[Senate Hearing 115-107]
[From the U.S. Government Publishing Office]
S. Hrg. 115-107
PRINCIPLES OF HOUSING FINANCE REFORM
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE PRINCIPLES OF HOUSING FINANCE REFORM
__________
JUNE 29, 2017
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
Joe Carapiet, Senior Counsel
Graham Steele, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Erin Barry, Democratic Professional Staff Member
Dawn Ratliff, Chief Clerk
Cameron Ricker, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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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
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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\
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\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.
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\10\ See ``Has Foreclosure Counseling Helped Troubled
Homeowners?'' Urban Institute. Available at http://www.urban.org/
research/publication/has-foreclosure-counseling-helped-troubled-
homeowners/view/full_report.
\11\ Id., at 2-3
\12\ https://www.philadelphiafed.org/community-development/
homeownership-counseling-study/
\13\ Id.
\14\ https://portal.hud.gov/hudportal/documents/
huddoc?id=ohc_counselingworks1214.pdf
Additional Material Supplied for the Record
LETTER SUBMITTED BY THE NATIONAL MULTIFAMILY HOUSING COUNCIL AND THE
NATIONAL APARTMENT ASSOCIATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT
STATEMENT SUBMITTED BY THE NATIONAL ASSOCIATION OF REALTORS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTER SUBMITTED BY THE NATIONAL ASSOCIATION OF REALTORS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF MAIN STREET GSE REFORM COALITION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY THE NATIONAL COUNCIL OF LA RAZA
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTER SUBMITTED BY THE NATIONAL ASSOCIATION OF FEDERALLY INSURED
CREDIT UNIONS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY GRAHAMFISHER
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY THE INDEPENDENT COMMUNITY BANKERS OF AMERICA
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
JOINT LETTER RE: PRESERVE THE GSE AFFORDABLE HOUSING GOALS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]