[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
                           
                           
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