[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

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs



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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\
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     \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



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