    [Senate Hearing 115-107]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 115-107

                      PRINCIPLES OF HOUSING FINANCE REFORM

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

                                    HEARING

                                   before the

                                  COMMITTEE ON
                       BANKING,HOUSING,AND URBAN AFFAIRS
                              UNITED STATES SENATE

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

               EXAMINING THE PRINCIPLES OF HOUSING FINANCE REFORM

                                   __________

                                 JUNE 29, 2017

                                   __________

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                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                          MIKE CRAPO, Idaho, Chairman

    RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
    BOB CORKER, Tennessee                JACK REED, Rhode Island
    PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
    DEAN HELLER, Nevada                  JON TESTER, Montana
    TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
    BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
    TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
    MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
    DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
    THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
    JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada

                         Gregg Richard, Staff Director

                     Mark Powden, Democratic Staff Director

                          Elad Roisman, Chief Counsel

                          Joe Carapiet, Senior Counsel

                    Graham Steele, Democratic Chief Counsel

                Laura Swanson, Democratic Deputy Staff Director

                Erin Barry, Democratic Professional Staff Member

                           Dawn Ratliff, Chief Clerk

                         Cameron Ricker, Hearing Clerk

                          Shelvin Simmons, IT Director

                              Jim Crowell, Editor

                                      (ii)

                                C O N T E N T S

                                  ----------

                            THURSDAY, JUNE 29, 2017

                                                                       Page

    Opening statement of Chairman Crapo..............................     1

    Opening statements, comments, or prepared statements of:
        Senator Brown................................................     2

                                   WITNESSES

    David H. Stevens, President and Chief Executive Officer, Mortgage
      Bankers Association............................................     4
        Prepared statement...........................................    35
        Responses to written questions of:
            Senator Menendez.........................................   125
    Edward J. DeMarco, President, Housing Policy Council of the
      Financial Services Roundtable..................................     5
        Prepared statement...........................................    98
    Michael D. Calhoun, President, Center for Responsible Lending....     7
        Prepared statement...........................................   105
        Responses to written questions of:
            Senator Menendez.........................................   127

                  Additional Material Supplied for the Record

    Letter Submitted by the National Multifamily Housing Council and
      the National Apartment Association.............................   130
    Statement Submitted by the National Association of Realtors......   132
    Letter Submitted by the National Association of Realtors.........   141
    Statement of Main Street GSE Reform Coalition....................   142
    Statement Submitted by the National Council of La Raza...........   143
    Letter Submitted by the National Association of Federally Insured
      Credit Unions..................................................   152
    Statement Submitted by GrahamFisher..............................   160
    Statement Submitted by the Independent Community Bankers of
      America........................................................   165
    Joint Letter Re: Preserve the GSE Affordable Housing Goals.......   174

                                     (iii)

                      PRINCIPLES OF HOUSING FINANCE REFORM

                                  ----------

                            THURSDAY, JUNE 29, 2017

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 10 a.m., in room SD-538, Dirksen
    Senate Office Building, Hon. Mike Crapo, Chairman of the
    Committee, presiding.

                OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

        Chairman Crapo. The Committee will come to order.
        Today the Committee will discuss and receive testimony on
    important principles of housing finance reform. Reforming the
    housing finance system is one of my key priorities this
    Congress. I have repeatedly stated that the status quo is not a
    viable option.
        In September of 2008, Fannie Mae and Freddie Mac were
    placed into conservatorship. Nearly 9 years later, the two
    enterprises remain in limbo. Today Fannie and Freddie, along
    with the FHA, dominate the mortgage market. Approximately 70
    percent of mortgages are backed by the Federal Government, and
    the largest buyer of mortgage-backed securities is the Federal
    Reserve.
        Fannie and Freddie are currently earning profits, but if
    the housing market experiences a downturn--and at some point it
    will--taxpayers could again be on the hook for many billions of
    dollars. Reform is urgently needed, and the Committee is
    actively exploring a variety of options.
        There are a number of principles that I believe share
    bipartisan support that we will explore further today. We must
    preserve the to-be-announced market and an affordable,
    accessible 30-year fixed-rate mortgage.
        We need multiple levels of taxpayer protection standing in
    front of any Government guarantee, including downpayments,
    loan-level private insurance, and substantial, robust, loss-
    absorbing private capital at guarantors comparable to the
    amount of capital maintained by global systemically important
    banks.
        Strong capital is essential to ensure that guarantors and
    other market participants can withstand the next downturn. We
    must ensure that small lenders have a level playing field when
    accessing the secondary market.
        The existing multifamily programs at Fannie and Freddie,
    which performed well through the crisis and already involve
    meaningful risk sharing with the private sector, should be
    preserved in some form as options in a future system. And,
    importantly, the transition to a new system should be orderly
    and deliberate and should utilize existing market
    infrastructure where possible.
        Additionally, we will explore some other concepts that
    could play a role in reform efforts. One interesting idea is to
    securitize conventional mortgages with a Ginnie Mae wrap. One
    of our witnesses, Mr. DeMarco, coauthored a paper suggesting
    one way to do that.
        Another important issue to address is how to foster
    competition among guarantors, to avoid the pre-crisis duopoly
    of two too-big-to-fail financial institutions.
        We also need to consider the role of FHA in the housing
    finance system and what reforms to FHA may be necessary as we
    work to establish a new system. A housing finance system
    dependent on two Government-sponsored enterprises in perpetual
    conservatorship is not the solution. Recapitalizing the
    enterprises and releasing them back into the market without
    significant reforms is also not a solution.
        The current system is not in the best interest of
    consumers, taxpayers, investors, lenders, or the broad economy.
    Three years ago, a bipartisan group of Senators passed a
    housing finance reform bill in this Committee. e have an
    opportunity now to build on that effort and create a broader
    coalition of Republicans and Democrats to pass a bill into law.
        I look forward to working with the other Members of this
    Committee and with our witnesses today throughout this process.
        Senator Brown.

                   STATEMENT OF SENATOR SHERROD BROWN

        Senator Brown. Thank you, Chairman Crapo, for holding
    today's hearing, and thank you for your work for years on this
    issue with Senator Corker and Senator Warner and so many
    others.
        Thank you, Mr. Stevens, Mr. DeMarco, Mr. Calhoun. Thank you
    for joining us.
        All three of our witnesses have substantial experience in
    housing. I look forward to hearing their testimony.
        I hope in a subsequent hearing we will be able to hear more
    from smaller lenders as well. For all of its faults, the
    current system does provide access to small lenders. Protecting
    small lender access to the secondary market is an important
    area of bipartisan agreement. I particularly appreciate Senator
    Menendez's interest in this. We should hear directly from small
    lenders about the best way to go about this.
        Changes to the housing finance system impact everyone from
    renters and homeowners to lenders and investors to retirees
    through their 401(k) plans and pension funds. As we learned
    during the economic crisis, not all changes are equal.
        The expansion of exotic subprime mortgage products led to a
    crisis in which 12.5 million homes were in the foreclosure
    process in the 5-year period beginning in 2007. The Federal
    Reserve estimated that families saw a 30-percent decline in
    wealth in the first 3 years of that crisis.
        In writing about the failures that led to the housing
    crisis in a book called ``The Subprime Virus'', Kathleen Engel
    and Pat McCoy concluded, ``The avarice of lenders and Wall
    Street reversed the efforts of cities like Cleveland to
    revitalize their communities . . . The Federal Government must
    make sure that what is good for Wall Street is also good for
    Main Street.''
        I would go a step further and say that the Federal
    Government should focus entirely on what is good for Main
    Street. The way we do that is by finding solutions for
    homeowners and renters. I am confident Wall Street will be able
    to fend for itself.
        Some proposals to reform housing finance focus more on how
    to allow private capital or financial institutions to take over
    for or stand in front of the GSEs than on the cost of the
    additional private capital to borrowers. Underrepresenting
    those costs will have consequences for access to credit and
    could reduce home values if new borrowers cannot access
    mortgages at affordable rates. States like Ohio and Nevada are
    still struggling with underwater homeowners in large numbers
    and how to address the ongoing problem of negative equity.
        Proposals do not focus enough on how to break down the
    barriers that still exist in the mortgage market for
    communities of color or providing continued access to credit in
    rural areas.
        As we try to achieve broad bipartisan consensus on a
    housing finance reform proposal, there are a number of open
    questions we need to address. How does each proposal avoid the
    kind of shareholder demand for returns that drove the worst
    decisions at the GSEs? How do the proposals prevent predatory
    mortgage products that targeted and stripped wealth from
    communities like Cleveland and Toledo and Dayton and
    Youngstown? How do we do a better job of prohibiting
    discrimination in the mortgage market?
        The Committee needs to have clear estimates that break down
    costs for borrowers across the entire eligible credit and
    downpayment spectrums. We need to learn more about whether and
    how adding multiple entities with differentiated products or
    services could change the national market or TBA market. We
    need to explore how each of these proposals would provide
    continuous access to mortgage credit when private capital flees
    during an inevitable downturn.
        There are three opinions represented here today; they are
    not the only opinions about this issue. I would like to submit
    for the record a number of plans and principles, including from
    the Independent Community Bankers of America and the Main
    Street GSE Reform Coalition, among others.
        As the Committee continues, Mr. Chairman, to work on a
    broad bipartisan plan, I hope we hear from a wide range of
    opinions and stakeholders about how the housing finance system
    could work better for Main Street and not just for Wall Street.
        Thank you.
        Chairman Crapo. Thank you, Senator Brown. And now we will
    turn to our witnesses.
        First, we will receive testimony from the Honorable David
    Stevens, president and chief executive officer of the Mortgage
    Bankers Association.
        Next we will hear from Mr. Edward DeMarco, president of the
    Housing Policy Council.
        And, finally, we will hear from Mr. Michael Calhoun,
    president of the Center for Responsible Lending.
        Before we begin, I should announce that I am going to have
    to slip out at some point for a markup in the Judiciary
    Committee, and so when I do so, the Committee will simply
    proceed apace.
        We have asked each witness to remember to keep their
    testimony to 5 minutes. I am going to remind the Senators once
    again that your question time is 5 minutes.
        With that, Mr. Stevens, you may proceed.

     STATEMENT OF DAVID H. STEVENS, PRESIDENT AND CHIEF EXECUTIVE
                 OFFICER, MORTGAGE BANKERS ASSOCIATION

        Mr. Stevens. Thank you, Chairman Crapo, Ranking Member
    Brown, and Members of the Committee. Thank you for the
    opportunity to testify today.
        It has been nearly 9 years since the GSEs entered
    conservatorship, and yet their long-term status remains
    unresolved. The financial crisis exposed the structural
    conflicts and misaligned incentives in the GSE business model
    as well as weaknesses in the regulatory framework that was in
    place at the time. Extended conservatorship is economically and
    politically unsustainable and an unacceptable long-term
    outcome. Without comprehensive reform, borrowers, taxpayers,
    and lenders will all face increased risk and uncertainty about
    the future.
        Because MBA represents over 2,300 member firms of all
    sizes, both single-family and commercial/multifamily, including
    650 small community-based mortgage lenders, we firmly believe
    that housing finance reform must foster a competitive primary
    market that is served by a diverse cross-section of lending
    institutions.
        A year ago, we convened a task force for the future of the
    secondary market. The task force reflected the composition of
    MBA's membership, residential and multifamily, from integrated
    financial institutions to the smallest community lenders. Our
    task force truly represented the full depth and breadth of the
    entire real estate finance industry rather than some narrow
    interest of any one specific market segment.
        Our proposal seeks to ensure equitable access for smaller
    lenders to the secondary market, prohibiting special pricing
    and underwriting based on loan volume, as occurred prior to
    conservatorship, preserving the cash window and small pool
    execution options, and preventing vertical integration by the
    largest market participants. I have submitted our proposal as
    part of my written testimony.
        Our proposal recognizes the need for any comprehensive GSE
    reform plan to balance three major priorities: taxpayer
    protection, investor returns, and consumer cost and access to
    credit. To achieve these policy priorities, MBA's plan
    recommends recasting the GSEs' current charters and allowing a
    multi-guarantor model that features at least two entities and
    preferably more. Guarantors would be monoline, regulated
    utilities owned by private shareholders operating in the
    single-family and multifamily markets.
        The core justification for utility regulation rests with
    the premise that privately owned utilities attract patient
    capital and derive much of their existence and powers from the
    State. The guarantors would be subject to rigorous capital
    requirements that would provide financial stability without
    unduly raising the cost of credit for borrowers. These
    requirements would be satisfied through a combination of their
    own capital and proven means of risk transfer in addition to
    that.
        The implied Government guarantee of Fannie Mae and Freddie
    Mac would be replaced with an explicit guarantee at the
    mortgage-backed security level only. This guarantee would be
    supported by a Federal insurance fund with appropriately priced
    premiums paid by the guarantors, much like banks pay for FDIC
    insurance today.
        Our plan explicitly calls for deeper first-loss risk
    sharing that is transparent, scalable to all lenders, and
    capable of limiting taxpayer exposure to nothing more than
    catastrophic risk.
        The task force also developed recommendations in two areas
    that have vexed past reform efforts: the appropriate transition
    to a new system and the role of the secondary market in
    advancing a national affordable housing strategy. Our proposal
    specifically notes the importance of leveraging the assets,
    infrastructure, and regulatory framework of the current system
    where possible. We also believe that any workable transition
    must utilize a clear road map and be multiyear in nature.
        We sought to develop an affordable housing framework that
    appropriately focuses the scope of the federally supported
    secondary market covering both renters and homeowners of
    various income levels. Our plan suggests other improvements to
    better serve the full continuum of households, including
    updating credit scoring and, most importantly, only Congress is
    the group that can provide the legitimacy and public confidence
    necessary for long-term stability in the primary and secondary
    mortgage markets.
        We cannot go back to a housing finance system that provides
    private gains when markets are strong, yet relies on support
    from taxpayers when losses occur. Calls to simply recapitalize
    the GSEs and allow them to operate without further structural
    changes are misguided. Under such plans, the post-crisis
    reforms already achieved could be reversed at the discretion of
    future FHFA Directors. The American people rely on a housing
    finance system that enables them to rent a quality, affordable
    apartment, buy their first home, or build a nest egg to pass
    down to their children. We owe it to them to proceed with the
    hard work of reform without delay.
        Thank you for the opportunity to testify, and I want to
    reiterate the MBA's longstanding commitment to work with this
    Committee on all elements of GSE reform, and I look forward to
    your questions. Thank you.
        Senator Brown [presiding]. Thank you, Mr. Stevens.
        Mr. DeMarco, thank you for joining us.

       STATEMENT OF EDWARD J. DEMARCO, PRESIDENT, HOUSING POLICY
              COUNCIL OF THE FINANCIAL SERVICES ROUNDTABLE

        Mr. DeMarco. Good morning. I am grateful to Chairman Crapo,
    to you, Ranking Member Brown, and all the Members of the
    Committee for the invitation to be here and for this
    opportunity. It is an honor for me to be back before this
    Committee, this time in my new capacity as the president of the
    Housing Policy Council, a role that I have had for a little
    less than a month now.
        Housing finance reform is a top priority for the Housing
    Policy Council. The status quo is untenable for many reasons,
    and Dave just went through some of them. And only Congress has
    the authority to make the permanent changes needed to put the
    system on a sound footing for the long term.
        The good news for all of you is that there is a lot of
    common ground, and much progress has been made over the last
    several years. Legislation can and should build on that
    progress.
        For my opening statement, I would like to start with two
    simple but important points.
        First, the passage of time has not diminished the need for
    Congress to enact legislation that brings the Fannie Mae and
    Freddie Mac conservatorships to an end while charting a path
    forward.
        Second, we know even more and we have greater consensus on
    many reform ideas today than we had in 2014 when the Committee
    last took up this issue.
        Consequently, the members of the Housing Policy Council are
    grateful for this Committee's leadership in restarting this
    legislative effort, and we are ready to assist in working with
    the challenges ahead to find a bipartisan path forward. In my
    limited remaining time, I would like to simply summarize the
    five principles of housing finance reform that are detailed in
    my prepared statement.
        First, reform legislation should fix what is broken and
    preserve what works in support of consumers and the market.
        Second, the transition from the old system to the new one
    should avoid disrupting consumers and markets.
        Third, private capital should bear all but catastrophic
    mortgage credit risk so that market discipline contains risk.
        Fourth, Government should provide a regulatory framework
    that is clear and equitable across all participating companies
    and ensures that participants in the housing finance system
    operate in a safe and sound manner.
        Finally, the Government-protected GSE duopoly should be
    replaced with a structure that serves consumers by promoting
    competition, affordability, transparency, innovation, market
    efficiency, and broad consumer access to a range of mortgage
    products.
        Two of these principles warrant a bit more explanation. In
    any reform system, HPC, like many other reform advocates,
    believes that substantial private capital should be ushered in
    to replace the taxpayer capital directly at risk today. Behind
    that private capital, we believe that an explicit full faith
    and credit guarantee on mortgage-backed securities would help
    private markets work better and would allow us to preserve
    certain features of the current system that provide benefit to
    consumers.
        Importantly, though, we also believe that this catastrophic
    Government backstop should include a system to pre-fund
    potential future catastrophic losses and also include a preset
    mechanism to ensure that any catastrophic losses that call upon
    taxpayer support will be repaid fully.
        The current system does some things well, but what it does
    not do is provide much opportunity for competition, innovation,
    and transparency. Fixing that should create greater opportunity
    to serve customers and expand credit access.
        As the Committee restarts its legislative efforts, as I
    have detailed in my written testimony, there is a lot of common
    ground across legislative and other stakeholder proposals on
    which to build. While important issues remain unresolved, these
    are not insurmountable challenges, and in many cases, the range
    of differences has shrunk over time.
        While not specifically the focus of today's hearing, the
    Housing Policy Council respectfully urges you to also consider
    the FHA program, its role in our housing finance system, and
    the potential to address pressing FHA issues as part of reform.
        So thank you again for inviting me, and I look forward to
    the questions and answers.
        Senator Brown. Thank you, Mr. DeMarco.
        Mr. Calhoun, welcome.

        STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER FOR
                          RESPONSIBLE LENDING

        Mr. Calhoun. Thank you, Ranking Member Brown, Members of
    the Committee. The housing finance system profoundly affects
    American families. It is also critical to the overall housing
    industry, which is nearly 20 percent of the U.S. economy.
        The Center for Responsible Lending is a nonprofit,
    nonpartisan research group that works to expand economic
    opportunities. We are affiliated and I have previously worked
    with Self-Help, a national community development lender, that
    has provided home loans and other financing to families, small
    businesses, and others for over 130,000 loans across the
    country.
        There are three key areas I will address in my testimony:
    first is the importance of our housing finance system to rural
    and underserved markets; second, how best to ensure our housing
    finance system works for community banks and credit unions;
    and, finally, the big question, how do we move forward with
    housing finance reform?
        Turning first to rural and underserved markets, one of the
    important achievements of our housing finance system is it
    created a national market where previously we had a fragmented
    one, with affordable 30-year mortgages available across the
    country, not just in the most lucrative, often urban markets.
    Today the GSEs are the largest provider of mortgage funding in
    rural areas. Other underserved markets include new households
    where the majority are and increasingly will be borrowers of
    color, who often bring less generational wealth than other
    borrowers. This reduces their ability to make large
    downpayments, and we need to recognize that.
        This challenge of first-time homebuyers, though, really
    drives the mortgage market, and today it is lagging in holding
    back the mortgage market, and we need further efforts there.
        The current GSE provisions--and there are an array of
    them--to address providing broad access were worked out over a
    decade of deliberations in Congress and passed in 2008 in HERA,
    the Housing and Economic Recovery Act, by a margin in the
    Senate of 80-13, something that we do not see quite as often.
    Those need to be left in place and not reopened and disturbed.
    Rather, all who use the Federal housing system and benefit from
    its Government support should be required to make their loans
    available to all creditworthy borrowers wherever they live in
    the country.
        Similarly, the housing finance system only works if it
    serves all qualified lenders, especially community banks and
    credit unions. These lenders are essential to the areas they
    serve and often they are the primary financial institution in
    those areas. Housing market dynamics, though, often tilt the
    benefits toward larger lenders, and I would urge the Committee
    to review all proposed changes through that lens and whether
    the changes exacerbate that condition. As others have said, it
    is critical that people be able to sell their loans on an
    individual basis to the GSEs or their successors and not just
    pool them into securities, which are very difficult for a small
    lender to do, but the pricing has to work also. You have to be
    able to get the same price, or you cannot compete.
        Thankfully, today as we look forward, we have a far
    different housing market and regulatory structure than we did
    pre-crisis. As Mr. Stevens noted, and others, the Great
    Recession revealed critical flaws with the GSEs, and Congress
    responded in 2008 with HERA, establishing a robust regulator, a
    new one, at FHFA. It has the duties and authority to ensure
    adequate capital, approve new products, and regulate the entire
    operations of the GSEs. And today the GSEs reinsure or transfer
    the risk on the majority of loans that they purchase. They also
    have greatly shrunk their portfolios, which reduces taxpayer
    risk. These types of reforms should be expanded and continued.
        For example, the current ban by FHFA on the GSEs
    participating in political contributions or lobbying we think
    should be made permanent, and we, too, support utility-type
    regulation and returns for the GSEs which would reduce
    excessive risk taking.
        Finally, it is important to recognize the central role that
    our housing system plays. As others have noted, this system is
    dependent upon the trust of investors from around the world. If
    that is disrupted, it will profoundly harm not just the housing
    system and the availability of mortgages, but home values
    across the country. Therefore, surgery on this system must be
    done with extreme care.
        Thank you again for your work on this important topic. We
    look forward to your questions and working with you on it.
    Thank you.
        Senator Brown. Thank you, Mr. Calhoun.
        Questioning will begin with Senator Corker.
        Senator Corker. Well, thank you, Senator Brown. I want to
    start by saying what a pleasure it was to work with Senator
    Crapo and yourself and your staffs recently on the Russia
    sanctions bill. I think it was an incredible effort by two
    committees working together, and people on both sides of the
    aisle, and I think it actually set the stage for the kind of
    thing we need to do with GSE reform when we actually get there.
    But I do want to thank you, and I appreciate you participating
    yesterday in the North Korea hearing that we had, and I thank
    you for turning to me now.
        I want to thank also Senator Crapo for his desire but also
    his great leadership on this issue, and I think all of you know
    that--because you were each involved, we passed something out
    of this Committee in 2014 and, you know, there was not much
    time left on the calendar, and we did not get it where it
    needed to go, but I want to thank him and his staff for his
    leadership on this issue. And I certainly look forward to
    working with them and Senator Brown's staff as we attempt to do
    it again this year.
        Each of you has played a very significant role in this
    issue, and I apologize, I am--we have a few other things going
    on, and I apologize. That is Heller calling. Thanks.
        [Laughter.]
        Senator Corker. But I want to say to each of you--and I
    know we had dinner the other night, Mike, with DeMarco, and we
    have had numbers of off-the-record discussions. We have done
    the same, Dave and I. What I see happening right now is a real
    consolidation of ideas. We have had think tanks that lean
    right, think tanks that lean left. We have had the Mortgage
    Bankers Association come together, and it just seems to me that
    the thinking around what needs to happen with GSE reform is
    coming to a place where I truly believe we are going to be able
    to pass a piece of legislation this year.
        It seems to me that the consolidation is coming around the
    fact that we do need to have an explicit guarantee that is
    catastrophic. We need to acknowledge that it is going to be
    there. There will be people on my side of the aisle that that
    will be a tough one to get to, but I think that is true. It
    needs to be paid for. I think there is a recognition that
    having an implicit guarantee out there that is not paid for is
    not the right place for our taxpayers.
        I think there is an agreement being generated that private
    capital needs to be in advance of that, that having a half-
    percent capital like the GSEs had during the crisis is just not
    where our Nation needs to be, with $5 trillion in assets.
    Having a pre-funded fund to deal with failures of mortgages,
    not of companies, is a place we need to go.
        Mr. Calhoun, I enjoyed so much talking to you the other
    night, and I could not agree more that access to secondary
    markets by entities of all sizes need to be there, and I think
    there has been a misunderstanding that people think somehow
    there is something that is being designed that tilts toward the
    larger institutions. I mean, nothing could be further from the
    truth, and I think we learned a lot going through this last
    cycle.
        That credit needs to be available through all cycles,
    through all economic cycles. It seems to me that people
    understand that, and I think the last go-round we did not focus
    enough on that component.
        And then, last, that simplicity needs to occur. I think our
    last effort was way, way too complex, had way too many moving
    parts, and I think we have all learned a great deal from that.
        As a matter of fact, I think we have learned that the
    existing infrastructure that we have in place is something we
    need to build off of.
        So I just want to say to you all I thank you for all the
    things you have done to help us get to a place of better
    understanding. It is my hope that this Committee is going to
    work together and produce something this year, and I would love
    to hear if any of you disagree with the assumptions I just made
    about where commonality exists.
        Mr. Stevens. I completely agree with everything you have
    said.
        Mr. DeMarco. Same here, Senator. Thank you.
        Mr. Calhoun. We agree with all those and have put that in
    our testimony. I would just flag an issue that you need to make
    sure that capital is available in those countercyclical times
    for the entities to operate, and that may be more than just the
    securities--for example, modifications of loans and maintaining
    the TBA market in a crisis. There needs to be some mechanism to
    fund that as well.
        Senator Corker. Well, thank you for your contributions to
    date and the ones that will come, and I hope this Committee
    will act on this most important issue that needs to be
    resolved.
        Chairman Crapo [presiding]. Senator Brown.
        Senator Brown. Thanks. I just wanted an introduction. Thank
    you.
        [Laughter.]
        Senator Brown. Could have been a little more generous than
    that, but what are you going to do?
        Chairman Crapo. My good friend Senator Brown.
        [Laughter.]
        Senator Brown. Or formerly good friend. Thank you. And,
    Senator Crapo, when you were gone, Senator Corker thanked you
    and me and Senator Cardin on the work on the Russia sanctions.
    In a Senate that looks dysfunctional to many on the outside and
    to many on the inside, it really was a terrific effort, 97-2,
    and I appreciate the work of the two of you, and Greg and the
    staff and your Committee and Colin and Mark and my staff and
    what we are doing in the House to keep this moving. So thank
    you for that on the sanctions bill.
        I have a handful of questions. Mr. Calhoun, I will start
    with you. The GSEs are again accepting 3 percent downpayment
    loans. What can we learn from this product? And in the work
    that the Center for Responsible Lending has done with low-
    wealth borrowers, I thought your comments about particularly
    people of color that have not had the historic opportunity, if
    you will, to accumulate wealth like people that look more like
    you and me do, what--paint that picture about expanding access
    to stable credit for borrowers ready for home ownership.
        Mr. Calhoun. The lesson of our lending and the lesson
    through the crisis, if you look at the GSEs, is what really
    matters is careful, fully documented underwriting. So while the
    subprime mortgages get a lot of the attention in the crisis, if
    you look at the GSEs, 50 percent of their losses came from not
    subprime but so-called Alt-A loans. Those are loans to higher
    credit borrowers but with no documentation. They made up only
    10 percent of the GSE loans but produced, again, half of their
    losses and really drove them into insolvency.
        In contrast, we have made loans for more than 35 years to
    families of modest means, including a lot of low-downpayment
    loans, including through the crisis. We had loans to those
    borrowers, 50,000 of them, during the crisis, including in
    2008, and they performed extremely well. And it is not some
    magic secret. They were carefully underwritten 30-year fixed-
    rate mortgages with full escrows and affordable payments. Those
    borrowers need a place to live, and they will fight to stay in
    that home. It is not like rent is going to be for free. And, in
    fact, today many people pay more in rent than what they would
    pay if they could purchase a home. And we have to serve that
    market going forward, or the whole housing market also does not
    work beyond the importance of reaching those households.
        Senator Brown. Thank you. As we write GSE reform
    legislation, and for many of us on both sides of the aisle, the
    affordable housing goals are particularly important--talk to
    me, if you would, talk to us about how GSEs' affordable housing
    goals have helped expand stable access to credit and in rural
    and urban underserved areas.
        Mr. Calhoun. So there are really four elements that the
    GSEs have to reach the whole market. First of all, they have a
    legal mandate to do it, but the four things they do--and one
    that is perhaps the most critical and often overlooked is that
    they are directed to pool risk like insurance usually does. And
    they have specifically said you need to make sure loans carry
    their own weight with the payments. But they do not all have to
    have the same rate of return, just like everybody does not pay
    a different Medicare premium. And if you do not do that, you
    price people totally out of the market. Access is one thing,
    but it has to be reasonably affordable, sustainable access. So
    that is the most important that needs to be looked at. And some
    of these proposals will tilt pricing heavily, our concern is,
    against families of modest means and, again, this is not evil
    intent or a goal, but they do have the effect of tilting things
    against community banks. Larger entities in the housing market
    have benefits of scale, and if the changes are not careful,
    they tilt things against the community banks, and it is harder
    for them to maintain the critical role that they do. So that
    would be the main point I would emphasize.
        The other three are the affordable housing goals, but
    equally important the duty to serve, which includes special
    measures by statute to serve rural areas, and also the
    affordable housing fund to sponsor programs carefully reviewed
    that expand housing efforts.
        Senator Brown. Thank you.
        Chairman Crapo. Thank you very much. I will take my turn
    now, and, again, I apologize for having to step out.
        First, to Mr. DeMarco and Mr. Stevens, each of you in your
    statements has made a comment. Mr. DeMarco, you said the status
    quo was untenable for many reasons, and, Mr. Stevens, you said
    the status quo was an unacceptable long-term outcome. Could you
    each briefly explain what are the consequences for consumers,
    taxpayers, and the economy if we do not take action?
        Mr. DeMarco. Sure. Starting with taxpayers, right now with
    the status quo, we have Fannie Mae and Freddie Mac securitizing
    trillions of dollars worth of mortgage-backed securities and
    all of the credit risk and all of the risks that they take on
    in that process is actually being supported directly by
    taxpayer capital. So taxpayers are at risk.
        We have a problem, a challenge for consumers in that this
    system continues unabated with a lack of transparency in
    underwriting and competition that can allow for the kind of
    innovation and developments that can inure to the benefit of
    consumers. And it is challenging for the business community to
    know what is it we are planning for strategically for the long
    term, as long as these companies are in a Government
    conservatorship and there is this continued uncertainty about
    what the long-term path is going to be, including what the
    long-term or ultimate role of the Government is going to be. So
    these all pose challenges in the current environment.
        Chairman Crapo. Thank you.
        Mr. Stevens.
        Mr. Stevens. I would echo what Ed said. Another additional
    perspective is there is a false sense of security, I think,
    amongst too many that the status quo is better than the
    alternative of reform. I remind everybody in the industry and
    every consumer group I can talk to that the strength and the
    role of the GSEs in the current environment today for extending
    credit to communities depends greatly on who the Director of
    the FHFA is. The qualified mortgage rule that the CFPB has put
    in place gives an exemption for the underwriting standards of
    the GSEs, and should a new Director come in and want to expand
    or contract that, that will have significant ramifications
    across the spectrum of home ownership and could whipsaw housing
    in either productive or unproductive ways. Extraordinary
    uncertainty.
        The other aspect I would just suggest is the GSEs today,
    their sole backstop is this $260 billion line of credit that is
    taxpayer-funded. And it is a deep, ample line of credit, but
    the capital markets around the globe still view that with
    extraordinary uncertainty. If you look at the price of a
    Freddie Mac or Fannie Mae mortgage-backed security against a
    Ginnie Mae security with an explicit guarantee, it is a
    difference of about three-eighths of a percent or so in rate,
    depending on the given day. And if the GSEs were to move out of
    conservatorship back to a previous state, that spread would
    widen significantly, affecting interest rates detrimentally for
    Americans everywhere who are looking at housing.
        So the view from our side is there is only one pathway
    here, and I think time is of the essence because we are going
    to go through a regime change at FHFA, and that should create
    some motivation to try to eliminate as much of that uncertainty
    as possible as we go forward.
        Chairman Crapo. Well, thank you, Mr. Stevens. And you
    actually led into my next question, although it is to Mr.
    DeMarco. Ginnie Mae mortgage-backed securities currently trade
    at a premium to Fannie Mae and Freddie Mac mortgage-backed
    securities in the market, and there are more than 400 Ginnie
    Mae-approved issuers. I know you, as I indicated earlier,
    suggested we look at the Ginnie Mae model, Mr. DeMarco. Could
    you explain some of the potential benefits of using the Ginnie
    Mae model or Ginnie Mae to guarantee MBS in the private credit
    enhancement?
        Mr. DeMarco. Right. Well, to start with just Ginnie Mae, if
    there is consensus, if the legislation is going to have a
    Government guarantee, catastrophic backstop guarantee on
    mortgage-backed securities, the Government already has a
    Government corporation that does that. Its name is known, its
    function is known globally. So rather than creating a new
    Government entity, at least it is available as an option as the
    source of that guarantee. So that is Ginnie Mae as the
    guarantor.
        But let us take the advantages of just the structure here,
    whether we use Ginnie Mae or we use some parallel system. There
    are several things about the Ginnie Mae model that accomplish
    things that all three of us have spoken about, including Mike's
    comments just a few minutes ago about smaller institutions.
        The way the Ginnie Mae security works is that Ginnie Mae
    does not actually issue the security. There are over 400
    different entities that are licensed by Ginnie Mae to issue a
    Ginnie Mae security. But what that means is these 400-plus
    issuers are all contributing mortgages into a single security
    that Ginnie Mae is putting its guarantee around. And what that
    does is it gives lenders of all sizes and types 400-some
    outlets in which to place their mortgages into the security,
    and it allows smaller lenders the opportunity to get the same
    price that the big lenders get because they are all going into
    a common security that has a great deal of liquidity. And so
    that right there in the structure helps to level the playing
    field between smaller institutions and larger institutions, and
    it gives them many avenues, including directly themselves, to
    be able to place mortgages into Government-backed MBS.
        Chairman Crapo. Thank you.
        Senator Reed.
        Senator Reed. Well, thank you very much, Mr. Chairman. Let
    me thank the witnesses not only for their testimony, but for
    their thoughtful engagement on these issues over many years.
    Yes, we are looking at each other over many years.
        I also want to thank the Chairman and the Ranking Member
    for making this a priority, but most particularly Senator
    Corker and Senator Warner for all of the work they have done to
    keep this issue close to the front burner.
        Mr. Calhoun, you reminded us of some of the things that
    HERA accomplished and that have to be maintained, but there was
    something else, too, and I would like to get your comment.
    OFHEO was able to get reimbursement for their activities, but
    it was subject to the Appropriations Committee, and that I
    think inhibited some of the robust oversight. HERA changed
    that, and going forward, I would presume that we have to
    maintain sort of an independent source of funding, not through
    the appropriations process, for whatever regulator that we
    produce. Is that fair?
        Mr. Calhoun. Yes, and I think Ed knows this well, that the
    GSEs used the appropriation process to restrict what funding
    was available and how it could be used and essentially
    handcuffed OFHEO. And so they had a weak regulator. Equally
    important--and this is a very, I think, effective change made
    by HERA--was before 2008, the affordable housing, the mission
    part, was controlled by HUD, which had none of the other
    regulatory authorities or duties. And I think an important
    change that was made in 2008 was that you consolidated that
    within FHFA where you have the same regulator doing both, how
    do you provide broad access but how do you balance that with
    making sure that it is safe and sound.
        If I can add one quick point just to clarify, on the
    backing for the GSEs today, just to be clear, they hold tens of
    billions of dollars of reserves that I think all observers
    believe are sufficient to cover any expected losses on their
    mortgage portfolio. They do not have reserves to cover a
    catastrophic event such as we had in 2008. But I did not want
    to leave the impression that they had no reserves for their
    operations today.
        Senator Reed. Let me just follow up before I get Mr.
    DeMarco's and Mr. Stevens' comments on the same question.
    Again, what we discovered post-2008, 2009, was many of the
    problems were in the servicers, and anything we do now, we are
    talking at a level of, you know, how do we securitize these
    products, et cetera. But many of the practical problems came
    about through poor regulation of services. Would that be
    something we would have to concentrate on going forward with
    this approach?
        Mr. Calhoun. Yes, and it is careful about not fragmenting
    that too much. Today FHFA has implemented a lot of important
    reforms supported with the help of the MBA that have greatly
    improved servicing for both the lenders, the investors, and the
    borrowers. It is just a better system.
        Senator Reed. Mr. DeMarco, you have some practical
    experience about the need for independence for the regulators.
    Can you comment?
        Mr. DeMarco. Yes. I think that there is no reason housing
    finance regulators should be different than other financial
    institution regulators. I think we have got plenty of history
    to indicate that independent funding, fees paid for by the
    regulated entities is the appropriate way to finance this.
    Obviously, the Banking Committees should have appropriate
    oversight over all of our regulators.
        With regard to your comment about servicing, yes, I mean,
    this is an important and challenged area. It is one of the
    things that I go through a bit in my testimony, and the idea
    of--we have made a lot of progress in servicing and servicing
    standards, but we are not all the way there yet, and I think as
    this Committee does deliberate servicing going forward,
    continuing to move toward not just a national servicing
    standard but something that is also paying attention to sort of
    the efficiency and clarity of what those rules are would help
    everyone.
        Senator Reed. Thank you.
        Mr. Stevens, a comment?
        Mr. Stevens. Yeah, I will not be redundant to the comments
    made, but in our proposal, we fully support keeping the FHFA
    and its independent role as the regulator. I would add,
    Senator, that HERA is an excellent piece of legislation. It
    depends significantly on the Director in charge of the FHFA,
    which is why we continue to say there are many elements here
    that need to be protected going forward, but we do need
    legislation to fully reform the GSEs because we cannot depend
    on the regulator, whoever that may be in 5-year increments, to
    protect the taxpayer and protect the housing system going
    forward.
        Senator Reed. Thank you. My time is expiring, but just one
    thought or comment. There was some discussion about Ginnie Mae,
    and there have been some thoughts about spinning that off or
    letting that agency be independent. Right now, as I think we
    all know, its revenues go to supplement many critical programs
    like the Community Development Block Grant, et cetera. And we
    have to think, if that is the path we take, how are we going to
    supplement those funds if they are no longer available,
    particularly in the context of budgets that are proposing the
    elimination of CDBG. When we were talking about Ginnie Mae
    going forward, it was simply supplementing what was substantial
    HUD commitments. Now we are in a situation where the proposal
    is zero for CDBG, for example, and if you take away the Ginnie
    Mae contribution, we are out of business. So just let me put
    that on the record.
        Thank you.
        Chairman Crapo. Thank you.
        Senator Rounds.
        Senator Rounds. Thank you, Mr. Chairman, and I think this
    is an excellent subject for this Committee to pursue.
    Personally, I have not made up my mind as to what the right way
    is to do it. I am open. I like the suggestions that I have
    heard and that you have laid out.
        During the time in which we had this catastrophe to begin
    with that brings us all together, I was serving as Governor in
    South Dakota. And I remember at the time thinking that what it
    appeared to me from the outside looking in was that we had a
    number of things happen at one time. You had a relaxation of
    underwriting for an honest attempt to try to allow more people
    home ownership. So you had political pressure asking for that.
        Second of all, you had a time in which the price of gas
    went up substantially. And individuals who were close, who had
    stepped in and who were barely making ends meet had a decision
    to make that either they could put money into the gas pump, and
    that means gas in their cars so they could actually get to
    work, or they could make a payment on their mortgage. And while
    they fully intended to do both, at the end of the month they
    had been able to get to work, but by that time they did not
    have enough money to pay the mortgage, and they got behind in
    many cases.
        Then in addition to that, it appeared as though there was
    also a question as to whether or not the underwriting had been
    properly done, as you suggested earlier, that the careful
    documented underwriting was not necessarily followed. A
    combination of all of them seemed to lend itself to this
    problem that we have got today.
        As we move forward, the regulations that we put in place
    can either help us rebuild this housing market or it can be
    detrimental, and, in particular, I am thinking in rural areas
    qualified mortgages require an appropriate appraisal. And yet
    the guidelines that have been laid out for those rural
    appraisals is rather difficult to meet in a large part of our
    country, and it has restricted the ability of banks in that
    area to get access to the secondary market.
        Regardless of what type of total reform we do with regard
    to creating this secondary market to provide liquidity, it has
    still got to be accessible to rural areas as well. And I think,
    Mr. Calhoun, you have laid that out, that it is critical that
    we do that.
        Could you just give me your thoughts in terms of the
    relationship between the expectation for a solid marketable
    security, a packaged security, and the need to be flexible or
    at least the need to be able to modify or fix problems that
    come up with the regulatory environment for rural areas or
    perhaps for inner cities or along the way the different things
    that come up that really do perhaps in some areas unfairly
    restrict those local lenders to having access to that secondary
    market?
        Mr. DeMarco. So, Senator, thank you. Points very well
    taken. So just to give a basic example, if one has a series of
    regulatory requirements in mortgage lending that affects the
    cost of originating a mortgage--let us just take that as an
    example, and suppose it adds $5,000 to the cost of originating
    a mortgage. Well, if it is a $500,000 mortgage, that has one
    sort of share of the cost of the mortgage. If it is an $80,000
    mortgage and that same requirement is still $5,000 to
    accomplish, that is going to make a much bigger impact on that
    loan in terms of whether it gets made or not or whether that
    potential homeowner is going to be able to buy a house.
        So it is a legitimate concern, and I think as we
    continually refine our regulatory framework, we need to be
    mindful of these costs and how it actually affects people
    particularly in inner cities and rural areas where otherwise
    the house value would be low but the regulatory costs are high
    as a percentage.
        If I could just briefly, you started this by talking about
    appraisals, and I think that this is also an area in which the
    housing finance reform discussion could assist the finance
    market generally by rethinking our appraisal regulatory regime,
    what actual information we are collecting, and what the rules
    are by which that gets done, because there are also some
    important cost considerations here.
        Mr. Calhoun. And if I may add, a topic that came up
    earlier, we have some concerns with the Ginnie model for small
    lenders because it is still--there are over 5,000 community
    banks, as you know well. It requires them generally, most of
    them, to sell their loans to someone else, and often those
    loans have to give up the servicing, too, and that is the
    customer relationship.
        Senator Rounds. Yes.
        Mr. Calhoun. And that is not the same as what we have now
    with the cash window where you get an equal cash price and you
    get to hold onto that servicing relationship. And I would just
    lift that up as something really, really important for small
    institutions to preserve in the system going forward.
        Senator Rounds. Thank you.
        Mr. Stevens. And if I could just add--and, by the way, I
    think a discussion needs to be had in the context of Ginnie Mae
    to separate what you call the wrap itself. What is the
    guarantee? I think that is the label, and for simplicity
    purposes you could do that. How the operational platform
    functions--and Ed I think tried to say that--needs to address,
    Mike, what you just talked about. So we agree with that.
        To your concern, I think this is really important, and we
    talk about it in our affordable section of our paper, is how do
    you reach rural communities. Oftentimes the largest financial
    institutions do not distribute personnel or products to
    communities; either they do not collect deposits in those areas
    or just the cost of originating an $80,000 loan, as Ed talked
    about, is too prohibitive to be profitable. And that is where
    small community lenders really play a role. That is why you
    need equal access for every lender to the platform, no special
    pricing for any institution, large or small, because small
    community banks have to be able to compete equally as well as a
    large institution. That was not the case pre-conservatorship of
    the GSEs.
        And the last point I would just make is to your question,
    is there a way to make credit variances in the future to
    accommodate the unique needs of rural communities? We expose
    that as an FHFA authority. The regulator needs to control
    excesses in credit risk, but they also need to make sure--and
    our paper explicitly calls for this--that we are meeting the
    needs of sustainable home ownership demands in underserved
    communities, and that would clearly call for rural markets.
        And so we really look forward to having that discussion
    because these are very important points that you have raised.
        Senator Rounds. Thank you.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you.
        Senator Menendez.
        Senator Menendez. Thank you, Mr. Chairman. Before I begin,
    I want to reflect on the pain and suffering endured by tens of
    thousands of New Jerseyans in the aftermath of the financial
    crisis. From 2007 to 2016, 85,000 families in New Jersey lost
    their homes to foreclosure, and the suffering inflicted by
    financial institutions that played fast and loose then
    continues to plague our communities.
        In 2016, nearly two-thirds of the foreclosures in New
    Jersey were related to the financial crisis. The sad thing is
    we knew how to help many of these families. We knew principal
    reduction would provide a pathway to affordable and sustainable
    payments for underwater borrowers. We knew if Fannie Mae and
    Freddie Mac had been permitted to participate in the HAMP
    principal reduction alternative, half a million homeowners
    could have been helped and taxpayers could have saved $1
    billion.
        But despite clear authority and direction from Congress in
    the Emergency Economic Stabilization Act of 2008, pleas from
    State Attorney Generals and even the Treasury Department, Mr.
    DeMarco, you refused to lift a finger. In 2012, you
    incomprehensibly claimed that allowing Fannie and Freddie to
    adopt principal reduction would cost Fannie, Freddie, and
    mortgage servicers too much money; and, two it would create
    moral hazard by enticing deceitful homeowners looking to abuse
    a program they did not actually need. Worse, the analysis you
    used to justify this ideological position was widely regarded
    as flawed.
        So as then-Chairman of the Housing Subcommittee, I held a
    hearing on the issue. I urged you in a letter to provide the
    Committee with an accurate analysis of the effects of principal
    forgiveness versus other mortgage modification options. Yet
    even after FHFA's own analysis showed the benefit to taxpayers,
    you remained intransigent.
        Now, as I think about where we are going in the future,
    that is something I cannot forget, and that is something that
    leads me to believe that what we need is clearer thinking, not
    ideology.
        So let me turn to one of the critical components that I
    think our current system is not producing enough, and that is
    access for small lenders to the cash windows that the GSEs,
    which provides them an opportunity to participate in the
    secondary market they would not otherwise have. Many of these
    lenders are community-oriented institutions working to increase
    affordable options for homeowners and borrowers in locations
    all across the country. And it is a shame we do not have a
    small lender here today since these lenders often provide
    access to credit in underserved communities. And their presence
    fosters competition so that borrowers can get more competitive
    rates. And they prevent concentration of the market in
    exclusively large institutions.
        So, Mr. Stevens, can you talk about why small lender access
    is important from the mortgage banker's perspective? And, Mr.
    Calhoun, can you speak to what the impact would be on
    borrowers, particularly those lower- and moderate-income
    borrowers in traditionally underserved areas where small
    lenders do not have access to the system?
        Mr. Stevens. Thank you, Senator, and it is an important
    question. I would just say that of our approximately 650 small
    lenders who are in our membership, some of whom have been the
    chairman of the association just in the last couple of years.
    We spent a great deal of time talking about access and
    equality, and it was actually under Acting Director DeMarco
    that we finally got guarantee fees level amongst the--between
    large and small that did not exist pre-conservatorship. In
    fact, from 1998 until 2010, concentration of lending in the top
    ten lenders of this country went from 40 percent to 80 percent
    because what the GSEs did is they gave far favorable pricing
    and credit terms to the largest financial institutions, which
    left the small community banks and smaller lenders in a less
    competitive position. It is one of the things we want to make
    sure never happens again.
        The cash window actually for Freddie Mac and Fannie Mae
    today is very active. They have a couple of thousand customers
    each compared to Ginnie Mae, for example, which only has about
    400 and does not have a cash window. And it is oftentimes a
    complaint from some larger institutions that cash window
    pricing is better than securitization pricing. It is a longer
    subject which we could talk about. It is daily spot pricing
    versus securities execution, which is a forward bid, so that
    does create some inter-day, inter-week dynamics in terms of
    ultimate execution.
        But to your point, and our paper calls for it, we think the
    way to resolve this long term is to never let the concentration
    return based on credit deals or pricing deals from guarantors,
    the GSEs, like they did before, which creates a concentration
    risk and an advantage to certain institutions over the
    thousands of others that are smaller and cannot bring a lot of
    individual market share. That unto itself made the competitive
    disadvantage of small lenders to be able to serve New Jersey
    and other States significant. And that is why we ultimately
    ended up with large concentrated risk in servicing on the
    balance sheets of certain institutions and a lot of the things
    you talked about.
        But this is a subject we address in our paper, and we would
    love to talk about that more as you go through considering
    reform.
        Mr. Calhoun. If I can add quickly, just to highlight that
    point, for the cash window to work well, it has to provide
    equivalent pricing to the security execution. It does not work
    for a community bank if you have got a cash window. But you are
    going to get paid a lot less than the big lender who is
    executing a security transaction. And that requires some
    pooling of cost because it is more efficient to transfer pools
    of thousands of loans than to do it on a loan-by-loan basis.
    But it is critical to protect the role of small lenders.
        Senator Menendez. Mr. Chairman, just one point for the
    record. It is Congress that prohibited volume discounts that
    created pricing differences for small lenders, and so,
    therefore, we have an opportunity to revisit that.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you.
        Senator Cotton.
        Senator Cotton. Thank you, gentlemen, for your testimony
    today.
        Mr. DeMarco, you served as the Director of FHFA and the
    conservator of Fannie and Freddie from 2009 to 2014. I am sure
    we can all agree that was an exciting and challenging task for
    you.
        Mr. DeMarco. We can agree to that.
        Senator Cotton. So we are in the ninth year of
    conservatorship for those two institutions, and it is our
    responsibility to chart a path forward. I think few people are
    as well equipped as you are to offer insight to us. Given
    practical and political considerations and almost a century of
    established precedent in the American housing finance market,
    what do you envision as the plausible best case, most
    practicable scenario for a model that insulates taxpayers from
    market fluctuations while also maintaining liquidity in the
    housing finance market in the aftermath of conservatorship?
        Mr. DeMarco. I think essentially, Senator, it means a
    mortgage market in which we, rather than having two different
    mortgage-backed securities that had been until 2008 operating
    with an implied guarantee from the Government and subsequently
    since 2008 have been operating with explicit support from the
    taxpayer through the Treasury Department, and that that is the
    bulk of the capital supporting it, that we move to a market in
    which private capital bears all but the very end tail risk on
    mortgage credit risk, that the Government enhances the market
    by combining these two different securities into one and allow
    a broader array of participants to be able to issue into that
    security.
        What that does is it preserves the benefit of what works
    today, including the ability of a homeowner to lock in a rate
    weeks before settlement, the ability of a lender to engage with
    that potential homebuyer to buy the mortgage, knowing that even
    though this mortgage is not going to be settled for a while
    that there will be a delivery into the secondary market that
    will be available.
        Those are the things that we are trying to build on, and
    what we are fundamentally trying to do is move away from an
    incredible systemically risky orientation of having all this
    mortgage credit risk on the balance sheet of two GSEs with the
    taxpayer exposed to something which private capital competes to
    be in this market and holds that risk and the Government is
    there to provide stabilizers and help enhance liquidity.
        Senator Cotton. Ought Congress try to end the
    conservatorship in prompt fashion?
        Mr. DeMarco. Yes, sir.
        Senator Cotton. What are the consequences of not doing so?
        Mr. DeMarco. Continuing to put the taxpayer at risk and
    continuing to keep the market from evolving and being able to
    seek better ways of serving customers.
        Senator Cotton. GSEs are somewhat unique to America. Are
    there other countries that you suggest we look to for
    alternative housing finance models as we study the best path
    forward?
        Mr. DeMarco. Well, I think we start from a rather unique
    base with what we have, and since what we are trying to do is
    evolve from where we are, I am not sure that there are other
    countries that would make sound examples to look to because of
    where we start.
        Senator Cotton. As a practical matter. There are multiple
    pending lawsuits about the third net worth sweep from 2012.
    What is the potential impact of those lawsuits on our efforts
    to end the conservatorship and move toward a future model?
        Mr. DeMarco. In some sense that is more a question for you
    all to answer. I think that the Congress of the United States
    created these two charters. The Congress of the United States
    has retained for itself the sole authority to alter those
    charters, end them, add to them. And so I think that the
    Congress should go ahead and do what is right for the long-term
    benefit of the country's economy and its housing finance
    system, and the litigation matters should follow normal course.
        Senator Cotton. But if a court finds those parties are
    entitled to compensation from the Government for the impaired
    property rights, we would have to take that into account for
    funding any kind of future model, right?
        Mr. DeMarco. Well, I assume then that there are things--
    right, I mean, we would have to know what the court ruling is.
    I cannot go any further. I am directly involved in this,
    Senator, so--but as I say, I think the Congress needs to get
    this done because this model is what broke----
        Senator Cotton. Sure.
        Mr. DeMarco. This GSE model.
        Senator Cotton. Mr. Stevens, in the time I have remaining,
    I want to ask a somewhat but not entirely off-topic question
    about PACE loans, a favorite topic of mine. Could you explain
    the threats to liquidity in the housing market that PACE loans
    can provide, and why right now Director Watt at FHFA is not
    underwriting mortgages with PACE loans on them?
        Mr. Stevens. Thank you, Senator, and thank you for your
    leadership on the subject. The PACE financing is a program that
    literally violates all the consumer protections we have put in
    place through Dodd-Frank. It provides no disclosure to
    consumers, and it creates the opportunity for a cottage
    industry of chattel providers of varying supposed energy
    improvements the opportunity to prey on unknowing consumers and
    sell them overpriced products without any regulation or
    control.
        The other aspect of it, Senator, which you know all too
    well, is it comes in the form of a tax lien, and in the event
    of default, tax liens get paid ahead of all other liens. These
    tax liens can be secured after the fact, after a loan has been
    put in first-lien position by an originator and by the
    investor. We applaud the work taken by FHFA to exclude those.
    HUD right now, the program, does allow them, and it is
    something that we think is nothing more than taxpayer risk and
    a consumer protection issue that needs to be resolved. And it
    is a rare case, Senator, where we are joined by the National
    Consumer Law Center on this issue in agreeing to the principles
    that the PACE program needs to be eliminated as an option in
    terms of the current structure the way it is provided without
    more clear consumer disclosure and lien protection rights.
        Senator Cotton. Thank you, gentlemen.
        Chairman Crapo. Thank you.
        Senator Cortez Masto.
        Senator Cortez Masto. Thank you, Mr. Chair. Thank you. I
    likewise am new to the Committee. This has been a great
    conversation. I appreciate it.
        Mr. Calhoun, I would like to start with you and really talk
    a little bit about changing demographics and access to credit.
    As you know, we have seen the pendulum swing back and forth
    when it comes to access to credit in certain communities. On
    the one hand, communities of color often were locked out of the
    mortgage market, and they were redlined or only offered
    products like contracts for deed mortgages, a kind of
    installment contract open to abuses. On the other hand, during
    the crisis--and I am from the State of Nevada--communities of
    color were flooded with subprime predatory mortgage credit.
        As we think about GSE reform, how do we ensure that all
    players serving the secondary mortgage market offer sustainable
    fair access to all creditworthy borrowers? And if we do not
    properly calibrate such a duty to serve the market, how could
    that end up either abandoning communities or inundating those
    communities with toxic forms of credit?
        Mr. Calhoun. So, first of all, Senator, thank you for the
    tremendous work you did as Attorney General in fighting to help
    families hurt by the financial crisis.
        This is really one of the key issues, and I think there are
    a couple aspects. First is preserving requirements that loans
    be sustainable. Again, it was a lack of documentation. As you
    know, the liar loans--you were at ground zero for a lot of that
    lending, and the State paid a heavy price for it.
        And then the second is preserve the important tools that we
    have now at HERA with FHA to advance affordable housing.
        And then, finally, in all of these discussions, we all
    agree that there should be more private capital in front of any
    Government guarantee of a catastrophic risk. But how that risk
    is structured and priced and delivers profoundly affects access
    for families of modest means and also the ability of small
    lenders to participate in the system, because, again, the
    mortgage market--the huge economies of scale push things toward
    the bigger lenders and the more lucrative markets. I mean, that
    is just people following their duty to their shareholders and,
    you know, that is appropriate. We have to recognize that and
    not exacerbate it.
        So, for example, the types of risk sharing that FHFA is
    doing now, they are doing risk sharing on the majority of their
    transactions, but they are doing it by selling pool insurance
    on the loans that they acquire, and that enables them to make
    sure that a broad range of borrowers, including families of
    modest means, are included in there but are not
    disproportionately getting hit with fees that can add 200 or
    300 basis points to the cost of the loans. And the same thing
    for small lenders. I mean, if you are selling insurance, it is
    easier to sell it to somebody who wants it for 50,000 loans
    than for somebody who wants it for 50 loans. And we have to
    recognize that but, again, not make a system that pushes things
    further in that direction, and that is, again, what I would
    urge the Committee to look at these proposals through that
    lens, because that will be one of the biggest impacts of what
    the Committee does.
        Senator Cortez Masto. Thank you. That is very helpful.
        Let me jump to another topic because my time is running out
    and follow up on Senator Menendez's conversation about
    servicing standards. I am more interested in the compensation
    aspect of this, and, Mr. DeMarco, I was one of those Attorney
    Generals that you received a letter from concerned about the
    lack of principal reduction. And so now I have an opportunity
    to ask you a question specifically, so I am going to put you on
    the spot here.
        What I have found, and particularly in the State of Nevada,
    with respect to servicing standards, it really was a matter of
    the compensation. The standards were just as important, but
    what we were paying servicers and that compensation and how it
    paid I think contributed to some of the poor conduct. There was
    more of an incentive to extract fees from homeowners and
    investors, and neither homeowners nor investors can fire their
    servicers, as we know, if they are not satisfied.
        So my understanding also was that FHFA released a white
    paper in, I think, 2011 looking to overhaul the way the GSEs
    pay servicers, and after accepting comments from industry and
    other stakeholders, it was abandoned, and the work was not
    complete. I am not sure why, but I would like to know: Do you
    think there is a way that FHFA should continue this discussion?
    And how should we pursue GSE reform and bring in the context of
    compensation and how we pay compensation?
        Mr. DeMarco. Senator, yes, thank you. We did, in fact,
    issue a couple of papers in which we invited public comment on
    revamping the mortgage servicing compensation scheme. To me it
    was not so much that we abandoned it as it ended up being a not
    ripe issue. But I believe, in fact, it remains an important
    issue.
        The reason it was not ripe at the time that we did those
    white papers is that servicing standards themselves and the
    requirements were still very much evolving. The CFPB was just
    coming online, and what their servicing rules were going to be
    was really an unknown at that point.
        And so what we heard in the comment period was, well, maybe
    changing the compensation arrangement would work, but until we
    know what these rules are going to look like, it was very--you
    would be putting the cart before the horse.
        Senator Cortez Masto. So you think there is a role now to
    address the compensation----
        Mr. DeMarco. I do. I believe that servicing compensation
    very much should be part of what is being looked at.
        Senator Cortez Masto. And you are willing to work with us
    to address that?
        Mr. DeMarco. Absolutely, Senator.
        Senator Cortez Masto. I appreciate that. Thank you.
        Chairman Crapo. Senator Perdue.
        Senator Perdue. Thank you, Chair. And thank you, gentlemen
    for your years of labor in this.
        I want to go to something at the very base of this. Having
    personal experience in this over the last 30 years, I have been
    concerned all along that the efficacy of the instrument that we
    are talking about here--and let us talk about the home
    mortgage. Mr. Calhoun, you mentioned something earlier that I
    agree 100 percent with that was lost in the debate. This was
    not just a subprime issue. But what we did is when trying to
    encourage more home ownership in this country starting in the
    late 1990s, we created low-income verification loans, no-doc
    loans, and so forth. And what this did, it did not just entice
    subprime lenders--or borrowers to get into a market over their
    head, but there were prime borrowers that overreached because,
    if you do not have to decide how you are going to pay for it,
    it is awful easy to get qualified.
        And so I would like to talk about what FinTech and the
    technology community is doing today regarding the underwriting
    of both these, and I think it--there is a company called
    TransUnion. It is a big credit bureau, and they have done a lot
    of studies on this, and I think the MBA has worked with them,
    and I applaud the MBA for all the work you are doing in giving
    us ideas about how to restructure this to learn from what we
    have seen, but also to adapt to the technology changes we are
    seeing today, particularly in this underwriting area.
        Today traditional, trended, and alternative data--those are
    three different types of data--are being used, and according to
    this study, some 26 million borrowers today could possibly be
    underwritten today using that that could not be under
    traditional means. And that would basically mean that 95
    percent of the borrowing public of America could somehow be
    evaluated. It does not mean they would all be qualified, but at
    least we would have a good predictor.
        Isn't the way forward what companies like SoFi and Kabbage,
    some of these FinTech communities are doing right now, with
    regard to alternative and trended data in addition to the
    normal traditional data? And I am not talking about a mortgage
    packet that is a foot deep like we see in some institutions.
    But what I would like you to do, Mr. Calhoun, is address that,
    because access to small markets, to the millennials,
    minorities, and all that, that might not have a--what do they
    call it? A thick file application? Is that what they call it?
    That might have a thin file--all of us had thin-file
    applications at one point. So how do we address the
    capabilities that technology has given us to create more
    opportunities for access, not just in small markets but in
    demographic markets that need our help as well? Would you
    address that?
        Mr. Calhoun. Certainly, and, again, before my present role,
    I headed lending programs for more than a decade at our credit
    unions, including our home loan, both retail and secondary
    market.
        We support use of both the alternative data and the trended
    data. The alternative is, for example, traditional credit
    scores do not pick up rent payments. We often find, again, a
    good measure of someone's ability and willingness to make a
    mortgage payment is if they paid their rent consistently and
    what level of rent they were carrying for an extended period.
    And I know that FHFA--Ed started the process there, and they
    are looking at alternative scores there.
        And trended, as you know, is just looking at how someone's
    credit score is moving. Are they improving their credit score
    or going down, either way, rather than just a static snapshot?
    And I think there is a lot of potential there, too, that that
    more accurately captures----
        Senator Perdue. Could we do that without having the foot-
    thick application file for underwriting? Is that still
    possible?
        Mr. Calhoun. I think FinTech is adding a lot of advances in
    that area. There are massive amounts of data, as everybody
    knows.
        Senator Perdue. But we want a predictor. That is what you
    want. You want an accurate forecast of somebody's ability to
    repay the loan and not get underwater.
        Dr. DeMarco, would you just address real quick--and I am
    going to run out of time on this question. I would love for you
    and Mr. Stevens to have a shot at this one. Access to capital
    is a huge issue in this market. That is what we are all trying
    to do. With the Fed right now having a $4.5 trillion balance
    sheet, with current statements saying that the Fed is going to
    rework that balance sheet down to the tune of somewhere around
    $2 trillion over the next 2\1/2\ to 3 years, what impact is
    that going to have on the capital markets while we are talking
    about restructuring the GSEs? Dr. DeMarco.
        Mr. DeMarco. I think the Fed is certainly anticipating
    doing this in a measured way in which it should have little, if
    any, effect on capital markets as it affects the mortgages, and
    I certainly would expect and anticipate that is how they plan
    to handle it.
        Mr. Stevens. The one thing we do look at--and I think it is
    an important question. There is a bit of an unknown. If you
    look over the last 20 years prior to conservatorship, the
    biggest buyers of agency mortgage-backed securities were the
    GSEs themselves. In post-conservatorship, it was the Federal
    Reserve buying most of the mortgage-backed securities. So we do
    need to make sure that the international, the global markets
    view the MBS produced out of this country as a credible, good-
    faith instrument, and that is actually one of the reasons why
    we think converting to an explicit guarantee on the mortgage-
    backed security will eliminate this question: Is it really AAA
    backed in good faith by the U.S. Government, or is it implicit?
    And if we can through reform get to an explicit guarantee on
    the MBS only, that will bring in a lot more institutional
    buyers from around the globe who today many will not buy--they
    will not buy Freddie and Fannie MBS. They will buy Ginnie's
    because that does have that explicit guarantee. And that is one
    way to help smooth out this transition process.
        Senator Perdue. Thank you, gentlemen.
        Chairman Crapo. Thank you.
        Senator Schatz.
        Senator Schatz. Thank you, Mr. Chairman.
        I want to start with Hawaii. It is unique. Ninety percent
    of the loans are originated in the State of Hawaii. We have got
    a couple of the best banks in the country as measured by
    independent analysis. And yet one of the idiosyncrasies of
    Hawaii is that we have sort of Manhattan real estate prices and
    not the corresponding salaries. And so the debt-to-income ratio
    has to be tweaked, and the local banks that originate the loans
    are more comfortable because they know that everybody stretches
    in order to afford a mortgage. And so they are more willing to
    extend credit to individual homeowners than perhaps a bank from
    the Mainland.
        So I will start with Mr. Calhoun and if we could work down
    the line. How does reform account for the geographic and
    demographic and economic idiosyncrasies? And how do we make
    sure that the system does not start to amalgamate into one bit
    sort of FinTech, three or four originators, and we are back to
    the point where we are, either through an app or whatever it
    may be, trying to persuade someone that we really can swing the
    mortgage, when we actually do not have a problem with our local
    banks? And, of course, they move it off their balance sheet
    just like everyone else does, but the problem that I see is
    that, to the extent that we start to establish debt-to-income
    ratios that are too firm, you are not accounting for the fact
    that Hawaii is different. We did not really have the same real
    estate market crash that the rest of the country had, despite
    our high prices. So there is something that they are doing
    right that I want them to be able to continue to do. And I will
    start with Mr. Calhoun.
        Mr. Calhoun. We agree with the need for standards, but
    flexibility so it works. We would commend and note that the
    GSEs recently increased their debt-to-income ratios to provide
    more space there, with compensating factors which show up in
    the files in Hawaii because of the experiences of many of--I am
    sure the staffers here know that you have to stretch to buy a
    house, for example, in the D.C. market. So we experience some
    of that here as well.
        But I think that the FHFA and the GSEs have moved in that
    direction, need to continue to make that aware, but then the
    big key is also this support for all financial institutions,
    all the mortgage lenders, not just the large ones, so that it
    is a viable program for them.
        Senator Schatz. Quickly, Mr. DeMarco and Mr. Stevens.
        Mr. DeMarco. Yes, in some sense, Senator, your question
    gets to the point that Mike Calhoun has raised repeatedly
    during this hearing about community lenders. As you pointed out
    in your question, community lenders have a particular insight
    into their community, the stability or risks that are involved,
    and they know their borrowers in a more personal or direct way.
    But the way the current system works is they do not get to, the
    technical term is, ``monetize'' that benefit under the current
    system, so that is why in housing finance reform the idea of
    creating multiple channels for lenders to be able to access
    markets, to deliver mortgages to the secondary market, but also
    multiple channels for which to put that private capital in
    front--and this is an example of where the lender themselves
    might say, you know, the best thing for me to do for my bank
    and my customers is to be the credit enhancer on this. Leveling
    that playing field will help a lot with what you have outlined.
        Senator Schatz. Mr. Stevens, I am going to let you answer,
    but I am also going to ask another question in the interest of
    time just to you. So a family has to make $75,000 a year to
    afford a two-bedroom rental in the State of Hawaii. And so I
    want to understand the distinction that we are trying to make
    in policy between single-family and multifamily lending and how
    we work on reform, sort of thinking about not just affordable
    housing as defined under statute, but just affordable housing
    in the sort of common sense of the word, housing that people
    are able to afford, which is not always--you know, not
    everybody in the country is supposed to own a home. Everybody
    in the country is supposed to live in a home, and that is where
    we are trying to get in the State of Hawaii.
        Mr. Stevens. Thank you, Senator. My nephew, who is an Army
    doctor at that pink hospital in Honolulu, went through
    struggles with his own home, trying to get affordability to buy
    his first place. I know it all too well, and I tried to help
    him out.
        In our paper we talk about affordability in the same
    context that you are discussing it now, as a spectrum. The GSEs
    do a great role in both multifamily and single-family in
    today's environment. We think affordability in communities
    across the country, expensive States like Hawaii, needs to be
    considered, and rural areas. We need to be able to look at them
    with a unique lens, and look at both affordable, available
    rental housing as well as affordable home ownership and make
    sure both are sustainable and that every American has the
    opportunity to live in a safe home. That is the most important
    thing. And as has been said here earlier, you never want to get
    past the tipping points where people create no-doc, negative
    amortizing products just to put people into home ownership when
    it may ultimately explode on them downstream. So you need to
    consider both.
        I will say for Hawaii--and you know this all too well--the
    GSEs have tried to address that over time through things like
    high-cost limits, which affected your State particularly, along
    with a few other metropolitan areas in this country. Those are
    tethers, those are triggers you can execute, and under our plan
    and most other plans, that is where the regulator plays a role
    to make sure that there is an obligation to serve communities
    of all shapes and sizes in this country. And, clearly, the
    uniqueness of Hawaii would fall into that.
        Senator Schatz. Thank you.
        Chairman Crapo. Thank you.
        Senator Scott.
        Senator Scott. Thank you, Mr. Chairman, and I want to
    follow up on Senator Perdue's question to Mr. Calhoun, but I
    want to ask Mr. Stevens to answer that question about the
    credit invisible, the folks who have a thin credit file. In
    South Carolina--he talked about the 26 million people around
    the country. In South Carolina, about three-quarters of our
    folks are scored or can be scored. There is about 16 percent
    that are credit invisible, and as has been suggested, they are
    making their rent payment on time, they are paying their
    utilities on time, they are paying their cell phones on time,
    but the FHFA does not use the latest model.
        Can you just speak for a few seconds on the benefits of the
    FHFA updating, using the latest model?
        Mr. Stevens. Yes, Senator, thank you. And I appreciate the
    question. The issue of credit scoring today is a challenge, and
    there are new models. If you look at the 2017 FHFA scorecard,
    they have a test to actually look at new credit models in the
    marketplace and determine whether there are alternatives. But
    without question, the models being used today are antiquated.
        Now, there are a lot of problems with looking at new models
    and adverse selection and things that credit experts will talk
    about. But without question, new models like VantageScore as an
    example, they can find ways to score a new population. The
    reason why this is important for all of us is, unlike the
    history of home ownership in this country, two-thirds of every
    new household formed over the next decade, according to the
    Joint Center for Housing Studies at Harvard, is going to be
    minority. And they come with less inherited wealth, more
    variable income patterns, and different sort of histories
    around credit. Many come from countries that were unbanked
    traditionally, did not trust the banking systems, and they just
    do not have the traditional credit patterns, but yet as Mike
    referred to earlier, there are other alternative forms where
    you can score them.
        We need to look at that. We need to understand the risks,
    if there are any increased risks with this new scorable
    population. But FHFA, until they take this on seriously and
    look at it, I think we are going to face this delta of those
    who can and those who cannot based on underwriting and credit
    standards of a long time ago. And that is what needs to be
    modernized.
        Senator Scott. Thank you, sir. Another question about the
    future economy or what really has become the current economy,
    the gig economy. When you think about the fact over the last 20
    years somewhere around 27 percent of the payroll employees have
    increased through the gig economy. This is a shared economy
    with a number of jobs, and when I was owning a business in the
    insurance industry, I was paid on commission. There is a lot of
    fluctuation in the paychecks. Our housing financing system has
    not caught up. The same mortgage payments are due month in and
    month out.
        The real question is: Is there a way--Mr. DeMarco, you have
    said creating shock absorbers by looking at savings accounts
    and other ways. What is the new opportunity for those folks in
    the gig economy to be a homeowner in this new economy?
        Mr. DeMarco. Thank you, Senator. This raises issues on both
    sides, right? I mean, the regulations, are so much about basic
    underwriting, qualified mortgage, really have an embedded
    presumption of a stable flow of income, and yet that is not
    where so many households are at. And so there is the challenge
    qualifying.
        On the other side, on the risk side, this also lends to
    greater income volatility, and so as we think about mortgage
    lending and mortgage risk, this income volatility, which is
    really growing throughout our economy, more and more households
    face it, is a risk factor we need to consider in how we are
    managing to that. So these things all need to be addressed.
        In terms of shock absorbers, this is where thinking a
    little bit more innovatively about products and about how we
    underwrite can help, and so I will give just two simple
    examples, not at all meant to be exhaustive.
        One is--and the work that Mike Calhoun's group has done
    really focuses on this. It is not just about full
    documentation. It is about where are the reserves and helping
    families build and establish reserves so that they can weather
    bumps in their income to pay their mortgage.
        The other is the mortgage product itself, and not to
    endorse an idea, but to use it to illustrate that ideas are
    being developed, there are some economists at the Federal
    Reserve that are looking at essentially the equivalent of a 30-
    year fixed-rate mortgage but with a savings component to it
    that actually builds in those kinds of buffers.
        So these are ideas that I think really warrant more
    consideration because I think it can expand credit access, but
    not just access. It can help make mortgage lending more
    sustainable.
        Senator Scott. Thank you.
        In terms of furthering what I call my ``opportunity
    agenda,'' I am very interested in promoting sustainable home
    ownership versus home buyership, so this is an important
    discussion. Thank you for your participation.
        Chairman Crapo. Thank you.
        Senator Heitkamp.
        Senator Heitkamp. Thank you so much, Mr. Chairman.
        Reviewing your testimony, and if I can just get you to
    agree, we all know that a foundational principle in all of this
    is preserving the 30-year fixed-rate mortgage.
        Mr. Calhoun. Yes.
        Mr. Stevens. Absolutely.
        Senator Heitkamp. Mr. DeMarco.
        Mr. DeMarco. Yes.
        Senator Heitkamp. Thank you. So I do not have to ask that
    question then. I am concerned about the rental market, which,
    Mr. DeMarco, in your testimony you made a critical point that
    one of our greatest challenges is actually in the rental
    market. You correctly point out that QM rules generally require
    household debt be no more than 43 percent of a family's monthly
    income, where we have 11 million renter families spending more
    than 50 percent of their monthly income just on rent, not
    getting any equity. You know, that idea that your equity in
    your home was going to be the third leg of your retirement
    stool, you know, when you think about Social Security, equity
    in your home, and some kind of pension/401(k). We no longer
    have that third leg because of this problem.
        Are there improvements to the way we handle the multifamily
    portfolio at Fannie and Freddie that could help address high
    rental costs? And I will ask you, Mr. DeMarco, to go first.
        Mr. DeMarco. I am not sure that the financing side, and
    particularly the role that Fannie and Freddie are playing in
    securitizing multifamily mortgages is the constraint or the
    barrier here. They are really on the renter side. It is income
    growth, right?
        Senator Heitkamp. Yes.
        Mr. DeMarco. It is stable jobs. It is growing income. And
    on the supply side, we have some real challenges in a lot of
    communities with regard to having developers be able to either
    rehabilitate or bring new multifamily units online quickly. And
    there are several reasons for that. The Obama administration
    actually last year had a report outlining some of this, but it
    goes to building requirements, zoning restrictions, and----
        Senator Heitkamp. I only have so much--we can maybe get
    some other opinions on this. I only have so much time.
        Mr. Stevens. The challenge is--and if you look at both
    Freddie Mac and Fannie Mae's multifamily programs over the last
    couple of years, as you know, there is a cap. They set a limit
    to how much they can lend. And they have come near those caps,
    and not enough of that has been affordable.
        So what Director Watt has done under his leadership, he has
    modified the cap so that you are unlimited if you provide--if
    it is affordable. So that is a step in the right direction. But
    I think for Ed, he highlighted some of it, but I will tell you
    that a real challenge is the demographic mix of who is renting
    and who is owning, and the pressure of the millennial
    generation delaying their decision to buy and putting upward
    pressure on rent rates, and that is affecting long-term renters
    and pricing them out of their ability to afford the rental.
    Yes, wages are really the core part of this, but on top of it,
    we are seeing unique upward pressure on rents because people
    are not going to buy homes at the same ages that they used to
    before.
        Senator Heitkamp. There was another report out today
    talking about the lack of savings for that downpayment.
    Millennials, I think in this report, 1K, that is the extent of
    their savings. They are paying off their student debt. They are
    living in higher-cost cities, which I think has an effect as
    well.
        One of the things I would suggest that we could do is
    encourage diversification, not put all of the Google employees
    in the high-price areas and look at lower-cost locations. But,
    you know, we need to have this discussion, and so I just wanted
    to lay down a marker.
        I want to talk about access to secondary market for small
    lenders. You know, we tried to address this when we were doing
    the Corker-Warner analysis and work a couple years ago, and one
    option we explored as part of Corker-Warner was expanding the
    role of the Federal Home Loan Bank to serve as an aggregator of
    small loans.
        What is your view on allowing the Federal Home Loan Banks
    to actually be an aggregator so that we can have greater access
    to the secondary market? And we will start with you, Mr.
    Stevens.
        Mr. Stevens. It is a complicated question, so this is a
    follow-up one. But I actually thought that was a work-around
    because the way the legislation was written, there was a
    concern that small lenders would not have access to the main
    system.
        Senator Heitkamp. Right.
        Mr. Stevens. I worry about the ability to have effective,
    what we call ``execution,'' pricing for small lenders, if you
    use only the Federal Home Loan Banks as the aggregator
    platform. As you know, the Federal Home Loan Banks work with
    community banks today. They all get access to a home loan----
        Senator Heitkamp. They all have a relationship.
        Mr. Stevens. That is correct. But nonbank originators do
    not have access to that system, and we believe strongly that
    the Federal Home Loan Bank is a tool here that can be used as
    you think about GSE reform to affect the overall market.
        But I would say the way we have resolved it in our plan is
    we think addressing the small lender issue is actually critical
    and based on the debates we have seen over the last few days,
    just over this hearing, that is the case, making a cash window
    that is at the same price with the same credit terms in the new
    guarantor model gives an outlet for all small lenders,
    regardless of size and regardless of business model, and it
    does not force them into some other system that because of
    liquidity and size may not get them the same pricing
    ultimately. So we need to consider all the levers.
        Senator Heitkamp. Mr. Chairman, I will follow up with
    written questions.
        Mr. Calhoun. Can I add just two quick statements?
        Senator Heitkamp. You have to ask the Chairman if you can
    do that.
        Chairman Crapo. If you are very brief.
        Mr. Calhoun. The Federal Home Loan Bank, as Mr. Stevens
    said, it is helpful. It is not sufficient. They have got to
    have a workable cash window. It cannot be a substitute for
    that.
        On the rental housing, one thing, we have got to preserve
    the things that are really helping. Those include the important
    role the GSEs play in multifamily financing, and also things
    like the low-income housing tax credit. If you do not preserve
    that, you are certainly making the problem even much worse.
        Chairman Crapo. And I thank Senator Heitkamp for helping me
    keep an eye on the clock.
        Senator Tillis.
        Senator Tillis. Thank you, gentlemen, for being here, and I
    want to go back, Mr. DeMarco, to a question that you were
    asking. On rental, I think the low-income housing tax credit is
    very important. We have a housing crisis in North Carolina,
    affordable housing crisis. It is not limited just to urban
    areas. We have similar challenges in rural areas. But you were
    going on to a point that I think is very important to make, and
    it is really the cost of entry for someone to build a
    multifamily unit, and it relates directly to a number of the
    zoning and regulatory hurdles within the very areas that say we
    need more affordable housing, we need a product that in order
    to be able to have affordable rent can come at a right price.
    But it is the additive cost of the regulatory hurdles.
        Can you expand on--any of you can, but because you went
    down that direction with Senator Heitkamp, I wanted you to
    touch on it.
        Mr. DeMarco. Right. So we clearly have seen in quite a
    number of communities the land-use restrictions, the zoning
    restrictions, and then the building requirements--even if you
    have a piece of property and can develop a multifamily
    development on it, the requirements that are whether it has to
    do with amenities or environmental or health and safety, many
    of which--all of which probably are good and valuable, but when
    these get so substantial----
        Senator Tillis. The projects do not work.
        Mr. DeMarco. ----that the fixed cost of the project, it
    either is not going to get done or it is going to end up being
    a high-rent development.
        Senator Tillis. They will by definition not be affordable,
    although the original intent was to produce an affordable
    product.
        Mr. DeMarco. Exactly.
        Mr. Stevens. It is interesting, and not wanting to sound
    like anti-regulation because good regulations are good, and we
    need to protect our consumer rights, et cetera, the time to get
    to occupancy in the multifamily market is extremely long
    comparatively to where it was a decade ago. And a lot of these
    are to the points that Ed made, and so it makes the marginal
    return of building small unit--large-unit buildings but low-
    cost-per-unit properties. You cannot get the margin out of it
    ultimately when you factor in all the capital costs associated,
    and the delay-to-market cost. So that is why you see all this
    high-end rental stuff being built, but not enough focus on the
    low end, and that has to do a lot with the regulatory barriers
    that Ed referred to.
        Senator Tillis. Yeah, I feel like we have to hold
    jurisdiction--to your point, Mr. DeMarco and Mr. Stevens, there
    are clearly regulations that should be in place for good
    reasons, but I believe that there are some that--at least in my
    State, some of the communities that are asking for more and
    more affordable housing are the worst offenders of putting in
    road blocks that create an additive cost that make it
    impossible. That is why I have really advocated as it relates
    to any kind of tax credits or grants from the Federal
    Government that we should come up with some sort of indexing
    scheme for these local areas to say once you reach a certain
    threshold where we think you are making it almost impossible to
    produce a product, then you are no longer eligible for the help
    to create--they can do whatever they want to, but they have to
    own the consequences of doing that, because I think it is a
    very big hurdle, or at least I can speak for North Carolina.
        In my remaining time, I wanted to ask really about the need
    for moving forward with reform, and I want to start with, you
    know, something pretty basic. Director Watt was here. He
    expressed his concerns about companies being required to
    operate without any capital. We also had Senator Cotton and
    Senator Crapo talk about the risk of another downturn, and you
    all made it very clear that the taxpayers are at risk.
        Can you give me some sense, if we reached a crisis of 2008
    proportions, just what that risk is on a dollar basis or some
    scope, some order of magnitude?
        Mr. Calhoun. Yes, so Treasury did do a detailed analysis,
    and the costs would be something in the range of $200 billion.
    They concluded that there was sufficient cushion within the
    existing line of credit, but that is the kind of dollar amount.
        I would point out that----
        Senator Tillis. So the taxpayers--without reform, the
    taxpayers would be at risk somewhere to the tune of about $200
    billion?
        Mr. Stevens. That is correct.
        Mr. Calhoun. I would say in looking at that--and I think
    there is unanimity here, and I think broadly, about needing
    capital there to protect it. There are things that have
    democracy made this a safer housing system that----
        Senator Tillis. So that I finish my question before my time
    is out, a follow-up question, I am kind of curious if you all
    believe that financial institutions operating or maintaining no
    capital is sound policy.
        Mr. Stevens. All I would say is the easy answer is no. The
    good news is there is an ample line of credit to cover all
    losses, and focusing on anything other than legislative reform
    I think is a diversion and we should not go down that path.
        Mr. DeMarco. Completely agree.
        Mr. Calhoun. They obviously need capital, and they need to
    accumulate it.
        Senator Tillis. I will be submitting a number of questions
    for the record.
        Thank you all for being here.
        Thank you, Mr. Chair.
        Chairman Crapo. Thank you.
        Senator Warren.
        Senator Warren. Thank you, Mr. Chairman. Thank you all for
    being here today.
        There is an affordable housing crisis in this country. Many
    people cannot afford to buy homes, and it has pushed the home
    ownership rate below 64 percent, which is well below the rate
    it was before the pre-bubble years of the early 2000s.
        Now, that in turn has put enormous strain on the rental
    market. A recent report from the National Low Income Housing
    Coalition found there is a shortage of about 7.4 million
    affordable rental units across this country. Millions of
    families are forced to spend more than half of their income on
    rent. This affordable housing crisis squeezes working families
    across the country and holds back economic growth.
        So any effort to reform our housing finance system must
    address this crisis. If it does not address this crisis, then
    it does not solve the problem in front of us and, in my view,
    is not worth doing at that point.
        So I just want to get all of you on record on a core point.
    Do you think that a primary goal of housing finance reform
    should be to meaningfully increase access to affordable
    housing, including the rental market? Mr. Calhoun, can I start
    with you?
        Mr. Calhoun. Yes, absolutely.
        Senator Warren. Thank you.
        Mr. DeMarco.
        Mr. DeMarco. Yes.
        Senator Warren. And, Mr. Stevens.
        Mr. Stevens. Absolutely.
        Senator Warren. All right. Good. So we have got that much
    going.
        Of course, the question is: How do we accomplish that? How
    do we get to that goal? When this Committee last considered
    housing finance reform, the two major proposals, Corker-Warner
    and Johnson-Crapo, including a 10-basis-point strip to provide
    funding for affordable housing. But both of those proposals
    also eliminated the affordable housing goals.
        So let me start there. Mr. Calhoun, do you think that
    creating a 10-basis-point strip for affordable housing while
    eliminating housing goals will address our affordable housing
    crisis or make the affordable housing crisis worse?
        Mr. Calhoun. No, and, again, when we say affordable housing
    goals, that is often shorthand for the range of tools that the
    GSEs and any successor should have and which have under HERA,
    and the biggest one is that pooling of risk. The pooling of
    risk far dwarfs the impact even of that increased housing
    affordability fund fee.
        Senator Warren. So let me ask then, what are some of the
    ways that we could make progress on this front? I assume that
    it starts by maintain the goals in the affordable housing
    strip, but what else could we be doing? How could we be
    building from there?
        Mr. Calhoun. So one example is, as we have talked some
    about today, the GSEs today as a model are off--are
    transferring risk, credit risk transfers, and they are doing it
    largely on a pool basis where they acquire the loans and then
    they sell that risk to a diversity of guarantors in the market.
    So it creates the kind of competition that Mr. DeMarco is
    talking about, but it allows for that pooling of risk that
    helps both families of modest means and the smaller lenders,
    particularly the rural lenders. And so that program should be
    maintained and continued, and if it is replaced with one--and
    this is the point of respectful disagreement. If it is replaced
    with one where that credit risk is all divided up on so-called
    the front end, before the bank makes the loan or before the
    issuer acquires the loan, that is going to push pricing that
    will favor the opposite way, to the larger lenders, to the
    wealthier borrowers.
        Mr. DeMarco. May I?
        Senator Warren. Thank you. Yes, Mr. DeMarco, please. Very
    quickly.
        Mr. DeMarco. So you asked a great question. What more can
    we do? What can we do better?
        Senator Warren. Right.
        Mr. DeMarco. I will answer at the programmatic level and
    the borrower level.
        At the program level, approaches that are under
    consideration in housing finance reform include a dedicated
    funding stream that you mentioned. It also includes a duty to
    serve requirement for the secondary market. What that really is
    about is about creating better partnerships between secondary
    markets and primary lenders. If a lender is in Boston and says,
    ``I have got this particular issue in Boston,'' there ought to
    be not just sort of a national rule but a way of working with a
    secondary market aggregator to tailor something to those unique
    needs. We had an earlier discussion about the unique
    circumstances in Hawaii. There is also the importance of
    thinking about FHA and how we make that work better.
        At the borrower level, to create better opportunities and
    access, we also need to think about how we are preparing
    borrowers to become homeowners. That includes downpayment
    building and assistance getting there. It includes financial
    education, homebuyer counseling. And it includes not measuring
    that we made a loan, but was the loan successful or not?
        Senator Warren. So thank you. This is very helpful, and we
    will talk more about this as we talk about some of the details.
        You know, I think it is worth looking at the original
    legislation. A big reason that the Government created Fannie
    and Freddie to begin with was to promote access to affordable
    home ownership. That is the reason for their existence, and
    that should be our main goal as we try to rewrite in this area.
        I am all for ending Government conservatorship, and I am
    certainly all for ending the old system where the private
    investors pocket all the profits while the taxpayers take all
    the risks. But I cannot be for reform if it does not address
    the affordable housing crisis in this country. So I would like
    to see us stay focused there.
        Thank you.
        Mr. Calhoun. If I may add, this is the point where we agree
    with the MBA and commend them. It only works if these actors
    all have a duty to serve the national market. Otherwise, you
    are going to have plenty of people who want to serve New York
    and San Francisco, and I love them both. But, you know, who
    will go to the rural counties in northeast North Carolina where
    it is much harder? Who will go to the other markets that are
    not as lucrative? You should not be able to just cherrypick and
    cream the market with the aid of a Government guarantee.
        Senator Warren. Good. Thank you. That is very helpful.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you very much, and that concludes are
    questioning. I want to thank our witnesses for being here today
    and providing your testimony. I am looking forward to working
    with you and other stakeholders as we address this critical
    issue.
        I also look forward to working with our Committee Members,
    Senator Brown and the other Members of the Committee, on this
    issue and building a strong, bipartisan solution.
        For Senators who wish to submit questions for the record,
    those questions are due on Thursday, July 6, and I encourage
    the witnesses, if you receive questions, to please respond
    promptly.
        With that, the hearing is adjourned.
        [Whereupon, at 11:47 a.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                     PREPARED STATEMENT OF DAVID H. STEVENS
      President and Chief Executive Officer, Mortgage Bankers Association
                                 June 29, 2017
        Chairman Crapo, Ranking Member Brown, and Members of the Committee,
    thank you for the opportunity to testify on behalf of the Mortgage
    Bankers Association (MBA). My name is David H. Stevens, and I am
    President and CEO of MBA. From 2009 to 2011, I served as Assistant
    Secretary for Housing and Federal Housing Administration (FHA)
    Commissioner at the U.S. Department of Housing and Urban Development
    (HUD). I am a Certified Mortgage Banker (CMB), and I have over 35 years
    of experience in real estate finance, including nearly a decade as
    Senior Vice President for Single-Family Business at Freddie Mac, where
    I witnessed the strengths of the business model as well as the
    weaknesses that contributed to the financial crisis and led to the
    current state of our housing finance system.
        MBA is the national association representing the real estate
    finance industry, an industry that employs more than 280,000 people in
    virtually every community in the country. The association works to
    ensure the continued strength of the Nation's residential and
    commercial real estate markets, to expand home ownership, and to extend
    access to affordable housing to all Americans. MBA promotes fair and
    ethical lending practices and fosters professional excellence among
    real estate finance employees through a wide range of educational
    programs and a variety of publications. MBA's membership of over 2,300
    companies represents all elements of real estate finance, including
    firms serving both the single-family and commercial/multifamily
    markets. Our membership includes commercial banks, investors, brokers,
    conduits, and industry vendors, as well as nearly 650 independent
    mortgage bankers, community banks, and credit unions, which comprise
    almost 80 percent of our single-family membership.
        We are now nearing 9 years since Fannie Mae and Freddie Mac (the
    GSEs) first entered conservatorship, and yet their long-term status
    remains unresolved. The financial crisis exposed the structural
    conflicts and misaligned incentives in the GSE business model, as well
    as weaknesses in the regulatory framework that was in place at the
    time. The result--a breakdown of the secondary mortgage market, $187
    billion in taxpayer assistance, and continuing Federal support of
    almost $260 billion--underscores the importance of comprehensive
    reform.
        Conservatorship of the GSEs has already persisted far longer than
    was ever intended. And while the Federal Housing Finance Agency (FHFA)
    has taken important administrative steps during this period, an
    extended conservatorship is economically and politically unsustainable.
    In the absence of comprehensive reform, borrowers forego the benefits
    made possible by a more vibrant secondary market, taxpayers remain
    exposed to elevated levels of credit risk, development of the private-
    label securities market remains stagnated, and lenders face increased
    uncertainty about the future. In short, the status quo is an
    unacceptable long-term outcome.
        To address the need for change, MBA convened its Task Force for a
    Future Secondary Mortgage Market (Task Force) in early 2016. The Task
    Force was comprised of members covering a broad cross-section of the
    real estate finance industry, including bank and nonbank lenders
    serving the single-family and multifamily markets and spanning a wide
    range of sizes and business models, mortgage insurers, REITs, and title
    companies. The members of the Task Force spent over a year considering
    and debating many potential models before issuing final recommendations
    for a reformed and improved secondary mortgage market system. The
    result of this extensive work was a detailed proposal released in April
    2017, titled GSE Reform: Creating a Sustainable, More Vibrant Secondary
    Mortgage Market. I have submitted this proposal as an addendum to my
    written testimony.
        It is important to note that our Task Force focused on balancing
    key public policy objectives with the realities of the marketplace. As
    industry practitioners, our members placed a premium on pragmatism. We
    are fully aware that there is no single perfect solution to GSE
    reform--all proposals involve various trade-offs. We believe that our
    plan addresses these trade-offs in a way that will benefit consumers,
    industry, and taxpayers, while also providing the long-term stability
    so essential to a healthy housing finance system.
        The Task Force took particular interest in two areas that have
    tested past reform efforts--the appropriate transition to a new system
    and the role of the secondary market in advancing a national
    affordable-housing strategy. Distinct working groups within the Task
    Force studied these issues and developed carefully crafted
    recommendations that we believe can bridge the divides that currently
    exist.
        With respect to the transition from the status quo to a new end
    state, the MBA proposal makes use of concepts that are well-established
    in finance and banking, as well as historical examples that have
    provided insights into the key elements of successful models. The Task
    Force specifically noted the importance of leveraging the assets,
    infrastructure, and regulatory framework of the current system wherever
    possible, while also emphasizing that any workable transition must
    utilize a clear road map and be multiyear in nature.
        The Task Force also sought to develop an affordable-housing
    framework that appropriately targets the scope of the federally
    supported secondary market within the full continuum of households,
    covering both renters and homeowners of varying income levels. To
    advance this objective, the MBA proposal features a framework that
    involves quantitative and qualitative metrics that focus on outcomes
    and that are transparent, well-defined, measurable, and enforceable.
    The GSEs' multifamily executions and their support for rental housing
    would be preserved. The proposal also recommends other potential
    improvements to better serve the full continuum of households,
    including updating credit-scoring models, better capturing
    nontraditional income, and providing enhanced liquidity for small-
    balance loans.
        Another critical objective of the Task Force--and one that has been
    the subject of intense debate during past reform efforts--was to ensure
    that secondary market reform fosters a competitive primary market that
    is served by lenders of all sizes and business models. In particular,
    the Task Force recognized the important role that smaller lenders play
    in strengthening the system for consumers by focusing on niche markets
    and leveraging unique knowledge of local needs (see Exhibit A--``Small
    Lender Access: Why It Matters''). The MBA proposal reflects this
    objective by ensuring equitable access to secondary market programs,
    prohibiting special pricing based on loan volume, preserving cash
    window and small pool execution options, and preventing vertical
    integration by the largest market participants.
        After contemplating many different types of business structures and
    regulatory frameworks for the Guarantors that will issue eligible
    mortgage-backed securities (MBS), the Task Force determined that a
    model based on regulated utilities would be most effective. The core
    justification for utility-style regulation rests with the premise that
    privately owned utilities derive much of their existence and powers
    from the state. Because the Guarantors will be granted the ability to
    distribute securities carrying a full faith and credit guarantee from
    the Federal Government, they must also accept the responsibility--and
    the regulatory oversight--to serve customers in an efficient and fair
    manner. The regulator would ensure that the premiums charged by the
    Guarantors are neither excessive nor inadequate, and that they remain
    nondiscriminatory in nature. Pricing would be transparent, with rates
    posted for public input. And in addition to the legal and economic
    rationale for utility-style regulation, this framework is also intended
    to address the problematic growth-company models and mindsets that
    existed at the GSEs prior to the financial crisis. Investor-owned
    utilities will aim to provide shareholders with a steady dividend over
    time rather than taking on excessive risks in a reach for market share.
    Companies with a dividend-focused culture will compete through more
    efficient operations, product and process improvements, and customer
    service.
    GSE Reform: Core Principles
        The MBA proposal recognizes the need for any comprehensive GSE
    reform plan to balance three major priorities: (1) taxpayer protection;
    (2) investor returns; and (3) consumer cost and access to credit.
    Pushing too far in any one direction may lead to a mortgage market that
    does not adequately meet the needs of all participants. To achieve the
    appropriate equilibrium among these priorities, the Task Force
    developed the following core principles to guide its work:

    Core Principles:

        Preserve the 30-year, fixed-rate, prepayable single-family
            mortgage, as well as long-term financing for multifamily
            mortgages;

        Maintain a deep, liquid to-be-announced (TBA) market for
            securities backed by conventional single-family loans;

        Attract global capital and preserve liquidity during times
            of economic stress through an explicit Government guarantee for
            eligible MBS backed by single-family or multifamily mortgages;

        Limit the explicit Government guarantee to the eligible
            MBS, while prohibiting the extension of the guarantee to the
            equity or debt of the Guarantors;

        Require the Guarantors to support an effective national
            affordable-housing strategy that helps meet the needs of low-
            income and underserved households and communities;

        Support a competitive and diverse primary market for
            lenders of all sizes and business models;

        Enable a robust, innovative, and purely private mortgage
            market to coexist alongside the Government-backed market;

        Preserve existing multifamily financing executions and
            permit new options;

        Establish a strong, transparent regulatory framework that
            promotes liquidity while protecting the taxpayers;

        Ensure that private capital assumes most of the credit
            risk;

        Ensure liquidity in the event of a full-blown systemic
            crisis; and

        Minimize risks to the liquidity and stability of the
            mortgage markets during the transition to the end state.
    GSE Reform: Guardrails
        The MBA proposal also addresses the risks that are inherent in any
    plan to reform the secondary mortgage market. To mitigate these risks,
    the Task Force developed a set of ``guardrails''--a statutory and
    regulatory framework designed to protect taxpayers, ensure liquidity,
    preserve what works in the current system, and align incentives across
    both the primary and secondary markets. These guardrails are comprised
    of structural requirements, prudential standards, and market conduct
    regulation:

    Structural Requirements:

        The end state should allow for more than two approved
            Guarantors to issue Government-guaranteed MBS;

        The regulator should be authorized to grant additional
            Guarantor charters;

        The Government guarantee should be explicit, funded by
            appropriately priced insurance premiums, and limited only to
            the MBS issued by the Guarantors;

        Guarantors should disperse credit risk to private capital
            investors through a variety of credit risk transfer (CRT)
            mechanisms, including deeper first-loss CRTs that are
            transparent, scalable to all lenders, and capable of limiting
            taxpayer exposure to nothing more than catastrophic risk;

        Guarantors should be stand-alone companies and lenders
            should not be allowed to own controlling interests in
            Guarantors;

        Guarantors' rate of return should be regulated using a
            utility regulation framework;

        Guarantors should issue a single uniform type of security
            for single-family mortgages;

        The Common Securitization Platform (CSP) should be
            established as a self-funding, Government-owned corporation and
            must be accessible to new Guarantors;

        The CSP should own all GSE historical single-family data,
            and new Guarantors and other market participants should be able
            to access and analyze this information for an administrative
            fee; and

        The regulator should have established mechanisms in place
            to respond to liquidity disruptions during severe market
            downturns or catastrophic events.

    Prudential Standards:

        The regulator should have sufficient powers and discretion
            with respect to capital regulation and other aspects of
            prudential oversight;

        Single-family loans eligible for inclusion in the
            Government-backed MBS should meet a Qualified Mortgage (QM)
            type standard;

        Multifamily mortgages of a type and quality similar to
            those financed by the GSEs today should be eligible for
            inclusion in the Government-backed MBS;

        Guarantors may hold only limited mortgage portfolios to
            support cash window operations, delinquent loan repurchases,
            loss mitigation activities, and certain multifamily assets; and

        Guarantors that reach a given size may be designated and
            regulated in a manner similar to systemically important
            financial institutions (SIFIs).

    Market Conduct Regulation:

        Guarantor charters should expressly maintain a bright line
            between the primary and secondary mortgage markets, with the
            Guarantors' allowable activities limited to the secondary
            market;

        The regulator should ensure that Guarantors provide
            equitable, transparent, and direct access for lenders of all
            sizes and types, and pricing and program participation should
            not be based on the loan volume or asset size of lenders;

        Guarantors should be required to maintain both cash window
            and MBS execution options; and

        Guarantors should be required to support an effective
            national affordable-housing strategy that helps meet the needs
            of low-income and underserved households and communities.
    Why Congress Needs To Act
        In its role as conservator of the GSEs, FHFA has put in place a
    number of policies and procedures to improve access to the secondary
    mortgage market and reduce the risks to taxpayers. These changes
    include more appropriate guarantee fee (g-fee) pricing that is based on
    the riskiness, not the volume, of the loans delivered; the development
    of the CSP and the Single Security initiative; extensive use of credit
    risk transfers by the GSEs; substantial reductions in the GSE retained
    mortgage portfolios; and enhanced oversight of, and risk management at,
    the GSEs.
        Despite these important steps, there is a critical need for
    legislative reform--both to bring about the remaining structural
    changes that are necessary to achieve the core principles listed above,
    as well as to ``lock in'' the recent improvements made by FHFA. It is
    only Congress that can:

        Alter the existing GSE charters to reconstitute the firms
            as Guarantors;

        Establish an explicit Federal Government guarantee on
            eligible MBS, as well as a Mortgage Insurance Fund (MIF) to
            stand ahead of taxpayers;

        Empower FHFA with a utility-style regulatory mandate to
            maintain a level playing field, as well as the authority to
            grant charters to new Guarantors in order to better enable
            competition in the secondary market; and

        Preserve the administrative reforms made by FHFA as
            conservator of the GSEs.

        And perhaps most importantly, legislative reform is the only
    outcome the provides the legitimacy and public confidence necessary for
    long-term stability in both the primary and secondary mortgage markets.
        It is therefore clear that calls to simply recapitalize the GSEs
    and allow them to operate without further structural changes are
    misguided. Under such plans, the post-crisis reforms already achieved
    could be reversed at the discretion of future FHFA directors. And
    recapitalization absent comprehensive legislation would likely embolden
    those who seek private profit at the expense of sound public policy,
    while mortgage market participants may lose confidence in the prospects
    of serious reform, creating further uncertainty around business
    planning.
        Finally, any movement towards recapitalization without
    corresponding reforms would be unnecessary from a safety and soundness
    perspective given the large levels of Federal support currently
    available to the GSEs. Even worse, this type of recapitalization plan
    would likely be counterproductive to efforts to develop and implement
    much-needed reforms.
        We cannot go back to a housing finance system that provides private
    gains when markets are strong yet relies on support from taxpayers when
    losses occur. Only by enacting comprehensive legislative reform can
    borrowers, lenders, and investors realize the full benefits of a
    diverse, competitive primary market and a vibrant, liquid secondary
    market. The hard work of reform should proceed without delay.
        Once again, I appreciate the opportunity to present this testimony,
    and I will reiterate MBA's long-standing commitment to working with the
    Committee on all elements of GSE reform.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

     President, Housing Policy Council of the Financial Services Roundtable
                                 June 29, 2017
        Chairman Crapo, Ranking Member Brown, and Members of the Committee,
    thank you for the invitation to be here today. It is an honor to be
    back before this Committee, this time in my new capacity as the
    President of the Housing Policy Council (HPC, or the Council), a
    division of the Financial Services Roundtable. The Council's 32 member
    firms are among the Nation's leading mortgage originators, servicers,
    insurers and mortgage data service and settlement providers. They
    operate in the mortgage market every day and they want it to be strong
    and stable for the future to serve their customers--current and future
    homeowners.
        The topic of this hearing--housing finance reform--is a top
    priority for the Housing Policy Council. While the housing finance
    system continues to function with Fannie Mae and Freddie Mac in
    conservatorships, the status quo is untenable for many reasons and only
    Congress has the authority to make the permanent changes needed to put
    the system on a sound footing for the long term. The good news is that
    much progress has been made since I last appeared before this Committee
    in 2013 as the Acting Director of the Federal Housing Finance Agency
    and since this Committee approved reform legislation in 2014.
        In these prepared remarks, I will review that progress and its
    importance to this effort. I will also describe the strides made since
    2013 in developing a broad consensus not just on the need for
    legislation but, in many ways, on such legislation's content. While
    significant differences of opinion remain on some key aspects of
    housing finance reform, they are relatively few and in some instances,
    multiple approaches may be workable and acceptable. The critical point
    is that reform cannot be completed without Congress. Your leadership in
    this effort is much appreciated and HPC's members stand ready to help
    you forge the bipartisan consensus needed to get this legislation to
    the finish line.
        Enacting comprehensive housing finance reform will put the country
    on a better course to ensure future homebuyers have broad access to
    credit and that our financial system can deliver this credit with much
    less systemic risk than in the past. Comprehensive housing finance
    reform can also ensure that taxpayers are protected and that Congress
    will not need to consider another bailout, even if we face a deep
    recession and a nationwide collapse in house prices as we did last
    decade. While ending the GSE conservatorships dominates housing finance
    reform discussions, any comprehensive review of housing finance should
    include the Federal Housing Administration (FHA) program as a critical
    component of the housing finance system.
    Principles for Housing Finance Reform
        An appropriate starting point for discussing major legislation that
    will affect so many citizens and a large segment of the economy is to
    agree upon a set of principles that can guide reform. The Housing
    Policy Council centers its reform views on the following principles:

      1.  Fix what is broken and preserve what works in support of
            consumers and the market.

      2.  The transition from the old system to the new one should avoid
            disrupting consumers and markets.

      3.  Private capital should bear all but catastrophic mortgage credit
            risk so that market discipline contains risk. The Government
            should provide an explicit, full faith and credit guarantee on
            MBS but with a pre-set mechanism to ensure any catastrophic
            losses that call upon taxpayer support will be repaid fully.

      4.  Government should provide a regulatory framework that is clear
            and equitable across all participating companies and ensures
            that participants in the housing finance system operate in a
            safe and sound manner.

      5.  The Government-protected GSE duopoly should be replaced with a
            structure that serves consumers by promoting competition,
            affordability, transparency, innovation, market efficiency, and
            broad consumer access to a range of mortgage products.
    Fixing What Is Broken
        Among the many things broken in the current system are: the burden
    the system places on taxpayers for the bulk of the capital needed to
    backstop mortgage credit risk; the lack of meaningful market forces in
    evaluating mortgage credit risk; persistent concerns about access to
    and affordability of credit for consumers despite the enormous
    subsidies inherent in the current system; the barriers to entry
    inherent in a system structured around two Government-sponsored
    enterprises (GSEs); and the systemic risk that results from
    concentrating most mortgage credit risk on two balance sheets. As we
    have seen, this systemic risk leaves taxpayers exposed to emergency
    bailouts when the system fails. All these flaws need to be fixed.
        At the same time, we need to preserve the features of the system
    that are working well, some of which have been greatly strengthened
    since the crisis. We should preserve: the efficient forward market that
    allows borrowers to lock in rates before settlement (known as the To-
    Be-Announced, or TBA market); the standardization of data and
    reporting; transparent and consistent reps and warrants; attracting
    private capital from mortgage insurers and a range of other capital
    providers; and the ongoing, nationwide access to the secondary mortgage
    market by lenders of all sizes and types, which benefits consumers and
    all participants in the mortgage market.
    Ensuring a Smooth Transition
        The pathway to the new system should be constructed with care.
    Hasty or ill-conceived transitions can disrupt markets, add risk, and
    limit credit availability. By the same token, an excessively drawn out
    transition can also be disruptive, especially if it leads to more
    interim measures that add costs and risks. Legislative reform can and
    should continue the gradual transition process that has been underway
    for several years. Such an approach allows new infrastructures and
    business arrangements to form around the new system before the old
    system is ended. A thoughtful transition also protects the value of $5
    trillion in mortgage securities already trading today and the new
    securities that will be issued during the transition period.
    Private Capital Should Bear Mortgage Credit Risk
        As the crisis demonstrated, the GSE-duopoly system created immense
    systemic risk and the imminent collapse of the housing finance market
    forced Congress to pass emergency legislation bailing out investors in
    the GSEs' mortgage-backed securities (MBS). Since then, progress has
    been made in drawing private capital back into a meaningful first-loss
    position, but more progress is needed. Housing finance reform should
    continue that gradual transition away from taxpayer capital support to
    a system based upon private capital that protects taxpayers and
    restores market discipline on risk-taking. The heads-shareholders-win,
    tails-taxpayers-lose construct must be banished. Instead, as described
    below, a new system should encourage multiple channels for bringing
    private capital to this market, including bank balance sheets, mortgage
    insurance, various capital market structures, equity markets, and
    reinsurance.
    Regulation Should Be Consistent and Transparent
        Today's mortgage market has thousands of firms engaged in the
    origination and servicing of mortgages. Some are large and operate
    nationwide, some are small and operate in a single community. Some are
    regulated as insured depository institutions, often with multiple
    Federal and State financial institution regulators overseeing their
    operations. Others are not subject to oversight by banking regulators,
    but have multiple Federal and State agencies monitoring their
    activities. This leads to duplication of regulatory effort and
    inevitable inconsistencies in the interpretation and application of
    rules, which drives up costs and ultimately limits credit access. We
    can do better. An improved regulatory framework should promote
    consistency and efficiency, which would lower costs to consumers while
    delivering more consistent and equitable outcomes for firms and
    consumers alike. Supervisory and other enforcement mechanisms should be
    consistent and transparent. Penalties should be commensurate with the
    harm and the intent of the violation. As in other areas of financial
    regulation, we need to return to an environment in which regulators
    seek first to encourage correction of errors rather than to immediately
    punish and penalize. But if egregious or persistent patterns of
    neglectful or willfully wrong activity exists, appropriate enforcement
    should follow. In sum, greater regulatory transparency and consistency
    are needed, across all types and sizes of firms and regulators.
    Competition Promotes Superior Outcomes
        We should not lose sight of the numerous benefits that competitive
    markets deliver to consumers. Reform should establish a market
    structure that removes barriers to entry while fostering competition
    and innovation. Competition benefits consumers by driving down costs.
    Innovation benefits consumers by adding new products and making the
    delivery of existing products more efficient and consumer-friendly.
    Appropriate standard-setting promotes healthy market competition by
    establishing rules of the road for all competitors. Standard setting
    may include data and disclosure standards, servicing rules, basic
    borrower eligibility rules, and standards around acceptable credit
    enhancement. Clear and enforceable standards, in turn, give market
    participants a more equitable basis to resolve disputes than what we
    have experienced since the financial crisis.
    Desired Outcomes
        Given these principles, HPC supports comprehensive housing finance
    reform that leads to the following outcomes:

      1.  A deep and liquid mortgage-backed securities market for multiple
            mortgage products, including 30-year, fixed-rate mortgages,
            that gives eligible borrowers access to credit throughout the
            business cycle and removes barriers to entry in the secondary
            market.

      2.  A TBA market with a means to normalize around loan delivery and
            performance standards that allows borrowers to lock interest
            rates when they apply for a mortgage.

      3.  A level playing field for secondary market access across charter
            type, size of lender, and source of credit enhancement giving
            homebuyers choices among mortgage originators.

      4.  Competition and market efficiency in lending, credit risk
            syndication, and mortgage servicing to keep mortgage rates low
            and give consumers choice among lenders and mortgage products.

      5.  Replacing the separate Fannie Mae and Freddie Mac MBS with a
            single deep, liquid MBS security with multiple issuers, backed
            by private capital and wrapped with a Government guarantee to
            broaden the investor pool for U.S. mortgage assets, thereby
            keeping mortgage rates low.

      6.  A common securitization infrastructure that operates with a
            uniform set of standards for mortgage servicing, investor
            disclosure, and dispute resolution.

      7.  A better approach to meeting affordable housing needs that may
            include elements such as a duty to serve, a dedicated funding
            stream, a modernized FHA, and/or other means to create
            sustainable mortgage loans for low- and moderate-income
            borrowers and communities.

      8.  Consistency in regulation and enforcement to reduce unnecessary
            compliance costs and provide certainty to lenders, servicers
            and their customers.
    Restarting the Legislative Process To Achieve Housing Finance Reform
        Since this Committee approved the Johnson-Crapo bill in 2014,
    administrative and marketplace actions, and additional policy analysis
    have improved the foundation for reform legislation. Those developments
    should make your legislative effort easier because reform concepts have
    been getting a real-life market test, and continued policy analysis is
    helping build a consensus among stakeholders.
        In this section, I will review this progress and its implications
    for legislation. I also will highlight the numerous common elements
    across most, if not all, reform proposals before assessing the critical
    things left to be decided.
    The Threshold Question--Should There Be a Government Guarantee of MBS?
        The approach to reform that HPC supports, and that is reflected
    across most reform proposals, provides for a single MBS that has an
    explicit catastrophic backstop Federal guarantee to replace the
    separate MBS issued by Fannie Mae and Freddie Mac that carried an
    ``implied'' guarantee. A common platform would be used to issue these
    securities and place the Federal guarantee. Multiple private entities
    would be able to add loans to the common pool. This is how the Ginnie
    Mae securitization process works today.
        But why any Federal guarantee at all? The simple answer is that an
    explicit, Federal guarantee to cover catastrophic credit risk is needed
    to ensure a steady flow of mortgage credit in all economic cycles.
    Housing finance, however, is far from simple, so I will provide a
    little more context for this important issue.
        Consider how the Fannie, Freddie, and Ginnie MBS work today. In
    each case, securitizing a pool of mortgages in a MBS separates the two
    essential risks in mortgage lending--credit risk and interest rate
    risk. Credit risk is the risk that the borrower is unable to make their
    payments and defaults on the loan. Interest rate risk is the risk that
    interest rates move up or down over time, while the investors are
    holding long-term, fixed-rate mortgages. Interest rate movements also
    influence borrower's likelihood of refinancing, which alters the
    expected time to maturity and creates reinvestment risk for investors.
        In a Ginnie Mae MBS, the credit risk remains with the Government
    insurance program (chiefly FHA and VA) with some residual risk to
    servicers. Interest rate risk goes to the private investors in the
    Ginnie Mae MBS. In the GSE world pre-conservatorships, beyond
    traditional mortgage insurance coverage, all mortgage credit risk on
    mortgages placed in Fannie Mae and Freddie Mac MBS resided on the
    balance sheets of those two companies. This was a recipe for systemic
    risk--$5 trillion in mortgage credit risk on two balance sheets (and
    those balance sheets had capital requirements for that risk that were a
    fraction of the capital required for other regulated entities). The
    interest rate risk on those MBS went to the private MBS investors. So,
    in the process of securitization, Ginnie, Fannie, and Freddie
    effectively separate credit risk from interest rate risk. Private
    capital retains the interest rate risk and Government capital retains
    the credit risk (in the case of Ginnie) and GSE shareholders retained
    the credit risk (in the case of Fannie and Freddie).
        Of course, market participants believed that the GSE shareholders
    were not alone in this process. They looked at the GSEs' Federal
    charters, subsidies, protected duopoly status, and weak capital
    standards together as indicating the Government would not let Fannie
    and Freddie default. This was the frequently discussed and officially
    denied implicit guarantee of the GSEs. Investors believed, rightly as
    it turned out, that the U.S. Government would not permit a global
    financial market disruption resulting from a default on Fannie and
    Freddie MBS.
        It is also important to understand how other significant elements
    of our current housing finance system grew out of this structure. The
    development of a TBA market rested on the proposition that MBS
    investors faced no credit risk and the MBS issuers' exemptions from
    certain securities laws. Thus, investors in MBS could buy and trade
    contracts for delivery of mortgages not yet originated. The TBA market
    does two important things--it adds substantial liquidity to the
    mortgage market, assuring lenders in the process of originating
    mortgages that investors are ready to buy and it assures borrowers that
    they can lock in today's interest rates even though it could be weeks
    before settlement.
        It is conceivable that, in the absence of a Government guarantee of
    MBS, the market would develop methods of separating credit risk from
    interest rate risk and create a hedging mechanism to replace the TBA
    market. Yet the experience of the private label MBS market should give
    us pause. That market, operating without the clarity of a Government
    guarantee, imperfectly separated credit risk from interest rate risk
    via complex security structures that parsed mortgage payment streams
    across multiple security tranches. There was no equivalent of TBA and
    the private label market was heterogeneous, which limited investor
    participation.
        In the context of housing finance reform, we envision a new
    secondary mortgage market in which multiple sources of stable private
    capital bears all but catastrophic mortgage credit risk on mortgages
    placed into this new MBS. We believe it is the responsibility of
    private market participants to bear this risk. But ensuring the
    liquidity of some $5 trillion in mortgages--the size of the Fannie and
    Freddie market today--requires more than that. To ensure that families
    get the benefit of deep and continued investor interest in MBS to
    finance long-term, fixed-rate mortgages, the consistency of the loan
    pools and the absence of credit risk in those pools needs to be
    protected. A meaningful segment of MBS investors today would not
    continue to invest in this market if they had to also manage credit
    risk. Fewer investors means higher rates for consumers.
        In all reform proposals that include a Government guarantee, that
    guarantee is limited to catastrophic or so-called tail risk; that is,
    private capital would directly bear all credit losses except losses
    caused by catastrophic economic circumstances (that is, the tail of the
    distribution of possible economic outcomes). Private market
    participants face several huge obstacles in managing mortgage tail
    risk. The frequency of a catastrophic event is rare. At most we have
    seen such events only twice in the past 100 years. The severity of the
    outcome is also extreme--losses far greater than in normal
    circumstances.
        Under corporate tax and accounting rules, it is difficult and
    expensive for private firms to price and hold reserves for such large
    and rare contingencies. So, in the absence of a catastrophic backstop,
    the cost of mortgages would go up and the supply would become more
    limited (for instance, downpayment requirements would be greater).
        Looked at this way, a Government guarantee is a way to enhance
    market performance by ensuring that credit risk is kept separate from
    interest rate risk in all economic environments. But we also believe
    that the system should have a pre-established system to fully repay
    taxpayers for any support provided as a result of the Government
    guarantee.
        HPC supports proposals for the Government establishing a Mortgage
    Insurance Fund and charging a fee for the Government's catastrophic
    guarantee on all Government-backed MBS replacing the Fannie and Freddie
    market. The Government would manage the Mortgage Insurance Fund and use
    it to pay MBS holders if we ever encountered a catastrophic market
    outcome that wiped out the private capital support.
        Importantly, though, this would not be the end of the story. Just
    as with Federal deposit insurance, any taxpayer advances to the Fund
    would be fully repaid over time through premiums assessed on future
    mortgages. The role of the Government's guarantee would be to more
    efficiently distribute catastrophic losses over time. As a pre-
    established system, the Fund would also serve as an automatic economic
    stabilizer; Congress and market participants alike could count on this
    mechanism to keep liquidity and confidence in housing finance through a
    catastrophic storm and any funds taxpayers lent into this system would
    have a built-in repayment mechanism.
        To make the likelihood of activating the Government backstop
    remote, there needs to be robust and reliable private capital standing
    ahead of the Mortgage Insurance Fund. Rather than the 45 basis points
    of capital required of Fannie Mae and Freddie Mac, first loss capital
    should be at least as great as what banks would be required to hold if
    the mortgages were on their books rather than placed into MBS.
        In sum, the future system must be properly structured and
    capitalized both to absorb even catastrophic losses and to provide
    countercyclical support. We view a Government guarantee as enabling
    markets to work more efficiently, making more mortgage credit available
    consistently and at lower cost to consumers. Since private capital
    would bear a substantial first-loss position, private capital would be
    incented to keep mortgage credit risk at prudent levels. And since the
    Government backstop for catastrophic losses would be pre-funded and
    have an ex post repayment mechanism already in place, taxpayers would
    not be bailing out the system but rather stabilizing it and enhancing
    the distribution of rare but substantial credit losses across time in a
    way private markets cannot.
    Building on Progress Made
        As the Committee restarts its legislative efforts, we believe there
    is a lot of common ground across legislative, industry, think tank, and
    other stakeholder proposals on which to build. Most, if not all, of the
    leading reform plans have the following elements:

        A common securitization platform operating either as an
            industry utility or a Government corporation.

        A single, Government-backed MBS to give rate investors (the
            private capital backstopping interest rate risk and the source
            of the long-term funding for long-term mortgages) freedom from
            credit risk concerns and deepening the universe of MBS
            investors. Some proposals call for creating a new Government
            entity to provide this insurance (for example, the Johnson-
            Crapo bill created the Federal Mortgage Insurance Corporation
            (FMIC)) while others recommend using an existing Government MBS
            guarantor (Ginnie Mae), and yet others are silent on this
            point.

        Substantial private capital would back each mortgage pool,
            supplemented by the capital of the pool aggregator (the entity
            bundling mortgages for securitization) and by an industry-
            funded, Government-backed reserve fund (as described just
            above).

         The credit risk transfer market that FHFA directed Fannie
            and Freddie to initiate is the basis for continuing to attract
            private capital using multiple structures and appealing to
            multiple types of investors in credit risk assets.

         A Government regulator would oversee this credit risk
            syndication and the sufficiency of the capital provided.

        Fannie Mae and Freddie Mac would be wound down and then
            ended as GSEs and their GSE charters would be extinguished.
            Whether and how they are merged or broken up or otherwise
            repositioned in the marketplace under a new charter and
            ownership regime is unresolved.

        The GSEs' current affordable housing goals regime would be
            eliminated (or at least altered), typically replaced by a
            funding stream generated from a small fee placed on all of the
            new Government-backed MBS created by reform. The use and
            control of these funds to support affordable housing varies by
            proposal. Most proposals also include some expression of a duty
            of secondary market entities to serve the broad market,
            including low- and moderate-income borrowers and communities.

        This extensive amount of common ground provides a strong foundation
    on which to legislate. Importantly, relative to 2013-2014, the
    uncertainty associated with change is much less. For example, work on a
    common securitization platform, which was first announced in 2012, now
    has 5 years of thought and development and is partially operational
    today. Another example: the idea that private capital can be raised to
    back mortgage credit risk via risk syndication has moved from theory to
    practice. The first transaction was completed in 2013. Today, FHFA
    reports that the GSEs have transferred risk on more than $1.4 trillion
    of MBS, with nearly $50 billion in capital support raised through this
    process. Moreover, this capital support has been raised through
    multiple channels and structures, ranging from lender recourse and
    deeper private mortgage insurance to reinsurance and structured capital
    market transactions. This is a very encouraging development as it shows
    both the interest of private capital in this emerging asset class and
    the multiple ways in which the capital can be raised and the multiple
    sources of that capital. By establishing post-conservatorship secondary
    market entities, Congress would be completing the development of this
    market. Secondary market entities engaged in this credit risk
    syndication should give lenders and investors alike confidence in this
    credit intermediation process.
    Key Issues Still To Resolve
        While important issues remain unresolved, these are not
    insurmountable challenges and in many cases, the range of differences
    has shrunk over time. Among the key issues left to be resolved are the
    following:

        Who owns and who may access the common securitization
            infrastructure? May it be used to issue private label MBS? What
            is the source of the Government guarantee--a new Federal
            entity, Ginnie Mae, or some other approach?

        How will legislation ensure consistent national servicing
            standards and other forms of standardization such as mortgage
            data standards, disclosure standards, and so on?

        Assuming multiple forms and channels for bringing private
            capital to back all but catastrophic credit loss on mortgages,
            how would FHFA (or some other regulator) ensure equivalency of
            these various credit enhancement structures in front of any
            Government guarantee? Should legislation direct bank regulators
            to update bank capital and liquidity rules for this new system?
            Whatever the approach, clearly the movement from a GSE-
            dominated secondary market to a post-conservatorship market
            will require a holistic review of capital, liquidity, and
            disclosure rules.

        How does this new regime ensure equitable access to the
            secondary market for loan originators of all size and charter?

        What requirements should be placed on secondary market
            entities to ensure they strive to reach traditionally
            underserved markets and borrowers?

        May lenders credit enhance their own mortgage production if
            they meet the same standards as guarantors must meet?

        What other legal changes are needed to make the new system
            work (for example, amendments to securities and tax laws would
            enable mortgage real estate investment trusts to more readily
            be a source of private capital in this new market)?

        What is the role of the Federal Home Loan Bank System in
            this new regime? Should their mission or membership change?
    Other Issues and Opportunities
        Beyond all the plumbing and market structure issues just reviewed,
    comprehensive housing finance legislation needs to concern itself with
    how our housing finance system serves the needs of all Americans.
    The Rental Market
        My testimony to this point has focused largely on the ownership
    market. Yet, today the country's greatest housing challenges are in the
    rental market. While the CFPB's Qualified Mortgage rule generally
    requires household total debt (including mortgage payment) to be no
    more than 43 percent of a family's monthly income, we have more than 11
    million renter families spending more than 50 percent of their monthly
    income just on rent. The waiting list for rental vouchers in many
    communities is years long. Moreover, local zoning, land use ordinances,
    and building requirements drive up the cost of new construction and
    rehabilitation, thereby limiting supply. While better education, jobs,
    and wages are the best solution, these supply constraints remain
    critical obstacles in many communities.
    FHA
        Few reform proposals deal with FHA, which is ironic since this
    agency offers the Government's flagship program for encouraging home
    ownership and because it is in such need of repair and modernization.
    While some of FHA's many challenges may be handled administratively,
    and HPC appreciates HUD Secretary Carson's openness to stakeholder
    input for improving the program, there can be a role for Congress here
    as well. At a fundamental level, Congress could give FHA a clear
    mission for serving 21st century borrowers and markets and ensure FHA
    has the resources to fulfill that mission.
        In my short time at HPC, I have been struck by the deep concern our
    membership has for the FHA program and its future. HPC members see
    great value in the program as a means for the Federal Government to
    target subsidies that promote home ownership opportunities. In that
    way, FHA should complement private sector efforts rather than using
    those subsidies, and FHA's thin capital base, to compete away business
    that the private market already is serving. There is enough need for
    access to credit for low- and moderate-income homebuyers that both FHA
    and private lenders should be actively and fully engaged.
        Yet, trends in the FHA program are troubling. Its market share in
    2016 grew to 17 percent yet participation by depository institutions
    has been declining. Former Ginnie Mae President Ted Tozer frequently
    remarked on the risks this combination was creating for taxpayers.
    Neither FHA nor Ginnie Mae has the staff nor the resources to manage
    the evolving risk profile in the FHA program, which risks its long-term
    ability to serve its customers.
        Earlier this month, HPC submitted a public comment letter to HUD
    outlining our concerns about the program as currently administered.
    From operational issues like property conveyance rules and weak quality
    control practices to legal requirements such as certifications to the
    use of enforcement tools such as the False Claims Act, these features
    of the FHA program as administered today are counter-productive to
    serving borrowers. As the Committee weighs housing finance reform, HPC
    respectively urges you to also consider the FHA program, its role in
    our housing finance system, and the potential to address pressing FHA
    issues as part of reform.
    Preparing Borrowers To Become Sustainable Homeowners
        A common element across many housing finance proposals is a goal of
    making mortgage lending more sustainable; that is, reducing the
    likelihood of default by borrowers, especially borrowers with less than
    perfect credit profiles. This requires more work and thought than
    simply subsidizing the cost of credit to low downpayment, low credit
    score, low-income borrowers. It requires greater attention to saving
    both for downpayments and for cash reserves once in the home, greater
    financial literacy, homebuyer education and home ownership counseling,
    and more effort to repair credit histories. Many HPC members sponsor
    and support programs that do these things.
        A challenge facing many lower income renter and owner households,
    indeed even moderate and some higher income households, is increased
    income volatility. Many people lack the resources to buffer themselves
    from life's disruptions, and income disruptions are more common today
    than in the past. Housing policy and our housing finance system needs
    to become more attuned to this challenge so better solutions may be
    found.
        Loan qualification standards also need to evolve and improve. For
    instance, greater competition has already led to more innovative
    approaches to credit scoring. With greater market transparency around
    mortgage performance and a competitive market for private capital risk-
    bearing, these developments will be more likely to get adopted,
    resulting in more consumers qualifying for mortgages.
    Conclusion
        In the 9 years since Fannie Mae and Freddie Mac were placed into
    Government conservatorships, the market has evolved substantially away
    from the failed system of the past. That process cannot be completed
    absent bipartisan legislation that deals with the status and charters
    of the GSEs and addresses related issues such as the role and health of
    FHA. The good news is that there are numerous common elements across
    the leading reform proposals. HPC is supportive of this consensus,
    which forms a solid foundation for legislation. While differences
    remain to be worked out, we are encouraged that compromise solutions
    are within reach. We stand ready to support this Committee as it crafts
    legislation that will set the country's housing finance system on a
    more market-based and competitive path because we believe this is the
    way to best serve the housing finance needs of our Nation's families.
    Thank you for inviting me here today.
                                     ______

                    PREPARED STATEMENT OF MICHAEL D. CALHOUN

                   President, Center for Responsible Lending
                                 June 29, 2017

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                   RESPONSES TO WRITTEN QUESTIONS OF
                 SENATOR MENENDEZ FROM DAVID H. STEVENS

    Q.1. Housing counseling is critical both at the pre-purchase
    stage to help potential borrowers evaluate their options and
    understand the risks, and it is an essential tool to borrowers
    that have run into trouble with their mortgages. We have strong
    evidence that housing counseling works--a 2013 study of nearly
    75,000 borrowers found that borrowers who received pre-purchase
    housing counseling were one-third less likely to become 90-days
    delinquent on their mortgage loans.
        Mr. Stevens, given your role in the previous administration
    as FHA Commissioner when housing counseling initiatives were
    expanded, what is your view of the value of pre-purchase
    housing counseling?

    A.1. We agree that housing counseling is a valuable tool for
    consumers--both prior to the purchase of a home and over the
    life of a loan. A mortgage is a complex financial transaction
    that can be intimidating for many borrowers. This complexity
    can be particularly daunting for first-time homebuyers, who are
    often unfamiliar with the requirements of a mortgage
    application or the general process for choosing a mortgage
    provider or product. While resources do exist to aid potential
    borrowers, these materials can be difficult to locate and
    compare.
        Some of the potential benefits of pre-purchase housing
    counseling for borrowers include:

        Improved financial literacy, which allows them to
            better understand mortgage-related terminology and
            concepts;

        Improved financial management skills, such as
            budgeting, long-term financial planning, and approaches
            to strengthen their credit profiles;

        More comprehensive knowledge of the process for
            searching for available homes, mortgage providers, and
            mortgage products;

        More comprehensive knowledge of the resources
            available to assist them, including educational
            materials and financial assistance programs; and

        Greater capacity to decide on a mortgage product
            that suits their particular needs or whether home
            ownership is the correct decision for them at that
            particular time.

        These benefits to the consumer could carry important
    implications through the life of the loan, such as reducing the
    likelihood of serious delinquency, which in turn could lead to
    more sustainable home ownership and fewer foreclosures. Our
    experience during the financial crisis and its aftermath showed
    that unsustainable home ownership can lead to costs for
    communities that extend beyond the individual households in
    default. Concentrated foreclosures have been tied to lower home
    values, blight, crime, population declines, and Government
    fiscal strains. On a national level, widespread foreclosures
    were shown to contribute substantially to financial and
    economic instability. Services that can reduce the likelihood
    of these negative feedback loops taking hold, such as
    counseling, should be encouraged and made more widely
    available.
        In order to help raise awareness of the benefits of
    counseling, MBA joined a coalition of groups representing
    lenders, investors, real estate agents, and counseling agencies
    to create the ``Home ownership Collaborative'' in 2016. Over
    the past year, the Home ownership Collaborative brought
    together industry stakeholders to host partnerships in a
    variety of local housing markets. These partnerships connected
    potential borrowers with HUD-approved housing counseling
    agencies and explored new and innovative ways to augment the
    benefits and expand the reach of counseling opportunities. MBA
    and the other sponsors of the Home ownership Collaborative will
    continue to host counseling events in the coming months with
    the goal of further raising awareness among consumers and
    developing new strategies to increase usage of counseling
    services.

    Q.2. In the past, I have expressed concerns about conforming
    loan limits for the GSEs, which is why I led efforts in the
    Senate to ensure that borrowers in states like New Jersey,
    which has some of the highest home prices in the Nation, are
    able to secure GSE mortgages. Last time the Committee
    considered reform, there was interest in lowering the
    conforming loan limits. Studies and reports have shown that
    larger loans actually perform better and default at
    significantly lower rates than smaller loans.
        Do you agree that conforming loan limits should be retained
    as we consider changes to the housing finance system?

    A.2. Currently, both Fannie Mae and Freddie Mac are restricted
    to purchasing single-family mortgages that fall below the
    conforming loan limits calculated annually through a formula
    set by the Housing and Economic Recovery Act of 2008. We agree
    that this is an appropriate mechanism for targeting the
    benefits provided by the GSEs--primarily lower interest rates
    on mortgages and continued access to credit through all parts
    of the business cycle--to low- and moderate-income borrowers.
        We do not support lowering the conforming loan limits as a
    strategy by which to attract more private capital into the
    housing finance system. While it is important to diversify
    exposure to mortgage credit risk and shift this exposure away
    from taxpayers, there are more effective options for doing so.
    For example, increasing the amount and types of credit risk
    transfers used by the GSEs will move mortgage credit risk into
    private-sector hands with less potential for disrupting
    financing for low- and moderate-income borrowers.
        We do support the current system of providing for higher
    conforming loan limits in high-cost areas, such as many
    counties in New Jersey. The housing finance system should
    recognize that access to modest, sustainable housing requires
    more resources in certain portions of the country, and
    therefore it is appropriate for the GSE conforming loan limits
    to reflect this reality. Similarly, we believe it is
    appropriate for the conforming loan limits to be adjusted over
    time as home prices increase. This process will help ensure
    that the GSEs serve a similar segment of the market, regardless
    of movements in home prices.
        These views are consistent with the policies described in
    MBA's recently released proposal for an improved secondary
    mortgage market. As our proposal notes, ``The current
    conforming loan limits should be preserved, with similar
    adjustments for high-cost areas, because they provide a well-
    understood threshold and relative ease of execution.'' Our
    proposal also calls for these conforming loan limits to be
    ``adjusted over time based upon home-price appreciation.''
    These policies were designed to keep the scope of borrowers
    served by the GSEs fairly consistent and targeted to those
    borrowers for whom the benefits of GSE-provided liquidity are
    greatest.
        We therefore agree that the conforming loan limits should
    be retained in a substantially similar structure in any future
    housing finance system.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                SENATOR MENENDEZ FROM MICHAEL D. CALHOUN

    Q.1. Do you think discrimination based on business judgment
    should be allowed as part of housing finance reform?

    A.1. The Fair Housing Act of 1968 \1\ and the Equal Credit
    Opportunity Act of 1974 \2\ prohibit discrimination in lending
    and lending transactions, and along with other provisions \3\
    articulate the policy of the United States that the housing
    market, including the system for financing housing, operates in
    a manner that is free of discrimination. Fair treatment is
    required regardless of race, gender, national origin, or other
    protected status. Additionally, where Federal funding is
    involved, whether in the form of loans, insurance or
    guarantees, Federal agencies administering such funds have an
    obligation to take affirmative steps to further fair housing.
    Further, the GSEs have a mandate to serve all credit markets at
    all times, which ensures broad credit availability in all
    regions of the Nation. The charters of the GSEs state that they
    must ``promote access to mortgage credit throughout the Nation
    (including central cities, rural areas, and underserved areas)
    by increasing the liquidity of mortgage investments and
    improving the distribution of investment capital available for
    residential mortgage financing.'' \4\
    ---------------------------------------------------------------------------
         \1\ 42 U.S.C. 3601.
         \2\ 15 U.S.C. 1691.
         \3\ Executive Order 11063, adopted in 1962, prohibits
    discrimination in the sale, leasing, rental, or other disposition of
    properties and facilities owned or operated by the Federal Government
    or provided with Federal funds. Available at http://portal.hud.gov/
    hudportal/HUD?src=/program_offices/fair_housing_equal_opp/FHLaws/
    EXO11063; Executive Order 12892, as amended, (adopted in 1994),
    requires Federal agencies to affirmatively further fair housing in
    their programs and activities, and provides that the Secretary of HUD
    will be responsible for coordinating the effort. Available at http://
    portal.hud.gov/hudportal/HUD?src=/program_offices/
    fair_housing_equal_opp/FHLaws/EXO12892.
         \4\ Fannie Mae's charter is in Title III of the National Housing
    Act, 12 U.S.C. 1716 et seq. Freddie Mac's charter is in 12 U.S.C.
    1451 et. seq.

        Under the Fair Housing Act's disparate impact liability,
    which was recently upheld by the United States Supreme Court in
    Texas Department of Housing and Community Affairs v. The
    Inclusive Communities Project, Inc., actions that have a
    discriminatory effect on a protected class are prohibited
    unless the defendant has a valid business justification. \5\
    Under the burden shifting test of disparate impact theory, the
    initial burden is on the plaintiff to establish a prima facie
    case that a housing decision or policy caused a disparate
    impact on a protected class. \6\ Once the plaintiff establishes
    disparate impact, the defendant can then counter with the
    defense that the policy or decision is ``necessary to achieve a
    valid interest.'' \7\ The defendant's ``valid interest'' will
    stand unless the ``plaintiff has shown that there is an
    available alternative practice that has a less disparate impact
    and serves the entity's legitimate needs.'' \8\
    ---------------------------------------------------------------------------
         \5\ (83 U.S.L.W. 1993, 6/30/15).
         \6\ Id.
         \7\ Id.
         \8\ Id.
    ---------------------------------------------------------------------------
        For more than 40 years, disparate impact liability has been
    used to further the goals of the Fair Housing Act. It has
    helped to curb overt discrimination and redlining in lending
    decisions opening up the housing finance system to all
    Americans, particularly those in rural areas and urban
    communities. Moreover, it has not provided an undue burden on
    lending nor flooded the courts with litigious claims. Instead,
    it has helped make lending decisions smarter and more efficient
    in an effort to be fairer. \9\
    ---------------------------------------------------------------------------
         \9\ For a more detailed analysis of the benefits of disparate
    impact liability on the Nation's housing finance system, See the brief
    of the National Fair Housing Alliance et al., available at https://
    www.americanbar.org/content/dam/aba/publications/supreme_court_preview/
    BriefsV4/13-1371_amicus_resp_NFHA.authcheckdam.pdf.

    Q.2. Housing counseling is critical both at the pre-purchase
    stage to help potential borrowers evaluate their options and
    understand the risks, and it is an essential tool to borrowers
    that have run into trouble with their mortgages. We have strong
    evidence that housing counseling works--a 2013 study of nearly
    75,000 borrowers found that borrowers who received pre-purchase
    housing counseling were one-third less likely to become 90-days
    delinquent on their mortgage loans.
        As we look to the future of the housing finance system, are
    there ways that we can better utilize pre-purchase housing
    counseling to expand affordable and sustainable home ownership?
    For instance, does it make sense to combine pre-purchase
    housing counseling with pricing incentives or as a compensating
    factor for credit scores or downpayment?

    A.2. There is strong evidence that housing counseling is
    effective in reducing foreclosures. \10\ Incorporating pre- and
    post-purchase counseling has significantly reduced
    delinquencies and has increased the frequency of positive
    outcomes for troubled borrowers. \11\ A recent study was
    conducted by the Federal Reserve Bank of Philadelphia. A pre-
    purchase home ownership counseling study released in 2014
    confirmed the continued efficacy of housing counseling. \12\
    The study was drawn from a random sample control group that
    received varying counseling delivery models. The delivery
    models were standardized across the entire sample. Participants
    who received the counseling education and one-on-one counseling
    saw an average increase of 16.2 points of their credit score
    over the course of the study, and reduced the number of
    delinquent accounts that were 30, 60, or 90 days past due. \13\
    This study reaffirms significant research that finds housing
    counseling as an effective means to keep borrowers from
    becoming delinquent, and improving outcomes for troubled
    borrowers. \14\ Based on these research findings we would
    encourage combining pre-purchase housing counseling with
    pricing incentives or as a compensating factor for credit
    scores or downpayment.
    ---------------------------------------------------------------------------
         \10\ See ``Has Foreclosure Counseling Helped Troubled
    Homeowners?'' Urban Institute. Available at http://www.urban.org/
    research/publication/has-foreclosure-counseling-helped-troubled-
    homeowners/view/full_report.
         \11\ Id., at 2-3
         \12\ https://www.philadelphiafed.org/community-development/
    homeownership-counseling-study/
         \13\ Id.
         \14\ https://portal.hud.gov/hudportal/documents/
    huddoc?id=ohc_counselingworks1214.pdf

                  Additional Material Supplied for the Record

     LETTER SUBMITTED BY THE NATIONAL MULTIFAMILY HOUSING COUNCIL AND THE
                         NATIONAL APARTMENT ASSOCIATION

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT

          STATEMENT SUBMITTED BY THE NATIONAL ASSOCIATION OF REALTORS

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            LETTER SUBMITTED BY THE NATIONAL ASSOCIATION OF REALTORS

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                 STATEMENT OF MAIN STREET GSE REFORM COALITION

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

             STATEMENT SUBMITTED BY THE NATIONAL COUNCIL OF LA RAZA

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       LETTER SUBMITTED BY THE NATIONAL ASSOCIATION OF FEDERALLY INSURED
                                 CREDIT UNIONS

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                      STATEMENT SUBMITTED BY GRAHAMFISHER

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

      STATEMENT SUBMITTED BY THE INDEPENDENT COMMUNITY BANKERS OF AMERICA

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

           JOINT LETTER RE: PRESERVE THE GSE AFFORDABLE HOUSING GOALS

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]