[Senate Hearing 116-91, Part 1]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 116-91


                  CHAIRMAN'S HOUSING REFORM OUTLINE: 
                                 PART 1

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

                                HEARING

                               BEFORE THE

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

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                                   ON

 DISCUSSING THE FEASIBILITY OF THE CHAIRMAN'S HOUSING REFORM OUTLINE, 
 ASSESSING THE APPROPRIATE LEVEL AND STRUCTURE OF TAXPAYER PROTECTIONS 
                                OUTLINED

                               __________

                             MARCH 26, 2019

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                                
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                                


                Available at: https: //www.govinfo.gov /

                              __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
38-478 PDF                  WASHINGTON : 2021                     
          
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania      JACK REED, Rhode Island
TIM SCOTT, South Carolina            ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska                  JON TESTER, Montana
TOM COTTON, Arkansas                 MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota            ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
MARTHA McSALLY, Arizona              DOUG JONES, Alabama
JERRY MORAN, Kansas                  TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota           KYRSTEN SINEMA, Arizona

                     Gregg Richard, Staff Director

                      Joe Carapiet, Chief Counsel

                          Matt Jones, Counsel

            Laura Swanson, Democratic Deputy Staff Director

                 Elisha Tuku, Democratic Chief Counsel

           Beth Cooper, Democratic Professional Staff Member

           Megan Cheney, Democratic Professional Staff Member

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                          Jim Crowell, Editor

                                  (ii)
                            
                            C O N T E N T S

                              ----------                              

                        TUESDAY, MARCH 26, 2019

                                                                   Page

Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    40

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2
        Prepared statement.......................................    40

                               WITNESSES

Sue Ansel, President and Chief Executive Officer, Gables 
  Residential, on behalf of the National Multifamily Housing 
  Council and the National Apartment Association.................     4
    Prepared statement...........................................    42
    Responses to written questions of:
        Senator Brown............................................    89
        Senator Cortez Masto.....................................    89
Edward J. DeMarco, President, Housing Policy Council.............     6
    Prepared statement...........................................    58
    Responses to written questions of:
        Senator Brown............................................    95
        Senator Cortez Masto.....................................    96
        Senator Moran............................................    99
        Senator Sinema...........................................   100
Greg Ugalde, Chairman of the Board, National Association of Home 
  Builders.......................................................     7
    Prepared statement...........................................    65
    Responses to written questions of:
        Senator Brown............................................   100
        Senator Cortez Masto.....................................   100
Mark M. Zandi, Ph.D., Chief Economist, Moody's Analytics.........     8
    Prepared statement...........................................    72
    Responses to written questions of:
        Senator Brown............................................   103
        Senator Cortez Masto.....................................   117
        Senator Moran............................................   120
Hilary O. Shelton, Director, Washington Bureau, and Senior Vice 
  President for Advocacy and Policy, NAACP.......................    10
    Prepared statement...........................................    77
    Responses to written questions of:
        Senator Menendez.........................................   120
Adam J. Levitin, Professor of Law, Georgetown University Law 
  Center.........................................................    12
    Prepared statement...........................................    80
    Responses to written questions of:
        Senator Menendez.........................................   121

              Additional Material Supplied for the Record

Reports submitted by Sue Ansel...................................   123
Prepared statement of the American Homeowners Alliance (AHA).....   170
Prepared statement of Diane Yentel, President and CEO, National 
  Low Income Housing Coalition...................................   174
Prepared statement of the Housing Assistance Council.............   188
Prepared statement of the Independent Community Bankers of 
  America (ICBA).................................................   192
Letter submitted by the Manufactured Housing Institute (MHI).....   199
Prepared statement of the Community Mortgage Lenders of America 
  (CMLA).........................................................   201


 
               CHAIRMAN'S HOUSING REFORM OUTLINE: PART 1

                              ----------                              


                        TUESDAY, MARCH 26, 2019

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:01 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 hearing will come to order.
    Today the Committee returns to its focus on the state of 
our housing finance system. It has now been a full decade since 
the Government asserted control of the GSEs, Fannie Mae and 
Freddie Mac.
    After 10 years of market recovery, these mortgage giants 
remain stuck in conservatorship, with taxpayers still on the 
hook in the event of a housing market downturn.
    It appears that the old, failed status quo is slowly 
beginning to take hold again, with the Government in some ways 
expanding its reach even further, entering new markets where it 
has never been before.
    Today Fannie and Freddie, along with Government-insured 
mortgages, dominate the mortgage market. Approximately 70 
percent of all single-family mortgages originated in this 
country are in some way touched by the Federal Government.
    I have long said that the status quo is not a viable 
option, and I consider it a top priority this Congress to find 
a comprehensive, legislative solution.
    During the 113th Congress, this Committee made progress by 
favorably reporting the bipartisan Housing Finance Reform and 
Taxpayer Protection Act.
    Since that time, the Committee has continued to study the 
issue, learn from previous iterations, and analyze a variety of 
proposals that have been put forward by the stakeholders and 
policymakers.
    Last month I introduced an outline for potential housing 
reform legislation.
    This outline sets out a blueprint for a permanent, 
sustainable new housing finance system that: protects taxpayers 
by reducing the systemic, too-big-to-fail risk posed by the 
current duopoly of mortgage guarantors; preserves existing 
infrastructure in the housing finance system that works well, 
while significantly increasing the role of private risk-bearing 
capital; establishes several new
layers of protection between mortgage credit risk and 
taxpayers; ensures a level playing field for originators of all 
sizes and types, while also locking in uniform, responsible 
underwriting standards; and promotes broad accessibility to 
mortgage credit, including in underserved markets.
    This outline is the byproduct of over a dozen hearings 
conducted by this Committee over the past decade. It also 
incorporates key elements of several housing finance reform 
plans that have been advanced by thought leaders. Many of those 
thought leaders have joined us today and will join us tomorrow.
    We will hear from 12 witnesses over the next 2 days on my 
housing finance reform outline and other general issues 
relating to our housing finance system.
    Thank you to our witnesses for your willingness to appear 
here today and for your continued participation in this 
important conversation.
    Today I am interested in discussing the viability of our 
framework, the impact it will have on various market 
participants, and to highlight the areas where work remains to 
be done.
    We are dedicated to getting this done, to bring to a close 
the conservatorship era, and to establish a durable, 
sustainable new housing finance system that works for all 
Americans.
    The time is now to resolve this issue, and I look forward 
to working with my colleagues to that end.
    Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Chairman Crapo, and thanks to all 
the witnesses for being here today.
    I have long said that the ``housing'' part of this 
Committee--this Committee's name is ``Banking, Housing, and 
Urban Affairs.'' The Housing and Urban Affairs agenda has been 
pretty nonexistent over the years of Republican rule, but 
clearly housing has not gotten enough attention, and I look 
forward to the next 2 days of discussions and working with 
Chairman Crapo to address our Nation's housing needs.
    Whether you rent or own a house, a house is not just where 
you live. One of the best books about housing is Matthew 
Desmond's book ``Evicted.'' A couple of years ago, he wrote in 
the front cover of my book, ``home = life.''
    Home equals life. That is how we should all approach this.
    A house is where you go after a long day at work. It is 
where you make memories with your children, marking time with a 
growth chart perhaps on the bedroom wall. It determines what 
neighborhood you live in, in many cases where you worship, 
where your kids go to school.
    Too many Americans, as we know, cannot afford that home.
    One-third of households are paying more than 30 percent of 
their income for housing, 21 million renters and more than one 
in five rural homeowners.
    In the fallout from the financial crisis, millions of 
people, especially of color, lost vast amounts of housing 
wealth they had finally been able to build after a century of 
redlining and discrimination.
    Today home ownership among African American households has 
fallen under 43 percent--30 percentage points below the white 
home-ownership rate.
    When work has dignity, everyone can afford housing and can 
choose to build wealth through home ownership and to pass that 
on to their children and grandchildren--something simply not 
available to nearly enough people of color in this country.
    That is simply not the reality we live in today. Any 
changes we make to our housing finance system should be to help 
working people, not more legislation coming out of the Banking 
Committee for Wall Street.
    In 2008, when Congress last passed substantial, bipartisan 
housing finance legislation, we strengthened oversight of our 
housing system; we took important steps toward serving 
Americans who too often are left behind.
    We maintained the GSEs' responsibility to facilitate 
national access to mortgage credit.
    This broad, national market means that interest rates for 
borrowers in Idaho look a lot like they do in Arizona or Ohio.
    We further targeted affordable housing goals. We 
established a duty to serve underserved rural areas, 
manufactured housing, and affordable housing preservation 
markets, all monitored by a new regulator.
    We also created the Housing Trust Fund and Capital Magnet 
Fund to allocate dedicated resources each year to the 
development of affordable housing opportunities for the lowest-
income households.
    We know markets do not always work perfectly, and the 
market is not serving those Americans on its own.
    These funds are far from enough to solve our affordable 
housing crisis, but they are part of the solution.
    Since 2008, FHFA has been an independent regulator that has 
worked to serve underserved markets, closely monitored the 
GSEs' business, and built up the capability to collect the 
housing data we need to help us help families.
    Unfortunately, not all of the 2008 changes have been 
consistently implemented. Even though they are funded outside 
the appropriations process, the Housing Trust and Capital 
Magnet Funds have not been safe from attempts to eliminate 
them. For the last 3 years, this Administration has proposed 
cutting these funds. And this year, nearly 3 months after the 
close-out of the GSEs' books and a month and a half after 
Fannie and Freddie told investors they had set aside funds for 
the Housing Trust Fund and the Capital Magnet Fund, the Acting 
FHFA Director still has not distributed these affordable 
housing dollars.
    Clearly, there is more work to be done to make sure every 
family can access the home-ownership opportunities and rental 
housing that meets their needs.
    As we begin these 2 days of discussions, we should start by 
asking: What housing options do families have today, and what 
housing opportunities we will make available for families in 
the future?
    Failure to put working families first in this process will 
only make it harder for families to afford rent or to buy a 
house; put the viability of the 30-year fixed-rate mortgage at 
risk; and, again, hit lower-income communities, communities of 
color, and rural Americans particularly hard.
    I look forward to hearing from each of our witnesses today 
about how the housing market is working for homeowners and 
renters and what we do about it.
    Thank you.
    Chairman Crapo. Thank you, Senator Brown.
    Our six witnesses today are: Sue Ansel, President and CEO 
of Gables Residential, on behalf of the National Multifamily 
Housing Council and the National Apartment Association;
    Mr. Ed DeMarco, President of the Housing Policy Council;
    Mr. Greg Ugalde, Chairman of the National Association of 
Home Builders;
    Mr. Mark Zandi, Chief Economist for Moody's Analytics;
    Mr. Hilary Shelton, Senior Vice President for Advocacy and 
Policy and Washington Bureau Director of the NAACP;
    And Adam Levitin, Professor of Law at Georgetown University 
Law Center.
    As you may notice, Mr. Shelton is not here yet. We are 
informed that he will be arriving shortly. If he does not 
arrive by the time he would ordinarily be scheduled for his 
testimony, we will make arrangements for him to give his 
testimony when he gets here.
    Ms. Ansel, you may proceed.

STATEMENT OF SUE ANSEL, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
   GABLES RESIDENTIAL, ON BEHALF OF THE NATIONAL MULTIFAMILY 
     HOUSING COUNCIL AND THE NATIONAL APARTMENT ASSOCIATION

    Ms. Ansel. Thank you. Chairman Crapo, Ranking Member Brown, 
and Members of the Committee, it is my privilege to appear 
before you on behalf of the National Multifamily Housing 
Council and the National Apartment Association to provide the 
one industry's perspective on housing finance reform.
    I am the Chairwoman of NMHC and the Chief Executive Officer 
of Gables Residential, a vertically integrated real estate 
company specializing in developing, constructing, financing, 
and managing multifamily and mixed-use communities. Gables 
manages over 30,000 apartment homes and approximately 430,000 
square feet of retail space.
    The apartment sector is a competitive and robust industry 
that helps 39 million people live in homes that are right for 
them. We help build vibrant communities by offering housing 
choice, creating millions of jobs and contributing to the 
fabric of the communities across the country.
    Demand for rental housing is at historical levels as a 
growing number of people choose the convenience and flexibility 
of renting. Millions of new apartment households have been 
formed since the mid-2000s. Because of this unprecedented 
demand, the United States will need to build 4.6 million new 
apartments by 2030. That translates to an average of 328,000 
new apartments every year. Yet we have only hit this mark twice 
since 1989. I tell you that to provide some context to help you 
understand how important it is to get housing finance reform 
correct.
    The apartment industry is extremely capital intensive. To 
perform effectively, we need consistent and reliable access to 
debt capital across all geographies for all different types of 
apartments and during all economic cycles. Today we are 
fortunate to be able to access several private capital sources, 
including banks, life insurance companies, commercial mortgage-
backed securities, pension funds, and private mortgage 
companies.
    Unfortunately, even during healthy times, the private 
market has been unwilling or unable to meet all our capital 
needs. Private capital generally focuses on larger metropolitan 
areas. The GSEs' multifamily programs and their access to the 
Government guarantees ensures that there is capital for 
projects located in smaller secondary and tertiary markets that 
do not meet the private sector's credit or return standards.
    Private capital is also generally not available or not a 
good fit for companies trying to acquire and preserve 
affordable housing. Affordable housing is extremely complex and 
often involves securing and layering numerous funding sources 
together. Many private capital providers consider this too 
complicated, but the enterprises understand these complexities 
and have proven capabilities to serve that market.
    The GSEs are critical to the entire industry, even for 
firms like mine, who secure most of our debt from private 
markets. Knowing that debt capital is available at all times is 
a critical factor for our ability to develop new apartments. 
The reasons those private lenders are willing to give us loans 
is because they know there is a source of takeout capital when 
construction is done. The GSEs' multifamily programs provide 
that confidence by operating in all markets.
    Mr. Chairman, my written testimony provides comments 
specific to your reform outline. As you consider any housing 
finance reform proposals, NMHC and NAA urge you to recognize 
the unique needs of the multifamily industry, and we offer 
several goals that we believe any new system for the 
multifamily industry must be met.
    First and foremost, include an explicit, paid-for Federal 
guarantee for multifamily backed mortgage securities available 
in all markets at all times.
    Second, recognize the inherent differences between 
operational and historical performance of the single-family and 
multifamily sectors requires different solutions to avoid 
putting at risk the 39 million Americans who rely on apartment 
housing. The GSEs' multifamily programs were not part of the 
housing crash because of their adherence to prudent 
underwriting standards, sound credit policies, and, most 
importantly, the fact that they place private capital at risk 
ahead of taxpayer dollars.
    Third, retain the successful components of the existing 
multifamily programs and whatever succeeds them. Establishing a 
new business model for our sector would only serve to disrupt 
capital flows. Lawmakers should preserve the enterprises' 
proven technology, processes, and personnel.
    Fourth, avoid market disruption during the transition to a 
new system by clearly defining the Government's role, analyzing 
the cost and the market impact, and developing a detailed and 
realistic timeframe for transition. By retaining the successful 
elements of the current system and providing an explicit 
guarantee for multifamily debt, we believe this Committee can 
succeed in ``doing no harm'' to our industry and our ability to 
produce the housing that the country needs.
    Thank you for the opportunity to testify today. I look 
forward to answering your questions.
    Chairman Crapo. Thank you.
    Mr. DeMarco.

   STATEMENT OF EDWARD J. DeMARCO, PRESIDENT, HOUSING POLICY 
                            COUNCIL

    Mr. DeMarco. Good morning. Chairman Crapo, Ranking Member 
Brown, Members of the Committee, thanks for inviting me to 
testify on the Chairman's outline for housing finance reform.
    Nearly 2 years ago, I appeared on behalf of the Housing 
Policy Council before this Committee to discuss the need for 
housing finance reform legislation. At that hearing we 
discussed why Congress needed to act, and we discussed the 
emerging consensus on many of the key features such legislation 
should contain. Since that time, we have seen continued 
progress toward consensus on the structural building blocks of 
reform. The Chairman's outline reflects that progress.
    As I explain in my written statement, the framework set 
forth in the Chairman's outline bridges the two leading 
approaches proposed for securitizing and guaranteeing 
conventional conforming mortgages. This is accomplished rather 
simply by allowing both approaches to co-exist. In my written 
statement, we call this a ``hybrid model'' for reform.
    My written statement also explains many of the technical 
features of the Chairman's outline and how those features would 
facilitate reform by reducing risk in the system, including 
systemic risk; expanding opportunities for market participants 
of all types and sizes; and creating more financing options for 
home buyers. I look forward to discussing any of these features 
with you.
    The Housing Policy Council's big-picture view on housing 
finance reform is this: The need for housing finance reform 
remains as critical as ever. True reform can only be 
accomplished by Congress. Only Congress can replace the GSE 
duopoly with a more competitive market that reduces risk to 
taxpayers while ensuring a steady flow of mortgage finance for 
home buyers.
    HPC members believe that housing finance reform will create 
a stronger, more resilient system. We seek a more competitive 
market that puts private capital in front of a Government 
guarantee and that operates on a more level playing field. 
Getting to a bipartisan consensus on housing finance reform has 
been a long process, but we are moving closer to that goal. 
With each new version of reform put forth in Congress, we see 
both refinements in the models and steady movement toward a 
broad consensus.
    Last year, we saw a bipartisan bill introduced in the House 
of Representatives, and we hope the Chairman's outline 
continues the progression toward a bipartisan consensus.
    The members of the Housing Policy Council are encouraged by 
these developments, and we are committed to working with
Congress and the Administration to get this long-sought 
legislation to the finish line.
    HPC members also recognize that reform will not happen 
absent meaningful progress on questions of affordability and 
availability of credit. Here, too, there has been progress, 
although some work remains. Fundamentally, this discussion 
should focus on the unique opportunity presented by housing 
finance reform. We can reassess the effectiveness of existing 
programs and whether they are adequate to meet the substantial 
housing needs our Nation faces today.
    Housing finance reform gives us a chance to make meaningful 
improvements in our programs and policies. For example, there 
is broad acceptance of an affordability fee that can provide 
meaningful financial support for the production and 
preservation of affordable housing. Since affordable rental 
housing is a critical challenge in many communities across the 
country, additional targeted resources in this area can help.
    The GSE housing goals targeted certain borrower segments 
based on income and geography, but the subsidy was delivered by 
a modest and broad reduction in interest rates, compensating 
for higher risk rather than directing these scarce resources to 
addressing the real obstacles these borrowers face in achieving 
and sustaining home ownership. I think we can do better than 
that, and with housing finance reform, we should be striving to 
do so.
    In short, the Housing Policy Council continues to believe 
housing finance reform is needed. The Chairman's outline 
captures the consensus elements of prior reform proposals and 
serves as a solid, workable foundation from which to develop 
legislation. HPC is ready to assist.
    Thank you.
    Chairman Crapo. Thank you.
    Mr. Ugalde.

   STATEMENT OF GREG UGALDE, CHAIRMAN OF THE BOARD, NATIONAL 
                  ASSOCIATION OF HOME BUILDERS

    Mr. Ugalde. Thank you. Chairman Crapo, Ranking Member 
Brown, and Members of the Committee, thank you for the 
opportunity to testify today. My name is Greg Ugalde, and I am 
the 2019 Chairman of the Board of the National Association of 
Home Builders. I am a builder and developer from Burlington, 
Connecticut, where I build in multiple communities and focus on 
first-time and move-up buyers.
    Safe, decent, affordable housing provides fundamental 
benefits that are essential to the well-being of families, 
communities, and the Nation. Unfortunately, NAHB's research 
shows that housing affordability remains at a 10-year low.
    For this reason, NAHB calls on Congress to make housing 
affordability a national priority. Advancing comprehensive 
housing finance reform will ensure the capital and liquidity 
necessary for consumers and home builders to access stable 
financing. We believe an effective housing finance system must 
address liquidity as well as affordability, regardless of 
domestic and international economic financial conditions.
    Additionally, we believe that comprehensive reform must 
originate in Congress and focus on fixing the structural flaws 
that still persist 10 years after the Great Recession. 
Comprehensive legislation, including a determination of the 
future of Fannie Mae and Freddie Mac, is the only way to ensure 
a stable housing finance system, preserve access to credit, and 
protects taxpayers.
    NAHB appreciates and supports Chairman Crapo's effort to 
put forth a thoughtful outline for housing finance reform that 
includes what we believe are essential elements for a 
comprehensive reform bill while leaving other significant 
details open for discussion and, most importantly, bipartisan 
agreement.
    In particular, we appreciate the Chairman's continued 
support for an explicit Government backstop for a key portion 
of the conventional mortgage market. We firmly believe this 
support is critical to the ongoing availability of a 30-year 
fixed-rate mortgage and financing of affordable multifamily 
properties.
    In addition to allowing for new market participants, the 
Chairman's outline calls for Fannie Mae and Freddie Mac to 
become private guarantors, which preserves the current 
secondary market role for the enterprises and allows the 
mortgage market to continue to benefit from their comprehensive 
and well-tested infrastructure.
    The outline would designate Ginnie Mae as an operator of 
the securitization platform and provide the explicit Federal 
Government guarantee for MBS. Employing a known and successful 
guarantee entity provides an advantage, but substantial 
upgrades will be needed for Ginnie Mae to successfully perform 
this expanded role.
    NAHB is pleased that the Chairman's outline proposes a 
continued role for the multifamily financing infrastructure of 
the GSEs. While we have concerns that the outline appears to 
require the enterprises to divest their multifamily businesses, 
we look forward to working with the Committee to ensure that 
reform preserves the successful elements of the current system.
    Finally, one of the barriers to increase housing supply and 
affordability is the lack of acquisition, development, and 
construction--or AD&C--financing for home builders and 
developers. We believe the enterprises should be authorized to 
support community bank AD&C lending activities in the future 
housing finance reform legislation. Overall, NAHB is encouraged 
that the Chairman's outline demonstrates that agreement on key 
elements of reform is emerging. The need for bipartisan 
legislation is urgent. We look forward to working with this 
Committee to find solutions for the remaining issues that 
continue to elude consensus.
    Thank you, and I look forward to answering any questions.
    Chairman Crapo. Thank you.
    Mr. Zandi.

  STATEMENT OF MARK M. ZANDI, Ph.D., CHIEF ECONOMIST, MOODY'S 
                           ANALYTICS

    Mr. Zandi. Thank you, Chairman Crapo, Ranking Member Brown, 
and other Members of the Committee, for the opportunity to be 
here. I appreciate it.
    I am the Chief Economist at Moody's Analytics. It is an 
independent subsidiary of the Moody's Corporation. But the 
views I express here today are my own views.
    You should also know that I am on the Board of Directors of 
the MGIC, a national mortgage insurer. I am also lead director 
of Reinvestment Fund, which is a national CDFI. We are 
headquartered in Philadelphia, which is my home.
    If you take nothing away from my testimony today, it should 
be this: The housing finance system is in critical need of 
reform, and Chairman Crapo's proposed framework for reform is 
an excellent place to begin. It reflects much of the hard work 
on reform that has been done on both sides of the aisle over 
the past decade since Fannie and Freddie were put into 
conservatorship, and there are many Members here today that 
have been very active in this effort over the years. So I would 
implore policymakers to use your outline as a framework to 
finish the job of reform.
    Your proposed framework does leave open several critical 
design issues that must be resolved for reform to be a success, 
but I believe they are resolvable. I will quickly describe your 
framework from my perspective and recommend how to address 
several of these issues.
    In the proposed future housing finance system, mortgage 
lenders will effectively have two options:
    First, as in the current system, lenders can sell their 
loans to guarantors like Fannie and Freddie, although there 
will be multiple guarantors in the proposed system, who then 
securitize the loan, manage the credit risk in the loan, and 
perform the role of master servicer. This is know as the 
``guarantor channel.'' This is the channel that we now exist 
in.
    Lenders' second option is to pool their loans, purchase 
insurance to cover the credit risk on those pools, and issue 
securities and perform the master servicing themselves. This is 
known as the ``lender-issuer channel.'' In either channel, the 
Federal Government provides a catastrophic guarantee that is 
provided by Ginnie Mae and paid for by mortgage borrowers.
    The first key structural issue is how to ensure that enough 
guarantors enter the system that there are none that are too 
big to be allowed to fail. Fannie and Freddie's complete 
domination of today's market will frankly make it impossible to 
attract new entrants absent significant steps to reduce 
barriers to entry. A more fulsome common securitization 
platform, increased transparency, and a multi-issuer single 
security will at the very least be required to support 
sufficient entry.
    The second key issue is to ensure that lender-issuers are 
not on the hook for the failure of the guarantors from which 
they purchase insurance. If they are, then they will not get 
true sale accounting for the loans that they make, which would 
make this channel entirely unworkable; and if they do get true 
sale accounting, exposure to the counterparty risk would put 
small lenders and nondepositories at a significant 
disadvantage. So for the issuer channel to work, the Government 
must assume the risk of a failed guarantor.
    The final key issue is how to ensure broad, consistent 
access to affordable mortgage credit, particularly in areas 
that the market may be less inclined to serve well when left on 
its own. Your
outline states that the current affordability goals and duty to 
serve will be replaced by a 10-basis-point market access fee to 
lower housing costs for low- and moderate-income borrowers. 
While this fee will generate much more funds than the current 
system to promote access, more needs to be done. Critically 
important is that all guarantors have a national footprint so 
that they cannot simply serve those markets that happen to be 
most profitable. It will also be important to effectively 
target the market access fund for those borrowers, lower- and 
middle-income borrowers, who actually need the help with the 
kind of help they actually need.
    There are, of course, other choices to be made: what 
capital and regulatory regime to impose on the guarantors and 
those providing credit insurance to ensure that they are 
protecting taxpayers standing behind the system; how to ensure 
the common securitization platform has the flexibility and 
autonomy it needs to be an effective market utility; and how to 
integrate the FHA--this is very key--how to integrate the FHA, 
VA, and USDA into a more seamless coherent system of Government 
support for the mortgage market.
    If lawmakers can effectively address these structural 
issues that I have identified, the remaining challenges are 
manageable. Your outline, Chairman Crapo, thus holds 
significant promise, in my view, making it a worthy place to 
renew the much delayed but desperately needed effort to 
overhaul the housing finance system.
    Thank you.
    Chairman Crapo. Thank you.
    Mr. Shelton.

 STATEMENT OF HILARY O. SHELTON, DIRECTOR, WASHINGTON BUREAU, 
    AND SENIOR VICE PRESIDENT FOR ADVOCACY AND POLICY, NAACP

    Mr. Shelton. Thank you very much, and good morning, 
Chairman Crapo, Ranking Member Brown, and esteemed Members of 
this Committee. I would like to thank you for asking me here 
today to discuss a topic of extreme importance to the NAACP and 
all the individuals, families, neighborhoods, and communities 
we serve and represent: the topic of home ownership.
    While no one would argue that housing is not a very 
important issue for our Nation and our economy, it is my hope 
that when reforming the policy, you do not forget the impact 
your actions will have on every American, especially those who 
for a multitude of reasons may be most reliant on a strong 
mortgage and secondary market, particularly Americans of color 
and low- and moderate-income Americans.
    In my written testimony, I provide the Committee with a 
history of laws and legal actions. In the interest of time, I 
will summarize the primary statistics here.
    Today the home-ownership rate among African Americans is 
approximately where it was when discrimination was legal, prior 
to the enactment of the Fair Housing Act of 1968. Any changes 
to the current system must continue to incorporate and protect 
important market segments--namely, people of color and low- to 
moderate-income families, on which a well-functioning future 
system depends and a just society demands. These changes must 
also continue to protect taxpayers.
    The successful reform of our current system would produce 
one that adequately serves the full universe of creditworthy 
borrowers, takes into account the unique needs and 
characteristics of communities of color. We should not and 
cannot return to the days of a loosely regulated system which 
led to reckless, unsustainable lending practices like those 
that caused the financial crisis and led to the devastating 
loss of wealth for too many Americans and disproportionately 
for people of color, costing taxpayers billions of dollars.
    Moreover, any housing reform policy must remedy the 
historical marginalization of communities of color and 
discriminatory practices within the mortgage market due to 
societal constraints and, in too many cases, to Federal 
policies. A secondary market structure that is too narrow 
increases the risks of perpetuating the current two-tiered 
lending system in which white, more affluent buyers are 
channeled into one system with one set of fees, and racial and 
ethnic minorities, people of color, and low- to moderate-income 
buyers are funneled into yet another.
    Specifically, the NAACP calls on Congress to retain and 
strengthen any and all duty-to-serve provisions by GSEs or any 
governmental program. Without an enforceable, robust obligation 
to serve all markets, history has proven that communities of 
color within our Nation will find it extremely difficult to 
access the mortgage market.
    We must retain if not strengthen any and all Federal 
mandates to ensure broad access and affordability in our 
Nation's housing finance system.
    Any alteration to our current housing system must also 
preserve and enhance fair housing and antidiscrimination laws. 
To wit, we must ensure that there is a rigorous, consistent, 
effective, and well-resourced structure to oversee and enforce 
fair lending rules and regulations, and we must be able to 
fully and adequately measure trends in lending to make sure 
that fair and sustainable loans are being made to all 
creditworthy borrowers, regardless of where they are looking to 
purchase their homes.
    Congress must preserve FHA-insured lending, responsible 
low-downpayment mortgage loans, and ensure access to existing 
downpayment assistance programs as well as promote cost-
effective loan modifications for existing homeowners.
    Congress must also formally recognize and boost the role of 
housing counseling. This entails both pre- and post-purchase 
counseling to help families understand what their obligations 
may be and how to best manage them, especially in times of 
unexpected stress.
    Any future housing reform proposal must also provide broad 
access to capital for all borrowers as well as institutions of 
every size.
    Any housing proposal must also protect and increase funding 
for the National Housing Trust Fund. There is still a dire need 
for the Housing Trust Fund throughout the Nation, and until 
that need is met, we must continue to fund and promote it.
    Last, but not of least importance, any housing reform 
policy must protect taxpayers.
    In conclusion, I would point out that Fannie Mae and 
Freddie Mac have provided critical mortgage capital to 
underserved communities.
    More than 50 years after the enactment of the Fair Housing 
Act of 1968, Congress has an opportunity to put some teeth into 
the promises made by that law. Although racial and ethnic 
minorities combined already represent a significant segment of 
the housing market, we are projected to be an even larger 
portion of the market over the next one to two decades.
    If we as a Nation are going to continue to grow and 
prosper, we must foster and accommodate our unique needs and 
characteristics that make efforts to provide us with 
affordable, sustainable home-ownership opportunities.
    I recognize the impact that any changes, or even no 
changes, to housing policy will have on our national and even 
global economy, and I do not envy the task ahead for you. 
However, I pledge to you that the NAACP stands ready to work 
with you to ensure that we get it right, that we do not make 
changes we will come to regret later.
    I stand ready to answer any of your questions. Thank you 
very much.
    Chairman Crapo. Thank you.
    Mr. Levitin.
    Mr. Levitin. I am not sure if this is working, the 
microphone.
    Chairman Crapo. It is.

  STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, GEORGETOWN 
                     UNIVERSITY LAW CENTER

    Mr. Levitin. Good morning, Chairman Crapo, Ranking Member 
Brown, and Members of the Committee. Thank you for inviting me 
to testify at this hearing.
    I appreciate the Chairman's concern about the so-called 
unfinished business of housing finance reform. Fannie Mae and 
Freddie Mac have been in conservatorship for over a decade now, 
and there is uncertainty about their ultimate future. 
Nonetheless, nothing about the market today suggests the need 
for a wholesale redesign of the housing finance system as 
proposed in the Chairman's outline.
    The housing finance market has already been extensively 
reformed since 2008. FHFA has replaced OFHEO and been a more 
effective regulator. Fannie and Freddie have become much better 
capitalized, and the guarantee fees now better reflect the 
risks they assume.
    Fannie and Freddie have also been substantially de-risked. 
Their portfolio holdings and mortgages have been reduced, and 
their exposure on mortgage-backed securities has been minimized 
through various credit-risk transfers.
    Moreover, the mortgage market as a whole is safer because 
of Title XIV of the Dodd-Frank Act and the activities of the 
Consumer Financial Protection Bureau. This reform has happened 
piecemeal, but as a result, we have a housing finance market 
that works quite well today. Let us not lose sight of that.
    Most creditworthy Americans are today able to obtain 
mortgage financing on reasonable terms. The terms that peer 
borrowers
receive are substantially similar, no matter where they live. 
East, West, North, and South, urban, suburban, ex-urban, and 
rural, borrowers today can readily obtain a long-term fixed-
rate mortgage. That is, they can obtain the product that has 
built the American middle class and for which there is a strong 
consumer preference.
    Borrowers can also lock in an interest rate prior to 
closing, so they can budget their home purchase bids with 
confidence. And they can choose to get their loan from among 
thousands of institutions, including local community banks and 
credit unions.
    We have today a system that provides some support for 
affordable mortgage credit to low- to moderate-income 
households,
although we could do much better there. And we have a 
fundamentally stable system because of the backstopping of the 
Federal Government.
    While the current system is not perfect, it is basically 
performing fairly well on every metric by which we ought to 
judge a housing finance system. Given this, we should be very 
hesitant to embrace radical reform proposals.
    The first rule for dealing with housing finance should be, 
``Do no harm.'' Yet the Chairman's outline risks having very 
serious unintended consequences: a loss of credit access for 
rural communities, the unavailability of the 30-year fixed-rate 
mortgage on competitive terms, the inability to readily get a 
pre-closing rate lock, a lack of secondary market access for 
community banks and credit unions, and an unstable procyclical 
market.
    These potential harms all follow from the fundamental 
design of the Chairman's proposal, namely, a system based on 
multiple guarantors that compete with each other for market 
share and credit risk. Such competition will result in the 
segmentation of the national market. For example, guarantors 
will charge one rate for urban mortgages and another rate for 
rural borrowers, if they serve them at all, because rural loans 
are riskier.
    Guarantors will also adopt procyclical pricing because they 
will not account for the systemic effects of their pricing due 
to the correlated nature of housing prices.
    I explain the mechanisms of this in some detail in my 
written testimony, but the short of the story is that we have 
seen this before. This is the story of the housing bubble that 
resulted in the 2008 financial crisis. The bubble was driven by 
private label securitization by Wall Street banks that engaged 
in a race to the bottom in underwriting standards as they 
sought to gain market share. Competition among guarantors for 
credit risk is likely to follow the same script.
    Fortunately, there is a better approach, namely, a single-
guarantor system with back-end synthetic credit-risk transfers. 
That is, a single entity would serve as a securitization 
utility and provide a uniform guarantee of the mortgage-backed 
securities it issues. The utility would then swap out most of 
the credit risk to capital markets using synthetic credit-risk 
transfers. Such a single-guarantor system avoids the harmful 
competition for market share among guarantors because it can 
transfer market-wide exposure through the credit-risk 
transfers. Such market-wide exposures forces investors to price 
in externalities.
    A single-guarantor system is also more stable than a multi-
guarantor system because the utility can temporarily carry the 
market itself during adverse market conditions when the credit-
risk transfers are not possible and thereby ensuring a steady 
provision of credit through the cycle.
    The best part is that we know that a single-guarantor 
system works. It is what we have today in all but name. We 
should either make our peace with the de facto single-guarantor 
system we have or take steps to formalize and perfect it rather 
than engaging in radical experimentation with a vital $11 
trillion market.
    I look forward to your questions.
    Chairman Crapo. Thank you.
    First of all, I appreciated the testimony of all of you. I 
found it very helpful and insightful. My first question is 
going to be on the multifamily market. I am going to ask Ms. 
Ansel and Mr. Ugalde to please respond.
    My plan envisions preserving a lot of the existing 
infrastructure and technology that market participants are 
familiar with, where possible. That includes taking advantage 
of the common securitization platform as a potential issuing 
platform for single-family MBS and Ginnie Mae to explicitly 
guarantee MBS that meet specific underwriting guidelines, and 
keeping the GSEs' multifamily business largely intact but as 
new entities.
    Ms. Ansel and Mr. Ugalde, do you agree that the multifamily 
businesses at Fannie and Freddie performed very well through 
the crisis and that we should follow the model that we have 
talked about here, which would be spinning off of the GSEs the 
multifamily businesses as private guarantors? I think that at 
least one of you said there may be some questions you have 
about that, but I would appreciate your response to it.
    Ms. Ansel. Thank you. Yes, obviously the multifamily 
housing performed very well during the housing crisis, and we 
think the proposed Johnson-Crapo Act is a very solid place to 
start to consider housing finance reform. We believe there are 
a number of unanswered questions and details that need to be 
worked out, and we look very forward to working with the 
Committee on resolving those details.
    Chairman Crapo. Thank you.
    Mr. Ugalde?
    Mr. Ugalde. Yes, Mr. Chairman, we stand committed to making 
sure that the finance needs of our multifamily members are met, 
and it is a good starting point. We echo a lot of those 
thoughts as well. But we are ready to work with the Committee 
to find ways into the future to continue the success of the 
multifamily financing.
    Chairman Crapo. All right. Thank you.
    And for Mr. DeMarco and Dr. Zandi, what is the best way to 
take advantage of the common securitization platform? And do 
you agree with the Ginnie Mae ``wrap'' that has been proposed 
in my outline?
    Mr. DeMarco. Certainly, Mr. Chairman, the Housing Policy 
Council agrees with the use of the Ginnie Mae ``wrap.'' Ginnie 
Mae's name is known around the globe, and global investors that 
provide capital for financing U.S. mortgages already have their
investment procedures that allow for the investment in Ginnie 
Mae. So I think that is very much the right thing to do.
    With regard to the common securitization platform, I think 
this is really a great opportunity and a benefit that we have 
in doing reform, is that we have the development that has been 
going on at the CSP, but we also have at Ginnie Mae a common 
securitization platform, if you will, that itself has been 
modernizing a great deal over the last 10 years. I give a great 
deal of credit to the people at Ginnie Mae there. I think you 
have got an opportunity to meld these two technology platforms 
and get the best of both.
    Mr. Zandi. I think using the Ginnie ``wrap'' is a great 
idea. This is one reason why we need reform, because mortgage 
rates are higher today than they otherwise would be if not for 
an explicit Government guarantee provided by Ginnie. There is 
debate about how much mortgage rates would be lower, but for 
the typical borrower, on average through the business cycle, it 
is probably about 20 basis points, 0.2 percentage points. That 
does not sound like a lot, but when you do the arithmetic, that 
is real money for a lot of people. And that is even more 
important for underserved communities in dark times when the 
economy is not performing well and housing markets are not 
performing well. The benefit to mortgage rates will be even 
greater.
    This is one of the key reasons why we do need reform, and 
using the Ginnie ``wrap'' makes perfect sense. There is no 
reason not to do that.
    With regard to the common securitization platform, I think, 
you know, Ed is the father of the CSP, so we owe him a lot. 
There was a lot of skepticism around the CSP and whether this 
would ever come to fruition and make a difference. It has been, 
in my view, a slam-dunk success. And here we are on the verge 
of issuing a single security off the CSP. I think that happens 
in June or July. Everything feels like we are on track to do 
that. And going to a single security also critically important 
to bringing down mortgage rates, because there had become this 
bifurcation in guarantee fees offered by Fannie Mae and Freddie 
Mac because of a range of differences that are now going away 
because of the CSP.
    The work on the CSP, though, is not complete. There is a 
lot more work that needs to be done, and if your framework is 
going to work and we are going to get entry of other guarantors 
into the system--so you are proposing Fannie Mae, Freddie Mac 
as guarantors in some future system, and then entry by multiple 
guarantors, other guarantors to compete with Fannie and 
Freddie--we need to lower the fixed costs of operating 
guarantors, and one of the fixed costs centers around the use 
of the CSP. So the CSP has to be expanded, hardened, to allow 
for other potential future guarantors to put their pipe and 
connect it to the CSP and operate in the same way that Fannie 
and Freddie do.
    There are other things we can talk about on the CSP, but it 
is a great starting point. It has been very costly. There has 
been criticism about the cost. But it feels like it has been 
worth the money, and this is key to any future reform.
    Chairman Crapo. Thank you. My time has expired.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Mr. Shelton, the GSEs' current charter along with their 
affordable housing goals and the duty to serve underserved 
markets requires the GSEs to promote access to credit across 
all markets, not just those that are the easiest to serve. If 
the GSEs' charter, duty to serve, and affordable housing goals 
were eliminated, what impact would you expect to see in 
underserved communities, particularly communities of color, 
which already are underserved by our housing system?
    Mr. Shelton. We expect to see a lack of opportunity, quite 
frankly, as we think about meeting the challenges that we have 
had. One of the reasons in my testimony I spoke to the issues 
of how the housing market functioned and lending opportunities 
were made available prior to the Fair Housing Act in 1968 is 
because that is exactly what we would be returning to. In 
essence, we would find ourselves without even the access to 
credit that we have seen before and the access to capital for 
many startup families to be able to actually raise their 
families, buy homes, and plan for the future.
    Senator Brown. And nothing in the Crapo outline would 
compensate for that?
    Mr. Shelton. No, sir. As a matter of fact, it is a little 
too short-term. As we think about caps and other issues along 
those lines, it begins a process, but does not allow the 
continuation or, quite frankly, from our perspective, the 
aggressiveness that is needed to protect the market and 
continue to make it available. So a duty to serve means we are 
being affirmative about seeing to it that those resources and 
opportunities are available to all.
    Senator Brown. Thank you.
    Mr. Levitin, and then I want to follow up and ask Mr. Zandi 
the sort of serious questions I am going to ask you, and I will 
ask his thoughts. We hear about the benefits of a broad 
national market for mortgage credit, a national market that 
ensures that at any given time a borrower in Lancaster, Ohio, 
or New Orleans can get a mortgage with a similar interest rate. 
Without the existing requirements for each of the GSEs to serve 
all markets, would you expect borrowers across the country to 
have the same certainty?
    Mr. Levitin. Absolutely not. Before we had the GSEs, we had 
regionalized housing markets with tremendous credit disparities 
across regions. Rural areas, the South and the West in 
particular, were less served than urban areas in the East.
    Senator Brown. So what would you predict, what parts of the 
country might have the most trouble accessing credit? Which 
ones would pay more? Describe regions or demographics, whatever 
you think you can figure out.
    Mr. Levitin. Rural areas will have a lot more trouble 
obtaining credit if there is not a duty to serve a national 
market. Urban communities, particularly communities of color, 
will have a lot more trouble accessing mortgage credit. And I 
think what we will see is a strong--we will continue to see a 
strong market for affluent, primarily white suburbs and ex-
urbs, and the rest of the country will have trouble getting 
mortgages at all; and if they do, it will not be on the same 
terms as wealthy suburbs.
    Senator Brown. Mr. Zandi, do you agree with that?
    Mr. Zandi. Yes, I agree that if the guarantors in the 
future system do not have a national requirement, a duty to 
serve a national market, we could see this bifurcation of the 
market, and we want to avoid that.
    Clearly, this creates a tension in that if guarantors are 
required to have a national footprint, that raises the cost of 
becoming a guarantor and raises the entry barriers and reduces 
the odds of getting entry into the system, getting those 
multiple guarantors that we need to get if we are going to get 
the competition that we want and also to reduce the systemic 
risk in the system, the too-big-to-fail risk. If you have two 
guarantors in the system--one guarantor, obviously, they are 
too big to fail. We need multiple guarantors. So there is a 
tension that we need to resolve there, but, yes, I do agree 
that the guarantors in the future system should have a national 
footprint.
    Senator Brown. So how would you do that? How would you 
change the outline to do that?
    Mr. Zandi. It is not a matter of changing the outline. It 
is coloring in the outline with more detail. I think there are 
several ways to do it. I mentioned the common securitization 
platform. Make that a more robust platform so that it lowers 
the cost of doing business to become a national guarantor. 
Provide more data and information. Fannie and Freddie today 
have released more data and information as part of their 
credit-risk transfers, but they still have a repository of lots 
of information that they are keeping close and that they can 
use. It is like Google having all this information and using AI 
to be able to use that to target the customers they want. The 
same with Fannie and Freddie. This data should be shared more 
broadly.
    Here is another idea, and I think it is very workable. You 
could make the cost of doing business higher for Fannie and 
Freddie requiring them to continue paying the 10 basis point 
fee for the 2012 payroll tax cut for awhile after its 
expiration in 2022, while allowing new guarantors not to pay 
the fee. This will give the new guarantors an advantage to 
allow them to gain the market share they need to become viable 
competitors.
    So there are multiple ways--I just mentioned a few. There 
are many others ways to make this work in a way that we get the 
national footprint, but we also get the multiple guarantors 
that we need to ensure competition in the system.
    Senator Brown. Thanks.
    Chairman Crapo. Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman.
    It is always easier to fix the roof of a house while it is 
sunny out, and so it is important to hold this hearing on GSE 
reform today while our housing market and economy are both 
healthy. And yet because our housing market and our economy are 
healthy, there appears to be no crisis immediately in front of 
us. And if there is no crisis immediately in front of us, 
Congress has a tendency not to act or to do anything in a 
proactive manner. At least that is my observation after being 
here for 4 years. I would suspect that others who have been 
here longer might disagree with me, but it seems to me that 
since right now there is not a crisis, we are not giving this 
the due credibility that it needs in terms of a proposal.
    Before we get into the specifics even of this proposal, as 
the Chairman has laid out, I would like to ask about a 
potential course of administrative action that has been 
discussed in the absence of legislation being proposed. In 
light of congressional inaction on housing finance reform, some 
have suggested that the Administration recapitalize the GSEs 
and then release them out of conservatorship. What would be the 
consequences of this action? Mr. Zandi, I would like to star 
with you, sir.
    Mr. Zandi. I think that would be a serious error. I think 
that would be going back to the future system we had before the 
crisis. The duopoly like we had before. Maybe more highly 
regulated and more highly capitalized than before, but they 
will have the same incentives to make the same errors and 
mistakes they made in the past, and I fear that in future 
generations we will be back here discussing how to bail them 
out. So that would be the last thing I would do. And that, by 
the way, is why it is another reason why we need reform, to 
your point that the sun is out, let us get this done before it 
starts to rain and starts to flood us out, because if we do, we 
are going to go down the wrong path.
    Senator Rounds. Unfortunately, we are not quite set up for 
flood insurance yet either, are we?
    Mr. Zandi. No, we are not.
    [Laughter.]
    Senator Rounds. Imagine that. Recap and release is the--of 
all of our options--and, believe me, we have thought about all 
of these. There is an old adage. Americans go down--I think 
Winston Churchill--I will botch this, but, you know, we try 
everything and we ultimately do not do anything until we do the 
right--whatever. You get what I am saying.
    Mr. Zandi. After we try everything else, then we----
    Senator Rounds. Yes, I have got to go back and read that. 
But my point is we have already gone down the path, and recap 
and release is at the bottom of the list of things we should be 
doing. Thank you.
    Ms. Ansel, would you care to comment?
    Ms. Ansel. Yes, I would agree, recap and release, some 
people have called for that, and we would--there has been a 
letter recently sent to the Administration signed by 28 real 
estate associations that call on the Administration and 
Congress to recognize the vital role that GSEs currently play. 
It is critical that any administrative reforms do not disturb 
the essential functions of the secondary mortgage market, and 
any reform, as we have said in my testimony, it is important 
that it is transparent and that it is well laid out so that any 
time for transition is carefully executed.
    Senator Rounds. Mr. DeMarco, your thoughts?
    Mr. DeMarco. Senator, I agree with Ms. Ansel and Mr. Zandi 
that recap and release should not even be on the table for 
discussion. It is the responsibility of the Congress of the 
United States to dispose of what happens to Fannie Mae and 
Freddie Mac and their charters. Congress reserved that to 
itself when it enacted HERA, and we are looking for the 
Congress to make those determinations for us.
    Senator Rounds. Thank you.
    Mr. Ugalde, you specifically mentioned the need for 
appraisal reform in your written testimony. I know firsthand 
the difficulty that can come with having to find an appraisal 
to complete a real estate transaction. I am not exaggerating it 
when I say that it takes weeks or even months to receive 
appraisals in certain parts of South Dakota. We made progress 
on this in S. 2155, and the banking regulators have also 
provided relief. Yet clearly the current system still is far 
from perfect.
    How can we improve the current appraisal system through the 
housing finance reform efforts?
    Mr. Ugalde. So when we look at the end of the day to be 
able to sell homes to our buyers, to our customers, they need 
to have certainty and predictability. One of their main 
obstacles when you are getting financing is that whole 
appraisal system. So any future efforts have to include making 
sure that appraisals can be delivered timely and in a 
financially sound manner.
    When you look at the restrictions now, for example, on 
comps, comparable house sales within areas, they are very 
difficult to do, especially as you get into rural areas and 
things and the timeframes that are set on those. So we really 
need to look at that as we move forward and make sure that 
people that are applying for mortgages can have the confidence 
that they will be approved for a loan in a timely manner and be 
able to buy a house.
    Senator Rounds. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. Thank you for 
holding this hearing.
    Let me state for the record that, having been involved in 
this subject for a long time, I never wanted to learn this much 
about housing finance.
    [Laughter.]
    Senator Warner. But I do think, echoing a number of the 
comments, that we are seeing some movement forward, and I 
applaud the Chairman for at least putting out a starting point. 
I am glad to hear such consensus around recap and release would 
be a disaster. I am glad to hear a number--and, Ms. Ansel, 
particularly in multifamily, did not cause the problem, first 
do no harm.
    I also think, Mr. Chairman, that we are seeing increasing 
recognition that we need additional transparency, that we need 
to do and continue to advance credit-risk sharing.
    I think the comments by Mr. Zandi about the common 
securitization platform, any reform means we need to build that 
up.
    I am particularly interested--and, Mr. Shelton, you and I 
have had a number of these conversations--about protecting low- 
and moderate-income households. That will be a majority of new 
households coming into the marketplace.
    And one of the things I would hope that would give us a 
sense of urgency, particularly on issues around access and 
affordability, is that the FHFA Director has broad authority to 
pursue these changes without Congress' involvement. And we know 
that in the near future, Mr. Calabria will take his position, 
and he could
actually start to dramatically change the housing market 
without Congress' involvement.
    So I want to point out--and I will direct this question to 
Mr. DeMarco, since he was head of the agency, and Dr. Zandi: 
Won't the new FHFA Director have the discretion to pull back on 
affordability goals and dilute the duty to serve? Can't he also 
lower loan limits, increase guarantee fees, and reduce product 
availability? He could reduce as well the cross-subsidy that is 
currently built into the system. He could eliminate the GSE 
patch and turn off funding for the Housing Trust Funds. And he 
could significantly increase capital requirements on the GSEs. 
He could do all that without any congressional input. Is that 
not correct, Dr. Zandi and Mr. DeMarco?
    Mr. DeMarco. Senator Warner, the statute gives the FHFA 
Director authority over all those issues that you have 
enumerated.
    Mr. Zandi. Yes, I concur. He has significant latitude.
    Senator Warner. And I guess, again, the notion that the 
status quo is going to mean simply the status quo I believe is 
a great, great risk.
    Specifically, I want to talk about the changes, how it 
could affect home ownership. Today--and we have spent a lot of 
time on this, many of us on the panel--we have spent about $4 
billion in cross-subsidies that are built into the system. Some 
of our proposals increase that by almost 50 percent. But if the 
FHFA Director decides to cut that cross-subsidy from $4 billion 
to $2 billion, Dr. Zandi, what effect would that have on home 
ownership?
    Mr. Zandi. It would be significant. Just to give you a 
sense of the numbers, cutting the cross-subsidy, let us say, in 
half--it is about $4 billion per annum currently--to, say, $2 
billion per annum, that would mean that roughly 350,000 
homeowners that were Fannie and Freddie homeowners would now 
face higher mortgage rates because they would be pushed into 
the FHA, VA, USDA system. So what would happen is that the 
share of mortgages that are done by FHA, VA, and USDA would 
increase; the amount done by Fannie and Freddie would decline--
which, by the way, also increases taxpayer risk, because FHA, 
VA, and USDA cover most of the credit risk, and in the case of 
FHA, all of the credit risk in the mortgage loans. Currently 
Fannie Mae and Freddie Mac, through the risk transfers, are 
offloading a lot of the risks to private investors. So not only 
are you raising mortgage rates for these borrowers, reducing 
home ownership, but you are adding to taxpayer risk.
    Senator Warner. Let me add one more thing in the weeds on 
this. If the Director chose to basically release the GSEs from 
conservatorship, the QM exemption or the patch would go away. 
The patch allows GSEs to purchase higher DTI loans and, 
frankly, they accounted for about 30 percent of the purchases 
in 2018. If we got rid of the patch, Dr. Zandi, what would that 
do on affordability?
    Mr. Zandi. That would also have similarly significant 
effects. If you look at the data, over the last 5 years, nearly 
20 percent of all of the loans that Fannie and Freddie have 
purchased have been through the GSE patch because the debt-to-
income ratios of the borrowers have been above the 43-percent 
threshold that are in the qualified mortgage rule. So they are 
outside of being QM, and they are under the GSE patch. That is 
20 percent of all their loans.
    Senator Warner. I just want to make one final comment. 
Having gone down this path a number of times, I do understand 
the challenges about how we would have a fully functioning 
market. But I think there are ways that we can put speed bumps 
or guarantees in there, and I just want to urge my friends on 
the panel that there does remain potentially with the FHFA 
Director enormous risks of this being taken away from the 
Congress and done administratively, and I do hope we can 
continue to work in a bipartisan way to get this done.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Toomey.
    Senator Toomey. Thanks very much, Mr. Chairman, and thanks 
to all the witnesses.
    Just a quick follow-up question on this patch, and this 
will be for Mr. DeMarco. When I think about it, isn't it fair 
to say that the existence of this patch is really the CFPB 
subbing out to Fannie and Freddie the determination of what 
constitutes QM in a not terribly transparent way and in a way, 
as we just heard, that lowers credit standards?
    Mr. DeMarco. That is correct, Senator.
    Senator Toomey. So that is what it does. Thanks.
    I also want to talk about guarantors because there has been 
a general discussion that, under the Crapo model, we would like 
to see multiple guarantors enter the market under such a model. 
I would like to see that. If we mandated a nationwide universal 
duty to serve, doesn't that potentially discourage some 
potential entrants to the market who might, for instance, have 
an expertise for rural communities or a geographical expertise? 
So I will target this to Mr. DeMarco. First of all, do you 
think that such a mandate might discourage some entrants into 
the market? And what would you suggest we do to ensure that 
there are a lot of participants in the market?
    Mr. DeMarco. I think that requiring that certainly creates 
a barrier to entry, Senator, and it also creates potential 
unintended consequences. And I rather like the example that you 
posed in framing the question. Concern has been expressed 
already in this hearing about credit in rural markets, what 
makes rural markets different.
    I will give you another example: manufactured housing. Duty 
to serve as written in the law today actually has three 
component parts, of which one is manufactured housing. So why 
would we want to create a system in which we actually 
discouraged or created a barrier to entry to credit guarantors 
that we are going to take the time and effort to specialize in 
those market segments and specialize in serving those market 
segments.
    Senator Toomey. And, Dr. Zandi, you alluded to an interest 
in having multiple participants. Do you share the concern that 
Mr. DeMarco has just articulated?
    Mr. Zandi. I do. It is a balance. I do think the concern 
that allowing for the multiple guarantors that serve sub-
markets runs the risk of creating problems to address 
affordability and access more broadly. And----
    Senator Toomey. But it could also actually serve more 
communities by creating a lower barrier--lowering the barrier 
to entry.
    Mr. Zandi. It is possible, but my sense is you would 
probably get the opposite. I mean, that is what I fear. And, 
you know, I think if we could get to multiple guarantors and 
still maintain the national footprint, that is both desirable 
from an economic perspective and a political economy 
perspective. But you are right, there is a tension there.
    Senator Toomey. Let me go back to Mr. DeMarco for a second. 
Again, thinking about the Crapo outline, obviously Fannie and 
Freddie now have a huge legacy portfolio of mortgage-backed 
securities and guarantees. How do you envision dealing with 
that in a world in which they are just two of potentially many 
guarantors going forward?
    Mr. DeMarco. Since the Chairman's outline and most other 
reform proposals appear to envision there being some kind of 
transformation of Fannie and Freddie as two companies in 
conservatorship to--I do not know whether they pass through 
receivership and allow themselves to be rechartered and 
recapitalized, certainly the existing books of business that 
they manage could be licensed out to the new Fannie and the new 
Freddie to be serviced on behalf of the Government. But, 
actually, it also could look at the opportunity to take in 
those books of business and licensing them to other entrants as 
well to allow for--to ease this notion of entry and to create 
more opportunity for new guarantors to enter this market. But I 
certainly think the existing book would have to be managed 
under contract, the same way the FDIC does when it takes over a 
failed bank and then takes the existing loan portfolio and 
assigns it to other entities.
    Senator Toomey. So the mortgage-backed security market is, 
I think, probably the second most liquid fixed-income market in 
the world behind Treasurys. In this scenario, do you think the 
liquidity in that market would be preserved?
    Mr. DeMarco. I do, and there are some technical steps we 
could get into that Congress could take in the path of actual 
legislating to ensure that. But, look, I mean, these securities 
are trading out there today with the backstop of the U.S. 
taxpayer, and that backstop would continue--continues for the 
life of those securities. So that Treasury support that 
supports that $5 trillion in MBS today would exist for the life 
of the securities even if Fannie and Freddie themselves do not 
exist.
    Senator Toomey. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Smith.
    Senator Smith. Thank you very much, Chair Crapo, and also 
to Ranking Member Brown for holding this hearing. And thanks to 
all of you for being here.
    So I am starting from the core value that affordability of 
housing is really central to people being able to build the 
lives that they want, and so how we structure a housing finance 
system to support that goal is what is uppermost on my mind.
    So I would like to continue on this topic of the GSEs' duty 
to serve and how that works and what would happen if it were to 
change. And let me ask this really of anybody on the panel. Why 
do you think it is important for GSEs to continue targeted 
support for affordable housing and mortgage lending, 
especially--and I am very interested especially in native 
communities and rural areas. Does anybody want to start with 
this? Thank you.
    Mr. Ugalde. So when you look at the data and recently 
released statistics, in the last 15 years, for example, we have 
pushed entry-level home ownership back 5 years. So where we 
used to have 25-year-olds entering home ownership, it is now 
30-plus years.
    Senator Smith. Right.
    Mr. Ugalde. And when we look at many of the markets across 
the country, we need to focus on housing affordability. We have 
dropped in key sectors of the market as much as 10 percent 
home-ownership levels over the last 10 to 15 years. We have a 
lot of those stats in our testimony, but the issue that you are 
raising is critical. If we do not start focusing on that today 
and start plugging some of these holes, we are just going to 
keep going down that path and forcing some of the young people 
with college debt and credit card debt and all these things 
that we need to give them certainty in financing and the 
ability to have a set plan on getting to the American Dream of 
home ownership, and that is really one of our goals.
    Senator Smith. And so how does this duty-to-serve 
requirement or goal, how should--what impact is it having 
specifically, or what impact should it be having especially on 
rural areas and tribal communities?
    Mr. Ugalde. So just to finish the thought, if you do not 
impose a duty to serve, especially in specialized areas, you 
are going to leave too many holes, so it is going to become 
just for-profit and you are going to see cream skimming and a 
lot of the loans made in the more lucrative areas.
    Senator Smith. Thank you. Yes?
    Mr. DeMarco. Senator, maybe a moment of background on duty 
to serve, what that term actually means in law. The duty-to-
serve requirement was actually created in 2008, just 6 weeks 
before Fannie and Freddie ended up in conservatorship. So this 
is not a longstanding part of the GSE structure. Congress in 
2008 said to Fannie and Freddie, ``We want to see you focus 
more attention in three particular segments: manufactured 
housing, affordable housing preservation, and rural housing.'' 
It has only been in the last few years that there has actually 
been implementing regulations on that.
    So I do not think that we, you know, are in a place today 
where this is a longstanding, well-developed infrastructure at 
Fannie and Freddie that has had some longstanding, meaningful 
impact. I think I would take your question differently and say, 
look, as we are doing housing finance reform, as we are ending 
the GSE charters, and moving to a new secondary market, we want 
to make sure that we are creating robust liquidity for 
affordable housing preservation, for rural housing, and so 
forth. And so I think, for
example, the exchange I had with Senator Toomey a minute ago 
actually addressed the manufactured housing and rural housing
question. So I think that those are ways to think about the 
issues that you are raising.
    Senator Smith. Please, Mr. Levitin.
    Mr. Levitin. Mr. DeMarco is technically correct that when 
duty to serve----
    Chairman Crapo. Could you push the button on your 
microphone?
    Mr. Levitin. Mr. DeMarco is technically correct about when 
duty to serve became--using that phrase became part of law. But 
we have had a broader sense of duty to serve for much longer. 
The Fannie Mae Charter Act--I think it is 12 U.S.C. 1716, 
something like that--lays out what the purposes of Fannie Mae 
are, and it is to serve a national market. It is expressly 
required to do so. So it is not targeted duties about, you 
know, manufactured housing or affordable housing, but it is 
serving a national market, and that includes all communities, 
including tribal communities.
    Senator Smith. Thank you.
    Mr. Zandi. Can I point out that the beauty of the current 
system is that we have similar mortgage rates across the entire 
country throughout the business cycle, in good times and bad 
times, and that is because of the fact that Fannie Mae and 
Freddie Mac are national guarantors with a national footprint 
and view their mission as providing credit broadly through all 
market circumstances. That principal I think needs to be 
preserved in any future system. If we lose that, then we go 
back to a system that prevailed many, many years ago where some 
communities faced much higher mortgage rates than others, and 
that was in an economy and a housing market that I do not think 
is desirable. So we need to ensure that, and the debate is: Can 
you get there with multiple guarantors without a requirement 
that they serve all markets at all times across the country?
    Senator Smith. Right. Well, thank you, Mr. Chair. This is a 
very interesting topic, and I look forward to continuing to 
work with you on this.
    Chairman Crapo. Thank you. We appreciate that.
    Senator Kennedy.
    Senator Kennedy. Thank you, Mr. Chairman.
    Mr. DeMarco, can we agree that we put Fannie and Freddie 
under conservatorship?
    Mr. DeMarco. We did.
    Senator Kennedy. When did we do that? 2009?
    Mr. DeMarco. September 6, 2008.
    Senator Kennedy. 2008, so it has been 11 years. Why did we 
do that other than the fact that they were broke?
    Mr. DeMarco. We did it because they were broke and because 
they posed a huge systemic risk to the U.S. and global 
financial system.
    Senator Kennedy. But wasn't the charge to them, wasn't it 
to go forth and try to improve their financial condition?
    Mr. DeMarco. They certainly had that responsibility.
    Senator Kennedy. Have they done that?
    Mr. DeMarco. Apparently not.
    Senator Kennedy. Well, what have they been doing other than 
sucking on their teeth for 11 years?
    Mr. DeMarco. For the last 11 years, the Government through 
the agency of FHFA has been ensuring that the systems that 
Fannie and Freddie have to create and issue mortgage-backed 
securities--that is, to have the plumbing for a secondary 
mortgage market--that that plumbing remained active and 
operable and that the securities that were issued by these 
companies would still be purchased by investors around the 
globe for the protection of the U.S. housing finance system. 
And so for 11 years, we have successfully kept those two 
companies' systems operating and done so in a way that 
investors want to purchase these MBS still. So that provides 
liquidity to our system.
    Senator Kennedy. Well, could the GSEs right now survive a 
recession, a deep recession? Or are we going to be right back 
at square one?
    Mr. DeMarco. Well, certainly, I think if there was a deep 
recession and house prices declined, foreclosures went up, 
because they are so heavily involved in guaranteeing mortgage 
credit, there would certainly be losses. And because the 
capital of those companies comes from the taxpayer, the losses 
would go to the taxpayer.
    Senator Kennedy. Well, does anybody agree that the GSEs are 
still too big to fail?
    Mr. DeMarco. I agree they are.
    Mr. Zandi. Yes, they are. They are the largest financial 
institutions on the planet.
    Senator Kennedy. Right. Does anybody disagree with that?
    [No response.]
    Senator Kennedy. Well, then, how do you make them self-
sustaining? Are they not charging enough? Or do we just 
apparently subsidize them forever and a day?
    Mr. Zandi. No, they are actually charging plenty, and if 
they use that money to--if we reform them and have a reformed 
system and take them out of conservatorship and put them into, 
let us say, a multiple-guarantor system, as Chairman Crapo has 
proposed, at the current pricing, at their current guarantee 
fee based on everything they are doing, this would be a viable 
system over time. So we are there. It just takes an act of 
Congress. It takes the will to address these fundamental issues 
that are stopping us from passing legislation.
    Senator Kennedy. So it is Congress' fault?
    Mr. Zandi. No, these are complicated issues.
    Senator Kennedy. I mean, what has been going on for 11 
years?
    Mr. Levitin. I think that, unfortunately, there is no way 
to get around the fact that the Federal Government at the end 
of the day will bear the catastrophic risk in the mortgage 
market. The Chairman's proposal would have Ginnie Mae serving 
as an ultimate backstop. There is really no way around it.
    Senator Kennedy. Yeah.
    Mr. Levitin. When everything fails, it is going to fall on 
the Federal Government. We can try and minimize the chances----
    Senator Kennedy. I get it, Professor. It is going to fall 
on the American taxpayer. I know that is what you really meant.
    Let me ask you about flood insurance. Some of these 
mortgages, the people who take out these mortgages are required 
to carry flood insurance. Is that correct?
    Mr. DeMarco. It is certainly for loans sold to Fannie and 
Freddie, yes. If they are in a flood zone, they are required to 
have mortgage----
    Senator Kennedy. OK. What are the GSEs, what are Fannie and 
Freddie doing to make sure, if anything, that there is flood 
insurance other than sucking on their teeth?
    Mr. DeMarco. Senator, other than requiring loan originators 
and the servicers to make sure it is there, I cannot speak to 
what they specifically do today.
    Senator Kennedy. They do not have any follow-up system?
    Mr. DeMarco. Senator, I have been out for over 5 years, so 
I am just not----
    Senator Kennedy. Does anybody know? Or is this the 
attitude, if something goes wrong, that is OK, somebody will 
pay for it?
    Mr. Levitin. If there is a representation that there is 
flood insurance given to Fannie and Freddie and there is not, 
Fannie and Freddie should be following up on that and putting 
the mortgage----
    Senator Kennedy. Are they? Are they?
    Mr. Levitin. That I do not know.
    Senator Kennedy. I mean, sometimes people lie.
    Mr. Levitin. I do not know how vigorously they are 
prosecuting representation and warranty violations. That I 
cannot say.
    Ms. Ansel. Senator Kennedy, I would point out----
    Senator Kennedy. Yes, ma'am?
    Ms. Ansel.----in the past 11 years on the multifamily side 
that the GSEs have contributed over $37 billion of profits, so 
the multifamily side has been capitalized well and has a very 
careful, conservative underwriting and risk-taking strategy 
that served well during the global financial crisis and 
continues to do so going forward. So in any reform, we would 
encourage to do no harm and maintain those important statutes 
that have worked so well.
    Senator Kennedy. Well, you make a valid point, and I do not 
mean to be overly cynical about all of this. But the fact is 
that the GSEs have done much good. They have done a lot of 
harm, too. They have just done a lot of harm.
    Ms. Ansel. They have worked well in our segment of the 
industry. We have a very competitive industry, and they have 
been an important part of that. They are an important part of 
serving parts of the market that the private capital does not 
serve as well or as easily. So we would ask you to take that 
into consideration in reform.
    Senator Kennedy. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman. Thank you to the 
panelists.
    I want to ask a question of Dr. Zandi because we have had 
multiple long conversations about this topic. I want you to 
respond to what Mr. Levitin said, because as I leaned over to 
my friend Mark Warner, I said, ``Yeah, that is what I have been 
trying to say this whole time,'' which is to say that I do not 
doubt that there is a need to make at the sort of securities 
transaction level reforms, but it seems to me that, with the 
exception of some panelists and some advocates, that this is 
characterized primarily as a securities transaction and not as 
public policy to advance affordable housing. And I do not mean 
affordable housing purely in the sort of LIHTC officially, you 
know, AMI level but just making sure that people can afford to 
live in apartments and homes.
    So how do you address Professor Levitin's basic assertion, 
which is that what you are proposing is quite radical, quite 
experimental, it is an $11 trillion market, and from the 
standpoint of the consumer right now, there are a lot of basic 
protections that ought to remain enshrined in statute, and a 
lot of what is being talked about is aspirational, interesting, 
might work, but does not have the kind of ironclad guarantee 
that consumers and lenders at the sort of ground level have 
right now?
    Mr. Zandi. I do not think it is experimental. I think this 
is just evolutionary and just an add-on to the current system 
that we have been talking about since we started talking about 
reform.
    Senator Schatz. Well, except that you are also getting--I 
mean, at least people are contemplating getting rid of the duty 
to serve----
    Mr. Zandi. OK, so----
    Senator Schatz.----people are contemplating getting rid of 
certain standards that the FHFA establishes pursuant to statute 
and replace it with basically a pile of money that provides 
what is called a ``cross-subsidy.'' And I do not know if that 
will work.
    Mr. Zandi. If I were king for the day, I would increase the 
monies that go to the cross-subsidy. Right now, by my 
calculation, it is about $4 billion per annum. The 10-basis-
point fee that Chairman Crapo has in his proposal would raise 
that to roughly $5 billion. We would have a mortgage insurance 
fund to ensure that the catastrophic insurance that the 
taxpayers are on the hook for are paid for. You make that 
level. That is another cross-subsidy in the system, now up to 
about $5.5 billion.
    I would not stop there. I do understand that----
    Senator Schatz. But what about the duty to serve? What 
about all the rules that are sort of in exchange for increasing 
the cross-subsidy? Which, by the way, mortgage payers pay, 
right? It is a cross-subsidy, but, you know, we are all paying 
it. You increase the pile of money. I am all for that. But why 
in exchange for diminishing some of these bedrock protections?
    Mr. Zandi. I am not arguing that. I am still king and what 
I would say----
    [Laughter.]
    Senator Schatz. A king. So far, OK.
    Mr. Zandi. Yeah, I would have a national footprint--
right?--to ensure that we have equal access across the system. 
And if you insisted that we should have the same affordability 
regime, affordable housing goals, then I would say, OK, I would 
be OK with that. This is why: In my view--I am not a fan of the 
affordable goals, not because I am not interested in making 
sure that underserved communities are served. But I think the 
affordable housing goals are very ineffective. They do not 
work. But if you feel like you need those to provide certainty 
that we are going to get to where you want to go in terms of 
access across certain communities, if I were king, I would say 
fine, no big deal, because at the end of the day in my view it 
is irrelevant.
    Senator Schatz. Well, we have a minute left. I just want to 
challenge you on that. I tend to--I mean, I am not sure we 
totally disagree about the affordable housing goals or the duty 
to serve. I would argue not that they do not work, but they do 
not work well enough.
    Mr. Zandi. OK.
    Senator Schatz. Right?
    Mr. Zandi. Right.
    Senator Schatz. And that as difficult as it is to find 
affordable housing, as much as we are as a panel and as a 
country failing on this, we can, in fact, make this worse. And 
that is what worries me.
    It is true that we are not succeeding, but, therefore, we 
should eliminate what little protections we have seems to me to 
be a bit of a stretch, and I want you to respond to that in 
your last--in my last 30 seconds. You are king. It is your 30 
seconds.
    Mr. Zandi. Yeah, I mean, I am very sympathetic to what you 
are saying. The only thing I would say, though, is, you know, 
at $4 billion to 5--I am an economist, and I am focused on 
numbers. That is a big deal. That is a billion and a half more.
    Senator Schatz. Hold on. You think a billion and a half 
deal is not basically a drop in the bucket as it relates to----
    Mr. Zandi. No.
    Senator Schatz.----the entire housing market?
    Mr. Zandi. It would make a significant difference to 
hundreds of thousands of homeowners each year. And, by the way, 
it does not have to be 10 basis points. You know, if you do the 
arithmetic--and we have done the arithmetic--you could actually 
take this up to 15 basis points, and now we are talking, you 
know, substantively more money.
    Senator Schatz. I am for all of that. I just do not 
understand why the trade.
    Mr. Zandi. Well, my point is I do not think the affordable 
goals get you what people think they are getting, but I would 
take that trade because I am going to be able to provide much 
more funding to the people I am trying to help and the people 
you are trying to help.
    Senator Schatz. Thank you.
    Chairman Crapo. Thank you.
    Senator Warren.
    Senator Warren. So we know there is a housing crisis in 
this country and that millions of families who can afford to 
pay a mortgage and should be able to buy a home are shut out 
and trapped in a rental market with skyrocketing costs because 
they cannot get a mortgage. This is especially true for 
families of color who are more likely to be renters because 
they were denied opportunities to buy a home that white 
families had had those opportunities for generations. And then 
these same black families were targeted with the most abusive 
mortgages and loans in the run-up to the financial crisis. So 
it is a double blow.
    Today the black home-ownership rate in America is 43 
percent, and it is 47 percent for Hispanic Americans. The 
African Ameri-
can home-ownership rate is now 30 points below that of white 
Americans. That is the kind of gap we saw back when housing 
discrimination was legal.
    We are here today to talk about housing finance reform, and 
it is clear that any housing finance reform effort must focus 
on responsibly opening doors to home ownership to these 
families and easing the strain on renters, both of those 
things, plain and simple.
    So, Mr. Shelton, I would like to start with you. Under the 
current system, Fannie Mae and Freddie Mac have affordable 
housing goals that help banks make more loans to low-income 
borrowers in low-income communities. The Chairman's housing 
reform outline eliminates these goals altogether. If the goals 
are eliminated, would you expect the home-ownership gap between 
black and Hispanic Americans and white Americans to grow or to 
shrink?
    Mr. Shelton. The gaps will grow.
    Senator Warren. The gaps will grow. I agree. The affordable 
housing goals have been crucial in making mortgage credit 
available for communities of color, and any effort at reform 
should make them stronger, not throw them in the trash. To 
replace the goals in a program known as duty to serve that also 
helps expand access to home ownership, the Chairman's proposal 
creates a new Market Access Fund. This is the argument, that 
you are going to get to the same place with a new Market Access 
Fund. The proposed Market Access Fund shares funding with two 
other programs: the Houston Trust Fund and the Capital Magnet 
Fund. A generous estimate suggests that funding for the whole 
pot is no more than $5 billion a year. I think we all agree on 
that fact.
    So, Mr. Shelton, say the whole $5 billion went to the 
Market Access Fund, which is unlikely if we are going to have 
three dipping into it. Would low- and moderate-income borrowers 
and borrowers of color be in the same position, in a better 
position, or in worse shape than under the current system?
    Mr. Shelton. In much worse shape.
    Senator Warren. So the plan scraps the goal. It replaces 
the goals with a pot of money that is way too small to do the 
same job. Is that how you see it, Mr. Shelton?
    Mr. Shelton. Yes, ma'am, absolutely.
    Senator Warren. So I recently reintroduced my housing bill 
which puts about $47 billion per year in the Housing Trust Fund 
and Capital Magnet Fund. In the Chairman's plan, these same 
programs at most would get maybe 10 percent of that funding.
    So, Dr. Zandi, in an independent analysis you did of my 
bill, you wrote that because of those investments, the 
investments that would be made under my bill, and other reforms 
that are in the bill, ``By the end of the 10-year horizon, 
affordable housing supply should be approximately equal to 
demand.'' We would get supply and demand back in balance. Would 
a $5 billion per year investment split between three programs 
have the same effect?
    Mr. Zandi. No. I would argue that your legislation should 
be on top of and in addition to, separate from the discussion 
around GSE reform. What we are trying to do here is make the 
current system work better for underserved communities, and I 
think that is a reasonable debate, and we had it. But I 
entirely agree with you that that is not the end of the story. 
We need to help address another increasingly more serious 
crisis, and that is an affordability crisis. We have a serious 
shortfall of affordable housing, rental housing and for home 
ownership across the country, and each and every year this 
crisis is getting worse because the amount of--the home 
builders are having--for lots of reasons that Mr. Ugalde gave, 
they are not being able to supply the market with what they 
need, particularly at the low end, particularly at low price 
points. So your legislation, which provides significant 
financing and funding to the Housing Trust Fund and the Capital 
Magnet Fund to increase the supply of affordable housing--by 
the way, the brilliance of that is that it directs funds to 
organizations that are able to address complicated problems 
involved in developing affordable housing in urban centers and 
rural areas. That is what I do as lead director at CDFI in 
Philadelphia. That is what we are trying to do. Every home has 
a story, right? Title problem, tax issues and liens, all kinds 
of neighborhood issues. The only people who can solve that are 
people who are going to get the funding from the Housing Trust 
Fund and the Capital Magnet Fund.
    So, in my view, that is on top of everything we are talking 
about. It is not in lieu of everything we are talking about.
    Senator Warren. OK. So it is going to take both to fix the 
problem.
    Mr. Zandi. Oh, it is absolutely going to take both. These 
are different problems. We have got two different problems.
    Senator Warren. That is right--well, they are not different 
problems. They are related to each other. They are how we get 
people into homes that they can afford and how we also at the 
same time address the racial gap that is yawning in front of 
us. And that is the part I just wanted to underline here. The 
outline does not address the housing costs that families all 
across this country--black, white, Latino, urban, rural, 
Republican, Democrat--face. And unless we set some real goals 
and put some real resources into doing this, we are not going 
to make the changes that we need to make. So thank you. And 
thank you, Mr. Shelton.
    Chairman Crapo. Senator Tester.
    Senator Tester. Thank you, Mr. Chairman. I was waiting for 
the other side of the aisle, but evidently Kennedy is done. And 
I do not mean that literally, OK?
    [Laughter.]
    Chairman Crapo. Do not ever underestimate Senator Kennedy.
    Senator Tester. Never, never.
    Mr. DeMarco and Dr. Zandi, one of the most important parts 
of housing finance reform for me is to ensure that small 
lenders have access, that both urban and rural America continue 
to have equal and fair access to secondary markets. Currently 
small lenders are able to access what is referred to as a 
``cash window,'' which allows them to sell individual loans for 
cash to Fannie and Freddie. I want to know your view on that 
and if that is enough to give small lenders equal access.
    Mr. DeMarco. Well, they certainly have it today, Senator, 
and I think under the Chairman's outline, they would preserve 
all of those options they have today, and they would have more. 
So this ought to be better for small lenders because it 
preserves the cash windows at Fannie and Freddie. It allows new 
guarantor entrants, so that creates new cash windows. And it 
creates the opportunity for other issuers, because not all 
small lenders sell their loans directly to Fannie and Freddie. 
Many of them sell them to other loan aggregators, and that 
channel is also expanded under the Chairman's outline.
    Mr. Zandi. Yes, I agree. I think Chairman Crapo's proposal 
would address the small lender issue. Each of the guarantors in 
the system, the multiple guarantors, would have a cash window, 
and I think that is key for small lenders. That is what they 
are looking for, that is what they need, and I think that is 
what is provided in the outline.
    Senator Tester. All right. And so when it comes to rural 
America, is there anything additional we need, or do you think 
that is adequate? Now, I talk about rural America as all of 
Montana being rural, OK? And I want to get to the Home Builders 
fellow in a second here--is it Ugalde?
    Mr. Ugalde. Close, yeah.
    Senator Tester. Ugalde is good, but in rural America, you 
know, if there is a town of 5,000 people or more in Montana, 
housing is an issue. And it is a huge issue. It is an issue 
that is stopping businesses to expand. It is stopping 
communities to recruit new businesses. It is stopping economic 
development cold in rural America, at least in my State.
    And so are there other things we need to do as we look at 
GSE reform to try to drive the investment into places where, 
quite frankly, home builders are--there are not a lot of them, 
and those there are currently pretty busy. So, Mr. DeMarco and 
Dr. Zandi, could you see if there is any--talk about if there 
is anything else we need to do to drive? And then, Mr. Ugalde, 
I would love to get your opinion on what we need to do in these 
rural areas to try to get more housing?
    Mr. DeMarco. Well, one thing, Senator, we talked earlier 
when you were not here about appraisals being a challenge in 
rural areas. One of the things that at least a couple of the 
panelists, I believe, certainly I have suggested, is that this 
is something Fannie and Freddie are sitting on a massive mound 
of appraisal records and data, and making that more available 
would certainly assist, not just in rural areas but across the 
country. It certainly would be an assist with the appraisal 
problem in rural areas.
    Senator Tester. Dr. Zandi?
    Mr. Zandi. It is critical that the guarantors in the future 
system have a national footprint. They have an obligation to 
serve all markets in all conditions.
    Senator Tester. OK. Mr. Ugalde?
    Mr. Ugalde. Sure. What you say is so true as well. You 
know, home builders are challenged at the single-family and 
multifamily levels. They need remodeling, for that matter, 
across the country to get predictable financing. And our 
membership relies heavily on small and community banks. So the 
more that we can do, as was just discussed, about providing 
access at those levels and through those lenders, it does our 
members a world of good, and that is where we have to head into 
the future as this housing affordability issue keeps increasing 
rather than is curtailed at all or we need to make inroads 
pretty quickly into that whole issue.
    Senator Tester. Well, I want to thank--and I am not going 
to use all my time, but I want to thank the Chairman and the 
Ranking Member. I think we do need GSE reform. I think we need 
to move forward. Hopefully the Ranking Member and the Chairman 
can come up with a plan that works, that this Committee can get 
behind, and that works for this country. I can tell you, if 
there is one thing right now in my State that is stopping 
growth, it is housing. And it may be the same thing in Boise, 
and it may be the same thing in Minneapolis. But I can tell 
you, in our State it is housing. It is just putting a lock on 
all economic growth.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Tester.
    Senator Reed.
    Senator Reed. Well, thank you, Mr. Chairman, and I thank 
you for getting the kickoff, getting this going again. It is an 
important issue.
    Let me go down, and I want to start with Ms. Ansel. I have 
three questions which might be repetitive since I am about the 
last person that has been asking questions. But, first, in 
Senator Crapo's outline, who will be left out of the mortgage 
market? What category of borrowers will be left out, if any?
    Ms. Ansel. So, with respect, my expertise is in the 
multifamily market side, sir, and with respect to Senator 
Crapo's outline, he has called for a separate solution for the 
multifamily industry. We are strongly supportive of that. We 
believe there are more details to be hammered out yet, and so 
we look forward to participating in that. But we do not believe 
that anybody in the multifamily side will be left out as long 
as we are able to participate in this process.
    Senator Reed. And, Mr. DeMarco, your sense who might be 
left out?
    Mr. DeMarco. I do not see any borrowers being left out in 
this framework.
    Senator Reed. And from Home Builders, Mr. Ugalde?
    Mr. Ugalde. So we see it the same way, actually, that the 
Chairman's outline actually provides across the board, and we 
look forward to working to make sure that that is the case in 
the long run.
    Senator Reed. And, Dr. Zandi? Mark?
    Mr. Zandi. None.
    Senator Reed. Mr. Shelton?
    Mr. Shelton. Thank you. Without a robust duty to serve, our 
concerns are that racial and ethnic minorities and others will 
be left out yet again.
    Senator Reed. And, Mr. Levitin?
    Mr. Levitin. I think there are two markets that will be 
left out. I think rural markets will be left behind, and I 
think low- to moderate-income households will have trouble 
accessing capital.
    Senator Reed. And let me begin again with Ms. Ansel. Will 
it cost more to get a mortgage under this outline? I know it is 
very preliminary, but will it cost more?
    Ms. Ansel. Again, sir, as we work through the details, we 
do not believe it will cost more. We think it will be--there is 
a good competitive process in the multifamily side. We have 
access to private capital as well, and we believe that this 
solution will continue to provide a good competition for 
mortgages.
    Senator Reed. Mr. DeMarco, please.
    Mr. DeMarco. I do not see reform having any meaningful 
impact on mortgage rates.
    Senator Reed. And, Mr. Ugalde?
    Mr. Ugalde. The same thing. I think, though, to further 
that a bit, if our members are braced that if there is a modest 
cost to this, it is well worth going through it.
    Senator Reed. OK. And, Dr. Zandi?
    Mr. Zandi. It will lower mortgage rates. I mean, you have 
to fill in some blanks because it is an outline, and there are 
numbers you have to fill in. But under reasonable assumptions 
and filling--and they are reasonable because they are mine, I 
will fill them in, you know. They are going to be lower, and a 
key reason is we are going to get an explicit Government 
guarantee, Ginnie Mae guarantee. That is worth something, and 
that is going to bring mortgage rates down. So that is why we 
need reform.
    Senator Reed. Mr. Shelton?
    Mr. Shelton. Because it is just an outline at this point, 
we can see a number of scenarios in which we would have 
problems. We would be delighted to provide some of those 
options to consider.
    Senator Reed. Thank you.
    Mr. Levitin. I am going to disagree with Dr. Zandi. I think 
it actually could cost more, and here is why. The system that 
is proposed is likely to be more procyclical, and when you have 
a more unstable market, lenders are going to start pricing that 
in. They are going to be pricing in for the instability. Having 
the guarantee provides some stability here with the Ginnie Mae 
backstop, but the Ginnie Mae backstop is only a catastrophic 
backstop. It does not cover noncatastrophic losses, and that 
will still be a problem.
    Senator Reed. And then, Senator Tester touched upon this, 
the impact on credit unions and community banks: Will they do 
better or worse? Ms. Ansel.
    Ms. Ansel. Again, in the multifamily industry, we have 
strong competition. We rely on multiple sources. So, again, 
based on the outline, we do not see an impact to----
    Senator Reed. Mr. DeMarco, please.
    Mr. DeMarco. Such institutions retain all the options that 
they have in today's system, and they gain more, so I would 
have to believe that this helps them.
    Senator Reed. OK.
    Mr. Ugalde. Positive impact.
    Senator Reed. Positive impact. Dr. Zandi?
    Mr. Zandi. Yeah, if anything, positive.
    Senator Reed. Positive.
    Mr. Shelton. And, again, we are deeply concerned about the 
prospects, and certainly those small lending institutions have 
had major struggles over the years. Without the additional 
support we would love to see, and certainly those things that 
are part of the system we discussed, we could see a scenario in 
which there would be problems.
    Senator Reed. And, Mr. Levitin?
    Mr. Levitin. Well, once again, I am going to disagree. I 
think that this system could be a real problem for small 
institutions, that the basic economics are that if you are a 
guarantor, you are going to prefer dealing with a large 
institution to a smaller one. And while I appreciate that the 
Chairman has said in the outline no volume discounts, there are 
lots of other ways that a guarantor could prefer large 
institutions to small ones, simply having different pricing for 
a cash execution than from a swap execution.
    Senator Reed. I just have a few moments left, but in your 
written testimony, Professor Levitin, you recognize that 
competition is a very good way to allocate scarce resources, 
but there might be some dangers in competition. Can you just 
quickly, within seconds?
    Mr. Levitin. Absolutely. Competition can be a wonderful 
source for getting efficient allocation of resources, but it 
can also go too far. If you want to see the simplest example of 
this, what this Committee has been dealing with, with Wells 
Fargo, where competitive pressures have pushed Wells into a 
bunch of really bad behaviors.
    Senator Reed. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Cortez Masto.
    Senator Cortez Masto. Thank you. Let me just start off by 
thanking the Chairman for having this hearing.
    Chairman Crapo. Thank you.
    Senator Cortez Masto. Housing and affordable housing and 
the lack of affordable housing in Nevada is the number one 
issue, and I know it is an issue across the country. So I just 
appreciate the outline that you have put out there, the ability 
to have a starting foundation to have this discussion. So thank 
you so much for that.
    And I apologize, I had to step out for some other work, and 
am back here with all of you, so you may be repeating. But the 
initial conversation really was interesting to me, and there 
are a couple of things that I kind of want to get in the weeds 
on.
    But first let me start with this. I think it was Professor 
Levitin, you talked about a single-guarantor system is the best 
and it just needed to be perfected. Can you give me examples of 
what that perfection would look like, kind of the top three 
things?
    Mr. Levitin. I think it might mean something along the 
lines of merging Fannie and Freddie so we really have one 
single guarantor, and we are taking steps already in that 
regard with the common securitization platform that will be 
producing a single security.
    It would be making explicit that their credit-risk transfer 
transactions must be on a market-wide basis rather than on 
segments of the market. Right now they are only segmenting 
their credit-risk transfers based on LTV, on loan-to-value 
ratio. They have got high and low loan-to-value ratio pools. 
They should be required, though, to preserve national pools so 
that we would not get the very problem that we have been 
discussing with a multi-guarantor system where you get 
geographic segmentation of the market. I think if you do that, 
and then also I would formalize the system of credit-risk 
transfers but have an exception for adverse market conditions, 
so that the default setting would be credit-risk transfers, but 
when the market is frozen, then the single guarantor can carry 
the system temporarily.
    Senator Cortez Masto. Thank you.
    And, Dr. Zandi, would you agree with that?
    Mr. Zandi. I am sympathetic to a single-guarantor system or 
maintaining Fannie Mae and Freddie Mac as Government 
corporations, so we avoid the problems of trying to merge these 
two institutions and continue to maintain the same competition. 
I wrote a series of papers describing how you would go about 
doing this.
    Having said that, I think we need to recognize the 
political economy issues involved, and if we want to get 
something done, if we really want to reform the system, if you 
want to get a piece of legislation done, that is not going to 
win the day, I do not think. And I do think we can use Chairman 
Crapo's proposal as a starting point, take the current system, 
two guarantors, open it up for entry, and do the things we need 
to do to lower barriers to entry and get that competition into 
the system.
    Senator Cortez Masto. So when you are talking about 
competition, are you talking about that you would expand the 
number of privately owned institutions to be allowed to do what 
Fannie and Freddie do?
    Mr. Zandi. Correct. So----
    Senator Cortez Masto. Can I ask--so let me just--I am 
trying to understand this, because I am looking at your--I 
think you wrote a Washington Post piece with Jim Parrott, 
September 2018, and you talked about Fannie and Freddie reform, 
and you said there were two choices. The first is to expand the 
number of privately owned institutions, and this would move to 
multiple guarantors. Or the second choice would be to combine 
Fannie and Freddie into a single entity. In the third 
paragraph, you said you would prefer the latter, which is the 
single utility. So what is the difference now? And, really, I 
am not trying a ``gotcha'' moment. I am just trying to 
understand----
    Mr. Zandi. It is not ``gotcha.'' Here is----
    Senator Cortez Masto.----because what we do today is so 
important for what we have heard of the issues on affordable 
housing.
    Mr. Zandi. Senator, here is the most important thing: We 
have got to have legislation. We have to get this done. And in 
my view, my estimation, if I were king, I would go down the 
single-guarantor path.
    Senator Cortez Masto. OK.
    Mr. Zandi. But I am not king, and we are not going to get 
that through legislation. So we have to think about what is 
second best that works.
    Senator Cortez Masto. We are not going to get it through 
legislation because of what you are hearing here now or you----
    Mr. Zandi. I have heard this for 10 years. I know.
    Senator Cortez Masto. OK.
    Mr. Zandi. I have been involved with this for 10 years. I 
have followed this very carefully. I have been down every 
single path, and I know what is going to work and what is not 
going to work, because I have been here before. And if you 
insist on going down that path, it will not get done.
    So then you say to yourself, well, what am I going to get--
how am I going to get----
    Senator Cortez Masto. No, and I appreciate that, and so I 
have only got a few minutes left. So I am curious, from Mr. 
Ugalde and Ms. Ansel, what I would love from you is specifics 
on this outline for reform. Obviously, there are concerns that 
you have about it. What are those specific concerns? Because I 
will tell you, at the end of the day, the affordable housing 
roundtables I have had all over my State, including in rural 
areas, my goal is to ensure what we do here helps what you do 
pencil out so we have more affordable housing. So what is it 
that we should be doing with this? How can we--I will not say 
``improve upon it,'' but what should we be doing that benefits 
what we are trying to achieve here, specifically?
    Mr. Ugalde. So, in our opinion, this is a great starting 
spot. So if you look at the Chairman's outline and start there 
and we are ready to get down into the----
    Senator Cortez Masto. I know. I have heard that. What are 
the specifics?
    Mr. Ugalde. So the specifics would be in areas of 
multifamily, for example, to make sure the question that was 
just asked, making sure that smaller lenders, community banks, 
can service our membership, to make sure that our end buyers of 
the single-family homes around the country are treated as 
equally as possible with the same rates and that we can get to 
a closing table effectively and efficiently and close on loans.
    So the predictability in the sure--the fact that the 
confidence that our buyers can take into the future, that is 
all key to us, and that is where I think we have to all work 
with the Committee to make sure that that happens.
    Senator Cortez Masto. OK. Ms. Ansel? And I know my time is 
up, Mr. Chairman. If you can in a few seconds.
    Ms. Ansel. I will answer quickly. The details are to be 
worked out, but the key is access to capital, to all markets, 
to all apartment types, at all times.
    Senator Cortez Masto. OK.
    Ms. Ansel. And that is key.
    Senator Cortez Masto. OK. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman, for holding 
these hearings, and to all of our witnesses today.
    I want to spend a bit of time focusing on the GSEs' current 
multifamily programs which serve a critical market role, 
certainly in a State like New Jersey--I understand that very 
clearly--but other States across the country, ensuring that 
multifamily financing is widely available throughout the 
economic cycle. So from my perspective, a private capital loan 
is insufficient to meet the demand for multifamily financing 
because during the crisis we saw more private market players 
exit the market entirely.
    So, Ms. Ansel, is it your sense that private capital 
sources have the capacity or the business interests to fill the 
market need for financing affordable and middle-income 
multifamily properties?
    Ms. Ansel. So private capital is an important part of the 
competition, but as you said, especially during the economic 
crisis, those private capitals retracted and were not 
available. And today they are not able to serve at full 
capacity for our capital needs. The GSEs perform a very 
important role. Most of the private capital is not--is more 
interested in serving the top-tier markets. The GSEs provide 
capital for secondary and tertiary markets that private capital 
is not interested in, whether it be Twin Falls, Idaho, or many 
small towns.
    Also, if you look at the details, the GSEs today, 80 
percent of their capital goes to serve residents that are less 
than 100 percent of AMI. So a good bit of that capital goes to 
the middle market and affordable housing. So GSEs are critical 
to that.
    Senator Menendez. So if the GSEs were to sell and privatize 
their multifamily businesses, what impact would this have on 
the availability and affordability of multifamily housing?
    Ms. Ansel. Again, it depends on the formation of that 
privatization. I think the key in whatever reform happens, as I 
mentioned before, is that we need the explicit paid-for 
Government guarantee for mortgage-backed securities. That can 
happen as privatized, but that is critical. We need to 
recognize the inherent differences in the multifamily business 
model. That needs to be important in any reform that goes 
forward.
    There are successful components. The GSEs performed very 
well over the last 11 years and during the economic crisis, so 
maintaining those instruments that have been so successful is 
critical in
reform. And, most importantly, we need a very transparent and 
defined timeline for any period of transition. So privatization 
works, but the details need to be worked out.
    Senator Menendez. But from what we have seen alone in the 
private market, as it exists now, that has not sufficed to meet 
the challenge.
    Ms. Ansel. That is correct.
    Senator Menendez. OK. Let me say my colleagues covered duty 
to serve pretty well, but let me just say in response to a 
comment Mr. DeMarco made to a question on the duty-to-serve 
rule not being implemented until recently. Mr. DeMarco, you 
were in charge of the FHFA, and you had 5 years to get this 
done, and it was not. So, you know, saying that we have only a 
short window in my mind does not undercut the responsibility of 
the duty to serve. I think it is a critical element.
    Let me go to Mr. Ugalde. As you outline in your testimony, 
one of the barriers addressing our affordable housing crisis is 
the availability of capital to create additional housing 
supply, and the lack of supply drives up prices and ultimately 
impacts affordability, particularly for entry-level and first-
time home buyers. In the past, I have led efforts to increase 
the availability of financing for real estate construction 
loans.
    In your view, how should we address the supply issue as 
part of our larger conversation on reforms to the system?
    Mr. Ugalde. So, first, Senator, thank you for all your help 
in the past. Very much appreciate it.
    The big issue, we have talked about single-family, 
multifamily renters and buyers at the end, but we also have a 
piece that affects our members directly at the beginning of the 
process: acquisition, development, and construction. I 
mentioned that. AD&C financing is key, and the more robust we 
can get that system to react to the needs of our members and 
builders and developers across the country, the better off we 
will be.
    The key to housing affordability is going to be the ability 
to get land at a fair price, and that usually means everything 
from density to purchasing at the most affordable rate 
possible, with the utilities and everything brought in. Tougher 
in rural areas, but we have many builders that are up for the 
task and looking to do it. They just need access to proper 
financing. So in a nutshell, if we could have--again, if I were 
king for a day, I would do everything that he was referring to, 
but I would also look to helping builders and developers in the 
initial process as well.
    Senator Menendez. OK. I appreciate that. We have no kings 
in this country, so that is not going to happen, at least not 
as of yet.
    [Laughter.]
    Senator Menendez. Mr. Chairman, may I have one final brief 
question? Thank you, Mr. Chairman, for your courtesy.
    GSEs can receive duty-to-serve credit for purchasing loans 
on small multifamily rental properties of 5 to 50 units. Ms. 
Ansel, what impact would eliminating the duty-to-serve rule 
have on the affordability of that segment of affordable rental 
options?
    Ms. Ansel. We support the duty-to-serve standards. We think 
that anything that brings additional access to capital across 
the rural markets or the markets that are less served is 
critically important. I think Chairman Crapo's access ideas may 
also fill those needs, but we think that anything that we can 
do to provide additional capital to the rural and underserved 
markets is critically important.
    Senator Menendez. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Menendez.
    That concludes the questioning for today's hearing. I would 
just like to say before I wrap it up that, again, I appreciate 
the testimony that all of you have provided here today. 
Frankly, all of you have been engaged on this. I think it was 
Dr. Zandi who said he had been down every path in the political 
world here over the last 10 years. I think I have been down 
every rabbit hole. And there are things that are doable, and 
there are things that are not.
    I believe, however, very strongly that, fortunately, the 
doable is something that is very robust and comprehensive, and 
that we can find a bipartisan pathway to resolve these issues. 
And I think your testimony here today has helped us to identify 
where we need to build that stronger consensus as to how to 
address some of the critical issues that you have each 
addressed here today and also some good ideas.
    There will be additional questions that you will receive 
from Senators in writing, and I tell my Senators who wish to 
submit those questions that those questions are due by Tuesday, 
April 2nd. And we ask each of the witnesses to respond as soon 
as possible to those questions. And I think that is really 
critical here because the discussions that have taken place 
today have shown that there is a lot of wisdom and a lot of 
experience among you that can help us find these solutions.
    I truly believe that the testimony and the questions and 
answers that were given today have shown that it is doable, and 
I look forward to working with each of you as we move forward 
to get it done.
    With that, this hearing is adjourned.
    [Whereupon, at 11:56 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
    Chairman of the U.S. Senate Committee on Banking, Housing and Urban 
Affairs, delivered the following remarks at the first of two hearings 
on his housing finance reform outline. The text of Chairman Crapo's 
remarks, as prepared, is below.
    Today, the Committee returns its focus to the state of our housing 
finance system.
    It has now been a full decade since the Government asserted control 
of the Government-Sponsored Enterprises, or GSEs, Fannie Mae and 
Freddie Mac.
    After 10 years of market recovery, these mortgage giants remain 
stuck in conservatorship, with taxpayers still on the hook in the event 
of a housing market downturn.
    It appears that the old, failed status quo is slowly beginning to 
take hold again, with the Government in some ways expanding its reach 
even further, entering new markets where it has never been before.
    Today, Fannie and Freddie, along with Government-insured mortgages, 
dominate the mortgage market.
    Approximately 70 percent of all mortgages originated in this 
country are in some way touched by the Federal Government.
    I have long said that the status quo is not a viable option, and I 
consider it a top priority this Congress to find a comprehensive, 
legislative solution.
    During the 113th Congress, this Committee made progress by 
favorably reporting the bipartisan Housing Finance Reform and Taxpayer 
Protection Act.
    Since that time, the Committee has continued to study the issue, 
learn from previous iterations, and analyze a variety of proposals that 
have been put forward by stakeholders and policymakers.
    Last month I introduced an outline for potential housing reform 
legislation.
    This outline sets out a blueprint for a permanent, sustainable new 
housing finance system that: protects taxpayers by reducing the 
systemic, too-big-to-fail risk posed by the current duopoly of mortgage 
guarantors; preserves existing infrastructure in the housing finance 
system that works well, while significantly increasing the role of 
private risk-bearing capital; establishes several new layers of 
protection between mortgage credit risk and taxpayers; ensures a level 
playing field for originators of all sizes and types, while also 
locking in uniform, responsible underwriting standards; and promotes 
broad accessibility to mortgage credit, including in underserved 
markets.
    This outline is the byproduct of over a dozen hearings conducted by 
this Committee over the past decade.
    It also incorporates key elements of several housing finance reform 
plans that have been advanced by thought leaders.
    Many of those thought leaders have joined us today, and will join 
us tomorrow.
    We will hear from 12 witnesses over the next 2 days on my housing 
finance reform outline.
    Thank you for your willingness to appear here, and for your 
continued participation in this important conversation.
    Today, I am interested in discussing the viability of our 
framework, the impact it will have on various market participants, and 
to highlight the areas where work remains to be done.
    We are dedicated to getting this done, to bring to a close the 
conservatorship era, and to establish a durable, sustainable new 
housing finance system that works for all Americans.
    The time is now to resolve this issue and I look forward to working 
with my colleagues to that end.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    Thank you, Chairman Crapo, and thank you to all of the witnesses 
for being here today.
    I have long said that the ``housing'' part of this Committee's name 
doesn't get enough attention, and I look forward to the next 2 days of 
discussions and to working with the Chairman to address our Nation's 
housing needs.
    Whether you rent it or own it, a house isn't just where you live. 
One of the best books about housing is Matthew Desmond's book Evicted, 
and couple of years ago, he wrote in the front cover of my book, ``home 
= life.''
    Home equals life. That's how we should all approach this.
    A house is where you go after a long day at work. It's where you 
make memories with your children, maybe marking time with a growth 
chart on the bedroom wall. It determines what neighborhood you live in, 
where you worship, and where your kids go to school.
    But too many Americans can't afford that home.
    Nearly one-third of households are paying more than 30 percent of 
their income for housing, including almost 21 million renters and more 
than one in five rural homeowners.
    And in the fallout from the financial crisis, millions of people of 
color lost vast amounts of housing wealth they had finally been able to 
build after a century of redlining and discrimination.
    Today, home ownership among African American households has fallen 
under 43 percent--more than 30 percentage points below the white home-
ownership rate.
    When work has dignity, everyone can afford housing and can choose 
to build wealth through home ownership and to pass that on to their 
children and grandchildren.
    That's simply not the reality we live in today, and any changes we 
make to our housing finance system should be to help working people--
not Wall Street.
    In 2008, when Congress last passed substantial, bipartisan housing 
finance legislation, we strengthened oversight of our housing system 
and took important steps toward serving Americans who are too often 
left behind.
    We maintained the GSEs' responsibility to facilitate national 
access to mortgage credit.
    This broad, national market means that interest rates for borrowers 
in Idaho look a lot like those in Ohio and Arizona.
    We further targeted affordable housing goals, and we established a 
duty to serve underserved rural areas, manufactured housing, and 
affordable housing preservation markets, all monitored by a new 
regulator.
    We also created the Housing Trust Fund and Capital Magnet Fund to 
allocate dedicated resources each year to the development of affordable 
housing opportunities for the lowest-income households.
    We know markets don't always work perfectly, and the market isn't 
serving these Americans on its own.
    These funds are far from enough to solve our affordable housing 
crisis, but they are part of the solution.
    Since 2008, FHFA has been an independent regulator that has worked 
to serve underserved markets, closely monitored the GSEs' business, and 
built up the capability to collect the housing data we need to help us 
help families.
    Unfortunately, not all of the 2008 changes have been consistently 
implemented.
    Even though they are funded outside the appropriations process, the 
Housing Trust Fund and Capital Magnet Fund have not been safe from 
attempts to eliminate them. For the last 3 years, this Administration 
has proposed cutting these funds.
    And this year, nearly 3 months after the close-out of the GSEs' 
books and a month and a half after Fannie and Freddie told investors 
that they had set aside funds for the Housing Trust Fund and Capital 
Magnet Fund, the acting FHFA director still has not disbursed these 
affordable housing dollars.
    Clearly, there is more work to be done to make sure every family 
can access the home-ownership opportunities and rental housing that 
meets their needs.
    As we begin these 2 days of discussions, we should start by asking: 
what housing options do families have today, and what housing 
opportunities we will make available for families in the future?
    Failure to put working people first in this process will only make 
it harder for families to afford rent or to buy a home; put the 
viability of the 30-year fixed-rate mortgage at risk; and hit lower 
income communities, communities of color, and rural Americans 
particularly hard.
    I look forward to hearing from each of our witnesses today about 
how the housing market is working for homeowners and renters. Any 
changes we consider must strengthen, not weaken, our ability to address 
the housing challenges facing our Nation and make the housing market 
work better for families.
































                PREPARED STATEMENT OF EDWARD J. DeMARCO
                   President, Housing Policy Council
                             March 26, 2019
    Chairman Crapo, Ranking Member Brown, and Members of the Committee:

    Thank you for inviting me to testify on the Chairman's outline for 
housing finance reform. My name is Edward DeMarco and I am the 
President of the Housing Policy Council (HPC), a trade association 
comprised of the Nation's leading firms in housing finance and 
dedicated to advancing responsible and sustainable home-ownership 
opportunities.
    In 2012, in my capacity as the Acting Director of the Federal 
Housing Finance Agency (FHFA), and conservator for Fannie Mae and 
Freddie Mac, I issued a strategic plan for the conservatorships titled 
``The Next Chapter in a Story that Needs an Ending.'' At that time, I 
noted that ``no clear legislative consensus has emerged [on GSE reform] 
from the Administration or Congress.'' That is no longer the case. 
Since 2012, the debate over housing finance reform has coalesced around 
a set of key elements. Those elements are: an explicit Government 
guarantee for mortgage securities backed by conventional mortgage 
loans, the placement of private capital in a first-loss position on 
those securities before the Government guarantee, assurance for fair 
and equitable access to credit, funding to support affordable housing, 
and a competitive, transparent marketplace that ensures a level playing 
field for all sizes and types of industry participants.
    The Chairman's outline for housing finance reform reflects this 
progression in our collective thinking. It is a practical, workable 
proposal that builds on all previous proposals, and the members of HPC 
stand ready to work with the Committee to put it in a legislative form 
that can be enacted into law.
    My testimony will address the components of the outline--the 
elements that we support, the open-ended questions that the outline 
identifies, and some areas where additional specificity is needed. In 
addition, I will highlight actions that FHFA and the Administration 
could take to ensure a smooth transition for new guarantors to enter 
the housing finance system with no competitive disadvantage relative to 
Fannie Mae and Freddie Mac. Finally, I will emphasize the opportunity 
to improve upon the current mechanisms to support affordable housing.
HPC Understanding of Proposed Framework in the Chairman's Outline
A Multi-Issuer, Single-Security
    A useful first step in defining housing finance reform is to 
stipulate what kind of mortgage-backed security (MBS) will be produced. 
The brevity of the Chairman's outline does not explicitly identify the 
MBS structure, but the overall framework suggests that it would be a 
multi-issuer, single-security. This structure is not new. The Ginnie 
Mae II security is a multi-issuer, single-security. Just last month, 
Ginnie Mae backed the issuance of over $23 billion in Ginnie Mae II 
securities.
    A multi-issuer security enables more than one lender to contribute 
loans to the security. Mortgage lenders licensed by Ginnie Mae to put 
loans into the security are deemed ``issuers.'' In the Chairman's 
outline, ``issuers'' may be the reconstituted Fannie Mae and Freddie 
Mac, new entrants that perform the same functions as the new Fannie and 
new Freddie, or individual mortgage lenders.
    A single-security means that all the various loan pools formed by 
the multiple issuers go into the same mortgage-backed security, wrapped 
with a Government (Ginnie Mae) guarantee. By bundling loans from 
various issuers into a single Ginnie Mae security, investors are able 
to buy a security that is backed by a pool of loans from a variety of 
issuers. In turn, each of the issuers achieves equal access to the 
capital markets; there is no benefit for large mortgage lenders over 
small mortgage lenders or banks over nonbanks. This makes the market 
for securities deeper and more liquid, which results in lower mortgage 
rates for families.
    Historically, the Fannie Mae and Freddie Mac MBS have worked 
differently. Fannie Mae and Freddie Mac have each been the sole 
``issuer'' of their mortgage-backed securities, and their respective 
securities were not interchangeable. This June, under the guidance and 
direction of the FHFA, the GSEs are replacing their separate MBS with a 
single MBS, the ``Uniform MBS,'' which is designed to make their MBS 
interchangeable. This is an important step toward the security 
structure envisioned in the Chairman's outline and other reform 
proposals.
    Having a multi-issuer, single-security, wrapped by a Federal 
agency, creates an opportunity to better distribute, rather than 
concentrate, both mortgage risk-taking and the operational processes 
involved in mortgage securitization. This will strengthen the housing 
finance system while preserving and improving access to sustainable 
mortgage credit for consumers.
Issuers and Guarantors: The Chairman's Outline Allows for Both
    One of the challenges to housing finance reform has been how to 
reconcile two competing approaches for securitizing mortgage loans. One 
approach, which may be called a ``bundled'' arrangement, is based upon 
a guarantor that is responsible for several key functions, including 
loan aggregation, the issuance of the mortgage securities, the master 
servicing of assets in those securities, and the placement of the 
credit guarantee on the mortgage loans. That is the approach embodied 
by Fannie Mae and Freddie Mac.
    The other approach, which may be called an ``unbundled'' or 
``stand-alone'' approach, is based upon the separation of the credit 
guarantee function from the issuance of the mortgage securities. This 
alternative approach is employed by Ginnie Mae, which places a Federal 
guarantee on mortgage securities backed by the Federal Housing 
Administration (FHA), the Department of Veterans Affairs (VA) and other 
Government-guaranteed mortgage loans, but Ginnie Mae does not issue the 
securities or operate as a master servicer of the assets in the 
securities.
    We read the Chairman's outline to permit both approaches to be 
applied to the securitization of conventional mortgage loans. Under the 
Chairman's outline, mortgage originators--all mortgage lenders from 
community banks and independent mortgage banks to large depositories 
and nonbank lenders--that have established relationships with Fannie 
Mae and Freddie Mac, would be able to continue to sell their loans to 
the reconstituted Fannie Mae and Freddie Mac. They also could continue 
to rely upon those reconstituted companies to issue and master service 
the mortgage securities, to place a private sector guarantee on the 
loans, and to acquire an explicit Federal guarantee on the mortgage 
securities from Ginnie Mae.
    Alternatively, as we read the outline, both small and large 
originators would be able to create and issue mortgage securities 
themselves if they purchase credit protection from an FHFA-approved 
guarantor.
    At HPC, we call the combination of these two approaches in the 
Chairman's framework ``the hybrid model.'' It is a hybrid model because 
it allows for guarantors that perform multiple functions, similar to 
the existing Fannie Mae and Freddie Mae structure, as well as 
guarantors that specialize in a focused, stand-alone activity of 
holding and distributing credit risk.
    Under a hybrid model, the reconstituted Fannie Mae and Freddie Mae 
and other FHFA-approved guarantors could serve as whole loan 
aggregators, acquiring mortgage loans from lenders through ``cash 
windows.'' These multifunction or ``bundled'' guarantors would issue 
mortgage-backed securities formed from the aggregated pools of loans, 
delivering them into the Ginnie Mae securities. Such guarantors also 
would be responsible for the master servicing of those loans, relying 
on and overseeing the work of independent servicers. Finally, these 
guarantors would guarantee the loans. In support of these guarantees, 
guarantors typically would perform some level of due diligence to 
ensure compliance with FHFA and their own underwriting and eligibility 
standards and receive a commitment from the loan seller called 
representations and warranties of compliance with applicable rules and 
standards.
    In short, the Chairman's outline preserves the current Fannie and 
Freddie structure, which also was the structure used in previous 
Committee reform proposals.
    In addition, as we read the outline, it also permits the 
development of ``stand-alone'' guarantors that would be responsible for 
only the credit guarantee function. These FHFA-supervised guarantors 
would offer the guarantee coverage on loans that meet the credit and 
eligibility terms set by FHFA and would have contractual agreements 
with private issuers who request and pay for the guarantee. In other 
words, the ``stand-alone'' guarantors would be accountable for, and 
would manage the credit risk associated with the mortgages while the 
other functions I have described--loan aggregation, security issuance, 
and master servicing--would be the responsibility of a separate issuer. 
Such guarantors would have a direct business interest in both the 
quality of the loans they guarantee as well as in the efficiency and 
effectiveness of the loan servicing. This stand-alone credit management 
exists in the private market today; for example, private mortgage 
insurers and participants in credit-risk transfer arrangements engage 
in this activity.
    In addition to the guarantor role in providing credit-risk 
protections to the system, HPC recognizes and agrees with the outline's 
preservation of loan-level credit enhancement in the form of private 
mortgage insurance on low-downpayment mortgages. Requiring first-loss 
coverage at the loan level via mortgage insurance or other loan-level 
credit enhancement on low-downpayment loans has been part of the GSE 
model for years. HPC supports continuing to require this additional 
level of private capital and credit-risk protection.
    In the proposed framework, FHFA would be the regulator of all the 
guarantors, whether they provide bundled or stand-alone services. FHFA 
also would be required to establish standards for the acceptance of 
credit-risk transfer structures. Thus, FHFA would be the regulator of 
the credit risk. FHFA would set standards for
approving guarantors, including capital and liquidity requirements, as 
well as the underwriting and eligibility terms for the mortgages that 
may be pooled in the securities backed by Ginnie Mae. Guarantors would 
pay a fee into a Ginnie Mae-managed Mortgage Insurance Fund (MIF) to 
cover losses in the event of the failure of a guarantor. Ginnie Mae 
also would regulate the business requirements and terms of the 
securities agreements.
HPC Supports Key Features of the Chairman's Outline
    HPC believes that this hybrid model is not only feasible, but also 
that it reduces the systemic risk associated with the current Fannie 
Mae/Freddie Mac duopoly by facilitating participation of new market 
entrants that enhance competition and innovation, while introducing 
market discipline and ending too-big-to-fail. With the addition of 
stand-alone guarantors and credit-risk transfers, there will be more 
channels for private capital to be accessed and deployed in a manner 
that improves the overall liquidity of the system as well as the 
distribution of risk across various private market participants--all in 
front of the Government guarantee.
    Moreover, by allowing for stand-alone guarantors, the Chairman's 
framework permits new entrant guarantors that specialize in risk 
management--including risk evaluation, risk retention, risk mitigation, 
and risk distribution. With greater focus on core capabilities and the 
need to compete for business, these companies would strive for 
innovative ways to increase their effectiveness, continuously improving 
the means by which risk is assessed and controlled. This would be a 
benefit for the system. In sum, HPC believes that the permitted 
separation and specialization of the functions involved in the 
securitization process--aggregation, issuance, master servicing, and 
guarantee--is a primary benefit of the Chairman's framework.
    Of equal importance, this arrangement preserves and cultivates the 
historically private-sector role of financial institutions in loan 
aggregation and issuance. Some smaller and mid-sized lenders like the 
simplicity of the existing GSE ``bundled'' model--with ``cash window'' 
whole loan aggregation services included. The Chairman's outline 
retains that option, making it available to lenders of all sizes. 
However, by allowing the option to separate credit-risk management from 
the other functions, the outline realizes the benefit of dispersing 
these activities more broadly, attracting additional private capital 
and stimulating the flow of that capital across various market 
participants. In other words, more rather than fewer credit-risk 
guarantors, and more rather than fewer aggregators and issuers, 
amplifies liquidity and expands the universe of private risk-holders 
that perform critical risk management functions and moderate risk 
across the system.
    A second benefit of the hybrid model is that it simplifies the 
transition from the existing GSE-centric framework to one with multiple 
private stakeholders engaged in specific market activities. In the 
hybrid model, companies seeking to become guarantors would not need to 
invest in the substantial infrastructure required to become ``bundled'' 
guarantors, which would require personnel, technology, and policies and 
procedures to accept delivery of whole loans; fund, hold, and issue 
these loans into securities; and master service the loans to track 
payments and monitor loan performance. Fannie Mae and Freddie Mac 
perform all of these functions. For new entrants to execute all these 
functions would require more capital and a much longer transition 
period.
    The Chairman's framework facilitates the transition by permitting 
guarantors to engage in the full range of functions or only provide the 
guarantee service. For example, private mortgage insurers already 
provide credit guarantees by pricing and managing mortgage credit risk 
and thus would face low barriers to entry in the guarantee function. 
Other credit-risk managers similarly could find an opportunity to 
compete in this space, thereby distributing risk and creating more 
channels for private capital to enter and compete. There are several 
benefits of such competition, including less concentration of mortgage 
credit risk, lower costs to home buyers, and greatly diminished risk of 
future foreclosure crises and taxpayer-financed bailouts.
    HPC members also support the Chairman's proposal to rely on Ginnie 
Mae as the vehicle to place a Federal guarantee on the securities. The 
Ginnie Mae guarantee is recognized worldwide. Ginnie Mae MBS are 
treated as a permissible and preferred investment option by foreign 
investors, including foreign central banks and sovereign wealth funds. 
These overseas investors represent a stable, substantial, and reliable 
component of the demand for Ginnie Mae MBS, which supports the 
continuous flow of global capital into the US housing market. 
Therefore, the Ginnie Mae wrap on these securities offers an efficient 
strategy to effect a systemwide conversion.
    HPC is in favor of the Ginnie Mae wrap but recognizes that 
resources will be needed to expand and enhance Ginnie's infrastructure, 
regardless of how much can be drawn from the existing GSE and Ginnie 
Mae operations to create new, possibly combined technology systems. For 
example, although the Common Securitization Platform (CSP) represents 
state-of-the-art technology and could be migrated to Ginnie Mae, it 
needs upgrades to enable additional issuers (beyond Fannie Mae and 
Freddie Mac) to connect and conduct business on the platform. The CSP 
also needs expanded functionality beyond the limited set of bond 
administration and disclosure features available today. In contrast, 
Ginnie Mae's platform already is set up to handle multiple issuers and 
additional securitization tasks, but today cannot support a fully 
digital securitization environment.
    In addition to the technology upgrades required, Ginnie Mae will 
need more personnel, which have been requested for years by Ginnie 
Mae's leadership, to fulfill the larger role for Ginnie Mae. That said, 
the core functions of Ginnie Mae are scalable, as evidenced by the 
significant growth in Ginnie Mae's business over the last decade. This 
clearly indicates that Ginnie Mae can take on more responsibility, 
provided it is given the necessary resources to do so.
    In summary, the Chairman's framework, with enhanced guarantor 
options, credit-risk transfers, and Ginnie Mae multi-issuer securities, 
would give lenders, both large and small, choices. A lender could rely 
on the aggregation and issuance services of a ``bundled'' guarantor, 
just as they do today with the GSE cash windows. Alternatively, a 
lender could choose to issue securities using their own loans, after 
obtaining the guarantee from a ``bundled'' or ``stand-alone'' guarantor 
by simply delivering those loans into the multi-issuer Ginnie Mae 
security. Still a third option would be for lenders to sell their loans 
to another issuer, whether that be another lender or an entity such as 
a Federal Home Loan Bank. Such options give lenders, big and small, the 
ability to retain or sell the servicing on their loans.
    Again, HPC believes that it is the array of options and 
opportunities presented by the Chairman's framework that provide for 
stronger, more distributed risk management and liquidity across the 
marketplace. Improved competition also should lower mortgage rates for 
consumers and maintain the ability of lenders of all sizes and charters 
to serve their mortgage customers.
Identified Issues for Stakeholder Input
    The Chairman's outline includes a few topics that need additional 
input. These topics are: market share limitations for all guarantors; 
capital standards for the guarantors; and downpayment requirements for 
eligible loans. In each case, HPC recommends that Congress authorize 
the regulator, FHFA, to establish appropriate requirements and 
standards.
    A market share cap is intended to prevent significant concentration 
of risk in any guarantor. This is an appropriate goal, especially given 
the systemic risk posed by the GSE duopoly. However, rather than an 
arbitrary and fixed market cap, we recommend that the Committee 
consider market-based incentives to drive the distribution of risk and 
volume of business across guarantors. For example, the guarantee fee 
paid by guarantors could be scaled to increase along with the market 
share of a guarantor. This would place some risk-based check on the 
size of guarantors. Similarly, the affordable housing fee could be 
scaled to increase along with the market share of a guarantor. This 
would produce a pricing differential that would account for the 
systemic risk inherent in excessive risk concentration in a single 
guarantor, thereby reducing the likelihood of that outcome.
    As for the capital standard for guarantors, we believe that 
Congress should follow the approach taken in Federal banking statutes 
and give general direction to FHFA, but not fix specific capital 
charges. The correct amount of capital will vary based upon the 
business structures and eligible activities of the guarantors as well 
as the relative systemic risks posed. For example, a ``bundled'' 
guarantor that is aggregating and issuing securities in addition to 
providing the guarantee will need adequate capital and liquidity to 
perform the first two functions, as well as capital to cover the risk 
of credit loss. In contrast, a ``stand-alone'' guarantor will need 
enough capital simply to cover the credit risk associated with its 
guarantee business, based on the volume, composition, and profile of 
loans guaranteed.
    In either scenario, the guarantor will be able to lay off some 
portion of the risk through a variety of risk-sharing arrangements that 
take into account specific attributes of the structures and 
counterparties involved, which also must be factored into the 
applicable capital standards and related capital relief. In other 
words, it would be inappropriate to create, by law, a single capital 
standard for all guarantors. HPC recommends that the Committee direct 
FHFA, as the regulator of guarantors, to establish an activities-based 
standard that creates a level of comparability and consistency in the 
capital treatment across the distinct and unique guarantor business 
models. Congress also could require that such standards address 
systemic risk and be counter-cyclical.
    Moreover, there is another element of capital regulation that we 
urge the Committee to include in housing finance reform legislation. 
The capital standards that FHFA develops should not be divorced from 
the capital standards applied to banks or mortgage insurance companies. 
A critical weakness of the pre-crisis capital standards set for Fannie 
Mae and Freddie Mac was the materially lower capital requirements 
imposed on the GSEs relative to the capital bank regulators required 
for the same risk on the same loans. We recommend that Congress direct 
that the various prudential regulators achieve some reasonable standard 
of comparability in their capital regulations for mortgage credit risk. 
Consistent capital standards will enable all lenders to make rational 
decisions on whether to hold mortgages on their books, to sell and 
securitize them, or to layoff some or substantially all of the 
associated credit risk through various other credit-risk transfer 
mechanisms.
    Finally, the outline leaves open the appropriate downpayment 
requirement for mortgage loans. Again, we believe that this is a 
standard that should be left to the FHFA in order to allow for 
appropriate variation by loan product, borrower profile, or other 
relevant risk characteristic. Leaving this policy standard to the 
regulator also would allow for future adjustments in response to 
changing market conditions or performance trends. Avoiding statutory 
limits also allows for future innovations that may make low 
downpayments less risky, and more appropriate to help serve all 
borrowers, than we can envision today.
HPC Recommends Additional Specificity and Clarity in Regulatory Roles
    There are two key areas of the Chairman's outline where we believe 
additional consideration is required: (1) FHFA's role in chartering, 
regulating, and supervising the guarantors; and (2) Ginnie Mae's 
responsibility for setting the terms of the securities agreements.
    FHFA's regulatory responsibilities, as described in the outline, 
are focused primarily on setting the financial strength requirements 
for the guarantors, establishing standards for credit-risk transfer 
structures, and the credit standards for the loans. We agree with these 
responsibilities but recommend that the framework add an explicit 
authority for FHFA oversight of the guarantors' operational risk. This 
is important, given the dissimilarities in the business models and 
activities of the distinct types of guarantors, with unique risks posed 
by those performing multiple functions in-house versus those who rely 
on legal agreements with independent vendors and counterparties.
    For example, a regulator overseeing a ``bundled'' multifunction 
guarantor needs to ensure a separation of duties that will permit risk 
management to drive loan delivery and guarantee decisions. The GSE 
model broke down in the years immediately preceding the crisis when 
executives responsible for loan production and business volume 
overruled the warnings raised by the credit-risk teams. Additionally, 
when regulating ``stand-alone'' guarantors, FHFA must set clear 
expectations for the guarantors to establish strong and well-balanced 
commercial counterparty standards and agreements that take into 
consideration the financial and operational capacity of issuer/master 
servicers as well as the division of accountability and liability 
between the guarantors and these counterparties.
    This highlights the responsibility of FHFA in leveling the playing 
field and in having robust, transparent standards applied comparably 
for the same activity. Guarantors will not be equal in strength or 
diversity of their capital base and institutional form. A system that 
recognizes and accounts for those differences, while maintaining a 
level playing field, is to the benefit of the overall housing finance 
system.
    All guarantors should compete on a level playing field and be held 
to the same transparent standards, ensuring the ongoing safety and 
soundness of the system and mitigating the risk of regulatory arbitrage 
based on inconsistently applied standards. For example, today FHFA 
holds private mortgage insurers to a transparent set of minimum 
operational and financial standards through the Private Mortgage 
Insurer Eligibility Requirements (PMIERs). While PMIERs may not be 
completely transferable to other forms of credit enhancement, the 
framework can serve as a starting point to ensure a common set of 
standards for all credit enhancement vehicles.
    In sum, the FHFA regulatory standards and oversight regime for each 
distinct type of guarantor must be clear and consistent. This will 
ensure that prudential regulation results in fair and comparable 
regulatory treatment as well as the protection of the system's safety 
and soundness.
    With respect to Ginnie Mae, HPC believes that housing finance 
reform legislation should explicitly list the core provisions and 
stipulations of the securities agreement that sets forth the rights and 
responsibilities of each party. More specifically, for Ginnie Mae's 
protection, housing finance legislation should authorize Ginnie Mae to 
set the terms of the securities, including, but not limited to:

    rules for submission and/or sharing of data and/or 
        documents to validate loan attributes, pool composition, or the 
        profile of a counterparty;
    rules for the custodial maintenance or recordation of any 
        mandatory asset- or pool-level data or information;
    responsibility for protecting security performance from 
        lenders that churn loans or otherwise produce abnormal 
        prepayment speeds;
    standards regarding the format and content of investor 
        disclosures;
    requirements and performance measures for bond 
        administration functions, to ensure timely remittance of 
        payments;
    standards for loan servicing, to include acceptable loss 
        mitigation procedures that replicate the existing Fannie Mae 
        and Freddie Mac servicing standards; and
    permissible remedial or enforcement actions that may be 
        pursued, as warranted.

Such standards are typical in existing Ginnie Mae and GSE agreements, 
as well as private-label pooling and servicing agreements. The 
Committee should stipulate that Ginnie Mae is responsible for 
developing a new set of standardized terms and requirements that 
reflect the very best of these various contract documents.
Seamless Transition_Practical Steps for the Conservator
    A commonly cited rationale for retaining the status quo housing 
finance system, however flawed, is that housing finance reform 
legislation may disrupt an otherwise functioning housing market. Yet, 
there are simple actions that the Conservator can, and should pursue, 
that would set the stage for an expedient and smooth transition from 
the current system. In other words, the Conservator can initiate 
actions that would pave the path to legislative reform. The primary 
goal of such actions is to build the foundation for new entrants to 
compete with the GSEs.
    The transition from the current housing finance system requires the 
development of a level playing field that allows private companies the 
opportunity to compete with Fannie Mae and Freddie Mac. There are at 
least two areas where the GSEs enjoy an overwhelming competitive 
advantage that should be addressed: (1) current mortgage-related 
regulations, some of which are not within the sole purview of the FHFA; 
and (2) the GSE's infrastructure in the form of data, models, and 
tools.
    Over the last few decades, GSE control and influence has grown 
substantially, in part due to the special privileges and exemptions 
afforded to the GSEs, including lower capital costs, appraisal 
exceptions under the Financial Institutions Reform, Recovery, and 
Enforcement Act (FIRREA), and the Qualified Mortgage (QM) patch, 
contained in the Ability to Repay/QM regulation. These and other 
privileges have provided the resources and insulation from competition 
that has allowed the GSEs to expand their operations and adopt 
innovative approaches that other private companies cannot pursue under 
the current regulatory regime.
    The return of the private label securitization market has been 
stymied, in part, by this imbalance. Investors are prepared to support 
private market activity, but the differential regulatory treatment of 
GSE mortgages creates a vast disparity in operational efficiency, 
costs, and legal liability. Addressing some of these disparities will 
require the cooperation of various Federal regulators.
    Separately, the Conservator can take actions to disseminate some 
components of the GSE infrastructure in a manner that leaves the 
infrastructure intact for the existing GSEs yet shares elements with 
new entrant competitors. For example, the GSEs have amassed millions of 
residential property appraisals, records that capture information on 
both the subject property and several comparable properties. Similarly, 
the GSEs, representing approximately one-half of the 10 trillion-dollar 
mortgage market, have millions of loan records, composed of 
indispensable transaction and performance data. Some portion of this 
data was released to support investor participation in the Credit Risk 
Transfer (CRT) initiative, but a significant segment of this critical 
information has not been published. This data should be shared with 
other market participants.
    Possession of this expansive set of data provides the GSEs with a 
significant competitive market advantage. It permits the two companies 
to monitor, evaluate,
analyze, and model risk in ways that are potentially more accurate, 
reliable, and predictive. Other private companies have the capabilities 
to develop competing technology and risk management tools. However, the 
GSE data monopoly ensures that the GSEs are always better informed of 
patterns and trends than any potential
competitors.
    To foster a truly competitive and transparent marketplace that will 
afford private companies the opportunity to evaluate becoming 
guarantors, HPC recommends that the Conservator publicly release, or 
``democratize,'' the GSE data. In addition to new guarantors, other 
stakeholders and market participants could benefit from the publication 
of this data. Broad market access to this data would permit wide-
ranging evaluation and understanding of risk from industry, Government, 
academia, advocacy organizations, and think tanks.
    The Conservator could also consider other components of the 
extensive GSE infrastructure, including technology tools that were 
built to manage, parse, and derive conclusions from the GSEs' massive 
data sets, as well as the risk models that are embedded in these tools 
and the various business systems of the GSEs. Most of these tools have 
been built while the companies have been in conservatorship, meaning 
they have been built using taxpayer funds. For example, HPC has 
requested release of the models used in the GSE capital framework. We 
continue to believe public release of this information would be 
beneficial for private market risk analysis. The distribution of this 
type of foundational information would facilitate enhancements in the 
risk management capabilities of the entire marketplace, a benefit to 
the overall health and soundness of the system.
Affordable Housing_New Approaches to Achieve Better Results
    The various housing finance reform proposals put forward over the 
last several years have all included a mechanism to generate funds to 
stimulate the production and preservation of affordable rental housing 
and to bolster targeted home-ownership assistance programs. HPC 
supports this approach. Our members recognize that appropriations for 
housing programs are not keeping pace with housing need in this 
country. Therefore, given the benefits derived from the Government 
guarantee envisioned in housing finance reform, it is reasonable for 
legislation to establish an obligatory contribution of dollars through 
transaction fees to expand the supply of desperately needed affordable 
housing.
    HPC also supports funding for specialized home-ownership programs. 
However, it is the preference of HPC members to direct new funds for 
home-ownership assistance to programs that contribute directly to the 
households in need, reducing the barriers to entry and financial 
challenges that these individuals and families face. HPC would prefer 
that new funds not be used to simply subsidize higher-risk loans or to 
compensate the industry to make loans that may not perform using more 
lenient underwriting criteria.
    We believe that funds used to address the areas of risk that drive 
the increased pricing, rather than subsidizing that pricing, would 
better serve the households in need. Examples of these types of 
programs are downpayment assistance grants that enable households to 
enter home ownership with some amount of equity in the property; 
savings programs that offer matching funds to increase the downpayment 
amount or, equally importantly, that create ``rainy-day'' reserves to 
address future needs; and dedicated accounts that could be tapped by 
homeowners in financial distress, to avoid missed payments and/or 
foreclosure. The application of dollars to these types of programs, as 
well as critical home-ownership counseling and education services, 
would help families prepare for and sustain home ownership,
improve access, address the real barriers, and create a true financial 
benefit and performance boost for low- and moderate-income (LMI) 
households.
    Along these same lines, HPC recognizes that there may be interest 
by some in preserving the GSE Affordable Housing Goals and Duty-to-
Serve activities. The intent of these programs is to ensure the 
secondary mortgage market makes credit available for more low- and 
moderate-income households, and targeted market segments (affordable 
housing preservation, rural markets, and manufactured housing) than the 
private sector may serve on its own without Government support. 
However, HPC believes that it is worthwhile to assess and revisit the 
impact and outcomes of these programs and consider alternatives that 
better achieve the intended objectives. Rather than repeat the use of 
methods that have had, at best, mixed results, we should seek new types 
of measurable targets and financing goals to ensure that traditionally 
underserved segments are targeted for guarantor support. For example, 
there may be high-impact ways to use additional funding, modeled on the 
Federal Home Loan Bank System's Affordable Housing Program, which has 
effectively served communities nationwide for decades now.
Comprehensive Housing Finance Reform Should Include FHA and PLS 
        Segments of Market
    The recommendations from HPC in this testimony have been focused 
almost
exclusively on the conventional conforming segment of the marketplace 
(backed by Fannie Mae and Freddie Mac today and by guarantors/Ginnie 
Mae in the
Chairman's outline). However, HPC members believe that true and 
comprehensive reform should also take into consideration the 
Government-backed (e.g., FHA and VA) and private label securities (PLS) 
components of the market. We believe that legislative reform and the 
marketplace will benefit from a secondary market framework that 
supports the full continuum of mortgage products and the full range of 
consumer needs and circumstances.
    Therefore, we advocate for comprehensive reform that includes the 
Federal Housing Administration (FHA), as the primary Government lending 
vehicle, as well as PLS-related provisions, to establish market 
standards, infrastructure, and/or practices to buttress the wholly 
private PLS segment of the market. We believe that it is critical to 
include these other important components of the mortgage market in 
developing a complete legislative proposal.
    Historically, FHA has operated the flagship program for serving 
first-time, low- and moderate-income (LMI), and minority home buyers in 
this country. The FHA offerings need to be appropriately calibrated and 
aligned with conventional products to provide well-priced, safe, and 
sustainable financing options to those borrowers who cannot access 
conventional financing. Consumers who rely on these products must do so 
with appreciation for lower-cost alternatives offered in the 
conventional market and a full understanding of the steps they might 
take to move from FHA to conventional products. In other words, FHA 
must complement and supplement the conventional market, yet always be 
available to fulfill the countercyclical role the Government plays as a 
reliable backstop if and when the private market contracts, as it did 
during the recent recession.
    Because FHA augments and complements the conventional market to 
ensure a broader, deeper mortgage market than the private market may 
achieve on its own, it is critically important for housing finance 
reform legislation to better align FHA's core underwriting, 
eligibility, and servicing standards, as well as the capital 
requirements that drive pricing, with those of the conventional market. 
Further, it is no secret that resource constraints at FHA have hampered 
the agency's capacity to fulfill its mission and perform its risk 
management role as the largest mortgage insurance company in America. 
HPC advocates for legislative reform that expands and enhances FHA's 
capabilities to manage its important duties and serve home buyers.
    HPC believes that the PLS segment of the marketplace should be 
addressed in the housing finance reform dialogue as well. This portion 
of the market could benefit from uniform standards and practices, an 
approach that has facilitated the growth of the conventional conforming 
segment of the market. Examples of the types of standards and practices 
that could be addressed in legislation include: loan-level data 
standards for borrower, property, and product characteristics; 
disclosure rules, for both the content and format of securities 
disclosures; due diligence practices; servicing and loss mitigation 
requirements; representation and warranty/counterparty liability 
agreements; and more. There has been some discussion regarding 
migrating or sharing of some of the infrastructure that is used in the 
conventional conforming market with the PLS market to achieve such 
standardization and we would encourage the Committee to facilitate this 
conversation to consider how housing finance reform can and should 
bolster the PLS market.
Conclusion
    Thank you for the opportunity to testify today on this critically 
important topic. HPC appreciates that the Chairman and the full 
Committee intend to pursue legislative housing finance reform and we 
are prepared to work with you. We think that the Chairman's outline 
reflects a workable set of ideas, many of which have been circulated in 
previous proposals, and we applaud you, Chairman Crapo for 
reinvigorating this critical policy discussion.
                                 ______
                                 
                   PREPARED STATEMENT OF GREG UGALDE
      Chairman of the Board, National Association of Home Builders
                             March 26, 2019
Introduction
    Chairman Crapo, Ranking Member Brown and Members of the Committee, 
I am pleased to appear before you today on behalf of the National 
Association of Home Builders (NAHB) to share our views on housing 
finance reform. My name is Greg Ugalde and I am NAHB's 2019 Chairman of 
the Board.
    NAHB represents over 140,000 members who are involved in building 
single-family and multifamily homes, remodeling, and other aspects of 
residential and light commercial construction. NAHB's members construct 
approximately 80 percent of all new housing in America each year. Our 
builders rely on both Government and private programs and financing 
sources to help provide decent, safe, and affordable single-family and 
multifamily housing to our fellow citizens.
    We believe an effective housing finance system must address 
liquidity as well as affordability and that those two elements are very 
closely related. Therefore, while it is important for the system to 
provide housing credit at affordable terms as well as address specific 
housing needs, it also is essential that credit is consistently 
available on those terms regardless of domestic and international 
economic and financial conditions.
Housing Affordability
    Safe, decent, affordable housing provides fundamental benefits that 
are essential to the well-being of families, communities and the 
Nation. For these reasons, housing affordability is among NAHB's top 
advocacy issues this year. We are working with Congress, the Trump 
administration, and State and local officials to help hard-working 
Americans purchase or rent affordable homes. Through these actions, we 
also will create jobs and move the economy forward.
    NAHB's research shows that housing affordability in the single-
family market remains at a 10-year low.\1\ Only 56.6 percent of new and 
existing homes sold in the fourth quarter of 2018 (October through 
December) were affordable to families earning the U.S. median income of 
$71,900. Although the national median home price decreased from the 
third quarter of 2018 to the fourth quarter, average mortgage rates 
rose by 17 basis points over the same period. This was the fourth 
straight quarterly rate hike and the highest rate level since the 
second quarter of 2011.
---------------------------------------------------------------------------
    \1\ Rose Quint, ``Housing Affordability Holds Steady at a 10-Year 
Low in the Fourth Quarter,'' NAHB Eye on Housing Blog, February 14, 
2019. http://eyeonhousing.org/2019/02/housing-affordability-holds-
steady-at-a-10-year-low-in-the-fourth-quarter/.
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    Several factors account for the affordability crisis. Ongoing job 
creation and solid household formations are driving strong demand for 
housing. Unfortunately, rising costs are constraining builders' ability 
to construct new homes and apartments at affordable prices to meet the 
demand. For example, excessive regulations at all levels of Government 
now account for 24.3 percent of the final price of a new single-family 
home built for sale \2\ and 32.1 percent of multifamily project 
costs.\3\ Construction costs also are increasing due to a scarcity of 
buildable lots, persistent skilled labor shortages, and tariffs on 
lumber and other key building materials. These costs are having a 
direct negative effect on housing affordability. NAHB's ``Priced Out'' 
Estimates for 2019 \4\ show that 127,560 households would be priced out 
of the housing market if the median U.S. new home price rises by 
$1,000. In other words, based on their incomes, 127,560 households 
would be able to qualify for a mortgage to purchase the home before the 
price increase, but not afterward. Similarly, a $1,000 increase in the 
cost of building a new rental unit will price out almost 20,000 renters 
for that apartment;\5\ the household would be rent-burdened after the 
rent increase, but not before.
---------------------------------------------------------------------------
    \2\ Paul Emrath, Ph.D. ``Government Regulation in the Price of a 
New Home,'' NAHB Economics and Housing Policy Group Special Studies, 
May 2, 2016. https://www.nahbclassic.org/
generic.aspx?sectionID=734&genericContentID=250611&channelID=311&_ga=2.3
8786983.52385
4983.1552510596-1923655094.1427310833.
    \3\ Paul Emrath, Ph.D. and Caitlin Walter, Ph.D. ``Multifamily Cost 
of Regulation 2018 Special Study,'' National Association of Home 
Builders and National Multifamily Housing Council, June 12, 2018.
    \4\ Na Zhao, Ph.D. ``NAHB Priced-Out Estimates for 2019,'' NAHB 
Economics and Housing Policy Group Special Studies, January 2, 2019. 
https://www.nahbclassic.org/generic.aspx?generic
ContentID=265844.
    \5\ Based on the 2018 median rent of $2,189, a $1000 increase in 
the cost of building a new apartment unit would price out 19,617 
renters.
---------------------------------------------------------------------------
    For these reasons, NAHB calls on Congress and the Trump 
administration to make housing affordability a national priority. An 
essential component of any strategy for housing affordability must be 
advancing comprehensive housing finance reform, which will ensure the 
capital and liquidity necessary for housing developers, builders, 
lenders and consumers to access stable financing. In addition, NAHB 
urges Federal policymakers to take appropriate actions to ease 
regulatory burdens, adopt sensible workforce development and 
immigration policy that will help our industry fill open jobs, and fund 
Federal housing programs.
Need for Comprehensive Housing Finance System Reform
    NAHB remains a staunch supporter of comprehensive housing finance 
system reform. To NAHB this means effective reform of the conventional 
mortgage finance market, including Fannie Mae and Freddie Mac (the 
Enterprises), private capital sources and Federal mortgage finance 
programs, in particular those of the U.S. Department of Housing and 
Urban Development (HUD), most involving the Federal Housing 
Administration (FHA), the U.S. Department of Agriculture's Rural 
Housing Service (RHS) and the U.S. Department of Veterans Affairs' (VA) 
Home Loan Guaranty Program. Additionally, we support an enhanced role 
for State and local housing finance agencies. These organizations play 
an important role in meeting affordable housing needs and NAHB believes 
they hold great potential to augment a
reformed housing finance system.
    NAHB believes comprehensive reform must come through Congress and 
focus on fixing the structural flaws that still persist 10 years after 
the great recession. Comprehensive legislation, including a 
determination of the future of Fannie Mae and Freddie Mac, is the only 
way to ensure a stable housing finance system, preserve access to 
credit and protect taxpayers.
    In September 2018, Fannie Mae and Freddie Mac completed their tenth 
year in conservatorship under the control of their regulator, the 
Federal Housing Finance Agency (FHFA). This was a stark reminder that 
housing finance system reform, which seemed so urgent following the 
mortgage market and financial crisis, is still unfinished business. 
NAHB believes strongly that having the Enterprises continue in 
conservatorship, with no end in sight, contributes to uncertainty 
regarding mortgage availability and affordability and is therefore both 
undesirable and unsustainable.
Administrative Housing Finance Reform
    Last September, as the 10-year anniversary of conservatorship of 
Fannie Mae and Freddie Mac approached, and again earlier this year 
after FHFA Director Watt's term ended, NAHB joined 28 other 
organizations in sending letters to Congress and the Administration 
urging policymakers to be cautious in making any administrative reforms 
to Fannie Mae and Freddie Mac before Congress has passed legislation to 
resolve the conservatorships. Absent legislation to change the 
structure of the Enterprises, administrative reforms to the Enterprises 
should seek to maintain and enhance the stability and liquidity of the 
housing finance system while considering the potential impact on 
borrowers, taxpayers, and market structure dynamics such as an expanded 
private market and a level playing field among market participant 
seeking market access through the Enterprises. Legislation must 
incorporate positive administrative changes already in place.
    In January 2019, the term of FHFA Director Mel Watt ended and the 
Comptroller of the Currency, Joseph Otting, was named by the 
Administration as Acting Director. President Trump nominated Mark 
Calabria, who is awaiting full Senate confirmation, to be the next FHFA 
director. As conservator and regulator, the FHFA Director has the 
authority to make reforms administratively. In the absence of 
congressional action, NAHB is concerned that administrative reforms 
could be more conservative than legislation that would require 
bipartisan approval. However, NAHB enjoys a positive working 
relationship with Dr. Calabria and we are confident we will have 
opportunities to discuss any concerns going forward.
    We believe it is particularly important for FHFA to provide notice 
and comment opportunities on proposed administrative changes and to 
provide adequate transition periods to allow market participants to 
adjust to new guidelines and circumstances. It is critical to avoid 
disruptions and dislocations in the mortgage credit market that would 
increase prices or decrease availability of credit for homeowners and 
home buyers.
Chairman Crapo's Housing Reform Outline
    NAHB appreciates Chairman Crapo's effort to put forth a thoughtful 
outline for housing finance reform that includes the essential elements 
for a comprehensive reform bill, but leaves other significant details 
open for discussion and bipartisan agreement. NAHB supports the broad 
concepts of the Outline. In particular, we appreciate the Chairman's 
continued support for an explicit Government backstop for a key portion 
of the conventional mortgage market. We firmly believe this is critical 
to ensuring the ongoing availability of the 30-year, fixed-rate 
mortgage that is so essential to affordable home ownership.
    NAHB is pleased that initial reform plans that called for winding 
down Fannie Mae and Freddie Mac have moderated to allow the Enterprises 
to remain important participants in the proposed new system. The 
Chairman's Outline calls for Fannie Mae and Freddie Mac to become 
private guarantors, which essentially preserves the current secondary 
market role of the Enterprises and allows the mortgage market to 
continue to benefit from their comprehensive and well-tested 
infrastructure. New, additional entities also would become private 
guarantors. Private guarantors will guarantee the timely repayment of 
principal and interest to investors of eligible mortgages that are 
securitized.
    The Outline would designate Ginnie Mae as the operator of the 
securitization platform. It appears the Outline would require Ginnie 
Mae to operate a securitization platform that securitizes mortgages 
backed by eligible conventional mortgages, significantly expanding the 
current role of Ginnie Mae whose securitization platform today 
securitizes only mortgages collateralized by Government-insured and-
guaranteed mortgages. Ginnie Mae would provide the explicit Federal 
Government guarantee for all these MBS. NAHB believes there are 
advantages to using the existing Ginnie Mae securitization platform to 
issue MBS collateralized with conventional mortgage loans although 
statutory changes will be needed to allow Ginnie Mae to perform this 
new function. NAHB cautions that with this considerable expansion to 
Ginnie Mae's MBS issuance there must be assurances that it would be 
able to scale up as quickly and effectively as needed in order to 
maintain market liquidity.
    The Outline allows that the technology and infrastructure developed 
as part of the Enterprises' Common Securitization Platform (CSP) could 
be sold or transferred to Ginnie Mae. NAHB appreciates this is noted as 
a possibility. In addition to potentially increasing the bandwidth for 
Ginnie Mae's securitization operations, knowing so many resources have 
been invested and the enormous effort undertaken by many stakeholders 
to develop the CSP, NAHB is pleased the Chairman recognizes the value 
of this new infrastructure and acknowledges that it may benefit a 
restructured housing finance system.
    As included in the Outline, NAHB supports mortgage requirements 
substantially similar to the qualified mortgage (QM) as a base for the 
definition of a sustainable, conforming mortgage, but believes that the 
new system should be given additional flexibility to establish 
underwriting criteria beyond baseline QM. In addition, NAHB believes 
the current, statutory requirements for determining conforming loan 
limits and loan limits for federally insured and guaranteed mortgage 
loans should remain intact. The authority to increase loan limits is 
important for the conforming mortgage market to remain relevant when 
house prices are increasing. This ensures conventional mortgage credit 
remains affordable and accessible to consumers.
    NAHB sees the value of mortgage market participation by lenders of 
all sizes. However, we appreciate the Chairman has made a considerable 
effort to show support for small lenders by prohibiting volume-based 
discounts on guarantee fees and other terms. In a reformed housing 
finance system, access to the secondary mortgage market and pricing 
should not be based on the volume of business or size or geographic 
location of the selling institution.
    Since 2013, the Enterprises have used credit-risk transfers (CRTs) 
to reduce the risk to taxpayers and encourage the return of private 
investors to the mortgage market. The current use of innovative CRT 
structures by the Enterprises has been very successful in attracting 
private capital and NAHB believes allowing guarantors to continue to 
lay off risk using approved CRT structures will continue to be positive 
for the market. As new guarantors enter the market, it is prudent to 
require that the FHFA approve CRT structures and allow only approved 
structures to be used by guarantors. The CRT approach has been untested 
in distressed markets so NAHB appreciates caution before relying on 
this framework too much. Also, any such program should have the dual 
purpose of lessening risk exposure and allowing for a reasonable 
interest rate/borrowing cost for borrowers.
    The Outline proposes to replace current affordable goals and duty-
to-serve requirements with a new Market Access Fund. The Market Access 
Fund, and the current Housing Trust Fund (available to provide housing 
for extremely low- and very low-income households, including homeless 
families) and Capital Magnet Fund (used to finance community service 
facilities and affordable housing activities and related economic 
development activities) will be funded through an annual assessment of 
10 basis points of the total annual loan volume guaranteed by each 
guarantor.
    NAHB has strongly and consistently urged Congress to ensure that 
the Enterprises, or their successors, demonstrate leadership in 
affordable housing by providing liquidity and supporting housing for 
families at different income levels in various geographic markets and 
in various market segments. NAHB supports an approach that would 
require the entities providing resources for this purpose to be 
accountable for the effectiveness of the programs to which such funds 
are distributed. In addition, NAHB believes the definition of 
affordable housing should be expanded from a focus on very low- and 
low-income families to include workforce housing that serves the needs 
of moderate-income families as well. Again, NAHB welcomes an 
opportunity to work with this Committee and other stakeholders to 
develop the details for this section of the bill.
    The Outline includes a robust role for the regulation of 
guarantors. As proposed in the Outline, NAHB believes the regulatory 
agency should be governed by a bipartisan board of directors instead of 
a single director. Board governance would mitigate the potential for 
extreme and abrupt changes in policy that are possible under the 
existing, single director regulatory regime. The significant oversight 
of the guarantors, including the establishment of prudential standards 
with regard to capital requirements, appears in-line with ensuring a 
safe and sound mortgage finance system. However, as the regulator 
contemplates the complex aspects of determining capital requirements, 
the industry should be consulted through notice-and-comment rulemaking.
    Elements of a smooth transition have been addressed in most housing 
finance system reform plans. NAHB is pleased that the Chairman's 
Outline is no exception. A careful transition is essential to ensure 
the new system is workable and effective. Any changes to the housing 
finance system should be undertaken with extreme care and with 
sufficient time to ensure that U.S. home buyers, owners, and renters 
are not placed in harm's way and that the mortgage funding and delivery 
system operates efficiently and effectively as the old system is wound 
down and a reformed system is put in place. Every effort should be made 
to reassure borrowers and markets that credit will continue to flow to 
creditworthy borrowers and that mortgage investors will not experience 
adverse consequences as a result of changes in process.
    We look forward to continuing to work with this Committee to 
achieve comprehensive housing finance system reform that has bipartisan 
support, addresses the flaws of the current and previous system and is 
sustainable for the long term.
Preserve the Enterprises' Successful Multifamily Housing Finance 
        Framework
    NAHB believes it is essential to have an efficient and stable 
secondary market where conventional multifamily mortgages are 
aggregated and placed into diversified pools for securitization and 
sale to investors worldwide. Therefore, NAHB has consistently advocated 
for preserving Fannie Mae's and Freddie Mac's successful multifamily 
financing infrastructure. The Enterprises' multifamily programs have 
consistently performed well, even in stressful market conditions. NAHB 
is pleased that the Chairman's Outline proposes a continued role for 
the multifamily financing infrastructure. Nevertheless, we believe 
there are some aspects of this proposal that require further 
consideration, and NAHB looks forward to working with the Committee to 
address these concerns.
    NAHB is pleased that the Outline recognizes the importance of 
multifamily financing in providing options for affordable rental 
housing, but we are concerned that the Outline appears to require the 
Enterprises to divest their successful multifamily business. The 
Outline envisions Fannie Mae and Freddie Mac as private guarantors, and 
``The multifamily businesses of Fannie Mae and Freddie Mac will be sold 
and operated as independent guarantors.'' We are concerned that this 
specific language may have the unintended consequence of precluding the 
Enterprises from addressing critical secondary multifamily market 
needs.
    A delicate balancing act is necessary to facilitate entry to the 
secondary multifamily market for new independent guarantors and to 
preserve the successful multifamily business lines and infrastructure 
from the status quo. As the Committee moves forward with housing 
finance reform legislation, NAHB requests that Fannie Mae and Freddie 
Mac receive the capacity and flexibility to fill gaps in the 
multifamily marketplace that others are not addressing. Legislation and 
subsequent regulation should support strong and sustained liquidity in 
the multifamily rental market.
    To better appreciate the role that the Enterprises' multifamily 
financing plays in the secondary multifamily market, it is important to 
understand that not all private market sources of capital for 
multifamily financing are available for all segments of the multifamily 
market. Each source has strength in specific niches and markets and 
also moves in and out of the market as economic conditions and 
investment goals change. Life insurance companies typically target low-
leverage, high-quality deals in the strongest markets (usually urban) 
and typically serve the highest income households. Once they meet their 
own portfolio investment targets, life insurance companies retract 
their lending. Banks do not provide long-term financing and are subject 
to significant restrictions in terms of capital requirements. Banks 
also have significant exposure to regulatory pressure that influences 
their lending decisions, including obligations under the Community 
Reinvestment Act (CRA). While the commercial mortgage-backed securities 
(CMBS) market was significant at one time, it has not recovered from 
the financial crisis and is not expected to resume its past levels of 
volume.
    These facts point to the need to maintain a viable, liquid and 
efficient secondary market for multifamily rental financing where the 
Federal Government continues to play a role. In addition, the secondary 
market must be structured to ensure that the appropriate range of 
products is available to provide the capital needed to
develop new and to preserve existing rental housing, as well as to 
refinance and
acquire properties. An adequate flow of capital will ensure that demand 
for rental housing is met and that affordable options are available for 
a range of households and communities.
    The critical consideration in a new system is broad and continued 
liquidity during all economic cycles and for all geographic areas. For 
these reasons, NAHB cautions against over-reaching in regard to 
reforming the multifamily finance system. This component of the 
Nation's housing finance system has performed, and continues to 
perform, very well. Housing finance reform should preserve the 
successful framework of the current system--including the Federal 
backstop for conventional and federally insured multifamily mortgages.
Additional Considerations for a Reformed Housing Finance System
    The elements below are not included in Chairman Crapo's Housing 
Reform Outline, however, NAHB believes they all should be considered in 
a comprehensive housing finance system reform proposal.
Appraisal System Reform
    NAHB is a strong proponent of a sound and effective appraisal 
system. The protocol for establishing appraisal standards and 
guidelines should be reformed. Such provisions should not be left 
exclusively to the system guarantors, as is currently the case. This 
arrangement inappropriately restricts appraisers in their task of 
achieving the most accurate estimates of value. The new system should 
include a means for all mortgage market stakeholders to contribute to 
the system's appraisal standards to allow appraisers greater latitude 
in completing their assignments.
    Currently, Fannie Mae and Freddie Mac impose de facto appraisal 
authority through the guidelines they have established for appraisals 
on the mortgages they purchase and the forms they use to collect 
appraisal information. These Enterprise appraisal rules tend to 
restrict appraisers' ability to pursue approaches that could result in 
more accurate valuation. In addition, confusion arises over how to 
interpret the Enterprises' appraisal guidelines in relation to the 
rules established by The Appraisal Foundation in the Uniform Standards 
of Professional Appraisal Practice (USPAP) and the appraisal 
regulations of the banking regulators. This has prompted industry 
participants to impose overlays that further impede the ability of 
appraisers to produce accurate valuations.
    NAHB urges the establishment of a single, consistent set of rules 
and guidelines for appraisers and appraisals, not controlled by the 
Enterprises. NAHB recommends establishing a Collateral Valuation 
Oversight Committee in the reformed housing finance system. This 
oversight committee would consist of a broad group of housing market 
stakeholders, including home builders, and, in consultation with 
Federal regulatory agencies, would be responsible for establishing and 
maintaining guidelines for the secondary mortgage market, appraisal 
reporting formats, and a repository for valuation reports. This 
committee could set standards to ensure the engagement of an appraiser 
who has the training and experience necessary for the assignment and 
has flexibility to conduct the analysis most effectively.
    In addition, NAHB encourages the development of a timely and 
workable process for appealing inaccurate or faulty appraisals that is 
fair, balanced and appropriate to allow all parties of the transaction 
to appeal appraisals that do not meet USPAP standards or are based on 
inaccurate data or assumptions. NAHB has been a proponent of the VA's 
``Tidewater Initiative'' which encourages open communications and the 
sharing of information that assists appraisers in their analysis. NAHB 
also is encouraged by The Appraisal Foundation's white paper on best 
practices and guidelines for an efficient and effective Reconsideration 
of Value process.
Support for Acquisition, Development and Construction Financing
    Discussions of housing finance system reform should include how to 
increase the availability of capital to meet the growing supply needs 
of the Nation's housing market. NAHB believes one of the barriers to 
increased housing supply and affordability is a lack of acquisition, 
development and construction (AD&C) financing for home builders and 
land developers. According to NAHB analysis of data from the Federal 
Deposit Insurance Corporation (FDIC), the stock of outstanding 1-4 unit 
residential construction loans at FDIC-insured banking institutions 
totaled $79 billion at the end of the final quarter of 2018. While this 
is a significant improvement of the $40.7 billion total from the first 
quarter of 2013, it is substantially smaller than the $203.8 billion 
stock outstanding from early 2008. Without an adequate pipeline of 
financing, developers and builders struggle to afford to buy lots which 
are increasingly expensive due to low- or very-low lot supplies noted 
in NAHB surveys. This lack of supply is driving up prices and impacting 
housing affordability, especially for entry level and first-time home 
buyers. NAHB believes the Enterprises should support community banks' 
AD&C lending activities and Congress should authorize such support in 
housing finance reform legislation.
A Carefully Regulated Fully Private Mortgage-Backed Securities System
    The conventional MBS market should operate in tandem with a fully 
private MBS system. A robust market for private label MBS will be 
critical to the availability of mortgage products that do not meet the 
conforming, conventional underwriting and credit guidelines or the 
programs of FHA, USDA and VA. NAHB believes it is essential to have an 
efficient and stable secondary market where conventional single-family 
and multifamily mortgages are aggregated and placed into diversified 
pools for securitization and sale to investors worldwide. This includes 
considering provisions to support and encourage the return of the 
private label mortgage securitization market. The Government guaranteed 
and nonguaranteed market segments can and should complement each other 
by specializing in distinct market niches while also competing on price 
and product for overlapping market segments.
    Investors in private label mortgage-backed securities (PLS) 
suffered enormous losses in the financial downturn and have not 
returned to the marketplace in any significant way. In fact, PLS 
currently comprise only about 4 percent of MBS securitizations. NAHB 
encourages policymakers to work with the investor community prior to 
finalizing legislation in order to ensure that the private market is 
able to gain enough momentum to support the housing market when housing 
finance reform legislation is enacted. It is important to make sure the 
legislation does not have unintended consequences that would prevent 
private capital from returning.
Role for the Federal Home Loan Banks
    NAHB always has viewed the Federal Home Loan Banks (FHLBanks) as 
having an important role in the housing finance system. NAHB's members 
rely on commercial banks, and in particular, community banks for their 
AD&C financing needs as well as for the mortgage credit needs of their 
home buyers. The FHLBanks were a steadfast source of financing 
throughout the most recent downturn. Their specific mission is to 
provide liquidity to their members, primarily banking institutions, to 
support housing finance and community investment. Their role should not 
be overlooked in a restructured housing finance system. NAHB believes 
there should be explicit acknowledgement of the significance of the 
FHLBanks to the housing finance system in any proposed reform 
legislation.
Affordable Credit
    NAHB would like to emphasize that increased fees and interest rates 
are ultimately paid by home buyers. Since financing costs have a 
significant bearing on the ability of home buyers to purchase a home, 
NAHB cautions that any fees contained in a legislative framework will 
likely be added to the interest rate and may have a negative effect on 
the market if the cumulative impact substantially raises the cost to 
buyers.
    Prospective home buyers are adversely affected when interest rates 
rise. NAHB estimates that with a quarter-point increase in the rate on 
a 30-year fixed-rate mortgage, as many as 1 million U.S. households 
would be priced out of the market for a median-priced new home.\6\
---------------------------------------------------------------------------
    \6\ Na Zhao, Ph.D. ``NAHB Priced-Out Estimates for 2019,'' NAHB 
Economics and Housing Policy Group Special Studies, January 2, 2019. 
https://www.nahbclassic.org/generic.aspx?generic
ContentID=265844.
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Conclusion
    NAHB thanks Chairman Crapo for his focus on housing finance system 
reform and for releasing his Housing Reform Outline. I appreciate the 
opportunity to submit our perspectives on housing finance system 
reform. We look forward to working with the Senate Committee on 
Banking, Housing, and Urban Affairs and others to build on this effort 
and develop legislation consistent with NAHB's recommendations and the 
consensus elements that have emerged over the last several years.
    NAHB believes many regulatory reforms undertaken at the Enterprises 
under the direction of the FHFA have strengthened the safety and 
soundness of the housing finance system, and ultimately need to be 
codified in legislation.
    Whether they rent or own, Americans want to choose where they live 
and the type of home that best meets their needs. Given the significant 
role that housing plays in the economy, we urge Congress to take a 
long-term, holistic approach to housing finance system reform. NAHB 
also urges Congress to carefully consider the differences between the 
single-family and multifamily market and not apply solutions to one 
piece of the market that are not appropriate for the other.
    NAHB thanks this Committee for its leadership on this important 
issue, and stands ready to work with you to achieve such reforms and 
provide much-needed stability for this critical sector of the economy.
                                 ______
                                 
               PREPARED STATEMENT OF MARK M. ZANDI, Ph.D.
                   Chief Economist, Moody's Analytics
                             March 26, 2019
    Chairman Mike Crapo of the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs released an outline for housing finance 
reform on February 1. As an outline it leaves much to be resolved, but 
it does offer a promising framework from which to begin. How this 
framework is filled in will be important, since a few critical 
structural choices yet to be made will have a dramatic impact on how 
the proposed system would work.
    My testimony offers a summary of where Chairman Crapo's framework 
starts, three of the most important design issues left to be decided, 
and how these issues must be decided to ensure a viable path for the 
legislative reform we so badly need.\1\ Before this, I consider the 
critical criteria that must be met for housing finance reform to 
succeed.
---------------------------------------------------------------------------
    \1\ My testimony is largely based on ``How Chairman Crapo's Outline 
of Housing Finance Reform Can Work,'' Jim Parrott, Dave Stevens and 
Mark Zandi, white paper, February 1, 2019 (but the views expressed in 
this testimony are my own). https://www.economy.com/mark-zandi/
documents/2019-02-27-Crapos-Housing-Finance-System.pdf.
---------------------------------------------------------------------------
Defining successful reform
    The success of any housing finance reform depends on its ability to 
satisfy six essential criteria, including ending too-big-to-fail, fully 
protecting taxpayers, providing equal access to the system for 
underserved communities and lenders of all sizes, maintaining 
affordable mortgage rates for borrowers under all market conditions, 
promoting competition, and easing the transition from the current 
system to the future system.
    The future housing finance system must end the reliance on too-big-
to-fail financial institutions. Fannie Mae and Freddie Mac were too big 
to fail, and the cost to taxpayers of forestalling their failure during 
the financial crisis was considerable. In the future system, no private 
institutions should be indispensable to a healthy, well-functioning 
secondary mortgage market, or be able to dominate the market by 
controlling its infrastructure or taking a significant share of the 
system's credit risk.
    Taxpayers must be fully protected from suffering any losses in the 
future system. This requires that there is substantial private capital 
in the system, sufficient to withstand losses in all but the most 
catastrophic economic scenarios. The Federal Government should stand 
behind the system, backstopping it against these dark scenarios, but 
mortgage borrowers should pay taxpayers for the cost of this backstop. 
Taxpayers should also have the ability to claw back from borrowers any 
costs they incur in backstopping the system.
    Maintaining broad access to mortgage credit for those in a position 
to become sustainable homeowners is one of the most important and 
widely supported objectives of housing finance reform. For this to mean 
anything, though, not only must borrowers be able to find a lender 
willing to make them a loan, they must be able to find one willing to 
make them a loan on terms that they can afford. Equal access for 
lenders of all sizes is also necessary to ensure sufficient competition 
in the future system.
    The future system must not result in significantly higher mortgage 
rates while still providing the necessary capital buffer to protect 
taxpayers and the appropriate access for underserved borrowers. The 
system must also be flexible enough to ease the impact on mortgage 
rates and credit availability during tough economic times when private 
sources of capital will either be unwilling to provide capital or 
require such a high return that it would cause rates to spike. This 
requires a catastrophic Government backstop.
    Competition in the future system is necessary to ensure that 
mortgage borrowers are offered innovative loan products with attractive 
terms and interest rates. This includes promoting competition in the 
primary lending market, the markets for taking credit risk, and the 
secondary market. It is also critical that competition in the system is 
not based on inappropriate underwriting standards, which will result in 
unsustainable lending and an unstable system.
    Finally, and arguably most important to successfully achieving 
legislative reform, the transition from the current system to a future 
one must occur with as little
disruption, uncertainty and risk as possible, building upon steps 
already under way. This includes Fannie and Freddie's current work to 
build a common securitization platform, or CSP, and the Government-
Sponsored Enterprises' current risk-transfer efforts. It is critical to 
move in an incremental fashion because the deep structural reform 
called for will require significant change to a complex and critically 
important system. The process of transition should be approached with 
an appropriate level of humility and flexibility in the face of the 
difficulty and importance of the challenge.
Chairman Crapo's system laid out in the outline
    Chairman Crapo's outline for housing reform goes a significant way 
toward meeting these criteria for successful reform. In the proposed 
system, mortgage lenders will have three options:

  1.  Lenders can sell their loans to one of multiple chartered 
        guarantors, which would issue securities through Ginnie Mae.

  2.  Lenders can purchase insurance from the guarantors to cover the 
        credit risk on their loans, and issue securities themselves 
        through Ginnie Mae, retaining master servicing.

  3.  Lenders can sell their loans to a loan aggregator, which would 
        either sell them to one of the guarantors as per option 1 or 
        issue securities themselves as per option 2.

    Lenders and aggregators must off-load all of the credit risk on 
their loans to the chartered guarantors, whichever channel they use, 
after the risk assumed by mortgage insurers on loans with a loan-to-
value of greater than 80 percent. Guarantors can then distribute some 
or all of the risk they assume through credit-risk transfers, resulting 
in a broad dispersion of credit risk throughout global markets. Ginnie 
Mae will own and manage the securitization infrastructure and provide 
the Government guarantee on the securities (see Chart).\2\
---------------------------------------------------------------------------
    \2\ Ginnie will also presumably manage the securitization of loans 
insured by the FHA, VA and USDA in the manner it does today. As we 
mention below, clarifying how these channels relate to each other will 
be an important next step in the development of the proposal.


    To minimize market concentration, lenders cannot be guarantors and 
no guarantor can guarantee more than a yet-to-be-specified percentage 
of all outstanding mortgages guaranteed in the channel.\3\
---------------------------------------------------------------------------
    \3\ The outline actually says that depositories cannot be 
guarantors, but we assume that the prohibition would apply to all 
lenders given that the reasons for prohibiting depository lenders apply 
in precisely the same way to nondepository lenders.
---------------------------------------------------------------------------
    There is a good deal yet to be specified in this framework. 
However, three critical design issues stand out in their importance: 
how the lender-issuer channel will work (the second option for lenders 
listed above); how the new system will attract a sufficient number of 
new guarantors to ensure adequate competition in the secondary market; 
and how the system will ensure broad access to affordable credit.
How the lender-issuer channel will work
    What it means to allow lenders to issue securities in this system 
depends on how a couple of questions are answered. The first is whether 
the issuer is on the hook for the failure of a guarantor from which 
they purchased insurance. Put differently, in the issuer channel, does 
Ginnie Mae step in to pay mortgage-backed securities investors after a 
guarantor has failed, or only after the issuer too has failed? If the 
latter, issuers will have counterparty risk that may compromise the 
issuers' ability to get true sale accounting on the loans delivered 
through the channel, tying up so much capital that the channel would 
likely be uneconomic for all lenders. Even if lenders do get true sale 
accounting, they would still have to hold additional capital against 
the risk, rendering the execution unappealing to all but big banks, 
which are uniquely positioned to use their scale to cover the 
incremental risk.
    If instead Ginnie Mae steps in to cover payments to MBS investors 
when the guarantor fails, then this problem disappears. Issuers will 
not have to set aside capital to cover the counterparty risk, opening 
the channel up to lenders of all sizes.
    The second question is whether in the system lenders are able to 
issue securities backed only by their own loans. If so, then some 
lenders could set up vertically integrated channels to sell MBS backed 
by loans valued most highly by investors, sending everything else 
through the guarantor channel. The housing finance system would then 
have two very different channels: one dominated by lenders selling 
their own premium MBS at premium pricing and another through which 
everyone else sells a broader mix of loans at worse pricing.
    This would pose a host of challenges.
    Larger lenders would be better positioned to vertically integrate 
as issuers, given the complexity and capital involved, forcing smaller 
lenders into a poorer execution that makes it harder for them to offer 
competitive pricing to borrowers in the primary market.
    Guarantors would find it difficult to compete with issuers given 
the latter's better execution. Guarantors would be forced to operate 
primarily in whatever segments of the market issuers do not want. This 
would make it difficult to attract capital to fund guarantors, 
compounding the challenge of attracting new entrants to compete with 
Fannie and Freddie.
    Finally, the fragmentation of the market would make it less liquid, 
less stable, and more expensive for borrowers. It would also make it 
difficult to ensure that all markets and communities are well served 
through the economic cycle, as issuers will focus on the most lucrative 
markets.
    It is thus critical that securities issued through all three 
channels be collateralized by the same multilender pools.\4\ By making 
the issuance fungible in this way, it would level the playing field for 
both lenders and guarantors, maintaining a single, deeply liquid and 
broadly dispersed secondary market.
---------------------------------------------------------------------------
    \4\ It would function much as Ginnie II functions today.
---------------------------------------------------------------------------
    If policymakers address these two open questions effectively, then 
the lender-issuer channel proposed could be a net gain to the system, 
allowing lenders to retain master servicing and thus spreading some of 
the associated liquidity risk beyond the guarantors, without 
compromising the system's competitiveness, stability or liquidity.\5\
---------------------------------------------------------------------------
    \5\ An interesting question is whether guarantors will price loans 
they purchase more favorably than those for which they only provide 
insurance, as in the former they will maintain master servicing, making 
it easier for them to manage the risk they have assumed.
---------------------------------------------------------------------------
How the system will attract new entrants
    The next design issue that must be addressed is how the proposed 
system will create competition among guarantors. To address the too-
big-to-fail problem, which is one of its central objectives, the system 
must ensure that enough new guarantors enter the space that any one of 
them can fail without bringing the entire market down.\6\ Although the 
outline includes a limit on the overall market share of any one 
guarantor, the system will need to make it feasible for other 
institutions to enter the market to compete with Fannie and Freddie.
---------------------------------------------------------------------------
    \6\ Allowing privately owned institutions to play a role so 
critical to the system that they cannot be allowed to fail gives them 
an incentive to take on excessive risk, knowing that taxpayers will 
bail them out if these risks do not pay off. Policymakers can address 
this problem in one of three ways: They can attempt to regulate the 
behavior of the privately owned oligopoly, as has been recommended most 
recently by the National Association of Realtors (https://
www.nar.realtor/sites/default/files/documents/2019-Working-Paper-A-
Vision-For-Enduring-Housing-Finance-Reform-02-07-2019.pdf;) they can 
put these critical functions into a governmental or quasi-governmental 
institution, as several of us have advocated (https://www.urban.org/
sites/default/files/publication/79771/2000746-A-More-Promising-Road-to-
GSE-Reform.pdf); or they can create a market in which enough privately 
owned entities own and manage that infrastructure that anyone can be 
allowed to fail, as is envisioned in the Crapo proposal. Simply re-
privatizing them with a few modest reforms, as some have advocated 
(https://thehill.com/opinion/finance/420633-fannie-and-freddie-
investors-want-us-to-forget-about-the-housing-crisis), will leave the 
too-big-to-fail problem firmly in place.
---------------------------------------------------------------------------
    This will be no small task. Fannie and Freddie not only have long-
standing relationships with the mortgage industry that give them a 
formidable head start, but they have built the securitization 
infrastructure that the vast majority of market participants rely on to 
access the secondary market. The way lenders interface with the 
secondary market has been determined in large part by the systems that 
Fannie and Freddie have put into place over decades, driving everything 
from what information lenders collect from borrowers and how, to what 
underwriting processes they run and what software programs they use. 
Even if they are not relying on a Fannie or Freddie system for a given 
process, a lender is often relying on a system that was built to handle 
one of Fannie and Freddie's systems. The same is true for investors, 
with a great many of the processes, standards and expectations for how 
investing in MBS works arising from the systems put in place over the 
years by the Government-Sponsored Enterprises.
    If the only way that a new entrant can compete with Fannie and 
Freddie is to attract lenders and investors away from this deep, 
comprehensive and long-standing nexus of rules, systems and 
technologies, then the odds of attracting a sufficient number of 
guarantors for the kind of system imagined here are impossibly long. 
For the system to work as intended, much of this infrastructure will 
have to be moved into the common securitization platform, or created 
anew there. By making what is in some ways the highway system of the 
housing finance system accessible to all guarantors, it will serve to 
lower barriers to entry rather than make them prohibitively high.
    The most realistic way to do this is to build on the work that the 
Federal Housing Finance Agency, Fannie, and Freddie are doing already 
with the common securitization platform (https://www.urban.org/sites/
default/files/publication/988
72/single_security_0.pdf). Once the CSP is effectively supporting 
issuance by both Fannie and Freddie, it should be well positioned to 
handle additional issuers. Unlike the initial effort of synthesizing 
two very different securitization systems in Fannie and Freddie, new 
issuers will be able to join by designing their de novo systems to sync 
up with the existing systems of the CSP, a much less daunting 
undertaking.
    However, the CSP is limited in which securitization processes it 
supports since it focuses exclusively on the bond administration 
functions. Here too it can and should be expanded (https://
www.urban.org/sites/default/files/publication/91976/
2017_07_18_the_common_securitization_platform_finalized_0.pdf). For 
instance, it should take on more loan-level data (https://
assets1c.milkeninstitute.org/assets/Publication/Viewpoint/PDF/
Blueprint-Admin-Reform-HF-System-1.7.2019-v2.pdf), so that market 
participants have access to the kinds of data that allow Fannie and 
Freddie to automate appraisals and other critical processes. Most 
useful here would be sharing the data and processes that drive Fannie 
and Freddie's automated underwriting systems, which together form one 
of their most formidable barriers to entry. By opening up their AUS to 
the market, at least for some brief period, other guarantors would be 
able to develop their own automated underwriting systems more readily, 
helping them to begin on terms more level with Fannie and Freddie. 
Policymakers could take this one step further by requiring the CSP 
intermediate between lenders and the guarantors' automated underwriting 
systems. Guarantors could be required to provide a portal to their AUS 
on the platform, so that lenders would submit information on a given 
loan for approval and pricing from all guarantors at once. This would 
dramatically reduce the prohibitive advantage that Fannie and Freddie 
would otherwise enjoy from the market's adoption of their AUS.
How the system will ensure broad, consistent access to affordable 
        lending
    And finally, another critical design issue that must be addressed 
is how the system will provide broad, consistent access to affordable 
mortgage credit, particularly in areas that the market may be less 
inclined to serve well when left on its own. Chairman Crapo's outline 
states that the affordability goals and duty to serve will be replaced 
by a market access fund, which will be funded by an annual 10-basis 
point fee on all securities issued through the channel.\7\ While that 
would generate more than $5 billion a year to lower housing costs for 
low- and moderate-income borrowers, which is more than the current 
system provides (https://www.urban.org/research/publication/access-and-
affordability-new-housing-finance-system), a great deal more about how 
this will be allocated and how the system as a whole will work will 
need to be developed in the right way to ensure that it provides 
adequate support for communities that need it.
---------------------------------------------------------------------------
    \7\ It is worth noting that the Crapo outline retains both the 
Housing Trust Fund and Capital Magnet Fund, which are focused on 
addressing the inadequate supply of affordable housing.
---------------------------------------------------------------------------
    First, it will be important that all guarantors have a national 
footprint, so that they cannot simply serve those markets that happen 
to be most profitable. Allowing guarantors to cherry-pick markets could 
lead to regional or demographic gaps in the secondary market, segments 
in which lenders have few to no places to sell their loans. This, in 
turn, would lead to gaps in the primary market that would be difficult 
if not impossible for the market access fund to overcome. It would also 
lead to volatility in liquidity as guarantors move from one market to 
another depending on the inevitable variations in profitability that 
will come with the economic cycle.
    It will also be important to develop a means of allocating the fund 
that cannot be captured by intermediaries. The current system does this 
relatively well. By delivering its cross-subsidy through a simple, 
largely level guarantee fee--whereby lower credit-risk borrowers are 
overcharged so that higher credit-risk borrowers can be undercharged--
it avoids the expense of sorting out who is to receive which kinds of 
benefit and paying others to deliver that benefit. Whatever means are 
used to deliver the cross-subsidy in the new system, the benefits 
should similarly flow to the beneficiaries in as automated and simple a 
way as possible.
    Last, it will be important to target the market access fund to 
those borrowers who actually need the help and to provide the kind of 
help they actually need. Here, the current system does not perform as 
well. Although much of the cross-subsidy is driven by the duty to serve 
and affordability goals to serve to low- and moderate-income borrowers, 
a significant portion is not. As most of the cross-subsidy is provided 
through the level guarantee fee paid by all Fannie and Freddie 
borrowers, almost a quarter of the cross-subsidy goes to those who are 
not low- or moderate-income borrowers, but benefit simply because they 
have poorer credit. Moreover, not all borrowers need help in the form 
of a modest reduction in their mortgage rate. Some desperately need it 
in another form such as downpayment assistance. The future system could 
thus do a better job channeling funding from those who can afford to 
pay to those who need the help and in the form that they can actually 
use.\8\
---------------------------------------------------------------------------
    \8\ Some have expressed concern that applying a conservative income 
cap on who can receive the subsidy would leave out some families that 
need and deserve help, particularly middle-class families of color 
whose ability to get a mortgage has been impacted by a legacy of 
discrimination. The answer, though, is more thoughtful targeting, not 
giving up on targeting altogether. As challenging as targeting may be, 
without it we are giving money to the wrong people and those who really 
need it are getting less, or none at all, as a result.
---------------------------------------------------------------------------
Conclusion
    There are, of course, other critical choices to be made, including 
what capital and regulatory regime to impose on guarantors to ensure 
that they are protecting the taxpayers standing behind the system 
rather than arbitraging the Government's backstop; how to give whatever 
institution owns and operates the securitization platform the 
flexibility and autonomy it needs to be an effective market utility; 
and how to integrate the Federal Housing Administration,
    Veterans Affairs, and the U.S. Department of Agriculture into a 
more seamless, coherent system of Government support for the mortgage 
market.\9\ But if policymakers can effectively address the more 
foundational issues discussed above, I think the remaining challenges 
are manageable. Chairman Crapo's outline thus holds significant 
promise, making it a worthy place to renew the much delayed, but still 
badly needed, effort to overhaul the housing finance system.
---------------------------------------------------------------------------
    \9\ The long list of issues to be addressed is a reminder of how 
challenging legislative reform will ultimately be: how guarantee 
pricing should be regulated; what the process for resolving a failing 
guarantor will be; how to handle transition; how to handle multifamily, 
and on and on.
---------------------------------------------------------------------------
                                 ______
                                 
                PREPARED STATEMENT OF HILARY O. SHELTON
       Director, Washington Bureau, and Senior Vice President for
                       Advocacy and Policy, NAACP
                             March 26, 2019
INTRODUCTION
    Good morning, Chairman Crapo, Ranking Member Brown, and esteemed 
Members of this Committee. I would like to thank you for asking me here 
today to discuss a topic that is crucial to the NAACP and all of the 
individuals, families, neighborhoods, and communities we serve and 
represent: home ownership.
    While not perfect, I would counsel extreme caution when reforming 
our Nation's housing policy. Housing currently represents approximately 
20 percent of the national economy, so while no one would argue that 
this is not a very important issue to our Nation and our economy, it is 
my hope that when drafting this policy we do not forget the impact our 
actions have on every American, especially those who, for a multitude 
of reasons, may be most reliant on a strong mortgage and secondary 
market: Americans of color and low- to moderate-income Americans.
    My name is Hilary O. Shelton, and I am the Director of the NAACP 
Washington Bureau and the Senior Vice President for Policy and 
Advocacy. I have been with the NAACP Washington Bureau for over 21 
years.
    Founded in 1909, the NAACP is our Nation's oldest, largest, and 
most widely recognized grassroots based civil right organization. We 
currently have over 2200 membership units in every State in the Nation, 
as well as on American military installations in Asia and Europe. Our 
mission statement declares that our goal is `` . . . to ensure the 
political, educational, social and economic equality of rights of all 
persons and to eliminate racial hatred and racial discrimination.''
    The desire to be a homeowner is not specific to NAACP members: home 
ownership is ``The American Dream.'' It represents not only safety and 
stability for an individual and his or her family, but it also leads to 
a sense of community, and is one of the most important tools for 
building and passing on wealth for most middle-class families. All 
Americans deserve a safe and decent place to live.
    Yet for too long, too many Americans have been denied the ability 
to follow their basic dream of home ownership. In 1968, President 
Lyndon B. Johnson signed the seminal Fair Housing Act into law. This 
new law made it illegal to discriminate against a person when they are 
renting or buying a home, getting a mortgage, seeking housing 
assistance, or engaging in other housing-related activities due to the 
race, color, national origin, religion, gender, or familial or 
disability status. It also prohibited discrimination based on the 
racial, ethnic, or income make-up of the neighborhood. At the time of 
the enactment of the Fair Housing Act, over 50 years ago, home 
ownership among African Americans was just over 40 percent. At the same 
time, home ownership among white Americans was well over 60 percent.
    In the first 40 years since the Fair Housing Act was signed into 
law, home-ownership rates among all races and ethnicities slowly 
increased, with home-ownership rates among African Americans nearing 50 
percent in 2005. But in the last 10 years or so we have seen those 
rates drop. Today, sadly, the home-ownership rate among African 
Americans is approximately back to where it was when discrimination was 
legal: just over 40 percent.
    To what do we owe this troubling phenomenon? First, it should be 
pointed out that while home ownership among communities of color in the 
United States was never on par with that of our white counterparts, it 
did increase prior to the recession of the late 2000s. Then, with the 
economic downturn of 2008 and the related housing crisis, most home-
ownership gains, especially those made among low- and moderate-income 
Americans and people of color of our country, were wiped out.
    According to the seminal study by the St. Louis Federal Reserve 
from the first quarter of 2017, between 2007 and 2010, mortgage 
delinquency surged across all groups, reaching a peak in January 2010 
of just under 10 percent and 8 percent for African Americans and 
Hispanics, respectively, compared to less than 3 percent for white 
Americans. Perhaps more important is the fact that just under 30 
percent and more than 31 percent of mortgage loans for African American 
and Hispanic borrowers, respectively, had entered foreclosure. That is 
in sharp contrast to the less than 12 percentage shares for white 
borrowers.\1\
---------------------------------------------------------------------------
    \1\ Garriga, Carlos, Ricketts, Lowell R. and Schlagenhauf, Don. 
``The Homeownership Experience of Minorities During the Great 
Recession,'' The Federal Reserve Bank of St. Louis Review, First 
Quarter 2017, pp. 139-67. https://doi.org/10.20955/r.2017.139-67.
---------------------------------------------------------------------------
    This loss of home ownership is one reason we have the stubborn, 
completely unhealthy, racial wealth gap in the United States. The 
typical white family
currently has over $14,000 in wealth, compared to just over $6,000 for 
the average Latino family and not even $3,500 for the average African 
American family.\2\ Moreover, 20 percent of African Americans currently 
live in poverty, compared to just over 6 percent of white Americans.\3\
---------------------------------------------------------------------------
    \2\ Asante-Muhammed, Dedrick, et. al., (September, 2017). The Road 
to Zero Wealth: How the Racial Wealth Divide is Hollowing Out America's 
Middle Class. Prosperity Now and Institute for Policy Studies.
    \3\ U.S. Census Bureau (2017). Table S1702.
---------------------------------------------------------------------------
    In response to the economic downturn, Congress passed the 2008 
Housing and Economic Recovery Act (HERA) and the 2010 Dodd-Frank Wall 
Street Reform and Consumer Protection Act.
    Together these two laws put into place several important safety and 
soundness regulations that the prior system lacked, and while they were 
by no means perfect they did serve to protect the taxpayers as well as 
groups that had heretofore been targeted by unscrupulous lenders with 
unsustainable products.
    Any changes to the current system must continue to incorporate and 
to protect important market segments--namely people of color and low-
to-moderate income families--on which a well-functioning future system 
depends and a just society demands. These changes must also continue to 
protect taxpayers.
NAACP RECOMMENDATIONS
    Successful reform of our current system would produce one that 
adequately serves the full universe of credit worthy borrowers, takes 
into account the unique needs and characteristics of communities of 
color, and builds on the positive innovations that have emerged after 
the financial crisis of the late 2000s. We should not and cannot return 
to the days of a loosely regulated system which led to reckless, 
unsustainable lending practices like those that caused the financial 
crisis and led to a devastating loss of wealth for people of color and 
cost taxpayers billions of dollars.
    Any housing reform policy must remedy the historical 
marginalization of communities of color and discriminatory practices 
within the mortgage market which were sanctioned, and often encouraged, 
by societal constraints, and in too many cases, Federal policies. The 
historic role that the Federal Government played in emboldening, and at 
times enforcing, mortgage discrimination and the targeting of unfair, 
unsustainable loans to racial and ethnic minorities in America, thereby 
limiting their choices and their ability to build wealth, cannot and 
should not be
ignored. A secondary market structure that is too narrow increases the 
risks of perpetuating the current two-tiered lending system in which 
white, more affluent
buyers are channeled into one system with one set of fees and racial 
and ethnic minorities, people of color, and low- to moderate-income 
buyers are funneled into another.
    Specifically, the NAACP calls on Congress to retain and strengthen 
any and all ``Duty to Serve'' provisions by Fannie Mae, Freddie Mac, 
Ginnie Mae, and any other Government-Sponsored Entity (GSE) or any 
relevant Government program. Without an enforceable, robust obligation 
to serve all markets, history has proven that communities of color 
within our Nation will find it extremely difficult to access the 
mortgage market. In the absence of an explicit, aggressive Duty-to-
Serve mandate most, if not all, capital will go to the ``cream of the 
crop'' mortgages, the more affluent home buyers with traditional 
borrowing credits, thereby ignoring the lower-wealth and lower-income 
home buyers who may nevertheless have proven themselves creditworthy. 
We must preserve and enhance all Duty-to-Serve mandates so that 
underserved markets, including but not limited to loans made to people 
of color, low- and moderate-income Americans, as well as markets for 
affordable rental housing and manufactured housing are covered.
    We must retain if not strengthen any and all Federal mandates to 
ensure broad access and affordability in our Nation's housing finance 
system. While alternative methods of achieving access and affordability 
may appeal to some, the NAACP is concerned that simply authorizing 
money to alleviate a problem is not enough, and as we have seen in the 
past year, even when money is appropriated it can easily be slated to 
be taken away.
    Any alteration to our current housing system must also preserve and 
enhance fair housing and anti-discrimination laws. To wit, we must 
ensure that there is a rigorous, consistent, effective, and well-
resourced structure to oversee and enforce fair lending rules and 
regulations. We must be able to fully and adequately measure trends in 
lending to make sure that fair and sustainable loans are being made to 
all creditworthy borrowers, regardless of where they are looking to 
purchase their homes.
    Congress must preserve FHA insured lending, responsible low-
downpayment mortgage loans, and ensure access to existing downpayment 
assistance programs as well as promote cost-effective loan 
modifications for existing homeowners. This will help not only first 
time home buyers but those who are already in their own home stay 
there.
    Congress must also formally recognize and boost the role of housing 
counseling. This entails both pre- and post-purchase counseling to help 
families understand what their obligations may be and how to best 
manage them, especially in times of unexpected stress. All HUD-approved 
housing counseling services must be able to reach low- and moderate-
income families as well as families of color, and they should be able 
to address any unique, but not disqualifying, characteristics.
    Any future housing reform proposal must also provide broad access 
to capital for all borrowers as well as institutions of every size. 
Small lenders, including community banks and credit unions, are often 
are the only sources of mortgage credit in underserved communities 
across the Nation. We must ensure that small lenders, credit unions, 
community banks and minority-serving institutions all have fair, equal, 
and affordable access to the housing finance system and that their 
needs, sometimes unique, are met.
    Any housing proposal must also protect and increase funding for the 
National Housing Trust Fund (NHTF). In a just-published follow-up to 
their in March 18 study \4\ the National Low Income Housing Coalition 
announced that within the United States there is a shortage of 7 
million affordable and available rental homes for households with 
extremely low incomes at or below the poverty guideline or 30 percent 
of the area median income (AMI), whichever is higher. Seventy-one 
percent of extremely low-income households are severely housing cost-
burdened, spending more than half of their incomes on housing. 
Extremely low-income renters are more likely to be severely housing 
cost-burdened than any other income group, accounting for 73 percent of 
all severely housing cost-burdened renters in the United States. The 
NHTF is the first new housing resource exclusively targeted to 
households with the lowest incomes, and its success must be protected, 
celebrated, and preserved. There is sadly still a dire need for the 
NHTF throughout the Nation, and until that need is met we must continue 
to fund and promote it. The NAACP is a proud, long-time supporter of 
the NHTF.
---------------------------------------------------------------------------
    \4\ National Low Income Housing Coalition, ``The Gap: A shortage of 
Affordable Homes'' March, 2018. https://reports.nlihc.org/sites/
default/files/gap/Gap-Report_2018.pdf.
---------------------------------------------------------------------------
    Last, but not of least importance, any housing reform policy must 
protect taxpayers. Taxpayers cannot be disproportionately exposed to 
risks; we must protect, and fully and rigorously implement the reforms 
passed in 2008 and 2010 that require strong capital standards for all 
parties in the housing finance system and set strong standards for 
sustainable mortgages for all. It is a basic responsibility of Congress 
to eliminate excessive and/or unfair risk to the taxpayers, their 
constituents as well as all of the American people.
CONCLUSION
    Fannie Mae and Freddie Mac continue to provide critical mortgage 
capital to underserved communities. Together, they purchased more than 
two million home loans or refinance mortgages in 2015, including almost 
half a million loans to low- and moderate-income borrowers, and nearly 
400,000 loans to borrowers of color.\5\
---------------------------------------------------------------------------
    \5\ Center for Responsible Lending, Testimony of Ms. Nikitra 
Bailey. September 6, 2018, before the U.S. House of Representatives 
Committee on Financial Services hearing on A Failure to Act: How a 
Decade without GSE Reform Has Once Again Put Taxpayers at Risk.
---------------------------------------------------------------------------
    More than 50 years after enactment of the 1968 Fair Housing Act, 
Congress has an opportunity to put some teeth into the promises made by 
that law. Although racial and ethnic minorities combined already 
represent a significant segment of the housing market, they are 
projected to be an even larger portion of the market over the next one 
or two decades. These households will be younger than current 
traditional borrowers, and therefore have less credit history and they 
will likely have lower incomes. As family structures and the labor 
market continue to evolve, these new ``nontraditional'' borrowers will 
require more flexible underwriting systems and access to affordable 
housing products in order to become homeowners.
    I recognize the impact that any changes, or even no changes, to 
housing policy will have on our national and even global economy, and I 
do not envy you the task ahead. Yet I pledge to you that the NAACP 
stands ready to work with you to ensure that we get it right, and that 
we do not make changes that will create unintended and harmful 
consequences which we will come to regret. As I indicated at the 
beginning of my testimony, it is my hope that when drafting this policy 
we do not forget the impact our actions have today on every American, 
in a manner that will shape our Nation's economic future.
    Thank you again for inviting me here today to speak to you about 
housing and home ownership. I stand ready to answer any and all of your 
questions.
                                 ______
                                 
                 PREPARED STATEMENT OF ADAM J. LEVITIN
           Professor of Law, Georgetown University Law Center
                             March 26, 2019

                      Witness Background Statement

    Adam J. Levitin is a Professor of Law at the Georgetown University 
Law Center, in Washington, DC, where he teaches courses in structured 
finance, financial regulation, bankruptcy, and commercial law. He is 
the author of Consumer Finance: Markets and Regulation (Wolters Kluwer 
2018), Business Bankruptcy: Financial Restructuring and Modern 
Commercial Markets (2d ed. Wolters Kluwer 2018), and, with Susan M. 
Wachter, The American Mortgage: the Rise, Fall, and Rebirth of the U.S. 
Housing Finance System (Harvard University Press, forthcoming 2019).
    Professor Levitin has previously served as the Bruce W. Nichols 
Visiting Professor of Law at Harvard Law School, as the Robert Zinman 
Scholar in Residence at the American Bankruptcy Institute, and as 
Special Counsel to the congressional Oversight Panel supervising the 
Troubled Asset Relief Program (TARP). Professor Levitin has also 
previously served on Consumer Financial Protection Bureau's Consumer 
Advisory Board.
    Before joining the Georgetown faculty, Professor Levitin practiced 
in the Business Finance & Restructuring Department of Weil, Gotshal & 
Manges, LLP in New York, and served as law clerk to the Honorable Jane 
R. Roth on the United States Court of Appeals for the Third Circuit.
    Professor Levitin holds a J.D. from Harvard Law School, an M.Phil 
and an A.M. from Columbia University, and an A.B. from Harvard College. 
In 2013 he was awarded the American Law Institute's Young Scholar's 
Medal.
    Professor Levitin has not received any Federal grants or any 
compensation in connection with his testimony, and he is not testifying 
on behalf of any organization. The views expressed in his testimony are 
solely his own.
                                 ______
                                 
    Mr. Chairman Crapo, Ranking Member Brown, Members of the Committee:

    Good morning. Thank you for inviting me to testify at this hearing. 
My name is Adam Levitin. I am a Professor of Law at the Georgetown 
University, where I teach courses in structured finance, consumer 
finance, bankruptcy, and commercial law. I appear hear today as an 
academic who studies housing finance, without any economic interest 
other than as a homeowner.
    I am deeply concerned about the basic direction of the Chairman's 
housing finance reform proposal outline. Today's housing finance market 
is functioning well. Most creditworthy Americans are today able to 
obtain mortgage financing, no matter where they live--metropolitan 
areas or rural communities. They can readily obtain a long-term fixed-
rate mortgage, the product that has built the American middle class. 
They can lock in an interest rate prior to closing, so they can budget 
a home bid with confidence. And they can choose to get their loan from 
thousands of institutions, including their local community banks and 
credit unions.
    The multi-guarantor system proposed in the Chairman's outline would 
place all of this in jeopardy. Specifically, a multi-guarantor system 
as envisioned will result in:

  (1)  rural consumers being unable to obtain credit on equal terms to 
        urban peers;

  (2)  consumers being unable to get 30-year fixed-rate mortgages on 
        competitive terms;

  (3)  consumers being unable to readily get pre-closing rate-locks;

  (4)  small lenders being shut out of access to the secondary market; 
        and

  (5)  an unstable, procyclical market that will put taxpayer funds at 
        risk.

While my prediction here is dire, it is hardly speculative. Much of 
this is what happened during the 2002-2008 housing bubble period, as 
well as in the pre-New Deal mortgage market.

    For example, how did Countrywide Financial and Washington Mutual 
and other private-label securitization sponsors grow their market 
shares in the bubble years? By lowering their underwriting standards, 
such that the risk-adjusted price of mortgage credit fell, even as the 
supply expanded.\1\ Private-label securitization financed primarily 
nontraditional mortgages, not 30-year fixed-rate loans, and private-
label MBS were insufficiently standardized to trade to-be-announced 
(TBA) market that enables lenders to offer pre-closing rate locks. By 
the end of the bubble, we started to see private-label MBS with 
geographically concentrated pools, such that if the bubble had gone on 
longer, a national market would have ceased to exist. And the massive 
underpricing of risk in the private-label MBS market enabled borrowers 
to bid up home prices to an unsustainable level, making a crash all but 
inevitable.
---------------------------------------------------------------------------
    \1\ See, e.g., Adam J. Levitin, Desen Lin & Susan M. Wachter (2019) 
Mortgage Risk Premiums During the Housing Bubble, 58 Journal of Real 
Estate Finance and Economics (2019).
---------------------------------------------------------------------------
    The lesson from the bubble is that secondary market competition for 
credit risk can be deleterious. A multi-guarantor system produced 
harmful competition among guarantors for credit risk because it will 
result in market segmentation and procyclical pricing.
    Fortunately, there's a ready fix to the problem based on one 
essential change: ensure that guarantors are taking on market-wide 
credit risk, rather than the credit risk on a segment of the market. If 
guarantors assume market-wide credit risk, the market will not segment 
and guarantors will not price procyclically. This is best achieved 
through a single-guarantor structure combined with back-end synthetic 
credit-risk transfers (CRTs). Such a structure would be a formalization 
(with some important adjustments) of the current, well-functioning 
system, which is a single-guarantor system in all but name.
    I elaborate on these points in the remainder of my written 
testimony.
I. First, Do No Harm
    The prime directive in dealing with the housing market should be 
``do no harm.'' The housing finance system we have today works quite 
well. We should not overlook this fact. Most creditworthy Americans are 
today able to obtain mortgage financing. Moreover, under the current 
system, there is:

  (1)  a national mortgage market with access to credit on 
        substantially equal terms everywhere in United States;

  (2)  widespread availability of the 30-year fixed-rate mortgage;

  (3)  a viable to-be-announced (TBA) market that enables consumers to 
        get pre-closing rate locks;\2\
---------------------------------------------------------------------------
    \2\ The TBA market is a market that trades forward contracts for 
mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, or 
Ginnie Mae. The settlement dates for TBA trades are often months after 
the trade, so lenders are able to hedge the interest rate risk on 
mortgages that they have committed to, but not yet funded. This enables 
lenders to offer borrowers a pre-closing rate lock on the mortgage.

---------------------------------------------------------------------------
  (4)  systemic stability;

  (5)  competitive small lender access to secondary markets; and

  (6)  support for affordable mortgage credit for low-to-moderate 
        income households.

In other words, the current system is producing the outcomes that 
should be sought in any housing finance system; these are the metrics 
by which any housing finance system should be judged.

    Yes, Fannie and Freddie are still in conservatorship, and that 
requires figuring out their future, but we have already seen 
considerable advances in housing finance reform. These reforms started 
with the Housing and Economic Reform Act of 2008 and have continued 
with the substantial operational changes Fannie and Freddie have 
undertaken while in conservatorship, most notably their adoption of 
various credit-risk transfer (CRT) transactions to shift credit risk on 
mortgages to capital markets and other investors.
    As a result of these reforms, Fannie and Freddie have been 
substantially derisked. Moreover, the mortgage market as a whole has 
been substantially derisked through the broader legislative reforms of 
mortgage lending in title XIV of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act and the subsequent activity of the Consumer 
Financial Protection Bureau. The reformed housing finance system we 
have today is working, and we should be very cautious before we 
undertake a wholesale revision of the system, particularly when there 
is not consensus about the right way to proceed.
    Unfortunately, as explained below, the multi-guarantor system, as 
envisioned by in the Chairman's outline, will fail at all of these 
metrics because of the destructive nature of competition among 
guarantors.
II. Competition Can Be a Bug, As Well As a Feature
    The starting point for the multi-guarantor system envisioned in the 
HRO is that there should be competition among guarantors for credit 
risk. The conceit is that as long as there are enough guarantors in the 
market, no guarantor would be ``too big to fail,'' and therefore market 
discipline resulting from competition is not to be feared.
    While competitive markets are generally a good thing, competition 
can have deleterious effects in some circumstances. One needs look no 
further than Wells Fargo's false account scandal; the intense 
competitive pressures on Wells encouraged corner cutting and worse.
    A similar concern exists in housing finance markets, where 
competition for market share can result in a race-to-the-bottom for 
credit risk. This was, in essence was happened during the housing 
bubble. Historically, Fannie and Freddie never really competed with 
each other on credit risk; their underwriting guidelines were always 
closely aligned. The growth of private-label mortgage securitization 
after 2002, however, created alternative secondary market executions 
that competed on credit risk. The result was a classic underwriting 
race-to-the-bottom (the equivalent of an insurance rate war), because 
the way for the investment banks that engaged in private-label 
securitization to gain market share was to lower underwriting standards 
and/or underprice for risk. Multiple investment banks competed with 
each other to securitize mortgages, and they pushed Fannie and Freddie 
into competition for market share too. The resulting glut of 
underpriced mortgage credit fueled the housing bubble.
    The housing bubble was the product of competition for credit risk 
in housing finance in order to generate profits. Pursuing a multi-
guarantor model simply takes us right back to a new iteration of the 
disastrous private-label market. Specifically, two adverse consequences 
will follow from secondary market competition for mortgage credit risk. 
First, competition will segment the market. And second, competition for 
credit risk will produce procyclical pricing that will result in 
unsustainably inflated home prices.
A. Competition Will Segment the Market Geographically and Render the 
        30-Year Fixed Uncompetitive
    As guarantors compete for market share, they will be under enormous 
pressure to engage in risk-based pricing. Risk-based pricing makes 
sense in some circumstances--a borrower with a 740 FICO should not be 
paying the same rate as an otherwise identical borrower with a 520 FICO 
score. Yet risk-based pricing also segments markets, and certain types 
of market segmentation are undesirable, as discussed below.
    In particular, risk-based pricing unwinds cross-subsidization, yet 
certain types of cross-subsidization are desirable in the market, 
namely when the behavior being subsidized has positive spillover 
effects on the entire market. Thus, we should want to subsidize 
mortgage products that promote financial stability, and risk-based 
pricing prevents such subsidization.
    The Chairman's outline envisions that FHFA will regulate the 
guarantors' pricing, but it is hard to imagine that FHFA would not 
permit risk-based pricing; if it does not, there is no way for the 
guarantors to distinguish their offerings based on price, and at that 
point what is the purpose of having multiple competing guarantors?
    1. Competition Among Guarantors Will Destroy the National Market
    Risk-based pricing may segment markets geographically, destroying 
the national housing finance market and drying up credit for rural 
America. Currently we have a single national market. Similar borrowers 
can obtain credit on substantially similar terms no matter whether they 
live in an urban market or a rural market. This is in part because of 
cross-subsidization within the system. Currently rural mortgages are 
subsidized by urban borrowers,\3\ just as free rural delivery of the 
mail is subsidized by urban customers.
---------------------------------------------------------------------------
    \3\ I am not referring to USDA rural development loans, but simply 
to conventional mortgage loans made to borrowers to lower-population 
density regions of the United States. Two key factors add to the 
riskiness of rural loans. First, appraisals are less reliable because 
of fewer comparables. Second, rural property values are often tied to 
the state of the agricultural or extractive economy in a way that 
metropolitan property values are not tied to a single industry.
---------------------------------------------------------------------------
    Just as all Americans benefit from rural consumers being able to 
participate on equal terms in a national informational market through 
free rural delivery, so too do all Americans benefit from subsidization 
of rural mortgages. Smaller mortgage markets are inherently less 
stable, just as a smaller insurance pool would be, because smaller 
markets are less able to spread risk. For example, suppose that instead 
of a national mortgage market, there was an Iowa mortgage market. If 
there were a bad soybean harvest one year, the spike in defaults might 
result in the collapse of the entire Iowa mortgage market. But because 
Iowa is part of a national market, there is the ability to weather a 
bad soybean harvest. National markets enable risk-spreading, which 
benefits all consumers with greater market stability, but national 
markets make some level of cross-subsidization inevitable.
    Competition will spur guarantors to engage in risk-based pricing, 
and if this is geographic risk-based pricing, there will quickly be a 
metropolitan market and a rural market. In that metropolitan market, 
there will also be an affluent (white) suburban market and a lower-
income (minority) urban market. In short, we will return to the pre-New 
Deal world of localized mortgage credit markets, with significant 
disparities in credit terms between markets, and greater instability in 
all markets.
    Once there is segmentation, there is also likely to be cream-
skimming, in which guarantors simply cease serving riskier markets. 
Borrowers in ``riskier'' markets, such as rural America, will pay more 
. . . if the market will continue to serve them at all. Rural 
communities will be at risk of becoming second class citizens in the 
mortgage market. At the same time, however, those borrowers in other 
``safer'' markets will themselves be at greater risk because they are 
now part of a shallower and less diversified market.\4\
---------------------------------------------------------------------------
    \4\ Geographic risk-based pricing may also raise fair lending 
issues.
---------------------------------------------------------------------------
    In short, geographic risk-based pricing destroys the positive 
externality of systemic stability that comes from a broad national 
market. And is it contrary to a fairness principle that every 
creditworthy borrower--urban or rural--should have the same chance of 
owning a home responsibly.
    Yet it is hard to gainsay the likelihood of geographic risk-based 
pricing in a multiguarantor system. There will be tremendous market 
pressure for it and FHFA can hardly forbid it, given that FHFA 
authorized already authorized it for Fannie and Freddie in the form of 
the Adverse Market Delivery Charges that penalized States with more 
robust consumer protection laws.
    2. Competition Among Guarantors Will Render the 30-Year Fixed-Rate 
        Mortgage Uncompetitively Expensive
    Competition will also spur guarantors to price adversely to 
mortgage products that entail greater risk for lenders: including 
longer-term mortgages (because amortization is slower) and fixed-rate 
products (because these are likely to be refinanced and thus cease to 
generate guaranty fees). This means that guarantors are likely to price 
adversely to the 30-year fixed-rate mortgage, such that the 30-year 
fixed will become uncompetitively expensive relative to other products.
    While the 30-year fixed is not the right product for all borrowers, 
it is the crown jewel of the American housing finance system. The 30-
year fixed is a uniquely American product, and it has been the bedrock 
of U.S. housing finance markets since the 1950s for good reasons:

    The long-term and free-prepayment ability has given 
        homeowners substantial financial freedom (``optionality''). The 
        homeowner can pay off the mortgage if she moves or keep it 
        while staying in the house without having to refinance or 
        payoff the loan;

    The fixed rate enables households to budget around what is 
        typically its largest monthly expense;

    The fixed rate shields households from interest rate risk, 
        which consumers are otherwise ill-prepared to address;

    The long term also keeps down monthly payments, which gives 
        households' economic flexibility and increases housing 
        affordability;

    Full amortization means that households are constantly 
        building equity and avoid balloon payments; and

    The 30-year term lets households telescope 30 years of 
        future earning power (roughly the time from household formation 
        to retirement) into current purchasing power.

No other mortgage product has so many benefits for both households and 
financial market stability. The 30-year fixed is the financial product 
that built the American middle class and made America a Nation of 
homeowners.

    Competition among guarantors for credit risk will make the 30-year 
fixed as more expensive and disfavored product. This is not idle 
speculation. The last time we saw vigorous competition for mortgage 
credit risk--the housing bubble years of 2002-2008--were also marked by 
the abandonment of the 30-year fixed in favor of nonsustainable, 
nontraditional mortgage products financed through private-label 
securitization.
    The 30-year fixed is not a naturally occurring product--it exists 
only because of extensive Government intervention in the mortgage 
market. The 30-year fixed has a positive stability externality on the 
entire mortgage market. But that externality cannot be captured by any 
individual lender, so lenders do not account for it. That is why, left 
to their own devices, lenders worldwide eschew long-term, fixed-rate 
mortgages. The 30-year fixed is an example of Government intervention 
to create and then preserve an important positive systemic stability 
externality.
    3. Competition Among Guarantors Will Undermine the TBA Market and 
        Prevent Consumers from Getting Pre-Closing Rate Locks
    The Ginnie Mae wrap envisioned in the Chairman's outline would 
standardize credit risk on all MBS across guarantors, but it would not 
standardize interest rate risk. Rate risk relates in part to the 
product characteristic and borrower characteristics; prepayment speeds 
are different for different products and based on different borrower 
characteristics. To the extent that guarantors differentiate themselves 
with specialization, there will be different prepayment speeds 
associated with different guarantors. For example, one guarantor might 
specialize in 3/1 hybrid ARMs and another in 7/1 hybrid ARMs and 
another in 15-year fixed-rate mortgages, each associated with a 
different prepayment speed.\5\
---------------------------------------------------------------------------
    \5\ 3/1 hybrid ARMs (a 3-year fixed-rate period followed by annual 
readjustments of the interest rate) will generally have a faster 
prepayment speed than 7/1 hybrid ARMs (a 7-year fixed-rate period 
followed by annual readjustments of the interest rate) because of the 
self-selection of borrowers into a loan with a shorter fixed-rate 
period indicates an intention to move before the fixed-rate period 
expires.
---------------------------------------------------------------------------
    If different guarantors are associated with different prepayment 
speeds, then Guarantor X's MBS will not be good delivery for Guarantor 
Y's MBS or Guarantor Z's.\6\ As a result, there will not be one 
national TBA market, but a separate TBA market for each guarantor, and 
that might result in no TBA market whatsoever. The TBA market exists 
because it is a deep and liquid market. If the TBA market were 
splintered into a dozen smaller markets, none of them would have the 
liquidity to support a reliable forward contract trade. As a result, 
lenders would not be able to hedge out their rate risk between the time 
a consumer is approved for a loan and closing. Lenders would likely 
stop offering rate locks for consumers, leaving consumers exposed to 
rate risk and potentially causing home sales to fail because of a 
financing contingency.
---------------------------------------------------------------------------
    \6\ A Ginnie II structure would mitigate some of this as Ginnie II 
MBS are blends of different seller/servicer MBS, but the particular 
blends will still vary. If there is enough variation, the MBS will not 
be good delivery for each other.
---------------------------------------------------------------------------
B. Competition Will Result in Procyclical, Unstable Housing Finance 
        Markets
    Housing is an inherently incomplete and inefficient market with 
enormous externalities. Because of these differences, housing finance 
markets cannot be expected to function like other, normal markets.
    First, housing markets are incomplete markets because housing 
cannot be shorted directly. A complete market should allow investors to 
express both long and short positions; if only long positions are 
available, prices will be skewed upwards. Housing markets cannot be 
shorted directly because the short seller cannot meet its delivery 
obligation because it cannot acquire the house even if the house price 
falls. This means that there is only long pressure on home prices; 
there are no direct shorts in the residential real estate market.\7\
---------------------------------------------------------------------------
    \7\ One can take a short position on housing derivatively through a 
credit default swap (CDS) that references a mortgage-backed security 
(MBS) or index of MBS, but it is not a short position on a particular 
mortgage or market, but rather on the set of mortgages that back a 
particular MBS or the MBS represented in the index.
---------------------------------------------------------------------------
    Second, and relatedly, housing is not a liquid asset. Part of this 
is that housing is not standardized, and part is that there are high 
transaction costs in the sale and purchase of housing. But part is 
simply that homeowners are not looking to buy and sell all the time 
because houses are not just a financial asset, but a consumable source 
of shelter. This means that home prices are slow to adjust up or down 
compared to the stock market.
    Third, home prices are correlated geographically and serially. The 
value of my house affects the value of neighboring houses and vice-
versa. This is geographic correlation. For example, if I leave a 
rusting car up on cinderblocks on the front lawn, it will diminish the 
value of my neighbor's house, whereas if I plant a beautiful garden, it 
will increase the value of my neighbor's home. Similarly, if my house 
goes into foreclosure, it will push down the value of neighboring 
homes. In contrast, the value of my car generally does not affect the 
value of yours. If I don't wash my car, it has no impact on the value 
of your car, and if I trick out my ride with a sweet new stereo system 
and fancy rims, the value of your car won't budge.
    Likewise, home pricing is correlated serially. Most homes are 
purchased on credit, and the amount of credit lenders will make 
available depends on the lender's valuation of the house, the loan-to-
value (LTV) ratio. Valuations are based on appraisals, and appraisals 
are generally based on the sale prices of comparable properties. So if 
housing prices have been rising for a type of property--say split-
levels in the neighborhood--then appraisals will also go up and lenders 
will make more credit available while holding the LTV constant. The 
result is that the prospective buyer will bid up the house price, thus 
making home prices serially correlated.
    Finally, housing is different because the value of my house (and 
hence yours given the geographic correlation) depends in part on the 
credit terms I receive, the constraints to borrowing or the lack 
thereof. Because most homes are purchased on credit, credit terms are 
major determinants of home pricing.
    If credit terms are tightened due to an exogenous shock, housing 
prices will fall. Guarantors will respond to a falling market by 
tightening credit terms, further destabilizing the market. Guarantor X 
does not care what effect its risk premia have on the value of a home 
that is collateral for lender Y. Lender X is simply concerned that it 
price in the risk of the falling market for itself, without regard that 
its pricing will have a procyclical effect that will harm guarantor Y. 
More generally, neither lender X nor lender Y cares about the systemic 
risk externality that results from overly risky lending practices. The 
only way that the systemic externality will be priced is when a party 
bears the risk of the entire mortgage market. Any segmentation of the 
market will fail to price for the risk.
    Unstable markets also undermine the basic conceit of the multi-
guarantor system: that no guarantor will be ``too big to fail.'' Yet 
the instability a multi-guarantor system will generate will affect all 
guarantors, and the fact that they will be monolines will ensure that 
they are all equally exposed. Thus, a multi-guarantor system raises the 
possibility of correlated failure, such that it will not matter that no 
entity is ``too big to fail'' if the entire system goes down.
C. Competition Among Guarantors Will Cut Off Secondary Market Access 
        for Small Lenders
    A multi-guarantor system would also disadvantage small lenders--
community banks, credit unions, and small mortgage banks. The Senate 
Banking Committee often expresses bipartisan concern about the 
disappearance of community banks, but it is hard to think of a reform 
that would be more devastating to community banks, credit unions, and 
small mortgage banks.
    Under the current system, small lenders are able to sell their 
mortgages directly to Fannie and Freddie at a ``cash window,'' meaning 
that they can be paid in cash, rather than in the form of Fannie/
Freddie MBS, which they would then have to sell. Many small lenders are 
not set up for selling MBS themselves.
    A multi-guarantor system would not necessarily have any ``cash 
window.'' Instead, small lenders that want cash might have to either 
sell to an aggregator--which would take a middleman's cut, thereby 
reducing the profitability of mortgage lending for small lenders--or 
sell to a guarantor.\8\
---------------------------------------------------------------------------
    \8\ Nothing in the Chairman's outline would prevent aggregators or 
guarantors from being affiliates of megabanks, which would mean that 
the megabank could then leverage its mortgage purchase to attempt to 
cross-sell the consumer and take business away from the community bank.
---------------------------------------------------------------------------
    There is little reason, however, to expect guarantors to want to 
serve small lenders. Guarantors assume credit risk on lenders because 
the lender makes various representations and warranties about the 
mortgages that it sells or gets guarantied. If the loans fail to 
conform to the representations and warranties, then the guarantor must 
look to the lender to recover any resulting damages. As a result, 
guarantors have an interest in the financial strength of the lenders 
with which they do business. Ten-million dollars in representation and 
warranty claims is immaterial to a megabank like Chase or Wells Fargo, 
but it might be catastrophic for a community bank. As a result, 
guarantors will prefer to do business with large lenders. Moreover, the 
cost of conducting diligence on a lender is roughly the same 
irrespective of lender size, so guarantors are incentivized to prefer 
dealing with large-volume lenders.
    The Chairman's outline would prohibit guarantors from offering 
volume discounts, but it does not undo the fact that guarantors have 
reasons to prefer dealing with larger lenders. Guarantors can readily 
find other ways to prefer larger lenders, however. For example, 
guarantors could have different lender approval standards for large and 
small lenders. Guarantors could offer lower rates for larger lenders 
(based on the lender's size, rather than sale volume). Guarantors could 
demand fewer representations and warranties from larger lenders. 
Guarantors could have sufficiently complex servicing requirements that 
small lenders could not retain servicing. Guarantors could charge more 
for a ``cash window'' execution than a swap execution. Merely 
prohibiting volume discounts is insufficient to ensure equal treatment 
of small lenders when guarantors have reason to prefer dealing with 
larger lenders.
    As a result, small lenders are unlikely to receive the same sort of 
equal access as they have today in the Fannie/Freddie system. Without 
this equal access, small lenders will be uncompetitive in the mortgage 
market. The irony, then, of a multi-guarantor system is that it pushes 
the market toward bigness on the mortgage origination front, even as it 
encourages competition among guarantors. In other words, robust 
guarantor competition would have the perverse outcome of hurting small 
lenders and concentrating the mortgage market in the hands of 
megabanks.
D. Competition Will Harm Affordability
    Normally, we think of competition as resulting in lower prices for 
consumers. In housing finance competition in the secondary market works 
differently, however. Because of secondary market competition's 
negative externality on systemic
stability, secondary market competition may actually increase mortgage 
costs as guarantors try to play catchup to price for the risk created 
by segmented, unstable markets. For example, suppose guarantor X has 
tried to gain market share in the California market by reducing its 
risk premia. The result will be home prices in California being bid up 
because of easier credit, and that in turn will boost appraisals and 
encourage greater lending volume from other lenders, enabling a further 
bidding up of home prices. So while credit might be cheaper, it will be 
offset by higher home prices.
    Taking this scenario a step further, however, the increased home 
prices here are divorced from fundamentals and are thus unsustainable. 
Given that guarantors are aware that any other guarantor's reduction in 
risk premia can set off a bubble, guarantors will start pricing for the 
instability created by the competition. The result in the end should be 
higher costs of credit because lenders have to try to price in the risk 
of market instability.
    I appreciate that the Chairman's outline recognizes a need for 
support of affordable housing for low-to-moderate income households. 
Broadening housing finance markets benefits everyone. It not only 
benefits low-to-moderate income (LTMI) households, but it benefits more 
affluent households by fostering a cohort of homeowners who can 
eventually move up into more expensive housing, helping to address in 
part the liquidity challenges referenced above. Moreover, to the extent 
the market is broader, it will be more stable, just as the vast number 
of cars has helped the stability of our auto insurance markets.
    The Chairman's outline envisions support for affordable housing 
through a tax-and-transfer system. Such a system is not in any way 
inherent to a multi-guarantor structure. While the key question is what 
level of support would exist, I would urge the Committee to support 
affordable housing through cross-subsidization, rather than tax-and-
transfer, as part of any approach to housing finance reform.
    Both approaches can achieve the same ends. Cross-subsidization, 
however, allows for a nimbler, market-based approach. If market 
entities are tasked with ensuring a certain level of LTMI lending, they 
will figure out how to allocate the cost of doing so among customers. 
This means that if there are shifts within housing markets, such as a 
rapid rise in home prices in a region, that market entities can adjust 
in real time to ensure a supply of credit to LTMI households in that 
region. In contrast, a tax-and-transfer system will inherently lag the 
market, just as conforming loan limits have. It gets updated only when 
Congress or a regulator gets around to it. All of this counsels for 
preferring a system of mandated levels of LTMI lending with cross-
subsidization as the funding mechanism, rather than tax-and-transfer, 
all else being equal.
III. A Simpler, Stabler Alternative: a Single-Guarantor System
    The multi-guarantor system, as envisioned in the Chairman's 
outline, will result in a procyclical and unstable housing market that 
will fail to provide widespread availability of the 30-year fixed or 
pre-closing rate locks, and will fail to provide
access to mortgage credit nationwide, particularly in rural 
communities. This is because competition among guarantors will result 
in segmentation of the market and procyclical risk-pricing.
    A better approach is a single-guarantor system that features back-
end synthetic credit-risk transfers. Such a system would involve a 
single entity guarantying MBS.\9\ This entity could be part of the 
Federal Government or have a credit line with the Federal Government. 
The MBS investors would assume the interest rate risk, while the 
guarantor entity would assume the rate risk. Because there would be 
only a single guarantor, there could not be market segmentation.\10\ 
Moreover, because the single-guarantor would be holding credit risk for 
the entire system, so it would be incentivized not to price 
procyclically because such procyclical pricing would only drive up 
defaults.
---------------------------------------------------------------------------
    \9\ A single-guarantor structure could be run through Ginnie Mae, 
through a public utility, or through Fannie Mae and Freddie Mac (as in 
our current bifurcated single-guarantor system). I do not express an 
opinion here on this level of design detail.
    \10\ An alternative way to achieve market-wide risk exposure would 
be to require the guarantors in a multi-guarantor system to cross-
guaranty each other. That is the first-loss risk would still remain on 
individual guarantors, but if a guarantor failed, all of the other 
guarantors would be jointly liable for the failed guarantor's guaranty 
obligations. If, and only if all guarantors failed--that is a 
catastrophic failure of the entire mortgage market--would Ginnie Mae 
step in with its backstop. This sort of mutualization of risk is hardly 
novel. It is the system that has existed successfully for the Federal 
Home Loan Banks since 1932. It is also the basic design of 
clearinghouses that are used across financial markets. And it is the 
design of the FDIC--a private mutual insurance fund with an implicit 
Government backstop.
    Mutualization produces an enormous moral hazard--every guarantor is 
incentivized to engage in excessively risky behavior because part of 
the tab is born by the other guarantors. But because the guarantors all 
recognize the moral hazard, they will respond by regulating each other, 
thereby keeping the risk in check. Individual guarantors might end up 
focusing on different market segments in terms of products, borrower 
profiles, or geography, but through the cross-guaranties, they would 
all be bearing market-wide risk, which would incentivize for them to 
price in the externalities of correlation risk.
---------------------------------------------------------------------------
    Because there would be only a single guarantor, the MBS would all 
be good delivery for each other and would support a robust TBA market. 
The guarantor entity would then swap out the noncatastrophic credit 
risk on the back-end through the issuance of credit-linked notes.\11\ 
These credit-linked notes would transfer the credit risk to capital 
market investors.
---------------------------------------------------------------------------
    \11\A credit-linked note is a securitization of credit default 
swaps. It provides a way for capital market investors to assume credit 
risk on a targeted asset pool without having to own that asset pool.
    The way this would work here is that Ginnie Mae would enter into a 
credit default swap or swaps on a reference pool of mortgages with a 
special purpose entity that it has created. The special purpose entity 
would fund itself by selling notes to capital market investors 
(presumably all institutional investors) and, as long as the swap 
remained outstanding, the special purpose entity would invest the funds 
in Treasury securities. Ginnie would take the short (protection buyer) 
position and the special purpose entity would take the long (protection 
seller) position, such that as long as the mortgages performed, Ginnie 
would make payments to the special purpose entity, which would use the 
payments to pay on the notes to the investors. If the mortgages failed 
to perform to some specified level, the special purpose entity would 
make a payment to Ginnie, using the funds it accumulated from selling 
the notes to the investors.
---------------------------------------------------------------------------
    If adverse market conditions obtained and these credit-risk 
transfers were not possible, the guarantor would continue guarantying 
mortgages, thereby ensuring a stable housing finance system, relying on 
the strength of the Federal balance sheet.\12\ Once the adverse market 
conditions passed, the guarantor could engage in credit-risk transfers 
once again, including on the whole book of mortgages it had guaranteed 
while the market was in turmoil.
---------------------------------------------------------------------------
    \12\ Critically, there is no greater Federal Government exposure in 
a single-guarantor system than in a multi-guarantor system.
---------------------------------------------------------------------------
    There are several additional benefits from using back-end CRTs 
using credit-linked notes rather than multiple front-end guarantors:

  (1)  The use of credit-linked notes eliminates the risk of guarantor 
        failure that exists in a multi-guarantor system. Credit-linked 
        notes are, by definition, pre-funded by investors, so there is 
        no risk of the single guarantor ever getting left holding the 
        bag except to the extent that it cannot place the credit-linked 
        notes, which would be an indication of a full-blown market 
        collapse.

  (2)  The market for credit-linked note investors would be much deeper 
        than the market for specialist mortgage guarantor entities. 
        Instead of perhaps a dozen entities competing in the market, 
        the credit-linked note market would be open to all manner of 
        institutional investors and perhaps also the general public. 
        Such a deeper market would be much more liquid and more 
        efficient, which would help reduce the costs of mortgage 
        financing to all consumers.

  (3)  There would be substantial operational efficiencies in having a 
        single credit-linked note issuance program housed in a single 
        guarantor versus a dozen different guarantors each replicating 
        mortgage underwriting and securities issuance activities.

  (4)  There would be no question about small institution access to the 
        system. Small lenders could deal with the single guarantor 
        through a cash window, just as they can with Fannie Mae and 
        Freddie Mac or through the Federal Home Loan Banks that serve 
        as Ginnie issuers.

    A single-guarantor approach is not novel. It is what we have today 
in all but name. Most of the mortgage market today is guaranteed by 
Fannie and Freddie, which as a single guarantor, even though they are 
separate entities: they are both under common control through the 
conservatorship, they both have capital support agreements with 
Treasury, their underwriting guidelines are substantially the same; and 
come this summer, they will be issuing a single security. Indeed, with 
their capital support agreements, there is effectively only one 
guarantor, the U.S. Government.
    Fannie and Freddie have also been engaged in back-end CRT 
transactions (Connecticut Avenue Securities and STACR, respectively) 
for the past 6 years. The Fannie and Freddie CRTs have been on 
geographically undifferentiated pools of 30-year fixed-rate mortgages. 
While the Fannie and Freddie CRTs have not been tested in a down 
market, Fannie and Freddie maintain the flexibility to keep supporting 
the market by assuming credit risk without CRTs when adverse conditions 
prevail.
    The fact that we currently have what is a single-guarantor system 
in all but name has a tremendously important implication: we know that 
a single-guarantor system works. We have a national housing market that 
ensures credit availability on substantially similar terms to similar 
creditworthy borrowers nationwide. There is a robust TBA market, and 
competitive access for small lenders to secondary markets. The 30-year 
fixed is widely available creating broad systemic stability benefits, 
and the limited competition between Fannie and Freddie on the front-end 
of the guaranty market adds to systemic stability. More could be done 
to support affordable mortgage credit, but the current system has both 
a cross-subsidy mechanism and a tax-and-transfer mechanism in place for 
providing such support. A single-guarantor system is tried and true; a 
multi-guarantor system is not in the conventional market.
    While we have a single-guarantor system in all but name, there are 
a pair of important reforms that should be undertaken before 
formalizing such a system. First, any mandate for a single-guarantor 
entity to use CRTs should have an adverse market condition exception 
that allows it to expand its own book of business countercyclically 
when necessary, with the expectation that they will eventually transfer 
the risk when market conditions settle.
    Second, the single-guarantor entity should be prohibited from 
engaging in geographic segmentation on its CRTs. At present, Fannie and 
Freddie CRTs transfer risk on national mortgage pools because Fannie 
and Freddie each serve a national market. But nothing currently 
prevents Fannie and Freddie from having CRTs on more harmful, finely 
segmented pools, including geographically segmented pools. Indeed, 
Fannie and Freddie already have segmented their CRT pools into high- 
and low-LTV pools. A single-guarantor entity should be required to 
engage CRTs (subject to an adverse market exception) on the basis of 
its entire book of business, rather than on a segmented basis.
Conclusion
    The multi-guarantor proposal envisioned in the Chairman's outline 
is fundamentally flawed because it would generate destructive 
competition for credit risk in the secondary market that would result 
in an unstable, procyclical housing finance system that would fail to 
ensure the widespread availability of the 30-year fixed-rate mortgage, 
fail to provide preclosing rate locks to consumers, disadvantage small 
lenders, and leave rural America without adequate mortgage financing. A 
better approach would be a single-guarantor structure with back-end 
credit-risk transfers that taps into a broader pool of investors and 
ensures that competition for credit risk does not segment the mortgage 
market or produce procyclical pricing.

2019, Adam J. Levitin

  RESPONSE TO WRITTEN QUESTION OF SENATOR BROWN FROM SUE ANSEL

Q.1. There was extensive conversation about the need for all 
guarantors to serve a national market. Do you believe than 
Fannie Mae, Freddie Mac, and any other guarantor serving the 
multifamily market and providing a catastrophic Government 
backstop should also be required to serve a national market?

A.1. Fannie Mae, Freddie Mac and other guarantors with access 
to a Government guarantee should be required to serve a 
national market. Capital must be consistently available across 
all markets. Further, one way the GSEs have been able to 
produce such a stellar performance record in multifamily is by 
being able to build a balanced book of business, diversified by 
product type, sponsor and geography. Geographic 
diversification, combined with the variety of property types 
served by the Enterprises (including higher-end properties, 
traditional workforce/middle income multifamily rental 
housing), as well as targeted affordable housing properties 
(such as Section 8 and Low-Income Housing Tax Credit 
properties) are an important feature of their design, allowing 
them to operate safely and soundly through market cycles.
    It is important to note that the broad market presence in 
place today for both Enterprises allows them to provide capital 
for apartments located in smaller secondary and tertiary 
markets that might not otherwise attract sufficient capital 
from other private capital debt providers. The national 
footprint of both Enterprises today helps the GSEs manage risk 
with a broad market perspective, while ensuring that there is a 
sufficient supply of liquidity in severe market downturns for 
all markets. It is a reasonable concern, based on private 
capital behavior during the 2008 financial crisis, that some 
geographies would be disadvantaged and experience harmful 
impacts on housing affordability absent a national mandate for 
guarantors--requiring them to facilitate capital in all markets 
throughout the business cycle. Any failure to ensure sufficient 
liquidity for all types of apartments will have a spillover 
effect that could be disastrous for America's renters.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM SUE 
                             ANSEL

Q.1. In its current form, do you think Ginnie Mae could play 
the role the Chairman's proposal envisions?

A.1. First, it is important to note that the outline is not 
specific regarding the role that GNMA would play relative to 
the multifamily business. However, if GNMA were to provide a 
Government guarantee for multifamily as outlined for single-
family, an extensive review would be required of the overall 
significant economic, technical, personnel, servicing, 
counterparty issues and capital market impacts that this 
decision would create. In its current form, NMHC and NAA are 
concerned that GNMA does not have the capacity to play the role 
the Chairman envisions as the agency is constituted.

Q.1.a. Do you have any concerns on the proposed sale or 
transfer of the Common Securitization Platform (CSP) to Ginnie 
Mae? How would such a sale work best in your view?

A.1.a. The original design and present implementation of the 
CSP is solely to serve the single-family market, and today it 
does not have the capability to be used by the multifamily 
market. Each Enterprise has developed distinct multifamily 
platforms: Fannie Mae's program (known as the Delegated 
Underwriting and Servicing program or DUS) delegates 
underwriting to approved seller/services, while Freddie Mac 
issues senior/subordinated notes to finance most of its 
multifamily originations, primarily through its K-deal 
structure. If the CSP were enhanced to handle multifamily 
business, it would require significant modifications. Further, 
if the decision is made to enhance CSP for multifamily, it 
would be important to ensure that it does not favor a single 
execution and, at minimum, could accommodate the existing two 
unique platforms of the GSE multifamily businesses that safely 
and successfully serve the marketplace. Without significant 
further design and development changes, the use of the CSP will 
solely benefit the single-family market.

Q.1.b. Is Ginnie Mae's staff adequately trained and compensated 
to take on a large new market?

A.1.b. At the end of 2018, the combined GSE multifamily 
portfolio stood at $557 billion, whereas the Ginnie Mae 
multifamily portfolio was $118 billion or approximately \1/5\ 
the size of the GSEs. NMHC and NAA have serious concerns on 
whether Ginnie Mae has the
expertise or infrastructure necessary to take on this 
significant expansion of serving a much larger multifamily 
Government-guaranteed securities portfolio. As an example of 
our concerns, we note that Ginnie Mae has not received an 
opinion on its audited statements for the past 5 years and 
continues to have material deficiencies identified by its 
auditors. The duration and magnitude of the deficiencies raise 
concerns about dramatically expanding Ginnie Mae's role. We 
believe thorough examination of potential risks posed to the 
housing finance system is required to determine whether a 
single entity that is currently comprised of 150 personnel--
with most of the key functional process steps outsourced to 
third parties--can adequately handle this responsibility and 
its associated process and risk management components.

Q.2. Do you support or oppose creating a single utility to take 
on the catastrophic risk? Please elaborate on your response.

A.2. Housing finance reform can take a multitude of forms, 
including a single utility model. Many see the utility model as 
a way to manage the returns and market presence of guarantors. 
This seeks to address the conflict between serving a public 
role while managing private shareholder returns. NMHC and NAA 
believe that the utility model could be an option if structured 
in a way that meets our stated principles of reform, which are 
to:

   LMaintain an explicit, appropriately priced, and 
        paid-for Federal guarantee for multifamily backed 
        mortgage securities available in all markets at all 
        times;

   LRecognize the inherent differences of the 
        multifamily business from the single-family business;

   LPromote private market competition;

   LProtect taxpayers by keeping the concept of the 
        Enterprises' multifamily first-loss risk sharing 
        models;

   LRetain the successful components of the existing 
        multifamily programs in whatever succeeds them; and

   LAvoid market disruptions during the transition to a 
        new finance system.

Q.2.a. If you oppose a single utility model and prefer a single 
guarantor platform or a multiple guarantor platform, please 
explain what changes should be instituted to ensure that 
community banks and credit unions are able to access the 
secondary market easily?

A.2.a. NMHC and NAA have not recommended a specific structure 
to be used for housing finance reform. Instead, we have 
continued to stress the importance of doing no harm when it 
comes to the multifamily sector. The bursting of the housing 
bubble exposed serious flaws in our Nation's housing finance 
system. However, the very successful multifamily programs of 
the GSEs were not part of the meltdown and have generated over 
$37 billion in net profits to the Treasury since the two parent 
companies were placed in conservatorship. Preservation of the 
liquidity provided by the GSEs is critical in all markets 
during all economic cycles. For this reason, as Congress works 
to reform the housing finance system, we urge lawmakers to 
recognize the unique needs of the apartment industry. We 
believe that the goals of a reformed multifamily housing 
finance system should build-on and retain the successful 
components of the existing multifamily programs in whatever 
succeeds them and must: 1) Maintain an explicit Federal 
guarantee for multifamily backed mortgage securities available 
in all markets at all times and paid for by all users; 2) 
Recognize unique multifamily risk-management characteristics 
when crafting reform legislation; and 3) Retain the successful 
components of the existing multifamily programs in whatever 
succeeds them.
    With that said, there are a variety of structures that 
could be adapted for the multifamily sector. Each structure, 
however, presents its own unique set of challenges for the 
industry. For example, today, the Enterprises' respective 
multifamily businesses have developed distinct multifamily 
platforms: Fannie Mae's program (known as the Delegated 
Underwriting and Servicing program or DUS) and Freddie Mac 
issues senior/subordinated notes to finance most of its 
multifamily originations, primarily through its K-deal 
structure. A single guarantor platform would perhaps envision a 
consolidation of the two platforms, which could serve to be 
extremely disruptive to the market.
    Today, the GSE multifamily market totals $557 billion, with 
Fannie's share 21 percent and Freddie's 19 percent. The 
regulator of a reformed system should be empowered to analyze 
and decide on the number of new guarantors allowed to enter the 
market, if any. At minimum, the analysis should examine how 
many guarantors the market can support.

Q.2.b. How will small institutions' business practices and 
compliance costs change under a single utility vs. a single 
guarantor vs. multiple guarantors?

A.2.b. There are a variety of structures that could be adapted 
to the multifamily sector. Each structure, however, presents 
its own unique set of challenges for the sector and would have 
to be evaluated on its own merits to determine impacts to not 
only small institutions' business and compliance costs but to 
the broader market as well.

Q.3. Do you support or oppose Fannie and Freddie selling their 
multifamily housing businesses?

A.3. The Chairman's outline proposes that the multifamily 
businesses be sold and operated as independent guarantors. The 
meaningful differences between the single family and 
multifamily sectors, both in how they operate and how they have 
performed,
require different solutions to avoid putting at risk the 39 
million Americans who rely on the apartment industry for their 
housing. We appreciate the distinct and separate treatment that 
the outline suggests relative to the multifamily business. The 
sale of the multifamily businesses is certainly an option that 
deserves consideration, but we believe there are critical 
details such as how to minimize market disruption, what is the 
appropriate transition period, appropriate capitalization of 
the new independent guarantors and preservation of the 
enterprises distinct multifamily executions--just to name a few 
that must be considered as the Committee works to craft the 
specifics surrounding such as sale.

Q.3.a. If the multifamily housing guarantee businesses were 
sold, who would buy them?

A.3.a. Until the structure and specifics of a reformed system 
are identified, it is difficult to determine who might be 
interested in purchasing the multifamily housing guarantee 
businesses. There are a number of issues that will be important 
to clarify for market participants prior to the sale (or 
purchase) of the multifamily businesses; such as how the 
businesses will operate, limits on who can buy or own the new 
businesses, capitalization, allowable business and products 
lines, limits or constraints on their existing business, 
conditions and requirements for access to the Government 
guarantee, transition time, access to the existing 
infrastructure and resolution of the legacy portfolio.

Q.3.b. How would the new guarantee structure affect the 
multifamily housing market? Please be specific.

A.3.b. The guarantee structure for multifamily is not specified 
in the Chairman's HRO. However, there are a variety of 
structures that could be adapted for the multifamily sector. 
Each structure, however, presents its own unique set of 
challenges for the sector and would have to be evaluated on its 
own merits to determine impacts to the broader multifamily 
market.

Q.4. What would you recommend Congress do to ensure that a 
housing finance law would provide more wealth-building, 
sustainable home-ownership opportunities for Latinos, African 
Americans, Asian Pacific Americans and Native Americans?

A.4. Congress should support a balanced housing policy that 
respects the rights of individuals to choose the housing option 
that best meets their financial and lifestyle needs. Housing 
finance reform should promote wealth-building for all 
households. People choose to live in apartments for many 
reasons, and their choice should not limit their ability to 
enjoy financial security. We need to promote policies that give 
people flexibility to build wealth whether they rent or own 
their home. Apartment owners and operators have long called for 
policymakers to better enable our Nation's renters' ability to 
build a financial profile that allows them to attain the many 
benefits that come with it. For example, credit reporting 
agencies have not captured a complete picture of the financial 
performance of renters. Existing credit scoring models that 
drive approvals, interest rates and other terms of apartment 
leases, car loans, insurance products, home mortgages and other 
financial products often do not accurately reflect the 
creditworthiness of renters. Apartment living now attracts a 
wide variety of Americans and will continue to do so, making it 
all the more important that credit reports and scoring models 
are modernized and adopted to prevent our nations renters from 
being put at a financial disadvantage.

Q.5. Do you think Chair Crapo's housing finance reform proposal 
would shrink the home-ownership gap between white and minority 
households in this country? If not, what would?

A.5. NMHC and NAA are primarily focused on the rental industry 
and do not have specific knowledge or information on this 
specific question.

Q.6. Do you have concerns regarding the proposal to create a 
bipartisan board of directors to govern FHFA? If such a board 
was
enacted, would it be able to function without a quorum if 
appointments were delayed?

A.6. NMHC and NAA do not have concerns about the creation of a 
bipartisan board of directors to govern FHFA. Creating a 
bipartisan board of directors is similar to how other financial 
regulators operate, such as the Securities and Exchange 
Commission and the Federal Deposit Insurance Corporation 
(FDIC).

Q.7. Are there any particular reforms that have stemmed from 
HERA and the creation of FHFA that you feel should be preserved 
or expanded as part of any housing finance reform?

A.7. The Housing and Economic Recovery Act of 2008 (HERA) 
established the Federal Housing Finance Agency (FHFA), as 
regulator of Fannie Mae and Freddie Mac, with responsibility 
for the effective supervision, regulation and housing mission 
oversight of both Enterprises. NMHC and NAA have consistently 
advocated for a strong and independent regulator with 
considerable expertise in multifamily lending--and we believe 
the establishment of FHFA was an important step in that 
respect. Further, we have previously recommended that any 
regulator of the Enterprises be provided sufficient financial 
resources and have reasonable independence from political 
influence, which were both improvements made in HERA. In order 
to best monitor and manage market risk and respond to capital 
needs in the market, we have also encouraged any Enterprise 
regulator to have established channels for collaboration with 
other prudential regulators, associations and other 
institutions that oversee and represent banks, insurance 
companies, the private securities markets (CMBS) and pension 
funds. As designed under HERA, FHFA reflects many of these 
goals.
    Importantly, HERA requires FHFA to ensure the Enterprises
operate in a safe and sound manner and foster liquid, 
efficient, competitive and resilient national housing finance 
markets. The mandate to promote safety and soundness, while 
also ensuring broadly available access to capital for housing 
finance, is critical to promoting taxpayer protection and 
meeting the housing needs of all communities. These principles 
from HERA are valuable and worth preserving as part of any 
housing finance reform effort.

Q.8. Do you have concerns with the Chair's proposal? If so, 
please explain why and what amendment you would suggest to 
remedy these concerns.

A.8. We commend the Chairman for putting forth an outline to 
start the debate on crafting a housing finance reform proposal. 
However, the Chairman's outline does not include any 
significant detail relative to multifamily. While the outline 
suggests that the multifamily businesses will be sold and 
operated as independent guarantors, there is very little detail 
on several important issues. Should the Chairman's proposal 
proceed, we would seek clarification on how the businesses will 
operate; limits on new market entrants; how much and what form 
of capital will be required; what type of business and product 
will be allowed to conduct; if there will be limits or 
constraints on their existing business; what conditions and 
requirements will be required for access to the Government 
guarantee; and details on the transition to the new status. 
While the outline includes an explicit, Federal Government 
guaranty on eligible single-family MBS, it does not specify 
whether this guaranty would be available to multifamily 
mortgages. In addition, in contrast to the previous so-called 
Johnson-Crapo proposal, the outline proposes that the explicit 
guaranty would be provided and managed by Ginnie Mae. Using 
GNMA as a guarantor would take major investment in 
infrastructure, personnel, technology and require major charter 
changes. Ginnie Mae, today, does not have the capacity nor 
expertise to handle this task.
    Addressing the unique needs of the multifamily business 
will require separate consideration. We urge the Committee to 
build on, and retain, the successful components of the existing 
multifamily programs in whatever succeeds them. Single-family 
and multifamily follow different processes for origination, 
financing, management and operations, have divergent 
performance records and
require distinct reform solutions. Failure to consider the 
unique characteristics inherent in the multifamily business 
could result in capital market dislocations that could disrupt 
housing for millions of renters. NMHC and NAA look forward to 
working closely with the Chairman, Ranking Member and Members 
of the Committee to identify specific provisions that will 
address the unique needs of the multifamily industry.

Q.9. Are there any proposed changes in the Chairman's proposal 
you think make our housing finance system better? Please define 
those.

A.9. Our country is experiencing a housing affordability crisis 
with current and future implications for families, communities 
and overall nationwide economic growth and prosperity. The 
Chairman's proposal reflects an acknowledgment of this housing 
affordability challenge, with the establishment of dedicated 
funding streams for programs to address the home-ownership and 
rental housing needs in underserved and low-income communities. 
We believe additional resources are necessary as private-sector 
stakeholders and policymakers continue to confront the housing 
affordability challenge. We encourage the Committee to remain 
focused on this issue as the legislative process moves forward. 
For all programs funded through a dedicated fee akin to the 
Chairman's outline, we believe participation eligibility and 
access to capital should be as broadly available to as many 
market participants as possible, in order to best leverage 
private sector expertise and maximize the impact of those 
resources.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM EDWARD J. 
                            DeMARCO

Q.1. You stated that small lenders would have more options 
under the Chairman's outline because there would be a cash 
window at each guarantor. But the Chairman's outline permits, 
but does not require, each guarantor to have a cash window.

Q.1.a. Do you believe each guarantor of Government-backed 
securities should be required to have a cash window in any 
housing finance system?

A.1.a. No. The Chairman's model would provide small lenders 
more options for selling their loans than they have under the 
current system. The outline envisions that a reformed Fannie 
Mae and Freddie Mac could continue to operate their cash 
windows. Additionally, the outline provides for the 
organization of new guarantors and new aggregators, which could 
purchase loans from smaller banks. Finally, lenders of any size 
or business model that prefer not to use a cash window may have 
the option to issue mortgages directly into the Ginnie Mae 
securities.

Q.1.b. Do you believe that pricing should be equitable across 
all guarantee structures (including the cash window, lender 
swap, or any other transactions)?

A.1.b. The Chairman's outline would prohibit volume-based
discounts on the guarantee fee or other terms. We believe that 
competition from new entrants would also contribute to 
equitable pricing for all participants.

Q.2.a. The Housing Policy Council represents organizations that 
would be eligible to be guarantors under the Chairman's 
outline.
Would any type of institution in the market today (outside of 
existing guarantors Fannie Mae and Freddie Mac) be well-suited 
to being a guarantor?
A.2.a. Mortgage Insurance companies have the capital, 
analytical capability, and the mortgage credit-risk expertise 
to become guarantors in a new system. We believe that other 
sources of private capital would also step forward to enter the 
system as guarantors. Any new entrant would have to meet the 
standards set by the Federal regulators of the new system.

Q.2.b. Do you believe any of your members would be interested 
in becoming guarantors?

A.2.b. Perhaps. I believe any potential new entrant would want 
to be assured that the housing finance reform legislation 
actually creates a competitive landscape rather than continues 
the Federal advantages bestowed just on the existing GSE 
guarantors. If a competitive landscape with a level playing 
field were achieved, then I think that some mortgage insurance 
companies would consider becoming guarantors. The Chairman's 
outline would prohibit banks from becoming guarantors.

Q.2.c. What is it about the mortgage guarantee business that 
appeals or does not appeal to your members?

A.2.c. Our members believe that private capital is ready to 
take on more of the mortgage credit risk in a new system and 
homeowners and the system would benefit from well-regulated 
competition with Fannie Mae and Freddie Mac. More competition 
should benefit the customers of HPC members--home buyers--by 
expanding the channels of capital seeking to back residential 
mortgage loans. It should benefit taxpayers by relieving them 
of their concentrated exposure to the decisions of Fannie Mae 
and Freddie Mac. It should benefit the global financial system 
by reducing or eliminating the enormous systemic risk at Fannie 
Mae and Freddie Mac, which we witnessed in 2008. And it should 
benefit the market support for affordable housing by 
encouraging new entrants willing and able to develop new 
approaches to expanding home ownership opportunities.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                       EDWARD J. DeMARCO

Q.1. In its current form, do you think Ginnie Mae could play 
the role the Chairman's proposal envisions?

A.1. Ginnie Mae can play the role envisioned in the Chairman's 
proposal. The significant growth in Ginnie Mae's business over 
the last decade demonstrates that its core functions are 
scalable. Nonetheless, in the system envisioned in the 
Chairman's outline, Ginnie Mae would need additional resources 
and staffing. Of course, the same could be said for any 
alternative to Ginnie Mae even before accounting for all the 
capabilities Ginnie Mae has today that any alternative would 
need to create.

Q.1.a. Do you have any concerns on the proposed sale or 
transfer of the Common Securitization Platform (CSP) to Ginnie 
Mae? How would such a sale work best in your view?

A.1.a. The sale or transfer of the CSP to Ginnie Mae would be 
appropriate in the context of the Crapo outline. Upgrades in 
the CSP would be needed to enable additional issuers (beyond 
Fannie Mae and Freddie Mac) to connect and conduct business on 
the platform. The CSP would also need expanded functionality 
beyond the
limited set of bond administration and disclosure features 
available today. In contrast, Ginnie Mae's platform is set up 
to handle multiple issuers and additional securitization tasks, 
but today cannot support a fully digital securitization 
environment. FHFA has the authority to provide for the sale or 
transfer of the CSP.

Q.1.b. Is Ginnie Mae's staff adequately trained and compensated 
to take on a large new market?

A.1.b. Ginnie Mae has the core expertise and can be the 
foundation for the organization to play the role envisioned. 
However, additional staffing and a revision of the pay scale 
would be appropriate given the scale and scope of its proposed 
new responsibilities.

Q.2. Do you support or oppose creating a single utility to take 
on the catastrophic risk? Please elaborate on your response.

A.2. HPC supports a single Government entity, preferably a 
Government-managed mortgage insurance fund, to manage the 
catastrophic credit risk associated with a full faith and 
credit Government guarantee.

Q.2.a. If you oppose a single utility model and prefer a single 
guarantor platform or a multiple guarantor platform, please 
explain what changes should be instituted to ensure that 
community banks and credit unions are able to access the 
secondary market easily?

A.2.a. Under the Chairman's proposed outline, small lenders 
would have more options to sell their loans than under the 
current GSE duopoly. If they prefer, they can continue to 
follow the same process they currently have and sell to the 
full-service guarantors that succeed Fannie and Freddie or to 
the new guarantors entering the system. They could also choose 
to sell their loans to a loan aggregator. Their options to 
access the secondary market will increase.

Q.2.b. How will small institutions' business practices and 
compliance costs change under a single utility vs. a single 
guarantor vs. multiple guarantors?

A.2.b. Their business practices and compliance costs will not 
have to change if they choose to continue with a guarantor that 
provides ``bundled'' services. Their costs could decline as a 
result of competition among new guarantor participants.

Q.3. Do you support or oppose Fannie and Freddie selling their 
multifamily housing businesses?

A.3. HPC's members are primarily single-family mortgage 
lenders, servicers and mortgage insurers. However, we believe 
that the GSE multifamily businesses could become successful 
stand-alone entities providing the multifamily guarantees they 
do today.

Q.3.a. If the multifamily housing guarantee businesses were 
sold, who would buy them?

A.3.a. We believe there are investors who would be interested 
in purchasing the businesses.

Q.3.b. How would the new guarantee structure affect the 
multifamily housing market? Please be specific.

A.3.b. The new structure should continue to provide for a sound 
multifamily market by placing private capital in a first-loss
position, as is done today with the GSEs' multifamily business, 
backstopped by a catastrophic Government guarantee.

Q.4. What would you recommend Congress do to ensure that a 
housing finance law would provide more wealth-building, 
sustainable home-ownership opportunities for Latinos, African 
Americans, Asian Pacific Americans and Native Americans?

A.4. Move away from the Government-backed, GSE duopoly that 
represents the current system--and its shortfalls in serving 
these market segments--and promote a market structure that 
fosters competition, innovation, and a level playing field. 
Where the new system provides subsidies, say through an 
affordability fee on securitized mortgages, ensure those funds 
flow directly through to borrowers who satisfy prescribed 
eligibility criteria and that those funds are used to solve the 
actual impediments eligible households may face in becoming 
homeowners. Those impediments may include downpayments, cash 
reserves, and financial education.

Q.5. Do you think Chair Crapo's housing finance reform proposal 
would shrink the home-ownership gap between white and minority 
households in this country? If not, what would?

A.5. A new housing finance system with more secondary market 
participants can help shrink the home-ownership gap by having 
more participants seeking to provide liquidity to the market. 
However, it is not the only solution. The FHA program should be 
modernized to more effectively serve first-time, moderate and 
lower-income home buyers and Congress, regulators, industry and 
all stakeholders should work cooperatively on initiatives that 
help educate potential home buyers, create programs that help 
match savings for downpayments and other creative, responsible 
steps to help increase sustainable home ownership in minority 
communities.

Q.6. Do you have concerns regarding the proposal to create a 
bipartisan board of directors to govern FHFA? If such a board 
was enacted, would it be able to function without a quorum if 
appointments were delayed?

A.6. There are several Federal financial regulatory agencies 
that operate effectively with bipartisan boards and they have 
procedures to deal with quorum issues. A bipartisan board could 
effectively function to govern FHFA. An effective single 
Director is also an alternative.

Q.7. Are there any particular reforms that have stemmed from 
HERA and the creation of FHFA that you feel should be preserved 
or expanded as part of any housing finance reform?

A.7. FHFA has most of the tools needed to be an effective 
regulator of the GSES and their guarantor successors in a new 
system. The key is to ensure that FHFA has complete and clear 
authority to charter, regulate and supervise guarantors in a 
new system. There should be explicit authority for FHFA to 
oversee the guarantors' operational risk.

Q.8. Do you have concerns with the Chair's proposal? If so, 
please explain why and what amendment you would suggest to 
remedy these concerns.

A.8. The Chairman's proposal is an outline, not full 
legislative text, but it does provide the key elements of a 
stronger system: an explicit Government guarantee, fair and 
equitable access to credit, support for affordable housing and 
a competitive, transparent marketplace that would ensure a 
level playing field for mortgage market participants of all 
sizes and types.

Q.9. Are there any proposed changes in the Chairman's proposal 
you think make our housing finance system better? Please define 
those.

A.9. There are two key areas of the Chairman's outline where we 
believe additional consideration is required: (1) FHFA's role 
in chartering, regulating, and supervising the guarantors; and 
(2) Ginnie Mae's responsibility for setting the terms of the 
securities agreements. Also, the Chairman's outline includes a 
few topics that need additional input and refinement. These 
topics are: market share limitations for all guarantors; 
capital standards for the guarantors; and downpayment 
requirements for eligible loans. In each case, HPC recommends 
that Congress authorize the regulator, FHFA, to establish 
appropriate requirements and standards.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR MORAN FROM EDWARD J. 
                            DeMARCO

Q.1. In a highly liquid, very efficient market, investors and 
traders are sensitive to any small change in information or 
performance. They are also highly sensitive to less-than-
perfect transparency and information. In the past they knew 
exactly what they were bidding on: either Fannie mortgages or 
Freddie mortgages.
    If the Common Securitization Platform commences, and 
investors and traders are not quite sure what is in the 
security (in part due to the ``to be determined'' nature of the 
security), will they not assume the worst, and thus pay less 
for the assets in order to protect themselves? And could this 
harm, and not help, market pricing to consumers taking out 
mortgages?

A.1. In fact, under the pre-conservatorship system, virtually 
all investors knew about the mortgage pools they invested in is 
that they were guaranteed by Fannie Mae or Freddie Mac (and 
implicitly by the taxpayers). They had little real insight into 
the loans, their features, or their performance. That has begun 
to change under conservatorship with the introduction of 
credit-risk transfer and that process should be completed. For 
private capital to evaluate, price, and manage mortgage credit 
risk, reliable, standardized disclosures are essential. HPC 
understands that all leading reform proposals, and the Crapo 
outline, envision such a disclosure regime, which should 
actually lower costs to consumers because of the improved, 
standardized disclosures that would give investors greater 
confidence in understanding the risks in any given pool. The 
SEC could take the next step in this reform process, revising 
Reg AB II in a manner that envisions and reflects a fully 
aligned, uniformly enforced set of disclosure rules and 
practices.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM EDWARD J. 
                            DeMARCO

Q.1. Last September, you testified before the House Financial 
Services Committee and said that sustainable home ownership, 
that is accessible for people of moderate means, ``requires 
greater attention to saving both for downpayments and for cash 
reserves once in the home, greater financial literacy, home 
buyer education and home ownership counseling, and more effort 
to repair credit histories.''

Q.1.a. In your experience--and recognizing that not all 
problems require a Government solution--what Federal programs 
have proven effective at accomplishing these goals?

A.1.a. The Federal Home Loan Banks' Affordable Housing Program 
has worked well.

Q.1.b. What more can Congress do, as a complement to housing 
finance reform, to improve financial literacy and home buyer 
education?

A.1.b. Congress and Federal regulators should work with 
industry and other stakeholders to identify and promote the 
voluntary financial literacy and home buyer education programs 
that consumers respond to. Encourage the States to expand 
financial literacy programs in secondary school curricula.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR BROWN FROM GREG UGALDE

Q.1. There was extensive conversation about the need for all 
guarantors to serve a national market. Do you believe than 
Fannie Mae, Freddie Mac, and any other guarantor serving the 
multifamily market and providing a catastrophic Government 
backstop should also be required to serve a national market?

A.1. Yes. If an entity benefits from support of the Federal 
Government, that entity should be required to serve a national 
market and make credit available for all geographic areas 
throughout all economic cycles. NAHB believes this principle 
should apply to the single family and multifamily markets.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                          GREG UGALDE

Q.1. In its current form, do you think Ginnie Mae could play 
the role the Chairman's proposal envisions?

A.1. In its current form, Ginnie Mae is a tremendously 
successful and profitable entity. Ginnie Mae's Federal 
Government guarantee on its mortgage-backed securities (MBS) 
creates an MBS that is highly regarded by investors in the 
United States and internationally. However, per the National 
Housing Act, Ginnie Mae's Federal Government guarantee is 
limited to MBS collateralized by mortgages insured or 
guaranteed by the Federal Housing Administration, the U.S. 
Department of Veterans Affairs, the U.S. Department of 
Agriculture Rural Development and the Office of Public and 
Indian Housing. In order to provide a guarantee on MBS col-
lateralized by conventional loans, as proposed in the 
Chairman's Housing Reform Outline, the National Housing Act 
would need to be amended. In addition, Ginnie Mae would require 
significant increases in staffing and support resources in 
order to successfully undertake the expanded role envisioned in 
the Chairman's proposal.

Q.1.a. Do you have any concerns on the proposed sale or 
transfer of the Common Securitization Platform (CSP) to Ginnie 
Mae? How would such a sale work best in your view?

A.1.a. We believe it makes sense to consider the sale or 
transfer of the CSP to Ginnie Mae within the parameters of the 
Chairman's Housing Reform Outline. This could potentially 
expand Ginnie Mae's securitization bandwidth and utilize an 
upgraded system on which significant industry time and 
resources have been invested.

Q.1.b. Is Ginnie Mae's staff adequately trained and compensated 
to take on a large new market?

A.1.b. Ginnie Mae's staff has managed a significant increase in 
its MBS issuance volume since 2007. By the end of November 
2018, Ginnie Mae had almost 400 issuers and its portfolio had 
reached $2 trillion in outstanding MBS, an increase from less 
than $427.6 billion in 2007. However, were Congress to enact 
housing finance system reform that requires Ginnie Mae to take 
on the securitization function of the conventional mortgage 
market, Congress should ensure Ginnie Mae has adequate staff 
and resources.

Q.2. Do you support or oppose creating a single utility to take 
on the catastrophic risk? Please elaborate on your response.

A.2. NAHB believes there are different housing finance system 
models that can work depending on the details of the model. 
However, we support significant private capital taking risk 
ahead of the Federal Government with the Federal Government 
providing an explicit guarantee in the case of catastrophic 
circumstances.

Q.2.a. If you oppose a single utility model and prefer a single 
guarantor platform or a multiple guarantor platform, please 
explain what changes should be instituted to ensure that 
community banks and credit unions are able to access the 
secondary market easily?

A.2.a. N/A.

Q.2.b. How will small institutions' business practices and 
compliance costs change under a single utility vs. a single 
guarantor vs. multiple guarantors?

A.2.b. NAHB believes this question is better answered by the 
lending community.

Q.3. Do you support or oppose Fannie and Freddie selling their 
multifamily housing businesses?

A.3. NAHB looks forward to working with the Committee to ensure 
that the successful multifamily financing infrastructures are 
preserved. This component of the Nation's housing finance 
system has consistently performed successfully, even in 
stressful market conditions.

Q.3.a. If the multifamily housing guarantee businesses were 
sold, who would buy them?

A.3.a. Without additional details regarding such a sale, NAHB 
is not comfortable speculating.

Q.3.b. How would the new guarantee structure affect the 
multifamily housing market? Please be specific.

A.3.b. Once again, additional details need to be in place to 
understand the effect of the new guarantee structure on the 
multifamily housing market. NAHB will be pleased to work with 
the Chairman and the Committee to consider what details should 
be addressed to ensure the new guarantee structure would not 
have a negative impact on the multifamily housing market.

Q.4. What would you recommend Congress do to ensure that a 
housing finance law would provide more wealth-building, 
sustainable home-ownership opportunities for Latinos, African 
Americans, Asian Pacific Americans and Native Americans?

A.4. NAHB believes the U.S. housing finance system should 
support all creditworthy borrowers in an equal manner. 
Comprehensive reform legislation will help to ensure a stable 
housing finance system and preserve access to credit for all.

Q.5. Do you think Chair Crapo's housing finance reform proposal 
would shrink the home-ownership gap between white and minority 
households in this country? If not, what would?

A.5. NAHB believes a successful outcome for housing finance 
system reform will be to preserve a system that provides equal 
access to affordable mortgages for all creditworthy households.

Q.6. Do you have concerns regarding the proposal to create a 
bipartisan board of directors to govern FHFA? If such a board 
was enacted, would it be able to function without a quorum if 
appointments were delayed?

A.6. NAHB believes the regulatory agency that will oversee a 
reformed housing finance system should be governed by a 
bipartisan board of directors instead of a single director. 
Board governance would mitigate the potential for extreme and 
abrupt changes in policy that are possible under the existing, 
single director regulatory regime.

Q.7. Are there any particular reforms that have stemmed from 
HERA and the creation of FHFA that you feel should be preserved 
or expanded as part of any housing finance reform?

A.7. The Housing and Economic Recovery Act (HERA) was enacted 
in 2008 and included numerous and significant measures. NAHB is 
focused on moving forward to the next step which is 
comprehensive housing finance reform legislation.

Q.8. Do you have concerns with the Chair's proposal? If so, 
please explain why and what amendment you would suggest to 
remedy these concerns.

A.8. No. NAHB is comfortable with the direction the Chairman's 
proposal appears to be heading. We look forward to the 
opportunity to work with the Chairman and the Committee to 
flesh out the many details that remain to be determined.

Q.9. Are there any proposed changes in the Chairman's proposal 
you think make our housing finance system better? Please define 
those.

A.9. NAHB believes the explicit Federal Government guarantee on 
the conforming, conventional mortgage market is critical. 
America's housing finance system needs Congress to pass 
bipartisan reform legislation that will provide certainty to 
the housing and housing finance markets. With additional 
details determined, the Chairman's Housing Reform Outline has 
considerable potential to transition the current, unsustainable 
system to a reformed, sustainable one.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM MARK M. 
                          ZANDI, Ph.D.

Q.1. During your testimony, you stated that the single security 
would bring down mortgage rates and that there ``had become 
this bifurcation in mortgage rates offered by Fannie Mae and 
Freddie Mac because of a range of differences that are now 
going away because of the [Common Securitization Platform].''
    Fannie Mae and Freddie Mac share similar business 
structures, have the same regulatory structures, and offer very 
similar products. For more than 10 years, they have also both 
had a line of credit with the U.S. Treasury.

Q.1.a. What factors do you believe led to the bifurcation in 
mortgage rates offered by Fannie Mae and Freddie Mac?

A.1.a. Historically, mortgage-backed securities issued by 
Freddie Mac traded at a lower price than those issued by Fannie 
Mae. To ensure this didn't impact mortgage rates, Freddie Mac 
needed to charge a lower guarantee fee than Fannie Mae, 
reducing Freddie's profitability (approximately $500 million 
per annum) and thus its payments to the Treasury. Freddie's 
securities traded at a lower price than Fannie's due to higher 
prepayment speeds and less liquidity in the market for Freddie 
securities. Not only are there fewer Freddie securities, but 
also a greater proportion of Freddie than Fannie securities are 
locked up in collateralized mortgage obligations. This makes 
them much less liquid than Fannie securities. A single security 
issued by the common securitization platform will ensure that 
this will no longer be an issue.

Q.1.b. What documents, policies, and procedures had to be 
harmonized to facilitate the transition to a single security? 
Would these same documents, policies, and procedures need to be 
aligned among all guarantors to maintain the benefits of a 
broad, liquid to-be-announced (TBA) market?

A.1.b. For a single security to be collateralized by the 
securities of either or both Fannie Mae and Freddie Mac, 
investors must view them as fungible. If investors do not, they 
will value each issuance of the single security according to 
which enterprise's securities back them, leading to a breakdown 
of the new security. To ensure fungibility, and thus the 
benefits of a broad liquid TB market, Fannie and Freddie must 
follow the same policies, procedures and documentation 
requirements, as will all future guarantors. The FHFA will also 
need to monitor the prepayment speeds of the guarantors, and 
work the guarantors to eliminate any meaningful differences. 
This is much like Ginnie Mae currently does for FHA, VA and 
USDA-backed Ginnie securities.

Q.1.c. How might variations in prepayment speeds on Fannie Mae 
and Freddie Mac securities impact pricing and ultimately the 
success of a single security?

A.1.c. If prepayment speeds are meaningfully different across 
the guarantors, the single security will not function well. The 
FHFA will thus need to monitor and address significant 
differences in prepayment speeds as they plan to with Fannie 
and Freddie once the single security is launched this summer. 
FHFA has indicated it would investigate any prepayment speed 
differential exceeding 2 percentage points for any coupon, 
maturity, or issuance year cohort in a single month. Thus, for 
example, if the prepayment differential between Fannie Mae and 
Freddie Mac in the 2015-issued 30-year 4.0 coupon exceeded 2 
percentage points in June, it would be investigated. Some 
market participants are pushing for more and stronger 
assurances, including rules for which policies have to be 
identical and commitments on what the FHFA will do if 
divergences arise. See Christopher B. Killian, ``Single 
Security-Priority Issues to Be Resolved before Launch,'' letter 
to acting deputy director of the Federal Housing Finance 
Agency's Division of Conservatorship Robert Ryan, July 10, 
2018, https://www.sifma.org/wp-content/uploads/2018/07/Single-
Security-%E2%80%93-Priority-Issues-to-be-resolved-before-
launch.pdf.

Q.2. In your testimony, you suggested that Fannie Mae and 
Freddie Mac should be required to share historical data to 
facilitate the entry of new guarantors into the market.

Q.2.a. If we had a system that allowed for new, private 
guarantors to enter at any time, should all private guarantors 
be required to share data with any current or future guarantors 
on an ongoing basis?

A.2.a. Full data disclosure by Fannie Mae and Freddie Mac is 
necessary to facilitate entry by new guarantors into the 
housing finance system. Without such disclosure, Fannie and 
Freddie's data advantage would be a significant entry barrier 
to new guarantors. However, once the number of operating 
guarantors is sufficient to ensure a well-functioning 
competitive market, it will no longer be necessary for Fannie, 
Freddie or the other newer guarantors to fully share their 
data. The future guarantor system will likely operate much like 
the current private mortgage insurance, which has six national 
MI companies. These companies do not share data with each 
other, and the market is competitive and functions well.

Q.3. In your testimony, you suggested that Congress or 
regulators could raise the guarantee fees Fannie Mae and 
Freddie Mac charge to borrowers to make new market entrants 
more competitive.

Q.3.a. What would the impact of increasing Fannie Mae and 
Freddie Mac's guarantee fees be on individual borrowers?

A.3.a. To facilitate entry by new guarantors, Congress could 
temporarily maintain the current 10 basis point fee paid by 
Fannie and Freddie to pay for the Temporary Payroll Tax Cut 
Continuation Act beyond its current expiration in 2022, but 
exempt new guarantors from this fee. The new guarantors would 
be able to charge a lower guarantee fee than Fannie and 
Freddie, allowing them to take market share from Fannie and 
Freddie and also reducing mortgage rates to borrowers. Once the 
guarantor market is deemed to be competitive, Fannie and 
Freddie would also be permitted to terminate the 10 bps fee.

Q.3.b. Would you expect some borrowers to pay more for their 
loan if Fannie Mae and Freddie Mac's guarantee fees were 
uniformly increased by some number of basis points to 
facilitate the entrance of new guarantors?

A.3.b. No, borrowers would not pay more as Fannie and Freddie's 
guarantee fee will remain unchanged. Some borrowers would pay 
less as their loans would be purchased by the new guarantors 
whose guarantee fee will be lower as they will not pay the 10 
bps fee to fund the 2012 payroll tax cut.

Q.4. The Trump administration's FY 2020 budget proposed to 
increase Fannie Mae and Freddie Mac's guarantee fees by an 
additional 10 basis points and to maintain the 10 basis point 
increase imposed by the Temporary Payroll Tax Cut Continuation 
Act through the full 10-year budget window (for a total 
increase of 20 basis points for the next 10 years), with the 
goal of generating ``an additional $32 billion'' and helping 
``to level the playing field for private lenders seeking to 
compete with the GSEs.''\1\ In 2012, following the passage of 
the Temporary Payroll Tax Cut Continuation Act, you said that 
it ``sets a very bad precedent for G-fees to pay for anything 
other than Fannie and Freddie providing insurance on 
loans.''\2\
---------------------------------------------------------------------------
    \1\ See ``A Budget for a Better America: Major Savings and Reforms, 
Fiscal Year 2020,'' pg. 171, available at https://www.whitehouse.gov/
wp-content/uploads/2019/03/msar-fy2020.pdf.
    \2\ ``Fannie, Freddie easy prey for cash-hungry Congress,'' David 
Lawder and Margaret Chadbourn, Reuters, May 30, 2012, available at 
https://www.reuters.com/article/usa-mortgages-congress-
idUSL1E8GHFJV20120530.

Q.4.a. Do you still agree with the statement you made in 2012 
that it is a bad precedent for guarantee fees to go toward 
---------------------------------------------------------------------------
anything other than insurance for loans?

A.4.a. Yes, guarantee fees should not go toward anything other 
than insurance for mortgage loans.

Q.4.b. What impact would the Trump administration's proposal to 
increase guarantee fees have on the cost to borrowers looking 
to take out a mortgage?

A.4.b. The Trump administration's budget proposal would 
increase mortgage rates by 10 basis points from current rates, 
and 20 basis points from rates that would prevail beginning in 
2022 under current law.

Q.5. You stated that you believe the Chairman's outline would 
lower mortgage rates.

Q.5.a. Please provide all relevant assumptions, including 
volume, borrower profiles, and guarantor capital levels and 
types, that you used to determine that costs for borrowers 
would decrease. Please also indicate whether you would expect 
different pricing outcomes for different borrowers.

A.5.a. The impact on mortgage rates of the Chairman's outline, 
and the underlying assumptions, are shown in the attached excel 
workbook. Under the most likely set of assumptions, mortgage 
rates for the typical borrower on average through the business 
cycle will be approximately 16 bps lower than in the current 
system. For low- and moderate-income borrowers, mortgage rates 
would be an estimated 29 basis points lower than in the current 
system through the business cycle.

Q.5.b. Please provide the pricing outcomes you would expect if 
the Trump administration's proposal to increase guarantee fees 
by an additional 10 basis points and maintain the 10 basis 
point increase imposed by the Temporary Payroll Tax Cut 
Continuation Act through the full 10-year budget window (for a 
total increase of 20 basis points) were put in place.

A.5.b. The Trump's administration proposal would effectively 
eliminate any reduction in mortgage rates under the Chairman's 
outline.

Q.6. In your testimony you stated that the 10 basis point 
assessment proposed in Chairman Crapo's outline would generate 
about $5 billion per year under your assumptions to fund the 
Housing Trust Fund (HTF), Capital Magnet Fund (CMF), and Market 
Access Fund (MAF). As you know, Congress created and currently 
funds the HTF and CMF with a 4.2 basis point assessment on 
Fannie Mae and Freddie Mac business. To date, the largest 
amount of affordable housing funding generated in any given 
year by this 4.2 basis point assessment has been $408.9 
million.
    Please explain what assumptions you use to estimate that a 
10 basis point assessment will generate $5 billion in 
affordable housing funds.

A.6. Fannie and Freddie currently ensure approximately $5 
trillion in mortgage debt outstanding. A 10-bps assessment on 
$5 trillion is equal to $5 billion in affordable housing funds 
per annum.

Q.7. In your testimony, you compared the $5 billion generated 
by a 10 basis point fee to the dollar value of the current 
cross-subsidization within the single-family mortgage system, 
which you have written is about $4.1 billion.\3\
---------------------------------------------------------------------------
    \3\ ``Access and Affordability in the New Housing Finance System,'' 
Jim Parrott, Michael Stegman, Phillip Swagel, Mark Zandi, February 
2018, available at https://www.economy.com/getlocal?q=dfbce7de-80b3-
4d64-88fb-9b33d00c9ac9&app=eccafile.

Q.7.a. How much of the $4.1 billion subsidy that you calculated 
is a subsidy within the single-family home-ownership lines of 
business? How much of that subsidy is targeted to the 
---------------------------------------------------------------------------
multifamily lines of business?

A.7.a. The $4.1 billion in estimated annual cross-subsidy is 
only on Fannie and Freddie's single family mortgages. See 
``Access and Affordability in the New Housing Finance System,'' 
Parrott, Stegman, Swagel and Zandi, Urban Institute white 
paper, February 2018, for a detailed discussion of a potential 
access and affordability regime under the Chairman's outline.

Q.7.b. What proportion of any subsidy provided through the 10 
basis point assessment should be allocated to multifamily or 
rental housing, and what proportion should be allocated to home 
ownership?

A.7.b. This should be determined by the FHFA.




















                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                      MARK M. ZANDI, Ph.D.

Q.1. In its current form, do you think Ginnie Mae could play 
the role the Chairman's proposal envisions?

Q.1.a. Do you have any concerns on the proposed sale or 
transfer of the Common Securitization Platform (CSP) to Ginnie 
Mae? How would such a sale work best in your view?

A.1.a. I would not sell or transfer the CSP to Ginnie Mae. 
Instead, I would turn the CSP into a separate utility owned by 
the guarantors, similar to the current ownership structure. The 
CSP as current structured is operating well and there is no 
reason to change it.

Q.1.b. Is Ginnie Mae's staff adequately trained and compensated 
to take on a large new market?

A.1.b. No, Ginnie Mae would likely need to become a Government 
corporation in the future housing finance system. It should 
also be able to charge a small fee for the services it provides 
the system and use this funding to support its activities, 
including hiring adequately trained staff.

Q.2. Do you support or oppose creating a single utility to take 
on the catastrophic risk? Please elaborate on your response.

Q.2.a. If you oppose a single utility model and prefer a single 
guarantor platform or a multiple guarantor platform, please 
explain what changes should be instituted to ensure that 
community banks and credit unions are able to access the 
secondary market easily?

A.2.a. My preference is a system in which Fannie and Freddie 
are turned into Government corporations or a single Government 
corporation. In this system, there would be no changes in the 
way community banks and credit unions access the secondary 
market. A multiple guarantor system is also a viable option for 
the future system, and to ensure access for small lenders, each 
guarantor will need to be required to provide a cash window and 
be prohibited from pricing differently across lenders.

Q.2.b. How will small institutions' business practices and 
compliance costs change under a single utility vs. a single 
guarantor vs. multiple guarantors?

A.2.b. Any future system should be (and can be) designed so 
there are no changes in business practices and compliance costs 
for small lenders. This would be clear in a system in which 
Fannie and Freddie become Government corporations or a single 
Government corporation, as there would be no change in how 
small lenders access the system. In a multiple guarantor 
system, small lenders may have some added complexity in working 
with more guarantors, but they would only do this if it meant 
lower costs or other benefits.

Q.3. Do you support or oppose Fannie and Freddie selling their 
multifamily housing businesses?

   LIf the multifamily housing guarantee businesses 
        were sold, who would buy them?

   LHow would the new guarantee structure affect the 
        multifamily housing market? Please be specific.

A.3. No, I would not require Fannie and Freddie to sell their 
multifamily housing businesses as part of any housing finance 
reform legislation. This could be disruptive to the housing 
market, and as such would make any reform much less likely to 
become law.

Q.4. What would you recommend Congress do to ensure that a 
housing finance law would provide more wealth-building, 
sustainable home-ownership opportunities for Latinos, African 
Americans, Asian Pacific Americans and Native Americans?

A.4. Under the Chairman's outline, this could be done by 
increasing the market access fee from its currently proposed 10 
basis points. This would increase the funds that could be used 
to increase the cross-subsidy in the housing finance system 
and/or fund other efforts to support greater home ownership 
among underserved groups. See ``Access and Affordability in the 
New Housing Finance System,'' Parrott, Stegman, Swagel and 
Zandi, Urban Institute white paper, February 2018, for a 
detailed discussion of a potential access and affordability 
regime under the Chairman's outline.

Q.5. Do you think Chair Crapo's housing finance reform proposal 
would shrink the home-ownership gap between white and minority 
households in this country? If not, what would?

A.5. Yes, if designed properly the Chairman's outline could 
result in increased home ownership for underserved groups with 
currently low home ownership. The Chairman's outline states 
that the affordability goals and duty to serve will be replaced 
by a market access fund, which will be funded by an annual 10-
basis point fee on all securities issued through the channel. 
While that would generate more than $5 billion a year to lower 
housing costs for low- and moderate-income borrowers, which is 
more than the current system provides, a great deal more about 
how this will be allocated and how the system as a whole will 
work will need to be developed in the right way to ensure that 
it provides adequate support for communities that need it.
    First, it will be important that all guarantors have a 
national footprint, so that they cannot simply serve those 
markets that happen to be most profitable. Allowing guarantors 
to cherry-pick markets could lead to regional or demographic 
gaps in the secondary market, segments in which lenders have 
little to no places to sell their loans. This, in turn, would 
lead to gaps in the primary market that would be difficult if 
not impossible for the market access fund to overcome. It would 
also lead to volatility in liquidity as guarantors move from 
one market to another depending on the inevitable variations in 
profitability that will come with the economic cycle.
    It will also be important to develop a means of allocating 
the fund that cannot be captured by intermediaries. The current 
system does this relatively well. By delivering its cross-
subsidy through a simple, largely level guarantee fee--whereby 
lower credit-risk borrowers are overcharged so that higher 
credit-risk borrowers can be undercharged--it avoids the 
expense of sorting
out who is to receive which kinds of benefit and paying others 
to
deliver that benefit. Whatever means are used to deliver the
cross-subsidy in the new system, the benefits should similarly 
flow to the beneficiaries in as automated and simple a way as 
possible.
    Last, it will be important to target the market access fund 
to those borrowers who actually need the help and to provide 
the kind of help they actually need. Here, the current system 
does not perform as well. Although much of the cross-subsidy is 
driven by the duty to serve and affordability goals to serve to 
low- and moderate-income borrowers, a significant portion is 
not. As most of the cross-subsidy is provided through the level 
guarantee fee paid by all Fannie and Freddie borrowers, almost 
a quarter of the cross-subsidy goes to those who are not low- 
or moderate-income borrowers, but benefit simply because they 
have poorer credit. Moreover, not all borrowers need help in 
the form of a modest reduction in their mortgage rate. Some 
desperately need it in another form, such as downpayment 
assistance. The future system could thus do a better job 
channeling funding from those who can afford to pay to those 
who need the help and in the form that they can actually use.

Q.6. Do you have concerns regarding the proposal to create a 
bipartisan board of directors to govern FHFA? If such a board 
was enacted, would it be able to function without a quorum if 
appointments were delayed?

A.6. This is a reasonable governance structure for the FHFA. 
What should happen if there is no quorum due to delayed 
appointments or any other contingency should be (and can be) 
addressed in legislation.

Q.7. Are there any particular reforms that have stemmed from 
HERA and the creation of FHFA that you feel should be preserved 
or expanded as part of any housing finance reform?

A.7. FHFA's oversight authority should be expanded in the 
housing finance system envisaged in the Chairman's outline. It 
should be able to regulate all guarantors and their 
counterparties in the future system with regard to safety and 
soundness. The FHFA should also be responsible for ensuring 
broad access and affordability to the secondary market for all 
lenders and underserved communities. It should manage a 
catastrophic mortgage insurance fund that is funded by a fee 
paid for by borrowers.

Q.8. Do you have concerns with the Chair's proposal? If so, 
please explain why and what amendment you would suggest to 
remedy these concerns.

A.8. The Chairman's outline for housing finance reform offers a 
promising framework from which to begin, but as an outline it 
leaves much to be resolved. How this framework is filled in 
will be important, since a few critical structural choices yet 
to be made will have a dramatic impact on how the proposed 
system would work. See ``How Chairman Crapo's Outline of 
Housing Finance Reform Can Work,'' Jim Parrott, Dave Stevens 
and Mark Zandi, white paper, February 1, 2019, for a detailed 
discussion of how to address these choices.

Q.9. Are there any proposed changes in the Chairman's proposal 
you think make our housing finance system better? Please define 
those.

A.9. The Chairman's outline provides a viable way forward to
reform the housing finance system. It satisfies all of the key 
objectives of reform, including ending too big to fail, fully 
protecting taxpayers, providing equal access to the system for 
underserved communities and lenders of all sizes, maintaining 
affordable mortgage rates for borrowers under all market 
conditions, promoting competition, and easing the transition 
from the current system to the future system. If the Chairman's 
proposal becomes law, with the adjustments that I outlined in 
my testimony to the Committee, it would be a significant 
achievement.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR MORAN FROM MARK M. 
                          ZANDI, Ph.D.

Q.1. In a highly liquid, very efficient market, investors and 
traders are sensitive to any small change in information or 
performance. They are also highly sensitive to less-than-
perfect transparency and information. In the past they knew 
exactly what they were bidding on: either Fannie mortgages or 
Freddie mortgages.
    If the Common Securitization Platform commences, and 
investors and traders are not quite sure what is in the 
security (in part due to the ``to be determined'' nature of the 
security), will they not assume the worst, and thus pay less 
for the assets in order to protect themselves? And could this 
harm, and not help, market pricing to consumers taking out 
mortgages?

A.1. No, the single security issued by the Common Security 
Platform will be a larger ($3.5 trillion) and more liquid 
market, resulting in more stable and potentially lower mortgage 
rates for borrowers. This is already evident in the better 
pricing of Freddie's mortgage securities which are being issued 
by the CSP. FHFA will need to monitor and address any material 
differences in the prepayment speeds of Fannie and Freddie 
mortgages, but this is similar to what Ginnie Mae already does 
for FHA, VA and USDA loans in Ginnie securities to great 
success.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM HILARY 
                           O. SHELTON

Q.1. It is clearly not in our public policy interest to allow a 
future housing finance system to break into distinct pieces, 
with one guarantor serving real estate markets in New York and 
DC, another serving California, and no one making loans to 
underserved borrowers in Newark or Paterson, New Jersey.
    Is it necessary to have a mandate on guarantors to serve a 
national market to promote affordable and sustainable home-
ownership opportunities for creditworthy borrowers, including 
those in urban and rural underserved areas of the country?

A.1. Response not received in time for publication.

Q.2. Without a mandate to serve a national market, is there a 
risk guarantors will cherry pick regions, borrowers, and 
products, inevitably leaving some borrowers without any options 
for mortgage credit?

A.2. Response not received in time for publication.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM ADAM J. 
                            LEVITIN

Q.1. It is clearly not in our public policy interest to allow a 
future housing finance system to break into distinct pieces, 
with one guarantor serving real estate markets in New York and 
DC, another serving California, and no one making loans to 
underserved borrowers in Newark or Paterson, New Jersey.
    Is it necessary to have a mandate on guarantors to serve a 
national market to promote affordable and sustainable home-
ownership opportunities for creditworthy borrowers, including 
those in urban and rural underserved areas of the country?

A.1. Yes, such a guaranty is necessary. Without such a mandate 
to serve nationally, guarantors will engage in ``cream 
skimming''--that is they will serve the most profitable 
submarkets, but will fail to compete for the business of less 
profitable and harder-to-price markets, particularly rural 
markets.

Q.2. Without a mandate to serve a national market, is there a 
risk guarantors will cherry pick regions, borrowers, and 
products, inevitably leaving some borrowers without any options 
for mortgage credit?

A.2. This is absolutely what will happen. Without a mandate to 
serve a national market some parts of the United States will be 
served by one or no guarantors.
    One needs look no further than the state of insurer 
participation in Affordable Care Act health insurance 
marketplaces to see how such a situation might play out. The 
Affordable Care Act lacks a national duty to serve for 
insurers, and as a result, insurers have engaged in geographic 
cherry-picking, leaving numerous counties (and every county in 
five States) with only one ACA insurance option and the real 
risk of having no options.

Q.3. Too many communities around the country, including in my 
home State of New Jersey, are still recovering from the 
foreclosure crisis. Part of the problem is that our current 
system still does not incentivize servicers to do everything 
they can to keep borrowers in their homes. In consideration of 
any housing finance reform proposals, should Congress consider 
a requirement for servicers to offer struggling homeowners 
affordable loan modifications that are in the best interests of 
borrowers, investors, and taxpayers?

A.3. While I support such a requirement conceptually, I am 
unsure how readily it could be applied in practice and also 
concerned that it might be unconstitutional if applied 
retroactively. Prudent servicing standards arguably require 
such loan modification offers, but there is little enforcement 
of prudent servicing standards. A bright line public law 
requirement, separate and apart from any contractual 
requirements, would help remove any doubt that prudent 
servicing requires loan modifications if doing so would 
maximize the
return on the loan to investors. Applying such a requirement 
retroactively could be challenged under the 5th Amendment on 
the grounds that it is an uncompensated taking. To the extent 
that prudent servicing standards already require such 
modifications, it would not be, but I do want to flag the 
potential legal issue.

Q.4. While the CFPB has made marginal progress on dual tracking 
issues, we continue to hear from struggling homeowners that 
they can't get their mortgage companies to pause foreclosure 
proceedings while they are being evaluated for loan 
modifications.
    Do you believe that this is another area where we should 
consider stronger standards?

A.4. Regulation X under the Real Estate Settlement Procedures 
Act prohibits most dual tracking if the borrower has submitted 
a complete loss mitigation application. 12 C.F.R.  1024.41(g). 
Many borrowers, however, still have trouble producing 
sufficient documentation so as to have a complete loss 
mitigation application, and until such application is complete, 
the servicer is allowed to dual track. It is not clear to me 
whether clearer or stronger prohibitions on dual tracking are 
necessary or whether this is an issue that the CFPB could best 
address through the supervision and enforcement processes.

Q.5. What, if any, other mortgage servicing standards or 
requirements should Congress consider as it contemplates 
reforming the housing finance system?

A.5. Congress should consider restrictions on the post-default 
fees that servicers can charge borrowers. Additionally, some 
servicers have outsourced services, such as property 
valuations, to affiliated firms that charge supra-competitive 
prices. These inflated fees come out of the pockets of 
investors to the extent the homeowner is underwater. Congress 
should address affiliate-transactions of servicers so that only 
market-rate, competitive fees are charged and no unnecessary 
fees are levied.

Q.6. Many of the housing finance reform proposals put forward 
call for a system with multiple guarantors--something which has 
the potential to spark a race to the bottom where guarantors 
chase volume by eroding underwriting standards or pricing, 
ultimately harming both borrowers and the market.
    How can we create a system where guarantors can compete in 
a healthy and productive manner, but where we eliminate or 
mitigate the risk of any potential race to the bottom?

A.6. I do not believe that it is possible to have guarantors 
competing for front-end credit risk in a healthy and productive 
manner. Such direct competition for credit risk on mortgages on 
the front-end of the secondary market will inevitably result in 
risk-based pricing that segments the mortgage market and 
ultimately makes the entire market less stable.
    A better approach is to concentrate all credit risk in the 
first instance in a single Federal Government entity (basically 
a combined Fannie Mae/Freddie Mac), which would then transfer 
risk to capital market investors through synthetic credit-risk 
transfers, much like Fannie and Freddie's STACR and Connecticut 
Avenue Securities programs. These back-end synthetic credit-
risk transfers could be restricted by law to being on the 
Government entity's entire book of business, such that there 
would not be risk-based pricing to segment the market. The 
result would be the benefits of private risk capital, without 
the downsides from it.

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