[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
A FAILURE TO ACT: HOW A DECADE
WITHOUT GSE REFORM HAS ONCE
AGAIN PUT TAXPAYERS AT RISK
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 6, 2018
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-115
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
_________
U.S. GOVERNMENT PUBLISHING OFFICE
31-575 PDF WASHINGTON : 2018
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
Shannon McGahn, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
September 6, 2018............................................ 1
Appendix:
September 6, 2018............................................ 43
WITNESSES
Thursday, September 6, 2018
Bailey, Nikitra, Executive Vice President, Center for Responsible
Lending........................................................ 8
DeMarco, Edward J., President, Housing Policy Council............ 5
Pinto, Edward J., Co-Director, Center on Housing Markets and
Finance; Resident Fellow, American Enterprise Institute........ 9
Swagel, Phillip L., Professor, University of Maryland School of
Public Policy.................................................. 6
APPENDIX
Prepared statements:
Bailey, Nikitra.............................................. 44
DeMarco, Edward J............................................ 75
Pinto, Edward J.............................................. 94
Swagel, Phillip L............................................ 118
Additional Material Submitted for the Record
Duffy, Hon. Sean:
Government-sponsored Enterprise Reform Coalition letter...... 126
A FAILURE TO ACT: HOW A DECADE
WITHOUT GSE REFORM HAS ONCE
AGAIN PUT TAXPAYERS AT RISK
----------
Thursday, September 6, 2018
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:07 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Present: Representatives Hensarling, Lucas, Posey,
Luetkemeyer, Huizenga, Duffy, Stivers, Hultgren, Ross,
Pittenger, Barr, Rothfus, Tipton, Williams, Poliquin, Hill,
Emmer, Zeldin, Trott, Loudermilk, MacArthur, Davidson, Budd,
Kustoff, Tenney, Waters, Maloney, Sherman, Clay, Lynch, Scott,
Green, Cleaver, Perlmutter, Himes, Foster, Kildee, Delaney,
Sinema, Beatty, Vargas, Gottheimer, Crist, and Kihuen.
Chairman Hensarling. The committee will come to order.
Without objection, the Chair is authorized to declare a recess
of the committee at any time, and all Members will have 5
legislative days within which to submit extraneous materials to
the Chair for inclusion in the record. This hearing is
entitled, ``A Failure to Act: How a Decade without GSE Reform
Has Once Again Put Taxpayers at Risk.'' I now recognize myself
for 4 minutes to give an opening statement.
September 6, 2008 is a day that will live on in economic
infamy, for today marks the not-so-happy anniversary of one of
the most frustrating and costly moments in recent financial
history, namely the 10-year anniversary of the Federal takeover
of the failed housing government-sponsored enterprises (GSEs):
Fannie Mae and Freddie Mac. The GSE's anticompetitive
government charters and ever-increasing affordable housing
mandates created a toxic mess of systemic risk. Their collapse
directly led to the second worst financial crisis in our
history, causing more than $190 billion of taxpayer bailouts
and forcing them into a government-run conservatorship.
Embarrassingly, 10 years later, the GSEs remain in
conservatorship very much alive and very much unreformed, as
they quietly return to their pre-crisis market dominance. That
is bad news for competition, innovation, and, most of all,
taxpayers, since the Congressional Budget Office has said their
$5.1 trillion of mortgage obligations are, quote, ``effectively
guaranteed by the Federal Government,'' unquote.
Meanwhile, as several of our witnesses will testify,
systemic risk is building yet again. The cost and risk of
continuing to do nothing is rising, and rising at an alarming
rate.
Reform, while critical, has proven elusive. For almost 20
years, I, along with other handful of reformers like
Congressman Ed Royce, have labored in vain to replace the GSE's
government-sanctioned monopoly with a new system based on
competitive private capital, innovation and consumer choice,
and market discipline.
We passed the PATH (Protecting Americans from Tax Hikes)
Act in the 113th Congress to do just that. I am reintroducing
the PATH Act this week if, for no other reason, it is the right
thing to do, and it will let me sleep better at night.
Regrettably, its chances for passage remain slim.
So as an alternative, I have decided to partner with Mr.
Delaney on the other side of the aisle to propose a bipartisan
compromise housing reform plan that preserves the government
guarantee in the secondary mortgage market. In the time I have
remaining in Congress, this is the plan I will pursue.
Our discussion draft, which we will unveil later today,
will repeal the GSE's charters permanently ending their
monopoly, and transition to a system that allows qualified
mortgages backed by an approved private credit enhancer, with
regulated diversified capital resources to access the explicit
full government securitization guaranty provided by Ginnie Mae.
I believe the plan will preserve much of what is demanded in
the current system, liquidity, the TBA market, and the 30-year
prepayable fixed mortgage. And it will do so while dispersing
risk and leveling the playing field for all entrants into
mortgage finance. Additional details of our proposal will be
released later today.
While by no means perfect, we offer this proposal as a
grand bargain on how to move past an increasingly dangerous
status quo. Codify and explicit government MBS guarantee into
law, coupled with an accountable and effective affordability
program, in exchange for placing the taxpayer in a catastrophic
loss position only, diffusing the credit risk beyond two GSEs,
and creating market competition. If the political will to enact
such reform stalls in this Congress or the next, the
Administration can and should effectuate change.
The President will appoint a new Federal Housing Finance
Agency (FHFA) director in January. The director has broad,
unilateral powers as conservator of Fannie and Freddie to
dramatically reduce their size, scope, and functions. If
Congress fails to act by early next year, I call upon the new
director to institute these reforms administratively.
The grand bargain I have described does not necessarily
represent my preferred policy, or optimal policy, but I believe
it represents an achievable policy in a good faith effort at
bipartisan compromise. A decade without GSE reform has once
again put homeowners, taxpayers, and the economy at risk. The
time to act is now.
With apologies to the Rolling Stones, ``You can't always
get what you want, but if you try sometimes, you just might
find you get what you need'' to avert the next housing crisis.
I now call upon the Ranking Member. I yield her 3 minutes
for an opening statement.
Ms. Waters. Thank you, Mr. Chairman. Mr. Chairman, this
hearing will focus on the failure to reform the housing finance
system. I would point out that Republicans control the House,
the Senate, and the White House, and there have been no
apparent steps to advance comprehensive housing finance reform
since they gained that control.
It was over 5 years ago that committee Republicans pushed
the PATH Act through this committee. That bill was not seen as
credible. It failed to gain unanimous Republican support in
committee, and the Republican leadership of the House declined
to bring the bill to the House floor for a vote. I am in
support of responsible efforts to reform our housing finance
system. I believe we must evaluate what Fannie Mae and Freddie
Mac have done well, as well as areas where the system still
needs improvement and reform.
Contrary to the claims of the majority, Fannie and Freddie
did not cause the crisis. The Financial Crisis Inquiry
Commission and others have made that clear. As we all know, the
crisis was driven by predatory lending, the private market
packaging those toxic, risky loans into securities, and then
selling those securities to unsuspecting investors. Fannie and
Freddie did not drive those actions, but the events that
transpired during the crisis made clear the need for their
reform.
While the Republican-controlled Congress has yet to act,
the Federal Housing Finance Agency has taken significant,
administrative steps to improve the safety and soundness of the
enterprises and reduce risk to taxpayers. As we consider
housing finance reform and work to address the structure of our
housing finance system, it is a priority for me to ensure that
underserved borrowers and communities are not overlooked. This
means that at the heart of any reform proposal, we need a
comprehensive strategy around access to affordable mortgage
credit, as well as access to affordable rental housing. And
with that, I yield the balance of my time Mr. Chairman.
Chairman Hensarling. The gentlelady yields back. I now
recognize the gentleman from Wisconsin, Mr. Duffy, Chairman of
our Housing and Insurance Subcommittee, for 1 minute.
Mr. Duffy. Thank you, Mr. Chairman. Ten years, 10 years on
since the financial crisis that was caused by a mortgage crisis
that put the U.S. economy and the global economy into a
tailspin, and at the center of that crisis was Fannie Mae and
Freddie Mac that was allowed, by way of a government guarantee,
to create a risky book of business they should have never been
able to make.
And so what did the Congress do? We passed Dodd-Frank, and
I don't want to get into a spitting match because Dodd-Frank
didn't do the reform that was necessary in the housing space,
and the Ranking Member will say, Well, you guys have controlled
Congress and now you have the White House. What have you done?
And that is fair enough.
The point is that we have to come together as a Congress in
a bipartisan fashion, to figure out a way to address our
housing finance system and make sure it works. But now to look
10 years on that Fannie and Freddie are in conservatorship, and
they have become bigger beasts than they were even before is
troubling. This is--one second, Mr. Chairman. Housing is
important to America. Housing is important to families. You
can't have a partisan bill, and that is why I am proud of Mr.
Delaney and Mr. Hensarling for working together. Whether this
is the package we move forward with or a different package, we
have to come together as a Congress representing American
families to make housing work in a more sustainable way. I
yield back, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Kildee, Vice Ranking Member of the committee, for 1 minute.
Mr. Kildee. Thank you. Thank you, Mr. Chairman and Ranking
Member. We have talked about GSE reform for a long time in this
committee. Several bipartisan proposals have been offered, yet
we have not been able to move any of those bipartisan bills to
the floor. I hope that changes. I have some reason for
optimism, but I hope it does happen. It is also important not
just that we talk about this and raise it in this meeting, but
we do so with facts and data rather than bias and misdirection.
We have to be wary of those who try to blame the 2008
crisis on expanded homeownership opportunities for low- and
moderate-income people. We need an honest assessment of the
larger role that other factors played, including the market for
mortgage-backed securities, deregulation, the availability of
risky nontraditional lending products. Home ownership
opportunities have to be available for low- and moderate-income
families, something that bipartisan GSE reform can encourage.
So it is up to this committee to ensure that reform doesn't pit
investors and lenders against one another to the detriment of
homeowners.
Finally, GSE reform must include a government backstop for
the secondary market. Without that, we can't see the end of the
30-year fixed-rate mortgage, which is the product around which
our markets are calibrated. I look forward to working on this
issue, and I am encouraged by what I heard in the last few
days. I hope we can move something this year. We shouldn't give
up on that possibility. This is really important. I thank the
Chair and the Ranking Member for holding this hearing. I yield
back.
Chairman Hensarling. The gentleman yields back. Today we
welcome the testimony of Mr. Ed DeMarco, President of the
Housing Policy Council. Mr. DeMarco earned a BA in economics
from the University of Notre Dame and a PhD in economics from
the University of Maryland. Prior to joining the Housing Policy
Council, Mr. DeMarco was a Senior Fellow at the Milken
Institute, and was the Acting Director, as I think we all know,
of the FHFA for 4-1/2 years.
Dr. Phillip Swagel is a Professor at the University of
Maryland School of Public Policy. Dr. Swagel earned his BS from
Princeton University and a PhD in economics from Harvard
University. Prior to joining the University of Maryland, Dr.
Swagel was a Visiting Professor at Georgetown University and
the Assistant Secretary for Economic Policy at the Treasury
Department.
Next, Ms. Nikitra Bailey is the Executive Vice President at
the Center for Responsible Lending. She earned a BA from the
Pennsylvania State University and a JD from the University of
Pittsburgh School of Law. Prior to joining the Center for
Responsible Lending, Ms. Bailey was a Communications Fellow for
the Opportunity Agenda.
Last but not least, Mr. Ed Pinto is the Co-director at the
Center on Housing Markets and Finance and Resident Fellow at
the American Enterprise Institute. Mr. Pinto earned a BA from
the University of Illinois and a JD from the Indiana University
School of Law. Prior to joining AEI, Mr. Pinto was Vice
President and Chief Credit Officer for Fannie Mae.
I think most of you have testified before so each one of
you, I believe, knows you will be recognized for 5 minutes to
give an oral presentation of your testimony. When the yellow
light comes on you have a minute remaining. Without objection,
each of your written statements will be made part of the
record.
Mr. DeMarco, you are now recognized for your testimony.
STATEMENT OF EDWARD J. DEMARCO
Mr. DeMarco. Thank you, Mr. Chairman. Mr. Chairman, Ranking
Member Waters, Members of the committee, thank you for having
me here today. It is an honor to be back before you at this
time in my capacity as the President of the Housing Policy
Council.
My prepared statement makes the following key points:
Fannie Mae and Freddie Mac failed 10 years ago and were placed
into government conservatorship backed by billions of taxpayer
dollars. The reason for this conservatorship and for this
massive amount of taxpayer support is that if their failure had
led to shutting them down, the systemic ramifications of that
would have been devastating. It was said at the time, and I
detail this in my statement, that the final resolution of these
conservatorships requires congressional action. Why is that?
Simply put, it was the Congress of the United States that
created these companies, chartered them, gave them their
mission, gave them their special privileges, gave them their
names, and reserved for itself, reserved for Congress alone the
authority to change the charters, eliminate the charters,
create new charters, merge the charters, and so on. So that is
why with these companies in conservatorship, we are awaiting
congressional action.
Now in the 10 years since, a lot of positive developments
have taken place, including developments that give the Congress
something to build on. This includes the development of a
credit risk transfer market and a common securitization
platform. In those ways, things have gotten better, but in some
ways, things have not. Indeed, the systemic reliance we are
placing on Fannie Mae and Freddie Mac, if anything, has grown
in these 10 years.
So 10 years ago we saw all around us the manifestations of
systemic risk in our financial system and since then, the
Congress and regulators and, indeed, private financial firms
have taken many steps to address these systemic issues, but the
ones embedded in our housing finance system are still
unchecked. So on behalf of the Housing Policy Council, I am
here to say we need Congress to make the policy decisions only
elected officials can make. The good news for all of you is
that there is a foundation to build upon. I already mentioned
the work being done by the conservator, but there is more than
that.
Just in this committee, there have been three comprehensive
proposals: One by the Chairman, one by the Ranking Member, one
by Congressmen Delaney and Himes. And just now, we have learned
of a bipartisan approach that creates a fourth basis upon which
to work. And that is not all the good news. There is also this:
As I review in my written statement, there is broad agreement
on many of the basic principles and desired outcomes we are
trying to achieve.
So the Housing Policy Council welcomes the Chairman's
latest proposal with Mr. Delaney and looks forward to reviewing
it and working with this committee, not just for the remainder
of this year, but until the job gets done. In the meantime, we
hope the FHFA and the Treasury continue to support Congress by
carefully examining the common elements across reform
proposals, and taking the administrative steps consistent with
these proposals that will make legislating easier and the
transition easier.
I would like to make a final comment. It is easy to focus
this discussion on what to do with Fannie Mae and Freddie Mac,
especially today as we mark this 10-year anniversary, but we
should not let the discussion get wrapped up in focusing just
on Fannie and Freddie. Our goal is to strengthen and modernize
a credit market, a market essential to one of our fundamental
needs--the need for housing. Our focus should be on the market.
In this case, the secondary mortgage market and how it connects
the ultimate borrower, a person or a family looking to buy a
home, with the ultimate provider of those resources--the
investor.
So let's start by remembering the key principles of a sound
market system: Competition, transparency, consistency, data,
equitable rules, and so on. And let's remember that with
financial markets, systemic risk is a real threat. We ought to
disperse risk through the system, not concentrate it. And we
ought to avoid deep concentration of market power in the hands
of one or two firms. And finally let's remember sometimes
social goals can only be met with the help and support of
government.
In housing finance, one key element of that support comes
from the FHA (Federal Housing Administration) program and other
government insurance programs. They also need to be part of our
conversation if we want to envision a complete safe and sound
housing system that assures the opportunity of sustainable
homeownership.
So, Mr. Chairman, thank you for inviting me to this
hearing, and I look forward to participating in the discussion.
[The prepared statement of Mr. DeMarco can be found on page
75 of the Appendix.]
Chairman Hensarling. Dr. Swagel, you are now recognized for
your testimony.
STATEMENT OF DR. PHILLIP L. SWAGEL
Dr. Swagel. Thank you, Chairman Hensarling, Ranking Member
Waters, Members of the committee, thank you for the opportunity
to testify on the subject of GSE reform. I was at the Treasury
Department 10 years ago when Fannie Mae and Freddie Mac were
taken into conservatorship. In fact, I testified in this room
before this committee 10 years ago next week on housing policy,
the same day that AIG was rescued, bailed out.
I think no one envisioned that 10 years later, the two
firms would remain in government control and that taxpayers
would still be on the hook for so much credit risk. Reform is
still needed. Too many families still find it difficult to get
a mortgage while the dominant government role means that
taxpayers are taking on too much risk. Today's housing finance
system should be unsatisfactory to all sides.
With the two firms at the time, and still today, the
linchpins of the U.S. mortgage system, allowing them to fail 10
years ago would have risked systemic consequences. Ten years
later, however, the two firms are still undercapitalized and
still too important to be allowed to fail. That is the key
problem. Housing finance reform should clarify the roles of the
private sector and the government. If the two firms or any
other firms competing in housing finance are still too
important to fail, simply stating that there will not be
another bailout is not credible. A return to a duopoly of
private firms such as with the recap and release idea would
reconstitute the implicit guarantee that was the most
problematic aspect of the pre-crisis system.
At the same time, considerable progress has been made in
conservatorship, and I think it is important to recognize that
FHFA under the leadership first of Ed DeMarco, and then most
recently under Director Mel Watt deserves credit for this
progress, as do the two firms themselves. Most importantly,
there is now private capital taking on housing credit risk
ahead of taxpayers. This is important progress. Reform, though,
should go further to improve incentives and better protect
taxpayers.
As policymakers, you should look skeptically at the
suggestion that requiring adequate capital will price people
out of mortgages. If a certain amount of private capital is
enough to protect taxpayers against all but catastrophic risk,
then additional capital should not be at risk. It cannot be the
case that taxpayers are safe, and yet, more capital has a large
impact on interest rates. If capital is expensive, well, then,
taxpayers are not safe. It can't be one or the other.
Administrative measures, while legislation is still being
discussed, should focus the GSE activities, especially on
improving their effectiveness. My written testimony discusses
several suggestions. I want to briefly focus here on ways to
improve the effectiveness with which the housing finance system
supports affordable housing. The current system provides about
$3.8 billion every year in cross subsidies within the pricing
structure of the insurance premiums charged by Fannie and
Freddie. Essentially, lower risk borrowers pay more so that
higher risk borrowers get a subsidy. But the problem is that
nearly one in four of the borrowers who receive a subsidy in
the current system are not low-income and not moderate-income.
The subsidies are not allocated based on need.
The impact is that a lower income family that has prudently
accumulated a downpayment and has lived within their means,
ends up paying more to subsidize a wealthier family with a
small downpayment and lots of debt. We can focus the affordable
housing assistance, even the amount that is there today, and
provide much better and more effective assistance for the
families who need help.
Housing finance reform remains necessary 10 years after
Fannie and Freddie were taken into conservatorship. Not moving
forward leaves too many families still facing difficulty
obtaining mortgages and taxpayers taking on too much risk.
Reform can improve the safety of the housing finance system and
better protect taxpayers and also provide for more access for
mortgage financing and better support for affordable housing.
Thank you very much.
[The prepared statement of Dr. Swagel can be found on page
118 of the Appendix.]
Chairman Hensarling. Ms. Bailey, you are now recognized for
your testimony.
STATEMENT OF NIKITRA BAILEY
Ms. Bailey. Good morning, Chairman Hensarling, Ranking
Member Waters, and committee Members. I thank you for the
opportunity to testify on this critical issue of GSE reform.
Ten years after the housing crash of 2008, millions of
hardworking families most harmed by unnecessary foreclosure
continue to be locked outside of the Nation's steady recovery
and housing finance system. However, their hopes to participate
in the American dream of homeownership remains strong.
I am Execute Vice President of the Center for Responsible
Lending, a nonpartisan research and policy organization
dedicated to protecting family wealth and ending predatory
lending. We are affiliated with one of the Nation's largest
community economic development credit unions Self-Help, which
is based in Durham, North Carolina, and has provided over $7
billion of safe and responsible credit in communities all
across the country.
The bipartisan Housing and Economic Recovery Act of 2008,
enacted by Congress, represented substantial reforms to the
Nation's housing finance system. This act put in place a new
and empowered regulator. Moreover, Dodd-Frank's ability to
repay standard and qualified mortgage (QM) rules together
provided baseline mortgage protections to have enabled the
steady though uneven recovery we experience today.
The sum of these reforms return profitability to the
Nation's financial institutions, and is well-documented in
regulatory reports. Earlier this month, the Federal Deposit
Insurance Corporation reported that the U.S. banking sector
reported a record $60 billion in profits in the second quarter.
With these gains, now it is time for the GSEs to be
restructured. It is a needed action that can be taken
administratively. Among housing stakeholders, there is broad
consensus that the housing finance system needs an explicit and
fully paid-for government guarantee with private capital in the
first loss position. However, we equally acknowledge and need
to resolve this fundamental disagreement with any proposal that
calls on the elimination of the enterprise's chartered Duty to
Serve obligations. The Duty to Serve provisions that begin in
the charters and remain in HERA (Housing and Economic Recovery
Act) require that credit is available in all markets at all
times. This directive creates liquidity in every community,
including rural ones, and for community banks and for credit
unions.
These requirements ensure that lower wealth borrowers get
an opportunity to succeed in homeownership. They also provide
mechanisms to keep smaller banks on equal footing with private
banks. Any reform that the system builds that moves us toward
excessive risk-based pricing has to be opposed. Average pricing
actually makes mortgage loans more affordable.
Our Nation's fair lending laws, along with HERA and Dodd-
Frank, underscore a longstanding Federal commitment for safe
and responsible mortgage credit on affordable terms. These
principles also evidence the belief that the system should not
only serve borrowers with the most pristine credit profiles.
Congress has exercised extreme caution thus far. You must
also reject untested models that introduce anxiety that come
with higher cost projections and provide less access and
affordability for working families.
Today, we mark the 50th anniversary of the Federal Fair
Housing Act, so as we think about GSE reform and all that it
offers, we have to deal with the fact that 50 years later,
black Americans still have the same rates of homeownership that
they had in 1968 when this Congress passed that significant
legislation.
We also have to look right at the Federal Government's role
in fostering historic discrimination that has put us in the
racial wealth gap that we are dealing with today. Today,
African Americans have 13 times less the wealth of whites.
Latinos have 10 times less the wealth of whites. That is the
result of Federal housing policy that said we will only insure
mortgage loans to white families for a significant portion of
those programs starting. They have given whites a heads up and
have denied African Americans and Latinos an opportunity for
equal parity.
Discriminatory redlining, along with predatory mortgage
lending targeted at families of color, place them at higher
risk of foreclosure. Many families were steered into loans with
dangerous features and higher costs, even when they qualified
for loans on separate terms that were cheaper. CRO's research
shows that for people who did not even experience foreclosure,
they lost $1 trillion of wealth in communities of color. So
they didn't have a foreclosure themselves, but they lived in a
community where there was a propensity toward it.
So the Federal Government role needs to be addressed, and
now is the time to do it. Thank you for this opportunity. I
appreciate it, and I look forward to answering your questions.
[The prepared statement of Ms. Bailey can be found on page
44 of the Appendix.]
Chairman Hensarling. OK. Mr. Pinto, you are now recognized
for your testimony.
STATEMENT OF EDWARD J. PINTO
Mr. Pinto. Thank you, Chairman Hensarling and Ranking
Member Waters, for the opportunity to testify today. In all the
work that I do, my prime interest is in the big picture--policy
implications informed by data about housing finance. I am also
interested in pointing out the various ways that the housing
lobby distorts national policy discussions for their own
benefit, and the detriment of first-time buyers and taxpayers.
In my written testimony, you will see a lot of detail but
my remarks are going to focus on big picture policy
implications. I will be referring to some of the numbered
charts in my written testimony. My testimony is based on risk
grading of 60 million individual mortgage loans dating back to
1990, and price appreciation trends for the most recent 9
million. I will cover four points that are informed by our
research: House price boom 1.0, from the '90s and the outyears,
the current house price boom 2.0, both driven by government
policy. The same policy decisions are promoting leverage and
leave entry-level buyers and taxpayers more exposed. The long-
running conservatorship and how that has been used to
strengthen the GSE's taxpayer-backed duopsony, and prompt
administrative action is advisable now.
Figure 1 shows that the risk buildup that took place
starting in the early '90s and ending the first time in 2007,
at the GSEs coincided with real house price increases over the
same period. This buildup is starting up again since 2012, and
as are house prices, which are in a boom 2.0. The FHA is a big
part of this process.
For many decades, U.S. housing policy has relied almost
exclusively on increasing borrower leverage, and a failed
attempt to make housing more affordable. This is because credit
easing in a seller's market makes homes less affordable as the
easing gets capitalized into higher prices.
Figure 2 shows that the history of GSE debt-to-income (DTI)
ratios over the past 30 years confirms this. Seller's markets
coincided, in both times, with the rapid rises in DTIs and the
real house prices that occurred during booms 1.0 and 2.0.
Turning now to some of the deleterious actions of Fannie
Mae, Freddie Mac, and the Federal Home Housing Finance Agency
since the beginning of the conservatorship. The DTI patch was
announced by the Bureau of Consumer Financial Protection in
2013, and is still in effect and bears special mention. Since
2013, 85 percent of all primary home purchase financing has
been guaranteed by agencies eligible under the patch.
Figure 3 shows that rather undertaking an orderly
transition period to the qualified mortgages, 43 percent DTI
limitation, this was what was envisioned by the Bureau, the
FHFA, the GSEs, FHA, and the VA, all took advantage of the
patch to promote higher DTI loans. Private portfolio lenders
and RHS showed much less use of DTIs greater than 43 percent.
As a result, 36 percent of agency-guaranteed loans that
originated in March 2018, had a DTI in excess of 43 percent,
the QM limit. Double the level the month before the patch was
announced. It may shock you to learn that 26 percent of FHA's
purchase loans have a DTI greater than 50 percent.
I will now turn to the core of the problem. In my view, not
enough attention has been paid to the policy arena--in the
policy arena to changes in leverage, or to the distinction
between buyer's and seller's markets. We are introducing four
new price indices to help highlight these changes.
One of the innovations is that we divided the price, the
house price into four bins because the market behaves
differently for each bin. Our broad conclusion is there is a
strong correlation between increasing census tract home price
appreciation, and increasing census tract mortgage risk index.
As you can see from Figure 7, most first-time buyers are in
the bottom two bins, and their mortgage loans are much riskier.
Prices in the low bins have increased much faster, 41 percent,
than medium high and high bins at 28 percent. This aggressive
financing has been a key driver of excessive house price
appreciation. In the low bin, 80 percent of the loans are
guaranteed by the GSEs and FHA. There is no doubt where this
impetus for higher prices is coming from. Consider if low
prices had increased at the same rate as the medium- and high-
tier--medium-high and high tier price bins. Entry-level buyers
today would be able to buy the exact same home for an average
of $17,000 less and with a lower risk of default. This is a
badly designed housing policy that is in place.
In my written testimony, I list a number of areas where the
long-running conservatorship has been used to strengthen the
GSEs. I will leave that to your review.
What about solutions? Let me start off by saying measured
step now should moderate the current pace of unsustainable home
pricing increases. In terms of legislation, I believe the PATH
Act is the only viable solution. In terms of administrative
steps, prompt acts should be taken by four agencies: HUD,
Bureau of Consumer Financial Protection, FHFA, and Treasury.
These are all laid out in my written testimony. Thank you.
[The prepared statement of Mr. Pinto can be found on page
94 of the Appendix.]
Chairman Hensarling. I thank the witnesses for their
testimony. I yield myself 5 minutes for questions.
Mr. DeMarco, I was struck by your written testimony. On
page 3, you subtitle that portion of your testimony, ``Yet
Systemic Risk is Growing Not Fading.'' You mentioned that there
are signs that underwriting standards are weakening, that
pricing by the GSEs is less than that backed by private
capital. You talk about the government's involvement growing
substantially in the 10 years since the conservatorship. And
then I am really struck by your quote, ``The level of systemic
risk posed by the GSEs has grown over these 10 years,''
unquote. As one of the four--as somebody who spent 4-1/2 years
of their life as the GSEs' regulators and probably one of the
three or four most knowledgeable people in the galaxy about the
GSEs, this is a profound statement. Can you elaborate?
Mr. DeMarco. Thank you, Mr. Chairman, yes. What I am trying
to indicate here is that during this time of conservatorship,
while we provide a taxpayer support to the conservatorships to
keep Fannie Mae and Freddie Mac functioning so that the country
could have a functioning secondary mortgage market, given the
duration of these conservatorships and the path that we have
since followed, what we have effectively done is concentrated
more and more of the actual decisioning and credit risk
management and risk assessment and pricing in these two
companies, two companies operating in a government
conservatorship.
So end to end, Fannie Mae and Freddie Mac are responsible
for virtually all the risk--for a great deal, if not virtually
all, of the risk analysis, pricing, and risk bearing in our
housing finance system, particularly and certainly for the $5
trillion of it that they are directly involved. They determine
which counterparties can participate in the system and in what
manner. They have broad reach to all stakeholders whose
functions are actually intended to manage and mitigate risk,
whether that be a mortgage insurer or a title insurer, an
appraiser, or a lender. So they set the rules of the business
for the entire market, including the underwriting box, and as I
said, the pricing and so forth.
So this tremendous concentration of being responsible for
the decisioning, the decisions and the practices governing
credit risk in our mortgage market is, to me, building systemic
risk.
Chairman Hensarling. Thank you. Mr. Pinto, you say
something similar in your testimony where you speak of we are
in the midst--quote, ``We are in the midst of another
potentially dangerous buildup of housing risk.'' You have, I
guess, a proprietary system mortgage-risk index. You say it is
on the rise again. How is this comparable to the buildup of
risk that you saw before the 2007-2008 real estate bust?
Mr. Pinto. Thank you, Mr. Chairman. We are seeing risk
increasing. We risk rate every loan that the agencies guarantee
each and every month. We have been tracking this for 5 years.
It is a little difficult, and we haven't completed our research
to compare it completely back to what it was last time,
particularly for FHA, which is a big part of the risk. What we
focus on is how the risk is going up generally, and then how
that ties into house price increase. And the research that I
presented today shows very clearly that the higher the risk in
a census tract, and the percentage of loans that are high risk
in a census tract, the faster the house prices go up. And this
is because these policies that the Federal Government has, have
done nothing to add any supply. It only promotes demand, and
demand in a pernicious way.
You can afford to buy a more expensive house, even though
it is the same house that sold for 10 percent less a year ago,
and that is what we are seeing; house prices going up year
after year, for the same houses in entry-level markets, and the
government is providing the leverage that allows that to be
purchased.
Chairman Hensarling. You also said in your testimony almost
half of the GSE's 2017 volume wasn't even related to buying a
primary residence, another 41 percent went to help well-to-do
buyers. And only 3.7 percent of GSE dollars went to repeat
buyers of more modest homes. So can you elaborate again how the
GSEs are making entry-level homes less affordable?
Mr. Pinto. So again, a very little amount of the GSEs'
business goes to entry-level, but because the GSEs are so huge,
they are 50 percent of all the mortgages, so even if, say, 10
percent of their business is going to entry-level but at very
risky terms, then that is cascading through these markets along
with FHA loans in these low entry-level price points, and that
is what is driving up the price. What we find is that today,
the GSEs, particularly Fannie Mae, are increasing their risk
most rapidly in the entry-level, and that is because they are
in competition with FHA.
Chairman Hensarling. Thank you, Mr. Pinto. My time has
expired. I now recognize the Ranking Member for 5 minutes.
Ms. Waters. Thank you very much. Before I get to a question
about this discussion about systemic risk, I would like to ask
Mr. DeMarco what good has happened since conservatorship, and
how has it been managed and what good can you say about it?
Mr. DeMarco. I can say a number of good things, as I went
through in my prepared statement. First of all, conservatorship
actually did ensure stability of our secondary mortgage market
during the financial crisis.
Second, while we had challenges in getting this right,
trying different things and seeing what worked and didn't, the
conservatorships did a lot to help prevent foreclosures and to
help people stay in their homes. A lot of effort was poured
into efforts to bring stability to existing homeowners.
Third, we have built a number of foundational, or we are in
the process, the FHFA continues to build foundational
cornerstones for reform, including credit risk transfer work
that has been done, the common securitization platform, loan
level data disclosures that have begun, and so on.
Ms. Waters. Very good. Now what evidence do you have of
this systemic risk that you are trying to describe to us today
that you blame the conservatorship for?
Mr. DeMarco. So in conservatorship, these companies
continue to operate with the tremendous advantages that they
had before conservatorship now with the added benefit of the
government backing. These companies are the ones that are
responsible for determining everything about credit--
Ms. Waters. I understand that. If I may interrupt you, I
understand what you have described. What is the evidence? Where
do we see the risk? Where does it actually manifest? Where is
it demonstrated?
Mr. DeMarco. Well, I think a couple of my fellow panelists
have provided a good bit of data on that point, but I would
point to a few things: The decisions to relax underwriting
standards in certain places is in the province just of Fannie
and Freddie; so, for example, they get to determine who gets an
appraisal waiver when they buy a home.
In terms of rules that this Congress or the Congress
established through Dodd-Frank on a qualified mortgage really
trying to get the Consumer Financial Protection Bureau to set
standards of what constituted a qualified mortgage, we have
written in this huge loophole for Fannie and Freddie that says,
Well, while this rule, this QM rule, is really important, it
doesn't apply for Fannie and Freddie.
Ms. Waters. OK. I appreciate that, and if the rule does not
apply on qualified mortgages, then you are saying great risk is
being created. You think it can be, but you have no
demonstration that it has created risk.
I am going to move on to Ms. Bailey. What do we need to
expand housing opportunities for the average citizen and for
low income?
Ms. Bailey. Yes, thank you so much. Fannie and Freddie,
along with FHA actually did what they were designed to do. They
actually sustained the market when private credit withdrew.
Risky private credit led us to the crisis and that is evidenced
in the Financial Crisis Inquiry Commission on pages 26 and 27.
So they did exactly what they were intended to do.
FHA actually increased lending at that time when Fannie and
Freddie were in trouble and actually has now returned to more
stable base levels. So Mr. DeMarco, while I appreciate the
wonderful perspective he is offering today, he instituted
policies in his tenureship of loan-level price adjustments when
he was the director of the Federal House and Finance Agency.
That agency's decision actually made it more expensive for
people of color and lower wealth families to afford loans
guaranteed by the GSEs.
So I would like to get a better understanding about that
decision and knowing how that was going to have the outcome
that we are talking about today where we are saying that the
GSEs aren't serving the broader-based market. That decision
happened during then.
Today we need to make access and affordability central in
this debate, and we need to get at pricing segmentation. The
whole system today is moving toward segmenting borrowers by
credit buckets, and by doing that, we are getting rid of
something that sustained the system for a long time, which is
average pricing, which allows us to make sure we have
affordable mortgages across the Nation.
Ms. Waters. What would you advise us to do to ensure that
we could include more low-income and more minorities in these
housing opportunities?
Ms. Bailey. Continue the system back toward pooling of loan
risk, because when you segment by the credit buckets, pricing
actually determines who can actually afford a mortgage, and
that is where most of the proposals are off track.
Ms. Waters. Thank you very much, and I yield back.
Chairman Hensarling. The gentlelady yields back. The Chair
now recognizes the gentleman from Wisconsin, Mr. Duffy,
Chairman of our Housing and Insurance Subcommittee, 5 minutes.
Mr. Duffy. Thank you, Mr. Chairman. Ms. Bailey, I just want
to clarify, I think, something that you said in your opening
statement. Are you saying that we should get rid of risk-based
pricing in the mortgage market?
Ms. Bailey. No, sir. I am saying we should get rid of
excessive risk-based pricing.
Mr. Duffy. What does that mean?
Ms. Bailey. The mortgage market already has risk-based
pricing built in, but what we have done now is to say we are
going to go in and put the burden of risk on borrowers that the
Financial Crisis Inquiry Commission said did not actually cause
the crisis, lower wealth families. So what we are saying to
those families who also have a history of racial discrimination
that resulted in them having lower credit scores and smaller
downpayments, that they actually have to pay more now in this
current system when they were not responsible for the housing
crash.
So what I am saying is, continue to do what the system does
well. For many, many years, the system has provided broad
liquidity in every community across the Nation. Both GSEs,
Fannie Mae and Freddie Mac, have made sure that we could expand
credit across the Nation, so continue to do what they actually
do really well, and don't get rid of such a foundational aspect
of the system so that we can bring in the very borrowers that
the future system depends. Seven out of 10 future borrowers are
going to be people of color, so we talk about affordability,
but we have to think about it in--
Mr. Duffy. I want to be clear here. So as long as our
system is blind to race and religion and sex or sexual
preference, blind to those things, you are OK with us looking
at someone's risk profile in regard to pricing of a mortgage?
Ms. Bailey. I appreciate you thinking that the system is
blind to race and sexual orientation, but it is not, sir. The
housing finance system is really rooted in the history and the
legacy of intentional--
Mr. Duffy. So I guess I am saying--I should say are we
going to base prices then on race and sex and sexual
preference?
Ms. Bailey. Say that again, sir.
Mr. Duffy. Are we going to base our prices on race or sex
or sexual preference or religion, is that what we should do?
Ms. Bailey. Part of what we are doing is we are saying that
we know that the impact of these practices impact people of
color, women, and lower wealth families differently, and we are
still orchestrating policies toward those--
Mr. Duffy. I am going to reclaim my time.
Mr. DeMarco, what happens in a system where we don't base
pricing on risk. Obviously we all want to make sure that the
system is blind to race and sex and religion, and based on
credit, but that is the way the market should work, right?
Mr. DeMarco. Right. Certainly when one is talking about
insurance, if you don't price based upon risk you get more
risk.
Mr. Duffy. Mr. Pinto?
Mr. Pinto. I agree. If you don't price on risk, you get
more risk. FHA is a perfect example of that. It does not price
on risk, and it gets a tremendous amount of risk, and it is at
the foundation along with the GSEs of this house price boom.
Mr. Duffy. And when you have more risk, that can lead to
crises which help the poorest among us, fair enough?
Mr. Pinto. Fair enough.
Mr. Duffy. OK. Mr. DeMarco, you talked about what might not
appear to be obvious to the average eye, but the bills that you
have looked at that have come out from both sides, there are a
lot of common themes. I don't have a whole lot of time, but I
want to touch on a few common themes that you see everyone in
the Congress talking about where we can wrap our hands around a
pathway forward that everyone could buy into.
Mr. DeMarco. Right. I will do, too, to be brief. The first
is that Fannie Mae and Freddie Mac do not continue forward as
government-sponsored enterprises. That doesn't mean that they
get liquidated. It means that their specialness and their
privileges and protections go away, and whatever they are
transformed into, they have to compete in the marketplace on
the same footing as everyone else. So we can keep the functions
that they have been providing the market, but make those
functions available to be provided by others.
The second thing is that they are now, with the Chairman's
announcement today, there certainly seems to be broad consensus
about establishing a single, mortgage-backed security that has
a catastrophic guarantee from the taxpayer, but is backed by a
substantial private capital in a first loss position, and that
is true from the Chairman's proposal to Ms. Waters' proposal
and all the others.
Mr. Duffy. I think one of the great debates we will have to
have is where does that catastrophic guarantee kick in. We
don't want it too low where the market would assess that.
Obviously if it is too low, and the Congress is going to step
in and say the market before the legislation would kick in,
fair enough?
Mr. DeMarco. That is correct.
Mr. Duffy. OK. I just want to quickly ask the panel about
any concerns about FHFA and transparency today. Mr. Pinto, any
concern there?
Mr. Pinto. Which?
Mr. Duffy. Transparency, encourage more transparency in the
markets today.
Mr. Pinto. I think there should be more information
released about the mortgages that are being made. There should
be complete transparency, and it should come from all the
agencies, and it should go back in time in terms of those
loans, so those can be looked at and researched.
Mr. Duffy. Mr. DeMarco?
Mr. DeMarco. Yes, one of the things that could be done is
to further make available to the public the loan level details
of the loan portfolios of Fannie and Freddie.
Mr. Duffy. Thank you. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair will recognize the gentleman from Missouri, Mr.
Cleaver, Ranking Member of our Housing and Insurance
Subcommittee.
Mr. Cleaver. Thank you, Mr. Chairman. Thank you Mr.
DeMarco, for sitting down with me some time back and discussing
some of these issues. Mr. Duffy and I have had a number of
conversations, and he just talked about one of the things that
I lift up as someone that must be involved in any kind of
reform of the GSEs from my standpoint, and they are, as I have
said before, a 30-year fixed-mortgage rate as well as the
explicit government backstop. I would like for the entire panel
to tell me something that you believe to be inextricable to a
reform package of the GSEs, other than the two that I have just
laid out. Anyone?
Ms. Bailey. I would say the system's current affordability
provisions, its Duty to Serve, the ability to provide by broad
liquidity in every credit market across the Nation, and the
housing goals that are really important to ensuring that we
have an inclusive and broadly serving mortgage market, so those
would be additional ones, along with ensuring that smaller
lenders remain on equal footing with their larger bank
competitors.
Mr. Cleaver. But what specifically can we do to increase
affordable financing or financing of affordable housing? What
can we build into the infrastructure of a reform package for
the GSEs that would assure increased funding for affordable
housing, which is one of the biggest needs in the country right
now?
Ms. Bailey. Yes, sir. I totally agree with you, and I would
say that the move toward excessive risk-based pricing is really
making it really challenging. So underwriting standards help
determine who should qualify for a mortgage. Pricing actually
determines who can actually afford to pay, and when we move
toward these excessive standards, we make it too expensive for
working families to afford these mortgages. So what we often
see is that FHA is now overconcentrated with a segment of
borrowers--upper-income people of color, Latinos, and African
Americans--that the conventional market should be serving, but
because of the historic discrimination and lower downpayments
and lower credit scoring, that is the result of the historic
discrimination they are not able to get conventional markets
from the conventional space.
Mr. Cleaver. Mr. DeMarco?
Mr. DeMarco. Mr. Cleaver, to your first question, the thing
I would add that is fundamental to reform is providing real
clarity about what is the role of the government in our housing
finance system and where and how is that role manifested. And
then what is--on the other side of that coin, what is the role
we expect of the private market, and is that private market
allowed to actually operate as a market and given the tools and
the guard rails necessary. So that clarity would help a lot.
Mr. Cleaver. Thank you. I thank both of you for that. Where
in receivership, what is missing, what is going awry? And let's
just assume we do nothing. What would be the consequences of us
doing nothing right now, leaving GSEs in a conservatorship?
Mr. DeMarco. All of the credit risk that is being run
through those companies is being supported by the American
taxpayer.
Ms. Bailey. I think it is important to also add, though,
that they are offloading some of that risk with the credit risk
transfers, so they are--and I think all of our testimonies
acknowledge that--that they are actually offloading some of
that risk to the private market. The question is, are they
offloaded in a way that gets rid of that segmentation of
pricing that we talked about earlier. We see that some of that
is happening on the front end, and it is safer when it happens
on the back end. So we just need to move the system more toward
that back-ending when we are doing credit risk transfers. But
they are offloading some of the risk on the private market.
The key is to make sure private capital comes in a safe and
responsible way. The only time when private capital dominated
the market, we ended up in a national housing crisis. So we
want to just be careful with private capital. I think we all
agree that it needs to come back in, but we have to do it in a
way that is really safe for borrowers, as well.
Dr. Swagel. I would just add quickly, we are going to miss
out on innovation if we stay with the current system, and we
won't know what we are missing out. We know that too many
people still can't get mortgages, and that is because the
dominant government role has pushed away private innovation,
and that is what we will miss with the current system.
Mr. Cleaver. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Huizenga, Chairman of our Capital Markets Subcommittee.
Mr. Huizenga. Thank you, Mr. Chairman, and I have about a
half an hour's worth of questions. We are going to try and do
this real quickly, and one of the things I want to start with,
and I would like to move right down the panel, and if you could
quickly answer these two things. What do you think the proper
loan-to-value would be for the GSEs to be involved in and
engaged? And also, what is the proper debt-to-income ratio for
borrowers? What should that be? So Mr. DeMarco, and I will just
move right down.
Mr. DeMarco. Mr. Huizenga, those are challenging questions
because households don't--
Mr. Huizenga. That is why I am asking the experts.
Mr. DeMarco. But I think it is risky to give a single
answer to a question like that, because if I told you that the
proper debt-to-income ratio was 38 percent, how does that work
for a retiree who has retained a lot of assets but doesn't have
income and wants to buy a retirement home? So that is an
example of why a single answer is challenging here.
Dr. Swagel. Obviously--
Mr. Huizenga. I am sorry, but how about for the GSEs to be
involved, though? I understand that debt-to-income ratio maybe
for individuals, but what should that loan to value be for a
GSE's involvement?
Mr. DeMarco. Well, when I was the acting director, we had
it at 95 percent was the maximum. It is currently 97.
Mr. Huizenga. Mr. Swagel?
Dr. Swagel. I will just add, obviously I agree with Ed. If
we are going to have the government behind these risky loans,
let's acknowledge it and make that explicit and not bury it
within the details of the GSE pricing system. If we take on
risk, let's account for it.
Mr. Huizenga. So no percentage.
Dr. Swagel. I apologize. I also, again, like Ed, I don't
have a particular number because the circumstances of borrowers
will just vary so widely.
Mr. Huizenga. But again, if we are looking at risk in the
GSEs, what should that level of risk be?
Dr. Swagel. I would agree with Ed. I wouldn't want the
sorts of 3-1/2 percent loans that the GSEs have been instructed
to push. That, to me, seems--
Mr. Huizenga. Would returning to the 95 percent that Mr.
DeMarco had just referenced, would that be acceptable, better?
Dr. Swagel. Five-percent downpayment, it just seems a very
modest amount. We know housing prices can go down as well as
up. I think that puts borrowers at risk.
Mr. Huizenga. OK. Ms. Bailey?
Ms. Bailey. I would agree with Mr. DeMarco. I think those
are decisions that need to be left with the regulator that
Congress empowered to actually regulate the GSEs. We now have
in place a very strong and powerful regulator that we didn't
have before. The problem that we had leading up to the crisis
before is that they did not have a powerful regulator. Congress
has acted through hearings to actually create that, so those
underwriting decisions should remain at the later level.
And I know there is some concern about moving forward the 3
percent downpayment, but I have to explain to you, the Center
for Community Capital at the UNC school did research on
borrowers with smaller downpayments. And those borrowers, when
they get a safe mortgage, they actually perform well. There was
a study of borrowers all across the Nation, and they actually
were able to amass $38,000 in home equity even during the
housing crisis. We now have the safe mortgage practices because
of the strong regulation, and we now have the effective
regulator.
Mr. Huizenga. So just make sure that you understand, I, as
a former licensed realtor, I sat at those closing tables and
understood, when my parents bought a home and the amount they
had a downpayment was very different than when I did, and it
was very different when I sat at my first closing and they slid
a check across to both the seller and then the buyer. I am
assuming you would agree that having zero percent down is a bad
idea?
Ms. Bailey. I am saying those decisions are best left at
the regulator.
Mr. Huizenga. So you would say that a zero percent down
would be acceptable?
Ms. Bailey. I am saying that those decisions are
underwriting and should be with the regulator.
Mr. Huizenga. OK. We will move on. Mr. Pinto?
Mr. Pinto. So I think we have just seen what happens when
you leave it to the regulator. First of all, the Bureau said 41
percent was the proper DTI. You have pushback from the
industry, went to 43. Put a rule out at 43. Got pushback from
the industry, put in the patch, and then FHFA pushed Fannie and
Freddie to go to 50. Regulators are not going to protect us
from this.
What the issue really becomes is we had a system where we
had a debt-to-income limit, generally across the country back
in the early 1990's. It was 38 percent. You had compensating
factors above that. I presented a chart that shows once Fannie
and Freddie started moving away from that, those numbers just
went to the stratosphere. They came back down. And then after
the patch was put in place they have gone through the
stratosphere again. You have to have some limitations that act
as friction in the sellers' markets.
Mr. Huizenga. OK. And in the 10 remaining seconds, I wanted
to talk about multifamily loans; and real quickly, can these
multifamily markets function without the presence of GSEs?
Mr. Pinto. Yes.
Mr. Huizenga. Anybody else?
Mr. Pinto. Yes.
Mr. Huizenga. Ms. Bailey? Quick answer, please.
Saved by the bell.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, Ranking Member of our Capital Markets Subcommittee.
Mrs. Maloney. Thank you, Mr. Chairman.
And thank you to all the panelists. I am a strong proponent
for affordable housing. And in cities, especially large cities
like New York, that I am privileged to represent, affordable
housing is the absolute number one public policy goal. So I
strongly believe that any reform of GSEs should not in any way
diminish resources for affordable housing and should usually,
or hopefully, increase resources.
So my question to Ms. Bailey and Mr. DeMarco, as we look at
GSE reform, what is the most important thing that we can do to
protect and even expand support for affordable housing?
Ms. Bailey?
Ms. Bailey. Thank you. We should definitely ensure that we
move the system back toward average pricing. Again, pooling of
loan risks--and I know I keep harping on this point--but
pooling of risk and averaging the risk actually makes it more
affordable. And we have to keep those broad-based Duty to
Serves. Those goals were put into the charters when the GSEs
were created, and they were also carried forward in the Housing
and Economic Recovery Act of 2008.
Everyone else in all the proposals that come forward, they
want to give us aspirations. They don't have any strong
enforcement mechanisms behind them. Without the strong
enforcement mechanisms behind them for affordable housing, we
won't see that produced. So, right now and in our current
system, we have strong goals with clear mechanisms for
enforcement. Give us a stronger enforcement; we will see a move
toward that end. And get rid of this risk-based pricing.
Mrs. Maloney. Thank you. Thank you.
Mr. DeMarco and Ms. Bailey, we are--some people on the
committee are advocating using the Ginnie Mae as a model for
GSE reform and essentially transferring all of the--Fannie and
Freddie's responsibilities to Ginnie Mae. But this is a tiny
agency, and it has less than 200 employees now, and I would say
it has a very, very different business model than the--and it
doesn't even focus on credit risk at all now because Ginnie Mae
only securitizes loans that have already been guaranteed by the
Federal Housing Administration or the Veterans Administration.
So I am really questioning and rather skeptical that Ginnie
Mae is equipped to handle this type of responsibility or that
the Ginnie Mae model would work for a deeper, larger mortgage
market. So, in your view, Mr. DeMarco and Ms. Bailey, is this a
good idea, or would using Ginnie Mae model for GSE reform raise
borrowing costs for middle-class Americans looking to buy a
home?
Mr. DeMarco. So, Mrs. Maloney, as I will find out this
afternoon some of the details of the Chairman's and Mr.
Delaney's Ginnie Mae proposal, but I don't think it is correct
to say that Ginnie Mae is going to be taking over all of the
functions and responsibilities that Fannie Mae and Freddie Mac
have. As I understand these proposals, having coauthored one
along these lines, Ginnie Mae actually retains a more limited
functionality here, which is to be the issuer of government-
wrapped, mortgage-backed securities in global financial markets
so that the investors globally understand the backing of the
American taxpayer on these mortgage-backed securities, but they
are not undertaking all these other activities. And, in fact,
Fannie Mae and Freddie Mac would be transformed, and a lot of
this would take place in the private sector.
As to whether this is untested, Ginnie Mae is a $2 trillion
securities operation today, and it is doing quite well.
Mrs. Maloney. But it doesn't have the risk model. And my
main question is, would it raise borrowing costs for middle-
class Americans, Ms. Bailey, in your view?
Ms. Bailey. It would. And it would also put smaller lenders
on unequal footing with their larger bank competitors. Ginnie
is really complex and has a lot of complexity around it that
would make it difficult for smaller lenders to manage. So we
would also have to take that into consideration. So I agree
with your statement.
Mr. DeMarco. I am sorry. I take some exception to that.
Mrs. Maloney. I have one more question, and it is for you.
And it is one my favorite topics.
Mr. DeMarco. Let's have it.
Mrs. Maloney. Multifamily housing. If the Chairman wants to
give you more time after that, but I really--multifamily
housing is very important to my district. Everybody lives
vertically, not horizontally. And in the crisis, I think it is
fair to say that multifamily housing performed relatively well.
In fact, it subsidized the single-family businesses.
So my question to Mr. DeMarco is, do you think that Fannie
and Freddie's multifamily businesses are currently sharing
enough risk with the private sector to adequately protect
taxpayers? As I understand, the first tranche is guaranteed
by--
Chairman Hensarling. The time of the gentlelady has
expired. A brief answer--
Mrs. Maloney. It is so tough, but this is such a good
question.
Chairman Hensarling. A brief answer from the witness,
please.
Mr. DeMarco. I think that the model that Fannie and Freddie
each use in their different models to risk-share capital, a
risk-share credit risk in multifamily is worth considering in
what we are looking at with single family; it shows it can be
done.
Mrs. Maloney. Thank you.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, Chairman of our Financial Institutions
Subcommittee.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
And, Mr. DeMarco, just to follow up on that question by
Mrs. Maloney, I know Mr. Huizenga asked the same question
basically with multifamily housing. You made the statement in
your testimony that we need to fix what is broken, preserve
what works. And it seems the multifamily portfolio has done
very well. And I think, as both of my colleagues indicated, is
there a way to look at that as perhaps a model, or take from
that the way to perhaps structure something for the single-
family situation, or what is your--
Mr. DeMarco. The basic lesson that I would suggest from the
way the multifamily businesses operate at Fannie Mae and
Freddie Mac is that in fact there is a meaningful amount of
risk sharing that goes on in those systems. Until the
conservatorships, there was virtually none in the single-family
space. So effectively what has been going on with single
family, we have been trying to start developing that kind of
risk sharing, but it does take place in the multifamily space.
What is--what cannot be removed, however, is, as long as
Fannie and Freddie are operating as government-sponsored
enterprises, they are competing in this commercial market
financing a multifamily dwelling; they are competing with all
the advantages that you get when you are a GSE. In this case,
with--they are in conservatorship; an advantage is the backing
of the American--
Mr. Luetkemeyer. When you say ``competing,'' competing
against the private market, right?
Mr. DeMarco. Yes.
Mr. Luetkemeyer. Thank you very much.
I know that yesterday we had a--under the leadership of
Chairman Duffy, we had a hearing that focused on the cost of
regulations with regards to the ability of consumers to be able
to afford housing because we found yesterday that 32 percent of
the cost to the consumers is actually Federal, State, and local
rules and regulations.
We had a hearing or had a roundtable with myself and my
colleagues, Mr. Budd from North Carolina and Mr. Huizenga, here
on Tuesday afternoon with some regulators, all the regulators
involved, as well as some banks and some other interested
parties with regards to some of the CECL (current expected
credit loss) rules that are coming out. Does anybody know or
you have heard of CECL before and know what this is about? It
is basically where the banks have to--when they make a loan,
immediately upfront reserve more in their loan loss reserve for
a potential loss.
And so I was wondering: This is going to be a very, very
costly situation for them. They are going to have to segregate
capital. It is going to be--and eventually it is going to be a
cost that is passed on to the consumer. If you have heard of
this and are aware of this, would you give me an opinion on
whether this is going to be helpful, hurtful, to the consumers
being able to afford housing, and then what effect it is going
to have on FHA and Ginnie--or Freddie and Fannie, excuse me?
Mr. DeMarco. I can't answer all of those points, but I can
address a couple of them. Certainly, long duration assets like
a 30-mortgage, the CECL accounting creates new challenges for
portfolio lenders that they didn't have before. And so that is
going to have an effect on those businesses. The question is,
if you create a reserve upfront, should we be simultaneously
reexamining the consideration of those reserves under capital
rules?
So, if you are going to fundamentally change the accounting
for reserves so that we consider reserves to be something other
than what they traditionally have been, then we have to ask:
Well, look, our bank capital requirements have been written in
a way under an old reserving regime, we now have to reconsider
those capital rules, given that we changed the nature and the
requirements around reserves.
To your other point about this, if this does have an impact
that makes it more costly for a bank to portfolio a mortgage
loan, then it creates yet another regulatory incentive for
those loans to perhaps be sold off into the secondary market to
Fannie and Freddie rather than being held by the bank because
the costs of carrying that loan have gone up in a relative
basis.
Mr. Luetkemeyer. We were discussing a while ago the
difference between 5 percent down and 3 percent down. So we are
not talking about a whole lot of money there. So, again, when
you are looking at costs--32 percent of the costs of making a
loan is regulation--suddenly that is a pretty significant
figure. So, if that is significant enough, we were discussing a
minute ago between people getting a loan where they have 5
percent down or 3 percent down, to me this would be a barrier,
would it not, those increased costs?
Mr. DeMarco. Yes. In fact--and you are quite right. I point
out in my written statement that these kinds of barriers are in
fact inhibiting bringing affordable housing supply onto the
market, both in terms of rental and in terms of single family.
And I actually cite in an Obama Administration report pointing
to some of these, especially at the State and local level,
barriers and some ideas about how to mitigate some of them.
Mr. Luetkemeyer. Thank you. My time is up. I yield back,
Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes another gentleman from Missouri, Mr.
Clay, Ranking Member of Financial Institutions Subcommittee.
Mr. Clay. Thank you, Mr. Chairman.
And thank the witnesses for being here. Before I get into
my questions, I wanted to note that my friend and colleague
Representative Duffy brought up the issue of race in
consideration of risk. And it is not--it is not the risk that
is involved; it is really the institutional racism that exists.
We know during the housing crisis that borrowers of color
were steered into high-priced loans, and communities of color
now are targeted by predators. What communities of color are
looking for is fairness in the housing market, in lending, and
not being charged what I call a black tax for being black,
being charged more for a mortgage product. So it is not about
risk; it is about the institutional racism that exists.
Just so the panel understands, and my friend from Wisconsin
understands that we are asking for equal protection under the
law so that we can also realize the American Dream and not the
American nightmare. And I will--I intend to have that
conversation with Mr. Duffy and explain it to him on what
actually happens.
But this--my first question is for Mr. Pinto. Mr. Pinto,
saving up for a downpayment is one of the biggest barriers to
homeownership. That is why responsibly underwritten, low-
downpayment mortgage products backed by Fannie Mae and Freddie
Mac, the Department of Veterans Affairs, and the Federal
Housing Administration serve an important role in expanding
access to homeownership. In fact, the Department of Veterans
Affairs has been backing zero downpayment mortgages for years
with a very successful track record. You have been very
critical of low-downpayment loans. Do you contend that low-
downpayment loans cannot be responsibly underwritten, or do you
contend that veterans should not have access to zero
downpayment mortgages?
Mr. Pinto. So what I think--thank you for that question.
What I contend is that credit easing, minimal downpayments,
high-debt ratios, et cetera, in a seller's market with a 30-
year loan ends up getting capitalized into higher prices, and
that doesn't help anyone, and it particularly doesn't help low-
income buyers. I presented data from 9 million loans that show
that. What I have proposed--
I think I have mentioned this at this committee before is a
zero downpayment loan, 100 percent LTV, with a 20-year loan
term. The problem with all the subsidies that you are talking
about is they get ladled on top of the 30-year loan, and they
get capitalized into higher prices.
Mr. Clay. Got it.
Mr. Pinto. The solution is to go back to a 20-year loan and
use that subsidy to increase the buying power to allow the 20-
year loan, which amortizes much faster, to be gotten by this
lower-income buyer. I call it LIFT Home: Low-income first-time
homebuyer tax credit.
Mr. Clay. OK. What about those who are recent graduates of
college who are heavily indebted with student loans? How do we
address them when you and I know that their credit scores are
lower because of the student loan debt? How do we address that?
Mr. Pinto. I think Congress has to look at the student loan
program, which has exploded in the last 5 or 6 years to--I have
lost track--$1.4 trillion, and fix that. Having said that, the
research I have seen shows that the student loan debt--and this
is going to sound counterintuitive--is not that much of an
impediment, mostly because most of the buyers are in deferral
or on income-based programs. Therefore, it is not creating the
debt-to-income ratio problem that is commonly thought.
Mr. Clay. How about another solution that will allow the
mortgage companies to buy the student loan and roll it into the
30-year mortgage? What about that?
Mr. Pinto. Taking something that was supposed to be
something paid back hopefully over 5 or 10 years and turning it
into a 30-year debt doesn't make any sense to me.
Mr. Clay. All right. I give.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr, the Chairman of our Monetary Policy and Trade
Subcommittee.
Mr. Barr. Thank you, Mr. Chairman, and thank you for having
this hearing on this--as you refer to it--the not-so-happy
anniversary of American history involving the day that the
Federal Government took over Fannie Mae and Freddie Mac. And
while the GSEs admittedly provide liquidity to the housing
finance system, let's face it, Fannie Mae and Freddie Mac were
more than mere bystanders in the 2008 financial crisis. They
were in fact at the epicenter of that crisis because they were
thinly capitalized. They bought risky loans with very low
downpayments. And with all respect, contrary to Ms. Bailey's
revisionist narrative, the absence of risk-based pricing in
loans purchased by GSEs was precisely the problem.
And the fact that GSEs fueled origination of mispriced
loans that put people in homes with mortgages they couldn't
afford was exactly the problem. That was what caused the
financial crisis. I just think that if we ignore that basic
fact, we are willfully disregarding history, and we are bound
to repeat history, as Mr. Pinto was warning us here today.
I do want to compliment Mr. Delaney and our Chairman for
working in a bipartisan manner. I have a lot more studying to
do and looking at the proposal before us that they have worked
on. I want to learn more about it. But it does seem to me that
putting layers of diversified private capital in a first loss
position will help ensure more accurate pricing of risk and
reduce the number of bad loans. It seems to me that that is
exactly the direction we want to go in to have better pricing
of risk.
Let me move to a question, and let me ask Mr. DeMarco. The
QM rule that we have worked so hard--the CFPB worked on recent
statutory changes where we injected a new portfolio safe harbor
for the QM rule. Explain to us a little bit more your belief
why we should apply a comparable QM rule to the GSEs. And I do
note that the bipartisan proposal would do that.
Mr. DeMarco. So the qualified mortgage rule was considered
by many involved in developing that legislation to be a key
aspect of Dodd-Frank. It statutorily ruled out certain loans or
loan characteristics that were thought to be fundamental in the
financial crisis. It allowed the BCFP (Bureau of Consumer
Financial Protection) to then write additional rules governing
what constituted a qualified mortgage, and so that rule was
written, and so it applies to all mortgage lenders. It says:
All right, here is the set of standards for what constitutes a
qualified mortgage.
But then it said: But if the mortgage is acceptable to or
financed by Fannie Mae and Freddie Mac, then that is OK. So we
really created two different standards, a qualified mortgage
rule, unless you have been financed through a government-
sponsored enterprise.
Well, people are--the industry, borrowers, advocates,
everybody seems really happy with this QM patch. Well, we can't
have it both ways. Either the QM patch is the right way of
articulating what constitutes a qualified mortgage, in which
case we are restricting access to credit through the BCFP rule,
or the BCFP rule is right, and for some reason, we are creating
this huge loophole.
Mr. Barr. Mr. DeMarco, to Ms. Bailey's concern that there
would be excessive pricing of risk, wouldn't the portfolio
lending model provide an escape valve that would be safer than
the originate-to-distribute model so that if we build upon our
work in the regulatory relief package that is now law and allow
for--if there is--if there is a mortgage that is out there that
is outside of the QM rule, but a lender with full view of the
borrower's ability to repay were willing to take that risk,
retain that risk in portfolio, is that a way to address Ms.
Bailey's concern that we want to provide access to affordable
housing but do so in a safe and sound way?
Mr. DeMarco. Yes, sir.
Mr. Barr. Mr. Pinto, in my remaining time, let me just ask
you about credit risk transfers really quickly. Some banks are
concerned that, while we like to see the credit risk transfer
increasing, some banks have stressed that bank capital rules
may impede credit risk transfers. Are you concerned about that?
Mr. Pinto. I am concerned that there should be a level
playing field. I am also concerned that these credit risk
transfers need to be upfront, transparent, and put on in place
at origination. They should not be done in the murky black box
that they are being done today by the GSEs.
Mr. Barr. I yield back. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch.
Mr. Lynch. Thank you, Mr. Chairman.
I also want to thank all the panelists for your
participation today. It has been very helpful. Ms. Bailey, I
grew up in the south Boston housing projects, the Old Colony
Housing Projects, with a lot of other families that were
struggling at the time. My dad had a--so he used to say at
times, we had to save up to be poor. And he was only half
joking. So we had the blessings of a home in public housing.
The housing was built probably in the 1940's right after
the Second World War. And now we are trying to rebuild it. We
are about halfway done rebuilding some of those units. But my
problem now in my district, which is a big part of Boston and
Brockton and Quincy and a bunch of towns on the south shore, is
that not only do I have a problem finding housing for people
who are struggling, like my family was, but I am struggling to
find affordable housing for firefighters, teachers, nurses,
construction workers, and so there is a gap there. Now I need
workforce housing. They are getting priced out. It is just
insane.
I know that Chairman Hensarling sent a letter to Mel Watt
back in February criticizing him for making Fannie Mae and
Freddie Mac continue to contribute to the affordable housing
trust fund and the Magnet Fund. What is the status right now of
our public housing, and is there anything in the formula that
might help my nurses, my teachers, my teamsters, and
construction workers, firefighters, police?
Ms. Bailey. Thank you for the question. Yes. Those funds
need to be fully funded. And I thank you for sharing the
background that you are sharing. The very pricing segmentation
that I talked about earlier is hurting working people across
the country. So absolutely those things should be fully funded.
And I need to just, for one moment, just respond a little bit
to the response about Fannie and Freddie and the revisionist
history.
Most of the mortgages that Fannie got in trouble for were
all A mortgage loans. They were actually financing and chasing
the mortgages for upper-income borrowers; these were not
working families like the ones that you were just talking
about. So it is really important for us to really highlight
that they were no-doc loans to A borrowers. And 10 percent of
those were GSE loans. So it wasn't the subprime loans that had
been raised.
Mr. Lynch. Right.
Ms. Bailey. And it is also really important for me to make
sure that we are talking about, for the risk-based pricing, we
are talking about catastrophic risk, and we need to get
specifically at the GSE cost, the GSE's price for 75 percent of
that, so when I am making that point that is exactly what I am
going for. The housing trust fund and the Capital Magnet Fund
need to be fully funded because we know increasingly more and
more Americans are paying more than 50 percent of their income
to cover their housing costs. The Harvard Joint Center report
that just came out made that fact really clear, and clarified
that working families just don't have--wages haven't kept up;
they have real wage stagnation. They just don't have the
resources to cover the increasing costs around housing.
So pricing segmentation really hurts them and stifles their
ability to get even quality rental opportunity as well.
Mr. Lynch. Thank you. I know that in other areas, in health
insurance and in auto insurance, we spread the risk. We don't
put all the risk on the sickest people and make them pay the
greatest amount. We try to figure out--that is the nature of
insurance; you spread the risk out so that we all absorb it,
and if you are lucky enough to be healthy, you pay a little bit
more, but if you do get sick, then you have some relief there.
It just--and I realize that there is a blending that needs to
happen here--I think Mr. DeMarco has touched upon it--where if
we can shift in a balanced--if we can rebalance the risk, I
guess, between the GSEs and the private market, find a way to
do that because we have to shift that over, but do it in a way
that maintains our ability to offer a 30-year fixed mortgage at
a reasonable interest rate, that is hugely important to average
Americans who are trying to get out there and buy their first
home.
So, Mr. Chairman, I want to thank the witnesses again for
your participation, and I yield back the balance of my time.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman, for calling this
important hearing.
Thank you each of you for coming in and offering your
expertise today. There are numerous options that we will
consider to restructure the GSEs to--with the goal of returning
them to financial health. With this, they range from simply
taking them out of conservatorship to converting them to
private corporations or creating a new government agency.
In your opinion, Mr. DeMarco and Mr. Pinto, which of these
options would provide the most future stability for both the
markets and the consumer?
Mr. DeMarco. In my view, creating private companies backed
by private capital in a competitive market has the best long-
term outcome, both in terms of the stability of the market as
well as innovation and provision of credit to the families.
Mr. Pittenger. Yes, sir, Mr. Pinto, and try to--
Mr. Pinto. I would agree with that. I would just add,
without a government guarantee on those companies, and I would
also add that we need to have an administrative solution
because, even if you put in place the proposal that the
Chairman and Mr. Delaney have put forth, it would take many,
many years for that to actually come to fruition. We are in a
problem today where we have house price boom 2.0. What I am
concerned about are the low-income buyers and the minority
buyers who are in neighborhoods that have prices that are at
unsustainable levels, and they are going to get hurt when that
reversion to the traditional trend occurs, and it is going to
be in all of your districts. And that is what I am concerned
about. There is nothing in a legislative solution that is going
to address that. It can only be addressed with administrative
solutions--pit.
Mr. Pittenger. Well, let me ask you this. If they are
released from conservatorship, how would they be recapitalized?
Mr. Pinto. I don't believe they should be released from
conservatorship. I think they should be wound down.
Mr. Pittenger. Yes, sir. Mr. DeMarco.
Mr. DeMarco. Yes, Congressman, I believe Congress needs to
decide what the final disposition of them is, but I would not
return them as GSEs.
Mr. Pittenger. Ms. Bailey and Mr. Swagel, Dr. Swagel,
concern with the GSE reorganization comes from small community
banks. Small lenders fear the development of additional
guarantors controlled by megabanks, which could result in
volume discounts. These discounts would leave the smaller banks
at a distinct disadvantage. What are your plans to ensure that
small community lending groups will be able to compete?
Ms. Bailey. Right now, as the system works, small lenders
have access to the cash window on equal footing with their
large bank competitors. A lot of the proposals that we have
discussed could really impact the level of equal access for
small lenders. So I agree with you that small lenders need to
be able to operate in their own unique way without having to do
pricing purchases through their large bank competitors. That
puts them at an unfair advantage because they just can't get
the volume discounts that the larger lenders are able to get.
So I agree with that point.
Mr. Pittenger. Dr. Swagel.
Dr. Swagel. I will just add. One of the worst aspects of
the old system was the disadvantage of small lenders. And
Chairman Hensarling's plan, the Corker-Warner, DeMarco-Bright,
all of these ensure equal access for small lenders. That is
important.
Mr. Pittenger. Mr. Pinto, you have said in your testimony
that current policy is creating a home boom and, therefore,
making entry-level homes less affordable. In your opinion, what
policies could be put in place to make housing affordable for
low- to middle-income home buyers?
Mr. Pinto. Thank you for that question. As indicated
earlier, the problem with all of the subsidy, cross-subsidy,
Duty to Serve, all of these programs is they take the existing
30-year mortgage, which itself is a very highly leveraged
instrument, add a lot of risk to it, and then somehow provide
some subsidies on those loans and cross subsidies. The problem
is that gets capitalized into higher house prices during
seller's markets, which we are now in the 71st month of the
national seller's market.
The answer is to say--if you want the 30-year mortgage over
here, that is fine, but if you want to do something for low-
income, let's take the 20-year term and let's figure out how we
provide them an ability--and I proposed this first-time home
buyer tax credit--you take the tax credit and you buy down the
interest rate, and you do some other things because it is a
lower risk loan to begin with, et cetera, and you then equalize
the cost. So the 20-year loan now has the same monthly payment
roughly as the 30-year loan, except it amortizes much more
quickly. You now have a wealth-building machine for low-income
buyers. They get into the house, and you would have zero
downpayment, and that is the solution.
Mr. Pittenger. Thank you. Ms. Bailey, quickly, are you
encouraged that with the economic policies in the last 2 years
that have been put in place, that the unemployment for African
Americans is at an all-time low, does that encourage you to
believe that they will have greater access to homeownership in
the future?
Ms. Bailey. No, sir. And I have to say, when people of
color have been in the marketplace, they have never been well
served or fairly served, and because of the history of
discrimination, they have also been targeted with more
expensive--
Mr. Pittenger. But you do acknowledge that unemployment is
at an all-time low? Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott.
Mr. Scott. Thank you, Mr. Chairman.
Well, this has been quite a newsworthy morning. When I
opened up the opinion section of The Wall Street Journal,
ladies and gentlemen, this morning, I was greeted by my friend
Chairman Hensarling's op-ed piece touting a bipartisan deal
that he has struck on GSE reform. And I really appreciated
that.
Chairman, you touted in the paper--The Wall Street Journal
this morning, you said, and I quote from The Wall Street
Journal, you said, reduce taxpayers' risk, codify into law an
explicit government guarantee, and increase market competition.
These are all great things, and I certainly look forward to
reading and learning more about it, and I certainly encourage
everyone to look at this morning's Wall Street Journal. I think
that the Chairman has put out some excellent points.
However, until I see the full text, I remain just a bit
skeptical because it wasn't until this morning, in this
surprise editorial in The Wall Street Journal, that showed the
willingness of the Chairman to agree on some issues that--of
course, we have had some differences--because, prior to this
editorial this morning, the Republican side would not agree to
the 30-year mortgage. Wouldn't agree that it would remain
intact. Wouldn't agree, even more importantly, to ensure
affordable housing and rental housing is supported.
Before this morning's op-ed piece, it quite honestly was
only the Democratic proposals that guaranteed these proposals.
Very much needed. That 30-year mortgage guarantee is the
bedrock of our financial system. And I say this as one of the
original cosponsors of Mr. Delaney's bill, Partnership to
Strengthen Homeownership Act, H.R. 1491. But I certainly
welcome this sterling example of leadership on the Chairman's
part here to work in a bipartisan way in these final 3 months.
It reminds me of this past week when we went through a
profound exercise in this Nation during our services for the
late Senator John McCain, and we found that there was a great
cry in this Nation for us to show bipartisanship, Republicans
and Democrats working together. But it is also worth noting
that to the American people, it was Democrats under the
sterling leadership of our Ranking Member, Ms. Maxine Waters,
who has been fighting and been our protector on many of these
issues.
And it is so exciting and glorious, quite honestly, to see
our Chairman and our Ranking Member--and I will tell you we are
blessed in this committee to have the kind of knowledgeable
leaders in our Ranking Member and our Chairman. And, quite
honestly, it is going to be a disappointment for my friend
Chairman Hensarling to leave. We came together, so I have great
affection for him.
And I do urge everyone to read this op-ed piece today. It
is a tremendous article, and it is something that I think will
provide a way for us to go forward in a bipartisan way.
Now, in my last--well, I only have 18 seconds, but let me
just say, the GSEs did not cause this crisis, and the
information is there to do it. It was caused by private
activity in the housing market anchored in Wall Street and
steering individuals that they know they couldn't pay into
that.
I yield back. Thank you, sir.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Florida, Mr.
Ross.
Mr. Ross. Mr. Chairman, thank you.
And I thank the panel for being here. I also want to
acknowledge, Mr. Chairman, your op-ed piece today, it was very
refreshing to see, and it is even more refreshing to see that
you and my good friend from Maryland, Mr. Delaney, are working
toward a bipartisan resolution of what is a powder keg waiting
to explode again, that will work to the detriment of the
taxpayers of this country.
And as I look at our regulatory system and insurance and
think that we have--and I know that we have better than any
across the world, our State-based form of regulation, I am
concerned that we should maybe take a page from our European
friends', who do not have GSEs and subsidized mortgages in
their housing market and seem to do very well. As I begin my
questioning, I do want to lay the predicate that, of course,
this issue of GSE reform has been before a majority of a
Democrat Congress and a majority of Republican Congress.
Eventually it will collapse if we don't make a change. And no
one party has a monopoly on good ideas, and therefore, a
bipartisan effort is what is necessary to get this done, and so
I laud your efforts into that.
Mr. DeMarco, in your testimony, you write that, quote: The
GSEs operate with a substantial advantage that guarantees that
they will be able to offer better terms and lower pricing than
any other market participants.
What are the dangers of not opening up the markets to other
charters?
Mr. DeMarco. You concentrate risk. You stifle competition.
And even more important, perhaps, you stifle innovation.
Mr. Ross. And without reform, do you believe that we will
continue to see the GSEs entrench themselves further in the
market?
Mr. DeMarco. Yes, sir.
Mr. Ross. There is no other alternative. And there is
capacity out there, is there not in the markets?
Mr. DeMarco. There is.
Mr. Ross. And I would--as much of a purest I would like to
be and say the government shouldn't be in the business of
business, the only way we can actually address this is to have
a combined effort of public-private partnerships where the
government is involved in some form as a backstop--would you
not agree?--unfortunately, from a political perspective.
Mr. DeMarco. I think it actually can help perfect markets
and help markets to work better with a well-defined role for
the government.
Mr. Ross. And, Mr. DeMarco, I agree, a 30-year mortgage has
been the saving grace for many families. The ability to get
into a mortgage affordably and be able to pay for it and move
on to another mortgage later on. Now, would any way, shape, or
form these reforms that we are proposing adversely impact the
availability of a 30-year mortgage?
Mr. DeMarco. No, I don't believe so.
Mr. Ross. What about rates? The affordability of rates has
been at an all-time low, somewhat suppressed, but nevertheless
there. Would not--would market factors or forces allow--in a
competitive environment--allow for at least a stabilization of
affordable rates no different than we have today.
Mr. DeMarco. Yes, I think so.
Mr. Ross. Dr. Swagel.
Dr. Swagel. I agree. I will just add, on the risk-based
pricing, the actions taken by the Fed are much more important.
So, in some sense, instead of criticizing Ed on what he did
with the risk-based pricing, the criticism would be of Chair
Yellen and Chair Bernanke, which seems like an unfair
criticism.
Mr. Ross. I appreciate it. Anybody else? Ms. Bailey?
Ms. Bailey. I would say, in the current system, we are
likely to see rates go up, and not--
Mr. Ross. Spike. There will probably be a spike before
stabilization.
Ms. Bailey. Not in the current system, but if we move
toward these other untested systems, because what they do is
they bring in a level of anxiety, and they say bring in these
new market actors, market actors that won't be subject to our
Nation's fair lending laws. So our ability to make sure we have
the fairness and equity that the system currently has--
Mr. Ross. I agree.
Ms. Bailey. --a way, and then the affordability, we have a
$4 billion subsidy in the market right now. Those proposals say
that they are going to bring in an extra billion dollars.
However, what they fail to realize is, once you actually
calculate the cost, that is not going to be the outcome, and
the market at other times, when more borrowers of color and
lower wealth families were actually able to get the mortgage
credit they deserve, actually had a much higher subsidy. So, if
we look at a better timeframe of this lending, we will see
higher rates of subsidy. Right now, the market isn't doing--
Mr. Ross. Higher rates of subsidy that are today by the
GSEs?
Ms. Bailey. Say that again.
Mr. Ross. You are saying higher rates of subsidy than exist
today by the GSEs?
Ms. Bailey. We would see more affordability for more
borrowers because right now Fannie Mae and Freddie Mac are not
serving the borrower pool that they have served in the past. So
we are missing out on an opportunity to really go back and do
some things right. And I have to remind the committee, there
was a time where we looked at loans for people of color and
lower income families differently, and we let them get
perpetuated with abusive financial practices--
Mr. Ross. I appreciate that.
Ms. Bailey. And we have to bring them right into the center
of this debate. And any reform that we do has to have them at
the center. Seven out of 10 future buyers--so this is a safety
and soundness concern for our market--are going to be people of
color. You can't build the system without figuring out how to
bring those people in. Wealthier borrowers--homeowners won't
have anybody to sell their homes to.
Mr. Ross. I appreciate that, Ms. Bailey. My time is
expired.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Maryland, Mr.
Delaney.
Mr. Delaney. Thank you, Mr. Chairman. And I want to thank
you and the Ranking Member for this hearing.
And, Mr. Chairman, in particular, I want to thank you for
the opportunity to work with you on the bipartisan housing
finance reform proposal that we are releasing today. I think it
reflects some of--the type of great principled compromise that
you typically see associated with legislation that really
reflects the common good of the citizens. And I appreciate your
efforts to work with me on this, and I appreciate the
opportunity to work with you on this. And I think we came up
with a good product. And also like most good bipartisan
compromises, we were finishing it at about 11 o'clock last
night. So it had all the elements of a good deal.
But, in particular, I think it does five things that are
really important. First and foremost, it stabilizes the housing
finance system in this country, which, let's face it, the U.S.
housing market is the second largest fixed-income market in the
world, and it needs to be stabilized, and it needs to be safer.
And we need to put the taxpayers in a situation where they have
less risk in the future, and that they will have a housing
system that will have more private capital, more discipline,
and it can be an enduring part of the American financial
system. So I believe it does that.
Second thing it does, and this is very important, it has
been a core element of the Democratic principles that the
Ranking Member has led us on since I have been in the Congress,
which is preserving the 30-year fixed-rate mortgage, which is
important to Americans' ability to afford housing and have
their housing asset be part of their long-term portfolio.
It has a meaningful increase, or at least it creates a
pathway for a meaningful increase, in terms of the amount of
capital allocated to affordable housing. I think we have an
affordable housing crisis in this country right now, and I
think it is a very, very significant problem. And it is pricing
so many Americans out of the opportunity to own a home, for
them to raise their family in that home, and have the stability
that a home provides, and become part of a community.
And it has been my view for a long time that, as a country,
we have, in general, probably over-allocated some of our
resources toward housing generally at the expense of not
allocating enough resources toward affordable housing in
particular. And I believe this proposal we have come up with,
by creating a pathway for a fee to go on every mortgage
securitized, we will start reallocating some of that capital
toward the really dire need we have for more affordable housing
in this country.
The fourth thing it does is protects a lot of important
consumer financial--or consumer protections that were embedded
in Dodd-Frank, which I think are important. And, finally, it
preserves the part of the GSEs that has worked quite
successfully, which is the multifamily model. So the bill is
explicit about ensuring that those businesses within Fannie and
Freddie will, in some shape or form or fashion, be
reconstituted with the benefit of the explicit government
guarantee so that they can continue to provide the financing
that they do in the multifamily market.
So, again, I don't have any questions for our witnesses
here. I appreciate their testimony. I just really wanted to
thank you, Mr. Chairman, for the opportunity to work on this
bipartisan bill, because, again, I believe it reflects the type
of principled compromise that we need in this country. And I
think it is a good way forward for this Congress or for future
Congresses. So, with that, I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Rothfus.
Mr. Rothfus. Thank you, Mr. Chairman.
Thank you, panel, for being here today for this important
discussion on this anniversary.
Mr. DeMarco, in your testimony, you talked about how
moderate-income households are more susceptible to income
volatility, which is more prevalent today than in the past. You
continued by suggesting that housing policy and our housing
finance system need to become more attuned to this challenge so
better solutions may be found.
Can you give an example of some policy changes that would
better accommodate income volatility among moderate-income
homeowners?
Mr. DeMarco. Certainly. So we talked earlier about QM rules
and more generally various underwriting rules that are based
upon fixed ratios. Well, that becomes pretty challenging if
someone has an income source that is subject to this kind of
volatility. So rethinking some of these standards whereby we
take account of volatility so we get folks in mortgages that
are actually sustainable, is I think a very important thing.
I would add one other thing, Congressman, and that is, it
requires in some sense rethinking not just policies but about
mortgages or how we go about constructing mortgages. If we know
that there is income volatility there, what can we be doing on
the front end to build in some shock absorbers for families so
that they can weather those temporary disruptions and income
flows?
Mr. Rothfus. I am wondering if you can recap, in your view,
how a more streamlined and transparent housing finance system
with greater private-sector participation, as you discussed in
your testimony, would benefit homeowners in what way?
Mr. DeMarco. Because you would have a much richer pool of
lenders competing to provide this financing but to have
alternative ways of providing that ultimate financial support--
Mr. Rothfus. And what happens when you have more lenders
competing?
Mr. DeMarco. You get more innovation, and you get better
outcomes for consumers.
Mr. Rothfus. Better prices?
Mr. DeMarco. Yes, sir.
Mr. Rothfus. Mr. Pinto, as you know, between the GSEs and
Ginnie Mae, the Federal Government continues to dominate the
secondary mortgage market. How does the current level of GSE
involvement compare with historical levels?
Mr. Pinto. So, today, the GSEs are responsible for around
50 percent of all mortgages. Their percentage in history has
ranged from something around 50 percent to maybe 35, 40
percent. What is somewhat different is FHA and the VA and rural
housing now comprise about 35--excuse me, yes, 35 percent, and
so the 85 percent being guaranteed by the Federal Government is
extraordinary.
Mr. Rothfus. Compare that then with that historical trend,
and how it relates to homeownership levels?
Mr. Pinto. So homeownership levels actually, in the United
States, if you look broadly, have virtually remained unchanged
since the early 1960s. I would only point out that is about the
time the 30-year mortgage became commonplace. It is more
commonplace in the United States. It wasn't even authorized by
Congress until 1954 for existing homes for FHA. So it was in
the early '60s that the 30-year loan became commonplace. We
have made no progress on homeownership virtually since then.
Mr. Rothfus. In your testimony, you wrote: For many
decades, U.S. housing policy has relied almost exclusively on
increasing borrower leverage in an ineffectual attempt to make
housing more affordable. Instead, the result in a seller's
market--again, we have been talking about the seller's market--
is to make homes less affordable for the same reason policies
such as Duty to Serve, affordable housing fees, and cross
subsidization have the same effect: higher prices in a seller's
market.
Can you envision a scenario in which housing becomes
affordable as a direct consequence of scaled-back Federal
support for the housing market?
Mr. Pinto. Absolutely. And I presented in my testimony an
example of the Rural Housing Service, which is part of the
Department of Agriculture. They followed the Bureau of Consumer
Financial Protection's admonition that the patch was to get you
down to 43 percent. So what did they do in 2014? They announced
that they were going to lower their debt-to-income ratios, a
maximum to 41, and require compensating factors above 41.
Fannie, Freddie, FHA, VA did the exact opposite, and you
have seen the data that I presented. So we then looked at,
well, what happened? So the prices of FHA loans during this
time period that were paid by consumers went up 25 percent in 5
years, nominal terms. Incomes did not go up 25 percent.
Inflation hasn't been 25 percent, yet the prices went up 25
percent. At the lower end, they actually went up even further.
What happened with the rural housing? Prices went up 9
percent, about the same as inflation. What also happened? Debt
ratios went down, and the prices were much more stable.
Therefore, people were able to buy the houses with less
leverage. And, in fact, we looked at the incomes of the buyers,
and the incomes of the buyers in rural housing went up about
the same percentage as the income of the buyers in FHA. You get
the exact result that you just described. You get a better
result, not a worse.
Mr. Rothfus. I want to thank the panel for your insights
and being with us here today, and I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green.
Mr. Green. Thank you, Mr. Chairman.
I thank the Ranking Member and the witnesses for appearing
today. And if I may, with no disrespect to anyone else, I do
want to thank you, Ms. Bailey, for your courage. I thank you
for your courage because you have, on more than one occasion,
tried to explain that race is a factor. I am a capitalist. I
believe in free markets. But if you have invidious
discrimination in the market, the market is not a free market.
Would you kindly explain what you have been trying to get
across as it relates to invidious discrimination and race in
the marketplace, especially as it relates to lending?
Ms. Bailey. Yes, sir. And thank you for that point and for
the question. The point is, when we decided to put tremendous
resources in housing finance policy following the Great
Depression to bring America forward and offer this idea of
homeownership to more Americans, we did it in a way that
excluded people of color. We did it in a way that would not
allow Federal-insured mortgages to go to African Americans,
Latinos, other people of color. And by doing that, we created
historical wealth inequities because most Americans have built
up their wealth through homeownership. The equity that they get
from their mortgages is what they have passed on across
generations, to pay for them to go to college, to start
businesses. So that means a whole cohort of Americans did not
have equal access to that outcome.
So now, today, African Americans, Latinos, and other people
of color have smaller downpayments because they don't have that
wealth equity to pay forward. And then because of broader
societal discrimination, we know that they also have lower
credit profiles. So when we take and think about price
segmentation in the market today and we don't take those
factors into consideration and we put in policies that
reinforce that, then we just continually reinforce that legacy
of discrimination, and we hurt the very borrowers that our
future system depends.
Mr. Green. Thank you very much.
Mr. DeMarco, if I may, you are intimately familiar with
what I would like to address. You know what the yield spread
premium is?
Mr. DeMarco. Yes.
Mr. Green. You know what the yield spread premium is?
Mr. DeMarco. Yes, sir.
Mr. Green. And you know how the dastardly yield spread
premium had an adverse impact on minority communities. Is this
true?
Mr. DeMarco. I would be even more general, Congressman. I
would say that there were a number of lending practices that
were very abusive of minority communities and other borrowers
as well. Yes, sir.
Mr. Green. Absolutely. I agree with you. And for
edification purposes, the yield spread premium allowed a
broker, an originator, to qualify a person for a loan at 5
percent and then walk out and shake that person's hand and
smile in his face and say: Good news, we got you a loan for 9
percent.
It wasn't right. It wasn't fair. But it did encroach upon
the free market. And many people from minority communities who
qualified for lower loans, who would have been able to keep
their homes, were into foreclosure because they were pushed, if
you will, into these high-cost loans, notwithstanding a good
credit history. That actually happened to people, and you are
aware of this, Mr. DeMarco.
And, by the way, I am not condemning you, but you are the
person who knows most about this of the people on the panel, in
my opinion, because of your years of service with the Federal
Government. Do you concur with what I have said, Mr. DeMarco?
Mr. DeMarco. I believe instances like this did happen,
Congressman, and I would again take you a step further, and say
that private markets require and depend upon ethical behavior
by those involved.
Mr. Green. So the point that Ms. Bailey is making is
salient. It is something that has to be considered. But here is
my closing point, since I have but 20 seconds or less: Whenever
we have the opportunity to do something about invidious
discrimination, we find clever ways to work around it and just
go on with life as it is. I refuse to ignore what is obvious.
And at some point, we have to take what Ms. Bailey has said
seriously.
Thank you, Mr. Chairman. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Illinois, Mr.
Hultgren.
Mr. Hultgren. Thank you, Chairman. Thank you all. I
appreciate you being here. The Federal Home Loan Bank of
Chicago serves my district and works to provide liquidity to
member institutions to support the housing finance system.
During your tenure at the FHFA, Mr. DeMarco, you began the
rulemaking process to reevaluate FHLB membership requirements.
When Director Watt finished the rulemaking in 2016, it resulted
in a new definition of insurance, which excluded captive
insurers. FHL Bank of Chicago has three captives that will
eventually lose their membership in the bank because of this
change.
In a cooperative like the Federal Home Loan Bank, the loss
of these members and their significant borrowing would reduce
the scale that the Federal Home Loan Bank of Chicago and limit
its ability to serve its members in their communities. I
wonder, there has been a lot of discussion today about the need
to increase the role of private capital in our housing finance
system, and so I hope you might speak to the role that you see
the Federal Home Loan Bank already play in funding banks,
insurers, and other mortgage lenders that choose to hold
mortgage loans on their balance sheet instead of selling those
loans to Fannie or Freddie. And would you agree that we could
increase the role of private capital in our housing finance
system by shifting more mortgage lending to balance sheet
lending and away from securitization through the enterprises?
And I wondered, do the Federal home loan bank's advances to
their members tend to support balance sheet lending?
Mr. Pinto. Yes. Basically, Congressman, yes to all of that,
but I suppose you want slight elaboration. First of all, the
home loan bank system and Home Loan Bank of Chicago, in
particular, have shown some real leadership in demonstrating
the capacity to credit share, that is, to syndicate credit risk
through what they do, through providing an alternative avenue
for aggregating the loans of lenders, particularly of small
lenders. They have been especially good at providing financing
support for small lenders and for large lenders in terms of
being able to manage mortgages on their balance sheet by
getting the funding flexibility that home loan banks provide.
Mr. Hultgren. Thanks. I wonder if you--see what other
things I want to cover here real quick. While I understand the
concerns associated that many have, I do understand it
potentially expanding the footprint of Federal home loan banks
by allowing captive insurers to maintain membership. I wondered
is it fair to say, perhaps, that with some other regulatory
changes, captive insurers could provide a way to actually
attract private capital into the market while shifting
mortgages away from Freddie and Fannie?
Mr. Pinto. I believe that that is possible, and I would,
since the subject of this hearing is housing finance reform, I
would take it a step further in a general direction you are
headed, which is, I think it is important for the Congress to
consider liquidity sources for our financial system and housing
finance reform and what the proper role of the Federal home
loan banks and being a source of liquidity is, and I think that
this question about captive insurers is really one best
addressed by the Congress, because when the Congress created
the home loan banks, just like with Fannie and Freddie, and
wrote their mission and gave them these privileges but then set
some limits, the limit was really about who is eligible for a
membership and how that membership is structured, because
Congress knew it was providing a set of benefits to this
system. It wanted a closed system to benefit mortgage finance.
Life insurance companies--insurance companies were part of
the original membership of the home loan bank system because in
1932, when the system was created, life insurance companies
were a big source of capital that financed mortgages. Our
system is much different today. The risk with captive insurance
is there is a tradeoff. Certainly, captive insurance companies
can be structured in way in which they are an important source
of capital to support housing finance, but if this isn't done
properly, and you just simply allow captives then you can have
all sorts of companies, nonfinancial companies, companies with
no interest in housing, being able to gain access, and I
believe that that is part of what motivated the FHFA's final
rulemaking.
Mr. Hultgren. Just one last question on that, and I think
maybe getting into more specifics of how do we find that right
balance? How would you view an expansion of membership that
came with higher collateral requirements, or perhaps even
restrictions on types of eligible collateral and a way to
ensure that those that do gain membership do so in a way that
doesn't significantly increase the risk of the entire Federal
home loan bank system?
Mr. Pinto. All right. I think it is quite important if one
is to consider changes in the membership construct of the home
loan bank system that for the existing members, most of which
are insured depository institutions, and we pay careful
attention about how that alters the risk profile and whether we
are putting insured depositories at risk through how we do
that. So some of the ideas you suggested are ways of mitigating
the risk, but let me simply say it is a very important
question, one that needs to be carefully thought through.
Mr. Hultgren. I appreciate that, and I definitely agree
with you that I think it is something Congress ought to address
and ought to talk about, and I certainly would look forward to
suggestions or advice from the entire panel of how to do that
well. My time has gone by too fast. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Arkansas, Mr. Hill.
Mr. Hill. I thank the Chairman. I thank the Ranking Member
for doing this hearing. I agree with the Ranking Member. It is
a long time in coming in my 3-1/2 years in Congress that we
have a comprehensive hearing on this topic. So I thank the
Chairman. I thank he and Mr. Delaney for working on a
comprehensive proposal.
But abdication about responsibility in the secondary
mortgage market is a bipartisan opportunity. There is no one
contrary to the Ranking Member's emphasis on this
Administration and this Congress. This is a problem that
started 35 years ago. It has been dealing with it, it has been
abdicated by numerous administrations, both Democratic and
Republican, and I don't remember sitting here for 3-1/2 years
hearing any comprehensive proposal to change the secondary
mortgage market by Jack Lew during the Obama years.
My shelves are littered with studies about what is wrong
with Fannie Mae and Freddie Mac and the secondary mortgage
market. We have this historic one, 1980, Ronald Reagan. We have
the one I had to work on as a staffer of the Treasury 1990, and
it had a supplement smaller, 1991, and the list goes on and on.
And we ought to all be embarrassed, I think, by passing Dodd-
Frank and having the Financial Crisis Commission and not
pursuing active change in the series. So I thank all four of
you for being here today and sharing your views.
A few quick questions for the four of you. Do you support a
recap and release of the two secondary mortgage market
entities? Just give me a yes or no. We will talk some more. It
is not a trick question.
Mr. Pinto. No.
Dr. Swagel. No.
Ms. Bailey . Fundamental reforms have to happen first.
Mr. DeMarco. No.
Mr. Hill. Thank you. I think that is important, because I
think that is an important statement on your part. It reflects
across policy thinking apparatus, and that is something I think
is very important is that we don't just simply turn the page
and go on. And I agree, Ms. Bailey, that the new regulator has
a lot of power, and so I look forward to a new appointee at
that agency and hear their considerations.
One of my concerns is, and I was looking back at
Congressman Frank's work on Dodd-Frank. He said the profligate
availability of credit is a major reason for the current
problem, the housing crisis. Too many loans were made to people
that shouldn't have gotten them, and we need to reduce the
pattern of people getting loans who shouldn't have gotten them
because they couldn't repay them. That is what we think we have
achieved in this bill, and he is referring to Dodd-Frank, and,
he is talking about the ability to repay and the QM process.
So, Mr. Pinto, I think you have done a great job with your
research about how this patch issue allowing the GSEs to get
out and around the debt-to-income ratio that you talked to the
Ranking Member about; she also challenged you that those aren't
necessarily bad loans, and so, when you see FHA and the VA
going up over 50 percent debt-to-income ratio, that also comes
with a higher risk index that you outline in your testimony.
You didn't really talk much about that, but the GSEs have a 12
percent high-risk mortgage in their portfolios. Back in 2012,
it was 10 percent. Now your data shows that it is 29 percent.
So it is three times higher, they have made three times higher
risk loans in their portfolio since the patch. So the systemic
risk is growing in these unreformed GSEs.
The issue of mission creep. I have read a lot recently that
your successor, Mr. DeMarco, Mr. Watt is allowing a series of
expansions of power of Freddie Mac and Fannie Mae, and this is
an oligopoly, this is government power that is incurring now on
the private mortgage insurance business, on the commercial
lending business for purchase mortgage service rights. Can you
talk to us in the minutes we have remaining about your views on
expanding more pricing and market power by these two entities?
Mr. DeMarco. I think it contributes to the sort of systemic
risk that was at the heart of the financial crisis 10 years
ago. And the one--just to point out one example what you said,
providing advances to nonbank lenders for their mortgage
servicing is competing directly with a traditional function
that happens in our financial system without the benefit of
government backing, and by using Fannie and Freddie to fund
that we are using essentially the ability to raise money at
taxpayer cost of funds to provide that subsidy.
Mr. Hill. Well, it takes a lot to figure that rent on a
$700 million building, so that is important. Mr. Pinto,
quickly.
Mr. Pinto. We had a conference on this a couple months ago
and this was the poster for it. Insatiable, out of control,
nothing can stop it, the blob, Fannie Mae, Freddie Mac, and we
showed how the exact same thing happened at the end of the
'90s, and it is happening again today.
Mr. Hill. Well, I was there for the first movie so the
sequel is no better.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina, Mr.
Budd.
Mr. Budd. Thank you, Mr. Chairman, and also, again, thank
you to our witnesses, each of you, for being here today for
what I think is a very important hearing. I think the time is
right for Congress to make a push toward housing finance
reform, and if we don't act in a timely manner, the same risks
that were at the root of the 2008 financial crisis are going to
continue building up in the system, and we all know how that
story ends. Taxpayers and my constituents and people I serve
back home in North Carolina, they are on the hook. Taxpayers
are on the hook.
So, Mr. DeMarco, my line of questions are for you this
morning, or afternoon, whatever it is. It is afternoon now. In
your testimony you write that, quote, ``The uncertainty about
the future of GSEs and about the government's next steps stymie
innovation and long-term strategic investment by private
lenders and services and other stakeholders in the system,''
end quote.
So this is an important point that will not be solved by
continuing the status quo like we have now and thinking that
what we have today is just good enough. Markets need the long-
term certainty that can only come from real legislative reform.
So my question: What insights do you have today about the
advantages of legislative reform over administrative reform in
providing certainty in the market?
Mr. Pinto. Just what you said, Congressman. Even if
legislative reform has a multiyear transition cycle to it,
financial companies, mortgage lenders, servicers, everyone else
who participates in this ecosystem can know, with some
certainty, what the role of the government is, what the long-
term framework looks like and can make strategic business
decisions and capital investment in housing finance with some
certainty about what their role and opportunity is going to
look like. As long as we keep this cloud of uncertainty, they
don't know whether those long-term investment decisions are
going to be sound or not, because the government is creating
this uncertainty.
Mr. Budd. So just to further clarify, so you would agree
that it puts taxpayers at risk by avoiding long-term
legislative solutions to fixing housing finance reform?
Mr. Pinto. Yes, sir.
Mr. Budd. Do you believe that we will ever reach a level of
private capital necessary for a functioning mortgage market
without legislative action? Without legislative action?
Mr. Pinto. Not without legislative action.
Mr. Budd. OK. And finally, what areas in mortgage finance
would benefit the most from ending the GSE duopoly and opening
up to competition and innovation?
Mr. Pinto. Actually, I believe that we can do a lot more in
the affordable housing space and in the innovation of helping
borrowers where their actual needs are. We don't have
innovation in that space. It is only what Fannie and Freddie
allow through.
Mr. Budd. Thank you. Mr. DeMarco, that is the end of my
questions. I yield back to the Chairman the remaining time. I
thank you.
Chairman Hensarling. The gentleman yields back. There are
no other Members in the cue who have requested time, so I would
like to thank the witnesses for their testimony today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
[Whereupon, at 12:18 p.m., the committee was adjourned.]
A P P E N D I X
September 6, 2018
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]