidance of FHA, there would be a tendency 
to compete over the standards and undermine them overtime.
    The pricing of the housing finance should be set over the 
cycle, and standards should be maintained over the cycle as 
well to limit risk and to provide sustainable housing finance 
for the long-term.
    I thank you for the opportunity to testify today, and I 
welcome your questions.
    [The prepared statement of Dr. Wachter can be found on page 
66 of the Appendix]
    Chairman Duffy. Thank you.
    Mr. Krohn, you are now recognized for 5 minutes.


                  STATEMENT OF JEFFREY N. KROHN

    Mr. Krohn. Chairman Duffy, Ranking Member Cleaver, 
distinguished members of the committee, it is an honor to have 
the opportunity to provide this testimony regarding the 
sustainability of housing finance.
    My name is Jeff Krohn. I lead the global mortgage credit 
practice at Guy Carpenter. Our company is part of the Marsh and 
McLennan Companies and occupies a unique position within the 
mortgage credit reinsurance market.
    In my role, I oversee all client relationships with our GSE 
clients, Fannie Mae and Freddie Mac, and our global mortgage 
insurance clients. Separately, our organization is the broker 
for FEMA's National Flood Insurance Program. This program was 
put into place last year and proved to be a success by 
responding to Hurricane Harvey and reduce the burden to the 
taxpayer by over a billion dollars.
    Today, the U.S. economy enjoys a very strong housing 
market. However, the last financial crisis revealed the GSEs 
and private mortgage insurers carried all the weight of the 
losses caused by borrowers that could not make their mortgage 
payments. As a result of the crisis, material reform has taken 
place. The most notable change occurred in 2013 when the FHFA 
mandated Fannie Mae and Freddie Mac to initiate a credit risk 
transfer program that derisked their portfolios and protected 
the U.S. taxpayer by introducing private bond investors and 
multiline global reinsurers into the system.
    Today, reinsurers, bond investors, and private mortgage 
insurers provide the GSEs with a countercyclical force that 
sustains the housing market during uncertain times.
    The reinsurance market represents a significant and 
attractive source of private capital for the GSEs, because the 
industry bears a small amount of U.S. residential mortgage 
risk. And its other forms of risk are not correlated to 
mortgage credit risk to any meaningful degree. A.M. Best's top 
50 reinsurers have $727 billion of capital, and the stability 
of the reinsurance market has stood the test of time. Before, 
during, and after the crisis, the composite ratings of core 
reinsurers writing mortgage credit have remained strong and 
within a very narrow band of S&P ratings between A and A plus.
    The recent $73 billion in industry losses from this year's 
hurricanes, wildfires, and earthquakes have not impacted 
pricing or available capacity for the various GSE and mortgage 
reinsurance placements. The reinsurance market will continue to 
be an attractive and significant source of private capital for 
years to come.
    The Federal Housing Administration's mission is vitally 
important to first-time home buyers, low income borrowers, and 
consumers with limited credit history. But it is not a mission 
without risk for the U.S. taxpayer. The FHA's mission leads it 
to provide broader coverage on a pool of loans that is riskier 
than those of the GSEs. And the FHA lacks a credit risk 
transfer mechanism.
    The FHA capital requirements to support portfolio risk 
remain low. The latest actuarial report estimates the mutual 
mortgage insurance fund to be at 2.09 percent, just above the 
minimum 2 percent threshold.
    Guy Carpenter believes the FHA should fully explore ways to 
introduce private capital to effectively manage its credit risk 
and fulfill its mission. Private capital will introduce a 
market-like view of FHA's portfolio and provide valuable 
insights. Real-time pricing discovery and feedback could be 
incorporated into the FHA's insurance premium rates, 
underwriting, and loan programs. The results of which would 
make a more stable and predictable mutual mortgage insurance 
fund.
    Guy Carpenter's mission remains to develop broad and 
diversified reinsurance markets that reduce taxpayer risk, 
maintain liquidity, and help to build a strong housing finance 
system. Credit risk transfer has the interest of the American 
people at heart and will ensure continued access to affordable 
credit to underserved borrowers and act as a countercyclical 
force that sustains the housing market in uncertain times.
    Thank you again for the opportunity to provide this 
testimony.
    [The prepared statement of Mr. Krohn can be found on page 
35 of the Appendix]
    Chairman Duffy. Thank you.
    Mr. Rippert, you are recognized for 5 minutes.


                   STATEMENT OF ANDREW RIPPERT

    Mr. Rippert. Chairman Duffy, Ranking Member Cleaver, and 
members of the subcommittee, thank you for the opportunity to 
testify. My name is Andrew Rippert, and I am the CEO of Arch 
Capital Group's mortgage operations. In this role, I am 
responsible for the global mortgage guarantee and credit risk 
transfer business of Arch with an emphasis on the U.S. housing 
market. This includes Arch MI, the largest private mortgage 
insurer in the country. More importantly, Arch Capital Group is 
committed to expanding sustainable home ownership and 
affordable lending.
    Housing finance reform legislation has the potential to 
increase private investment, economic growth, and the 
availability of mortgages for creditworthy borrowers. The 
continued conservatorship of the GSEs increases systemic risk 
and policy uncertainty. These issues are keeping private 
capital on the sidelines and have contributed to a more anemic 
housing recovery and lower home ownership levels than we might 
have otherwise experienced.
    Legislative reform will help ensure that the system is 
prepared to handle an eventual and an inevitable market 
downturn. The work done to diversify risk through the CRT 
programs developed by the enterprises with the support of the 
FHFA has been significant in bringing private capital to the 
market. In fact, Arch has been a major supporter of and 
participant in CRT through our reinsurance operations.
    Arch recommends that the GSEs continue to innovate and 
expand on the available risk transfer structures. Additionally, 
legislation is needed to codify these policies and ensure that 
programmatic CRT is a permanent feature of the housing finance 
system. It is critical to lock in the advances made over the 
past 5 years to avoid the possibility of reverting to previous 
counterproductive norms and ensure the permanency and 
consistency of these programs.
    Existing CRT programs have reduced taxpayer exposure and 
provided important diversification of private capital sources. 
But the GSEs still hold significant first loss exposure 
concentrated on two highly leveraged balance sheets with an 
implicit taxpayer backstop. This structure needs to change to 
institute an explicit government guarantee at the security 
level, expand to include multiple guarantors, and ensure that 
private capital is positioned ahead of taxpayers in a 
meaningful way.
    Until structural changes are made to the guarantor model, 
the GSEs should continue to expand their use of back-end and 
front-end CRT transactions with reinsurers, mortgage insurers, 
and capital debt markets. There are a variety of CRT options 
available to the enterprises that offer practical and cost-
efficient ways to transfer risk that have yet to be 
implemented.
    Reinsurers, in particular, offer a highly rated pool of 
capital that is dedicated to housing finance reform on a long-
term strategic basis. They broaden the base of available 
capital and provide greater taxpayer protections.
    The most important thing that Congress can do from Arch's 
perspective to encourage the return of private capital is to 
make programmatic CRT a permanent feature of the housing 
finance system through legislation.
    With CRT assured as a permanent feature, private capital 
will make the necessary investments to underwrite mortgage 
credit risk across all market conditions. This will also 
provide regulators and policymakers with tremendously valuable, 
well-informed, and timely feedback on both the level of risk in 
the market and the economic cost associated with that risk.
    Reforming the U.S. housing finance system calls for a 
significant volume of private capital. Arch believes that if 
Congress were to enact legislation passed on the following key 
factors, additional private capital will be drawn into the 
system and promote a greater level of market certainty and 
sustainability.
    First, we need to position private capital ahead of 
taxpayers in a meaningful way.
    Second, we need to establish a regulatory framework that 
requires mortgage guarantors to follow a countercyclical 
capital model that is responsive to the dynamic nature of 
housing market risk.
    Third, require mortgage guarantors to follow and accumulate 
to distribute model that programmatically moves risk to diverse 
pools of private capital.
    Fourth, require additional transparency into the cost of 
credit risk as identified through CRT and its relationship to 
guarantee fees. And finally, reform the FHA to eliminate 
negative competition between the enterprises and the FHA 
programs.
    Thank you for the opportunity to testify. Arch is committed 
to working with this committee. I look forward to answering 
your questions.
    [The prepared statement of Mr. Rippert can be found on page 
42 of the Appendix]
    Chairman Duffy. Thank you.
    Mr. Sinks, you are recognized for 5 minutes.


                   STATEMENT OF PATRICK SINKS

    Mr. Sinks. Chairman Duffy, Ranking Member Cleaver, and the 
members of the subcommittee, thank you for this opportunity to 
come before you to discuss the housing finance system and 
opportunities for reform.
    This here marks the 60th anniversary of the modern-day 
private MI industry when my company, MGIC, was founded by Max 
Karl as a private sector alternative for borrowers and lenders 
to the government-backed and mortgage insurance provided by the 
FHA.
    We also appreciate the opportunity provide you with our 
experience of being providers of first loss credit risk 
transfer and recommendations for encouraging use of a loan-
level credit enhancement like MI in the mortgage finance 
system.
    While I will focus merely exclusively on the value and role 
of MI in my testimony, I will note that we believe in a future 
system of housing finance where there will be enough credit 
risk transfer that there will be a need for a variety of types 
of private capital, each playing a unique role.
    Private mortgage insurance's unique loan-level approach 
shields taxpayers from mortgage-related credit risks while 
ensuring creditworthy borrowers have consistent access to 
mortgage financing.
    Over the last 60 years, MI has helped more than 25 million 
families attain home ownership in a prudent and affordable 
manner, the majority of whom were first-time home buyers and 
more than 40 percent of incomes below $75,000.
    In my written testimony, I have covered a number of issues 
related to the MI industry, but here I will focus on three 
important attributes of MI that are critical to any housing 
finance system: Flexibility, stability, and reliability.
    First flexibility. Private mortgage insurance is typically 
provided at the individual loan level at the same time as a 
loan is originated. The mortgage insurance protection travels 
with the loan wherever it goes, whether or not that is onto a 
lender's balance sheet, sold to an investor, or placed into a 
securitization pool. As a result, private MI is fully 
compatible with the broadly shared goal of a housing finance 
system with multiple funding sources, a feature that 
distinguishes MI from other forms of credit risk transfer.
    It also means that MI is accessible to lenders across the 
country, from the biggest money center banks and nonbanks to 
small community banks, credit unions, and independent mortgage 
bankers. And because government insurance program like FHA are 
loan level as well, borrowers can easily compare mortgage 
offerings available to them.
    Over our history, we have readily adapted as the mortgage 
finance system has evolved from savings and loans to the GSEs 
and independent mortgage bankers. We are confident of our 
ability to continue to evolve and serve any new system that is 
created with virtually no disruption to the origination and 
servicing of mortgage loans.
    The ability of MI companies to scale up to cover a broader 
segment of the market is primarily controlled by the amount of 
capital they hold. That said, MI companies are no strangers to 
expanding or shrinking their capital to meet the need for their 
product in adapting to housing market trends.
    Since 2007, MI companies have collectively raised more than 
$14 billion to meet capacity, support new business, and pay 
claims. And we have seen three new companies enter the market 
since the crisis. In addition, we have used the same resources 
as the GSEs, reinsurance and capital markets transactions, to 
supplement our equity capital.
    We are confident in our ability to grow our capital, all of 
which will stand in front of the taxpayers to support an 
expanded role in the housing finance system.
    Next stability. Housing and mortgage markets are, by their 
nature, cyclical and can produce extraordinary catastrophic 
losses both at the national and individual levels. In this type 
of environment, there are sound reasons for creating monoline 
entities to provide coverage against that risk. The monoline 
regulatory regime for MI is intended to ensure the industry 
does not create systemic risk even during the worst downturn.
    It is not because regulators and MIs do not understand the 
value of diversification, which is evident in our investment 
portfolios and our insurance in force over time, and across 
geographies.
    Additionally, because MI's regulatory regime was designed 
with cyclical mortgage markets in mind, the MI industry has a 
commercial interest in remaining in markets being prepared for 
downturns. Indeed, this regulatory regime ensured that the MI 
industry continued to ensure new loans and pay claims. We are 
not too big to fail. We provide predictability and stability to 
the housing finance system.
    And finally reliability. Since the onset of the financial 
crisis, private MI companies have paid over $50 billion in 
claims, almost all of which directly reduce the amount required 
to rescue the GSEs. And during that time, MI has continuously 
been available at a reasonable cost in all markets across the 
U.S.
    Increased capital and operational standards in the PMI 
eligibility requirements, along with revised master policy 
terms developed with the GSEs, ensure that the private MI 
industry will be able to cover an even greater amount of 
mortgage risk in the next crisis.
    The private MI model has worked for 60 years. Each market 
cycle brings new lessons and adaptations. But the fundamental 
approach has been tested multiple times and still works. No 
other form of credit enhancement has a similar record of 
performance or resilience. Any policymaker looking at what 
works now for inclusion in a reform system would add MI to the 
list.
    With that said, I thank you again for the opportunity to 
testify and to answer your questions.
    [The prepared statement of Mr. Sinks can be found on page 
49 of the Appendix]
    Chairman Duffy. Thank you, Mr. Sinks.
    The Chair now recognizes himself for 5 minutes to ask 
questions of the panel.
    Mr. Canter, I don't know if you just heard Mr. Sinks' 
testimony, but if I read your testimony correctly, I think you 
said downturns, MI doesn't pay; is that correct? Is that a 
correct characterization of your--I kept you two separated, 
either side of the table.
    Mr. Canter. Yes. Certainly when there are large amounts of 
mortgage losses, the MI companies are going to come under 
stress. So that is--I think that is just a fact. If you buy 
hurricane insurance from an insurance company that just insures 
hurricanes, do you really want to keep buying hurricane 
insurance from them when there is a hurricane approaching? That 
is the issue. And that is all they do.
    That has a lot of value. I don't want to say that it 
doesn't. It has a lot of value. It is just that, when we talk 
about increasing how much exposure Fannie and Freddie are going 
to have and what the best way for them to hedge their risk, the 
fixed income markets provide a way for them to do that without 
taking that counterparty risk. And that is really the key.
    It is not that deep MI doesn't have any value. It does. And 
it should be pursued. It is really a matter of, when we are 
talking about what the cornerstone of the system is going to 
be, we think it should be the capital markets.
    Chairman Duffy. Mr. Sinks, what is your pushback?
    Mr. Sinks. As I said in my testimony, we paid $50 billion 
in claims. That would have increased that GSE number of 189 
billion by net 50.
    In addition to that, the MI's have paid 97 percent of the 
eligible claims coming out of the Great Recession, and the 
remaining 3 percent will be paid over time. So while there was 
stress and companies were impacted, at the end of the day, the 
claims were paid.
    Chairman Duffy. OK. That wasn't my main question, but I 
thought it was unique. You guys had different positions here, 
so I thought I would bring it up to start with.
    But the panel's view on the availability of private capital 
to assume first loss mortgage credit risk, there has been some 
debate on that topic. Any thoughts, Mr. Canter?
    Mr. Canter. So at the beginning of 2016, the GSE started to 
hedge their first-loss risk. And what I mean by ``first loss,'' 
it is important to understand, is that they hedge what we would 
call the bottom tranche of risk, meaning they start to--they 
pay for insurance or a bond issuance. That covers them from 
losses starting at 0 and going up to, say, 1 percent or up to 4 
percent.
    In the beginning of 2017, they changed that. And now they 
are retaining the bottom .5 percent of risk. So they are no 
longer hedging their first-loss risk from where we sit. We 
think, if the goal is for them to hedge as much risk away from 
the taxpayer as possible, they're not doing that. They are 
operating as if they are a finance company or a bank looking to 
achieve a certain return on what they think their capital is.
    Chairman Duffy. Anybody else? Thoughts, Mr. Rippert?
    Mr. Rippert. Private capital is, today, assuming first-loss 
risk. Mortgage insurers assume a meaningful amount of first-
loss risk. They are the biggest single counterparty to the 
GSEs, $200 to $250 billion of limited exposure. And reinsurers, 
frankly, are taking a first-loss risk as well through quota 
share reinsurance programs. And, frankly, they are positioned 
to take more first-loss risk.
    And I think an important distinction between mortgage 
insurers, reinsurers, and capital market's participants is 
mortgage insurers and reinsurers are set up to take first-loss 
risk on a front-end basis, to take the risk away from the GSEs 
before they even own the mortgage loan or at the time they 
purchase the mortgage loan. That is something that mortgage 
insurers and reinsurers can do much more effectively, frankly, 
than the capital markets can today.
    Chairman Duffy. I only have a minute left.
    We hear a lot of debate about, so when times are great, 
private capital is going to flow in, it is going to be 
wonderful. But when the cycle turns against us, everyone runs 
for the hills. Thoughts on that point? Any pushback on that 
point, Mr. Rippert?
    Mr. Rippert. I think--yes. I think that one of the biggest 
things, keeping private capital on the sidelines, is this 
uncertainty about--is the credit risk transfer programs of the 
GSEs here to stay, or is it, frankly, a science experiment? And 
if it is here to stay, private capital will make meaningful 
deeper investments to understand mortgage credit risk at a more 
fundamental level and be there over the long-term.
    Chairman Duffy. Even in a downturn. Even in an 2008-esque 
cycle?
    Mr. Rippert. I would give the example of reinsurance 
markets and, frankly, mortgage insurers as well. If you look at 
reinsurers as one example, they make an investment in a line of 
business to understand that risk and underwrite it, and they 
stay in it through the ups and downs. They moderate their 
exposure. They change their pricing. But they stay in the 
businesses through the cycle.
    The same is true of the mortgage insurers. They stay in the 
business through the cycle. So, yes, I do completely believe 
private capital can do that.
    Chairman Duffy. My time is up. And I want to be respectful 
of all the other members. I wanted to actually get to Mrs. 
Wachter's point on tying CRT pricing to GIFIs. I thought that 
was an interesting point that you made, and also the natural 
disaster risk separated from credit risk, which Mr. Canter 
brought up in his testimony, I don't have time for that, but I 
look forward working with all of you as we are trying to do a 
bipartisan product here on the committee.
    So I thank you.
    My time has expired.
    I now recognize the gentleman from Missouri, Mr. Cleaver, 5 
minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. I am struggling a 
little bit.
    A few weeks ago, I had the opportunity to meet--spend some 
time with Edward DeMarco, and we--he talked about this, what I 
thought was an interesting proposal that would use Ginnie Mae 
as the centerpiece for the housing finance system and then 
create a new kind of credit enhancer to transfer risk.
    Dr. Wachter, Mr. Canter, I am interested in your response 
to--are you familiar at all with--all right. Would you just let 
me allow you--what your response is to his proposal?
    Dr. Wachter. Today's hearing is on credit risk transfer, 
and so I would like to respond to your question in the light of 
credit risk transfer efficacy. And it seems to me that, while 
competition, of course, is important in many regards, 
competition over standards is not helpful. So to the extent 
that we have many guarantors or many credit enhancers, each 
with its own standards, each with its own premiums, this, in 
fact, can be destabilizing.
    So particularly, the purpose of CRTs, from my perspective, 
is to complete the market, inform the market, bring information 
to the market. And CRTs that are tied to individual guarantor 
portfolios, which is my understanding of how that proposal 
would work, would not be very liquid, and they would not be 
referencing the risk of the market as a whole, nor would they 
actually be referencing the risk only of the particular 
guarantors, because the risk that is created by one guarantor 
affects the entire market.
    So that is exactly what we want to avoid. We want to have 
the risk transfer--risk transfer programs pricing the overall 
market risk.
    So one thing you could do is require all of the guarantors, 
all of the credit enhancers to participate in one single credit 
risk transfer program and to have one single set of standards 
and one single set of rates. That would be very much like FHA 
and Ginnie Mae works now. And that would work.
    Mr. Cleaver. Before I hear from Dr. Canter, what is your 
opinion over collaterization as that one new standard?
    Mr. Canter. So we are very supportive of the Bright-DeMarco 
plan. We agree that there needs to be a balance between 
competition and underwriting guidelines. And that is really 
important, because if we have--if we had just one entity like 
some of the plans out there had envisioned, we don't think 
there would be enough incentive to respond to what investors 
need, and that could be long-term detrimental.
    On the other hand, if we have too many guarantors, the 
sizes of the deals get very small, and the capital markets find 
it difficult to participate, the liquidity of the bonds that we 
buy would suffer. And so there is this balance. And that is why 
I say there needs to be more than two guarantors in any new 
system, whether it is five or eight. It is probably less than 
10 is the way we would think about it. And the bond solution 
being fully collateralized is why we think it is such a key 
component.
    Mr. Cleaver. So do we have too much concentrated risk? Did 
that play a role, do you think, in the housing crisis? Dr. 
Wachter.
    Dr. Wachter. It wasn't concentrated risk. It was correlated 
risk. It was risk created by sectors that were underwriting 
unsoundly which then pervaded the entire market.
    So I don't think the problem was a problem of one set of 
standards. It was a race to the bottom, it was a race of 
declining standards, and a race where credit was not accurately 
priced, it was underpriced.
    So, no, absolutely not. That wasn't the problem. I am not 
saying that we can't have that problem, but that wasn't what 
caused the crisis.
    Mr. Cleaver. The last question. I am concerned about any 
kind of transfer. Is that going to be a very long process? 
Anybody. If we are going to transfer risk, we can't vote on it 
today and have that settled tomorrow.
    My time is up. I would like to talk to you about it at a 
later time.
    Thank you.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the Chair of the Subcommittee on 
Financial Institutions, Mr. Luetkemeyer, the gentleman from 
Missouri, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman, and thank the 
panel this morning.
    I want to follow up. Mr. Chairman made a good comment here 
which was something I was concerned about as well. Mr. Canter 
made--I believe it was--made the comment with regards to the 
GSEs' new takeout of the natural catastrophe loss risk and 
separate that from the credit risk. Can you explain that a 
little bit and what your thought process would be on that, sir?
    Mr. Canter. Sure.
    So right now, the way CRTs are constructed, if there are 
natural catastrophes like Harvey, Irma, and Maria, and there 
are resulting losses, that loss flows through to the CRT 
investor. If that loss happens through an MI policy, the MIs 
don't pay that claim if that house is uninhabitable. So from a 
CRT investor perspective, we are experts in valuing mortgage 
credit risk.
    Mr. Luetkemeyer. Who pays the loss, then, on the mortgage 
insurance?
    Mr. Canter. Fannie and Freddie. And eventually the CRT 
losses, if it is--
    Mr. Luetkemeyer. No other outside insurance, like 
homeowners insurance or the flood insurance, or whatever the 
takeover?
    Mr. Canter. Right. Obviously, if there is homeowner 
insurance, great. But a lot of hurricanes are not covered by a 
standard policy. Earthquakes are not required to be covered by 
Fannie and Freddie for California. So these are risks that my 
insurance colleagues, I think, have spent a lot of time on. I 
don't think that the GSEs and the rating agencies spend enough 
time on.
    And so from my perspective, the reason why this is 
important is because the capital markets are investing in this 
because they think they are there taking mortgage credit risk. 
We know we are also taking some natural catastrophe risk. But 
if losses were to happen, it could jeopardize the whole CRT 
market.
    And to me it is much more important that the CRT market is 
here to absorb financial condition losses and economic losses, 
because there are plenty of insurance companies throughout the 
world that can take natural catastrophe risk. And so that is 
what I am interested in is the long-term viability of the CRT 
market.
    And I just think that this natural catastrophe risk is 
misplaced in CRTs. But most importantly, the GSEs need to 
provide us the data and analysis to really be able to evaluate 
it, and they haven't really done so yet.
    Mr. Luetkemeyer. Mr. Krohn, in your testimony, maybe I 
misunderstood you, but you said something like FHA lacks the 
ability to lay off--work with CRTs to lay off some of the risk; 
is that correct?
    Mr. Krohn. That is correct.
    Mr. Luetkemeyer. Can you expand on that a little bit?
    Mr. Krohn. The risk remains within the FHA. There is no 
mechanism to transfer out of the system to bond investors, to 
reinsurers. That is the way it exists today.
    Mr. Luetkemeyer. OK. What are your suggestions on that?
    Mr. Krohn. I'm sorry?
    Mr. Luetkemeyer. What are your suggestions on how to solve 
that problem?
    Mr. Krohn. Well, we think the FHA should explore credit 
risk transfer. There are a number of things that we think might 
come out of that. It should increase the availability of 
coverage for the FHA if it can go through the cycles. They 
should get real-time pricing feedback, pricing discovery is 
part of the CRT process, and feedback around underwriting and 
the loan products offered by investors, by the reinsurance 
market.
    Mr. Luetkemeyer. OK. During the discussion here, it seems 
as though we--the word hasn't been used with regards to the 
different tools with the CRTs. But there seems to be, in my 
mind, a diversification that is necessary. But it wasn't, so 
there was no concentration within one particular area, whether 
it is reinsurance or whether it is the bond market or whether 
it is mortgage insurance. Would that be the assumption that--or 
would that be something--would you agree with that statement?
    There needs to be some diversification of each one of these 
different types of credit risk transfers would be necessary, or 
do you think one entity can handle all the risk?
    Mr. Sinks. If I may, I will take a shot at that.
    Our view is that you need to have multiple sources, which 
is inherent in your question. The smart people think that they 
are in a mature market. Private capital needs to put up about 
$200 to $250 billion of capital to support a multi-trillion 
dollar market. I don't think there is any one execution that 
can consistently deliver that through all markets, good times 
and bad times.
    And thus they need to try multiple executions, whether it 
is reinsurance, mortgage insurance, capital markets 
transactions. It is all of the above. It will take a commitment 
from everybody to meet the market needs.
    Mr. Luetkemeyer. Do the other guys agree with that?
    Dr. Wachter. No.
    Mr. Krohn. I agree with that statement.
    Mr. Rippert. I agree with that statement. And I think that 
the most popular--or the most effective source of capital, 
rather, at this point in time will change with conditions in 
the market.
    Mr. Luetkemeyer. Diversification is always the way you want 
to spread your investments.
    With that, Mr. Chairman, I yield back.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the very gentlelady from New York, 
Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Rippert, I believe that a strong and well-functioning 
secondary market should encourage lending to all income levels 
and communities.
    So my question to you is: What is the best thing we can do 
to ensure that private investors continue to invest in the 
secondary market? And what type of front-end or back-end credit 
risk transfer should we be looking at? And will that help 
first-time buyers or lower income borrowers?
    Mr. Rippert. I believe that the best way to address 
affordable lending standards, low income borrowers, is with a 
responsible lending platform that has three basic components. 
That is one of financial literacy and education to help inform 
borrowers that the responsibility they are taking on before 
they get into a mortgage product. I think that product 
guidelines need to be set forth that put guardrails on the 
system, that we are not offering mortgage products to borrowers 
that have this concept of a teaser rate initially and then 
escalated costs after a period of time. These are some of the 
sorts of products that cause problems in the market.
    And I think a third element is we really need to think 
carefully about making mortgage loans to borrowers, especially 
low income borrowers, when housing markets are overheated, 
housing prices are overinflated. In that scenario, based on the 
credit risk analytic work that we do, when borrowers get into a 
property that is significantly overvalued, their propensity to 
default, to reach financial stress, to not be able to make 
their mortgage payments, increases dramatically, anywhere from 
five to tenfold.
    And so we need to think carefully about extending mortgage 
credit to a borrower when prices are overheated, because this 
has a significant disproportionate impact, especially on low 
income borrowers. I think if we have a framework like that, 
then private capital will show up and support that.
    Ms. Velazquez. Dr. Wachter, will you please respond?
    Dr. Wachter. I think that the potential for front-end 
discount to be procyclical is great. That, therefore, in good 
times, the front end would be their pricing, in good times. And 
bad times it withdraws. And in the good times it has the 
potential for effectively raising prices and creating a bubble 
if it goes too far.
    That destabilizes the market raising risk overall, and that 
higher risk overall will be eventually priced in and will cause 
less affordability. What we need is a stable system which will, 
then, be less risky so that the market pricing of that less 
risk makes housing more affordable. This goes in the other 
direction.
    Ms. Velazquez. Thank you.
    Mr. Canter, in addition to exploring various types of 
front-end and back-end credit risk transfers, the GSEs have 
also explored expanding their investor profiles in the CRTs, 
including rates.
    What advantages do you believe expanding the investor 
profiles in CRTs will have? And do you believe that expanding 
the CRTs could disrupt the TBA market?
    Mr. Canter. So, no, I think the CRT market today is 
functioning very well, and the TBA market is functioning very 
well. So as the system stands today, there are no issues with 
TBA or the CRT market.
    As one of the members mentioned earlier, the transition to 
a new system is extremely important, probably just as important 
as the system that is actually decided upon. But in terms of 
the REITs (real estate investment trusts), the GSEs have been 
innovative. They have come out with a new structure that will 
make the CRTs more REIT friendly.
    So here we are talking about mortgage REITs. So that is a 
dedicated pool of capital that invests in mortgage products. 
And so we are going to see that as positive, because it brings 
down the cost of credit risk transfer the more investors that 
there are. It brings down the cost to Fannie and Freddie. And 
when that cost comes down, it means that potentially it has an 
effect on the GIFI, which can affect the borrower. Or even if 
it doesn't do that, it means that the U.S. taxpayer is paying 
less for the insurance, which ultimately is good for the 
taxpayer.
    Ms. Velazquez. Thank you. And I guess I will yield back.
    Chairman Duffy. The gentlelady yields back.
    The Chair now recognizes the gentleman from California, Mr. 
Royce, for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    In Mr. Rippert's testimony, you wrote: ``One of the biggest 
regulatory risks we see is the potential for the progress made 
over the past 5 years to be abandoned, in the absence of 
statutory changes.''
    So this is a concern I have as well. I think we have to 
lock in successes and build on those successes. And so, as some 
of you know, Representative Gwen Moore and I have introduced 
legislation requiring the GSEs to maintain the credit risk 
transfer market while increasing the amount and types of CRT 
transactions.
    To date, I suspect everyone on the panel would agree that 
Fannie and Freddie's CRT initiatives have been a success, in 
the sense that they are decreasing the exposure to unexpected 
loss and, in turn, decreasing risks to the taxpayers.
    We have heard more today on ensuring that CRT works as a 
stable source of capital through the economic cycle, even in a 
downturn. We need to get more institution-based capital 
involved. We have kicked that around. We need more players. We 
need mortgage insurers in this deeper. We need REITs and 
reinsurers, and we need to bring transparency and competition 
to front-end deals.
    So I would just ask the entire panel here, is this a 
laudable goal and how do we get there? I would just like to 
hear from you.
    Mr. Rippert. I think it is a very worthy goal. It aligns 
well with how we at Arch Capital Group think about the market 
and creating a more sustainable market that facilitates 
affordable lending to creditworthy borrowers. So we think that 
diversity of capital is critical, not just because at various 
times some capital will work more efficiently than others--and 
by more efficient, lower cost to borrowers--but you need it 
because of the amount of risk that needs to be transferred, 
this is approximately $250 billion of risk to be transferred to 
private capital.
    I think the functioning of capital across a cycle will be 
very effective as well in giving feedback. This concept of 
price discovery that gives an indication of the level of risk 
in the market will be a very important feedback mechanism from 
all these various sources of capital as well.
    Mr. Sinks. If I may, I would add I concur it is a laudable 
goal. I think it is necessary to have not only the variety of 
capital alternatives, but also the permanence of the capital. 
We need to know, in creating a housing policy system, that 
capital is going to be there in all markets. And so we need to 
clarify rules, develop capital requirements, and make sure that 
people can participate in all markets.
    Mr. Royce. So I think that experience shows that risk 
transfer worked and is working now at Fannie and Freddie. And 
we have also seen private reinsurers add about a billion 
dollars to the National Flood Insurance Program during the 
storm season, and there is even more capacity in the private 
market for increased risk transfer. Aon Benfield puts the 
reinsurance capital and derisking capacity at about 600 billion 
worldwide.
    So why not look elsewhere in the Federal Government? Why 
not--on the housing front, why not replicate risk transfer at 
FHA and Ginnie Mae, and why not encourage derisking for all 
Federal credit guarantee and insurance programs? That was the 
question I just wanted to ask in general of the panel. I don't 
know, Mr. Krohn, if you would care to comment.
    Mr. Krohn. Yes. I believe you need to look at these 
alternative sources of capital. The reinsurance industry, you 
mentioned the NFIP was incepted last year on January 1. In its 
first year, the program returned the entire limit to the 
Federal Government. This year, as it is being renewed, 
reinsurers have not fled for the hills. They are back, and they 
are having discussions with the NFIP and pricing that now, 
going forward.
    Mr. Royce. Yes. Well, with that in mind, I plan to 
introduce legislation to direct the Office of Management and 
Budget to identify other areas in the Federal balance sheet 
where derisking could be used to protect taxpayers. I think it 
is a strategy that would accrue to the benefit of stability all 
the way around, and in terms of proper pricing of risk and 
offsetting moral hazard in the system.
    But thank you very much.
    And, Chairman, thank you for the hearing.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the Vice Ranking Member of the 
full committee, the gentleman from Michigan, Mr. Kildee, for 5 
minutes.
    Mr. Kildee. Thank you, Mr. Chairman.
    Chairman Duffy. It rolls off the tongue, doesn't it?
    Mr. Kildee. You got it right. You can just say assistant to 
the regional manager, that is fine.
    Before I turn to the panel, I do want to commend the 
Ranking Member and the Chairman for this series of hearings and 
reiterate what I think has been discussed previously, and that 
is this is an area of policy where I think the divisions that 
often manifest on this committee might be able to be overcome. 
And so I want to encourage the leadership of the subcommittee 
to continue on that path.
    Very often, I think we imply ideological differences where 
technical solutions are really at the core of the issue. And as 
long as we know what direction we are going, I do think there 
is enough common ground for us to try to knit together some 
policy that we could all work together on, not 100 percent, but 
perhaps at least something that we could present to the full 
Congress in a bipartisan fashion. So I want to encourage that.
    It is also very good to see Professor Wachter. We worked 
together in my--well, when I was in real life before I came to 
Congress. And so it is good to see you and to have you here.
    I want to follow up a bit on the line of questioning that 
Representative Velazquez initiated. Not so much dealing with 
the secondary market or the structure on that end, but actually 
thinking about how the structure of the market and the way we 
manage risk could have an impact on certain cohorts of the 
housing market.
    And I am particularly concerned about the impact in weak 
markets and low-value markets, where we are already seeing real 
difficulty in getting mortgage financing. It is a pretty simple 
problem we face. And for those who don't know, I come from 
Michigan, from a string of older industrial cities that 
includes my hometown of Flint.
    And I recall having conversations in this committee about 
small mortgages. And I do remember--I don't want to throw any 
member under the bus, but I was crowing about the need for 
small mortgages and somebody said, oh, you can get a small 
mortgage. You can get a $150,000, $200,000 mortgage, no 
problem. In my hometown of Flint, we are looking for ways to 
finance home mortgages $25,000 and $30,000. And we just cannot 
get financing, because the risk associated with that mortgage 
versus the value of that mortgage on a balance sheet makes it 
really impossible for a lot of lenders to justify engaging.
    So I guess a couple of questions. What impact--well, I 
guess I will turn it around the other way. What suggestions can 
any of you offer that allow us to balance this question of the 
institutional risk in the marketplace and the need to make sure 
that we are penetrating with mortgage products into these 
really weak markets?
    So that it is not just a question of creditworthiness, 
which is another part of the question I want to get to, but the 
market in which a person lives with great credit, very often 
they are locked out of the housing market because they can't 
get a small mortgage in the size that I am talking about.
    Perhaps starting with Dr. Wachter, but I want to go to Mr. 
Rippert on a couple of other questions as well. Could you 
comment on that particular issue?
    Dr. Wachter. Yes. It is a very difficult problem. And it 
goes to the question of the lack of supply of mortgages affects 
the prices. So the very fact that mortgages are not there means 
that the properties are valued less. That is a reinforcing 
cycle.
    And that was the point of the CRA, Community Reinvestment 
Act, because the thought is that there are good risks out 
there, but they are being avoided. There is good lending, 
creditworthy lending that is being avoided just because of the 
perceived risk; and that other entities will not come into the 
market, so that is artificially limiting the pricing of that 
market. That is a real problem.
    My concern is that it is a natural outcome of cycles that 
pricing of capital does change over the cycle and it does 
change over place. So if we allow each place to have its own 
credit risk and that changes over the cycle, we will basically 
undo a national credit market, a national insurance market for 
default risk.
    That national insurance market for default risk has been 
very liquid and has efficiently priced interest rate risk, 
allowing for a 30-year fixed rate mortgage, and has allowed for 
credit risk to be priced relatively reasonably. But if we had 
every size of property, every geography having its own price, 
that would be very volatile over the cycle. So the problems you 
describe, which are very real, would become far worse.
    The way to directly take on your problem is to go back to 
the concepts behind the CRA and think of revitalizing 
communities with pools of capital. And that we need to return 
to, but it is probably a subject of another discussion.
    Mr. Kildee. Thank you. I appreciate it. I know the Chairman 
is a pretty good timekeeper. I think I have gone over a little 
bit. I appreciate the indulgence.
    Chairman Duffy. The regional manager yields back. Thank you 
for that.
    Listen. It looks like we have had a lot of members come in, 
but I think they have been pulled away so we don't have any 
other members to ask questions.
    But I want to thank the panel for their time--I know you 
are all very busy people--for sharing your expertise with us. 
This is an important space that we want to make sure we get 
right, and I can guarantee you that we will all be having 
additional conversations with you, if you don't mind, 
continuing to consult with the subcommittee and the committee 
as a whole. So we again thank you for your participation today.
    Without objection, all members will have 5 legislative days 
within which to submit additional written questions to the 
Chair, which will be forwarded to the witnesses. I would ask 
the witnesses to please respond in as prompt a timeframe as you 
can.
    Without objection, this hearing is now adjourned.
    [Whereupon, at 11:20 a.m., the subcommittee was adjourned.]

                            A P P E N D I X



                            December 6, 2017
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