[Senate Hearing 116-92, Part 2]
[From the U.S. Government Publishing Office]
S. Hrg. 116-92
CHAIRMAN'S HOUSING REFORM OUTLINE:
PART 2
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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 27, 2019
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Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: https: //www.govinfo.gov /
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
38-479 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 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
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WEDNESDAY, MARCH 27, 2019
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 32
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Prepared statement....................................... 32
WITNESSES
Michael Bright, President and CEO, Structured Finance Industry
Group.......................................................... 4
Prepared statement........................................... 33
Responses to written questions of:
Senator Brown............................................ 151
Senator Moran............................................ 152
Senator Cortez Masto..................................... 152
Robert D. Broeksmit, CMB, President and Chief Executive Officer,
Mortgage Bankers Association................................... 6
Prepared statement........................................... 36
Responses to written questions of:
Senator Brown............................................ 154
Senator Menendez......................................... 158
Senator Moran............................................ 159
Senator Cortez Masto..................................... 160
Lindsey D. Johnson, President, U.S. Mortgage Insurers............ 7
Prepared statement........................................... 55
Responses to written questions of:
Senator Brown............................................ 166
Senator Menendez......................................... 168
Senator Cortez Masto..................................... 170
Vince Malta, CEO and Broker, Malta & Co., Inc., on behalf of the
National Association of Realtors............................... 9
Prepared statement........................................... 66
Responses to written questions of:
Senator Brown............................................ 177
Senator Menendez......................................... 177
Senator Cortez Masto..................................... 178
Carrie Hunt, Executive Vice President of Government Affairs and
General Counsel, National Association of Federally-Insured
Credit Unions.................................................. 10
Prepared statement........................................... 107
Responses to written questions of:
Senator Brown............................................ 181
Senator Menendez......................................... 182
Senator Cortez Masto..................................... 183
Michael D. Calhoun, President, Center for Responsible Lending.... 12
Prepared statement........................................... 122
Responses to written questions of:
Senator Brown............................................ 185
Senator Menendez......................................... 186
Senator Cortez Masto..................................... 190
Additional Material Supplied for the Record
Letter submitted by the Credit Union National Association........ 194
Letter submitted by the American Financial Services Association.. 198
Prepared statement of Diane Yentel, President and CEO, National
Low Income Housing Coalition................................... 200
Letter submitted by the National Urban League.................... 214
Letter submitted by the Housing Assistance Council............... 217
Letter submitted by the Independent Community Bankers of America. 221
Letter submitted by the Community Mortgage Lenders of America.... 228
Letter submitted by America's Homeowner Alliance................. 232
CHAIRMAN'S HOUSING REFORM OUTLINE: PART 2
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WEDNESDAY, MARCH 27, 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 continues the conversation about the
state of our housing finance system and how we can set it on a
permanent, sustainable course, one that protects taxpayers and
fosters greater competition.
Yesterday, we received input on my Housing Reform Outline
from six different stakeholders and thought leaders
representing a variety of perspectives.
Former Acting FHFA Director Ed DeMarco stated that the
outline captures the consensus elements of prior reform
proposals and serves as a solid workable foundation from which
to develop legislation.
Dr. Mark Zandi noted that the housing finance system is in
critical need of reform, that the framework is an excellent
place to begin, and that policymakers should use it as a
framework to finish the job of reform.
The National Association of Home Builders, meanwhile,
expressed support for the broad concepts of the outline, while
also stressing the urgency of reform.
The National Multifamily Housing Council expressed an
eagerness to participate in the process, as we move forward,
and a belief that the outline would ensure a competitive
marketplace without increasing the cost of multifamily mortgage
credit.
Today, we will hear the perspective of six more
stakeholders, including Michael Bright, President of the
Structured Finance Industry Group; Robert Broeksmit, President
and CEO of the Mortgage Bankers Association; Lindsey Johnson,
President of U.S. Mortgage Insurers; Vince Malta, President-
Elect of the National Association of REALTORS; Carrie Hunt,
Executive Vice President and General Counsel at the National
Association of Federally-Insured Credit Unions; and Mike
Calhoun, President of the Center for Responsible Lending.
I thank you all for sharing your time and expertise with
all of us.
Your input is incredibly valuable as we look to flesh out
some of the details of a comprehensive plan.
As I stated yesterday, I consider housing finance reform to
be my top priority for the Banking Committee this Congress. The
status quo simply is not a viable option. We have a real
opportunity to act, and I am committed to getting it done.
I look forward to working with all of you in the days ahead
and anyone else willing to join us this long overdue effort.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. Thanks for the
witnesses, all six of you, for being here today. Good to see a
number of you again in front of this Committee.
As I said yesterday, housing is simply unaffordable for far
too many Americans. They cannot make rent without working two
jobs, let alone save enough to get a mortgage and build wealth
through home ownership through generations.
American families are the most important part of the
housing finance system, yet reform proposals and outlines often
fail to mention them altogether.
All Americans should be able to afford a safe place to call
home, whether they live in a Appalachian Ohio or whether they
live in East Cleveland, whether they are making a salary or
working for an hourly wage or earning tips.
Families need access to affordable mortgages from lenders
of all sizes who compete for their business by offering safe
products and the best service, and who will be there to help
families get through if they fall on hard times.
Last Congress, this Committee heard from six community
lenders. They represented small banks, credit unions, and
independent mortgage banks in Idaho, Ohio, South Dakota,
Georgia, North Carolina, and Illinois that help their customers
receive those sustainable loans.
They all agreed on the following four things: that
preferential treatment be based on the volume of loans a lender
delivers, whether in the form of volume discounts or
underwriting exceptions or the cost to retain servicing, hurts
small lenders and ultimately consumers; two, that we need a
guarantor that pools costs across the market and that has a
duty to serve all lenders; three, that small lenders benefit
from consistency in the secondary market; and four, that the
system does not need more than two guarantors in the secondary
market.
We are hearing from one of those organizations today.
Several of the associations represented that day have submitted
statements for the hearings this week reiterating those points.
I will ask unanimous consent later--I will ask it now, to
request that statements from the ICBA and the Community
Mortgage Lenders of America be included in the record.
Chairman Crapo. Without objection.
Senator Brown. Thank you.
Since 2008, the FHFA has implemented policies at the
Government-Sponsored Enterprises (GSEs) to provide equitable
treatment to lenders of all types and sizes across all markets.
FHFA has made sure the GSEs continue to serve a broad
national market and set market standards.
We hear time and again the system is working for small
lenders and their customers. We should not take steps that will
create uncertainty for small lenders or drive unhealthy
competition on quality and standards.
It includes any changes that would allow the largest
institutions to be one-stop shops for lending, guarantees, and
securitization with a Government backstop.
When this Committee last considered housing finance reform
legislation 4-plus years ago, many market participants made
clear that allowing a single institution to perform primary and
secondary market functions would undermine standards and
competition. I hope we still agree on that point today.
Any structural changes that we consider must not take us
backward to a system where lenders and the secondary market
pump up volume to satisfy Wall Street, with a race to the
bottom when it comes to protections. We know how that movie
ends.
We cannot create a structure where we restrict consumers'
options by putting local lenders who are serving their
communities today on an uneven playing field.
Finally, as we discuss broad changes to our housing finance
system, we should also consider how any changes would reduce or
increase the hurdles that borrowers and renters already face in
markets nationwide, and we know that is getting worse.
Some of our witnesses this morning have focused on the
growing challenges facing prospective homeowners. For example,
Mr. Malta's organization, the National Association of
REALTORS, has studied the burden that student loan debt has
placed on potential home buyers.
I have also heard from the Housing Assistance Council and
the National Low Income Housing Coalition about the unique
housing needs of rural households and low-income renters, as
well as we have heard from a coalition of 22 Civil Rights
groups, affordable-housing advocates, and community development
organizations on the key elements of my housing finance reform
proposal, of any one of them.
I would ask that all of their written statements also be
placed in the record.
Chairman Crapo. Without objection.
Senator Brown. Thank you.
And, finally, Mr. Chairman, American families are
confronted with new types of housing challenges, from mountains
of student debt to increasing rents in communities across the
country to stagnant wages violating what we should call the
``dignity of work'' all across the board.
As I said yesterday, 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 American families.
Thank you.
Chairman Crapo. Thank you, Senator Brown.
And we will now move to the testimony. I remind everybody
that we have a 5-minute time slow allotted for you. You have
got those clocks in front of you. Please try to stay with that
so that we can get more involvement from the Senators and their
questions, although they are limited to 5 minutes, too. And I
ask you to help them to stay to their 5 minutes as well.
With that, let us start. Mr. Bright.
STATEMENT OF MICHAEL BRIGHT, PRESIDENT AND CEO, STRUCTURED
FINANCE INDUSTRY GROUP
Mr. Bright. Chairman Crapo, Ranking Member Brown, Members
of this Committee, my name is Michael Bright, and I represent
the Structured Finance Industry Group, or SFIG. On behalf of
SFIG and its thousands of members in the securitization
industry, I very much appreciate the opportunity to speak to
you today.
SFIG was formed in 2013 with the goal of convening the many
diverse institutions involved in securitization, including
consumer and commercial lenders, data providers, auto and
equipment finance companies, rating agencies, law firms,
trustees, banks, and very importantly, end investors.
This structure forces SFIG to convene all parties, both
those involved with the creation of a fixed-income security and
those who invest in them. When SFIG takes a position, we have a
broad range of perspectives incorporated into our view. Since
SFIG represents all participants in a transaction, long-term
financial stability in the mortgage market as well as other
markets is a core principle of ours.
The purpose of today's hearing is to discuss reform of our
Nation's secondary mortgage market. I thank Chairman Crapo and
many other Members of this Committee for their continued work
on this issue. The latest outline touches upon many of the
principles that are important to SFIG, including creating a
clear role for private capital, establishing a clear and
explicitly defined role for the Government, the preservation of
a liquid TBA market, the preservation of a 30-year fixed-rate
mortgage, and making use of already existing securitization
infrastructure.
There is a substantial ongoing role for Congress to help
finish the job of housing finance reform for many reasons.
First, as the former head of Ginnie Mae, I can attest that
global investors will allocate much more capital and at a much
lower cost to the U.S. mortgage market if Congress puts a seal
of approval on a new end-state.
One major lesson I learned at Ginnie is that when speaking
to a non-U.S. investor, the first thing they will ask is ``Is
the law clear?'' Any lack of clarity on the Government's role
versus private capital's role adds ambiguity, and ambiguity
adds to costs. These costs are ultimately borne by the
homeowner.
There are many additional considerations relating to the
use of Ginnie Mae, and I am happy to discuss those with you in
more detail, if you would like.
Additionally, as I said to this Committee when I appeared
before it in 2018, we have a housing affordability crisis in
our Country, both in rental and home ownership.
Over the past decade, asset prices have increased
substantially faster than wages. This creates an imbalance in
our economy that is felt particularly strongly in the housing
sector. SFIG membership supports, and wants to help provide,
broader accessibility to mortgage credit throughout the
country.
Going forward, SFIG believes that private capital can, and
should be, productively channeled to further sound public
policy objectives and to augment the role of the GSEs and FHA.
Investor appetite for mortgage credit has been growing.
Insurance companies, for example, had roughly $500 billion of
residential whole loans on their balance sheet at year-end
2017, and this number continues to increase.
CRT transactions have provided roughly $70 billion of
first-loss private capital to the market. PLS and whole-loan
transactions are increasing slowly as well.
The pool of additional private capital available is today
quite deep. Reform should build upon this dynamic so that
private capital can help enhance safe and responsible access to
mortgage credit within the safeguards established by law and by
the CFPB.
As we seek to enhance the role of private capital, I would
like to cite three issues that we suggest Congress address.
Number one, an event that looms on the horizon is the end
of the so-called ``QM patch.'' Private capital can absolutely
help to fill in once this transpires, but some policy changes
would be very helpful to ensure the continued availability of
mortgage credit.
Most importantly, there needs to be a process of
determining what qualifies for a QM that is independent of
whether or not the GSEs' underwriting systems accept the loan.
Number two, policymakers should strive for better alignment
of regulatory capital requirements between the GSEs and banks.
For example, the GSEs get substantial capital relief, and
rightly so, for the credit risk transfer transactions they
issue. Banks, however, do not. By allowing banks to make a
loan, hold it on balance sheet, and if they choose, hedge some
of the credit risk in return for appropriate capital relief,
bank lending can play a more prominent role in our mortgage
market and help fill in where sometimes the GSEs cannot.
Finally, as policymakers look to reduce total reliance on
Fannie, Freddie, and FHA while ensuring access to home
ownership, a proper mechanism for allowing REITs to access the
home loan bank system makes sense.
There are, of course, many more challenges to discuss. In
the meantime, Mr. Chairman, I want to thank you again for
continuing to work on this important issue. We look forward to
working with you and with everyone on this Committee to ensure
that our Country's secondary mortgage market can better serve
all Americans. Thank you.
Chairman Crapo. Thank you.
Mr. Broeksmit.
STATEMENT OF ROBERT D. BROEKSMIT, CMB, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, MORTGAGE BANKERS ASSOCIATION
Mr. Broeksmit. Chairman Crapo, Ranking Member Brown,
Members of the Committee, thank you for the opportunity to
testify on behalf of the Mortgage Bankers Association (MBA). My
over 30 years' experience in real estate finance gives me a
unique appreciation for the complexity of the housing finance
system as well as the importance of ensuring that it operates
in accordance with a well-calibrated regulatory framework.
On behalf of MBA, I commend Chairman Crapo and his staff
for developing and releasing the outline being discussed today.
I would also like to thank Senator Warner and others on the
Committee for their previous efforts on this topic.
The housing finance system requires structural reforms that
will ensure a stable, liquid secondary market to support a
vibrant, diverse primary market, and comprehensive legislation
is essential for such reforms. MBA applauds the Committee for
its leadership in this role.
The 2008 financial crisis exposed fundamental problems in
the GSEs' business models as well as weaknesses in the
regulatory framework under OFHEO. Ten years later, we still
have not determined how or if the GSEs will be permanently
reformed. Only by enacting comprehensive legislative reform can
we provide the confidence necessary for a stable, sustainable,
and inclusive mortgage market. Reforms should proceed without
delay.
Chairman Crapo's proposal highlights the critical features
that should be included in any reform effort: robust
competition, access to affordable credit for borrowers, fair
pricing for lenders of all sizes, liquidity through the credit
cycle, reliable private capital to protect taxpayers, and
ongoing secondary market liquidity for multifamily housing.
Many of the priorities in the Chairman's outline align with
MBA's principles, as described in my written testimony. In
particular, the outline recognizes the need for competition in
the
secondary market, with privately owned, well-regulated entities
standing before a full faith and credit Federal guarantee. Such
a guarantee is a critical determinant of investor demand and
should apply to securities in both the single-family and
multifamily markets.
The outline proposes that the explicit guarantee be
provided and managed by Ginnie Mae. this structure is viable,
as Ginnie Mae is designed to perform this function and has a
proven history of ensuring payments on Government-guaranteed
securities.
The use of a Ginnie Mae guarantee, however, should not be
confused with the use of the Ginnie Mae securitization
infrastructure and processes; that is, a system in which
lenders issue securities rather than deliver loans to
guarantors. Based on extensive feedback from our members, MBA
believes a system that is structured around guarantors
minimizes transition risk and ensures equal access to the
secondary market for a diverse set of lenders, consistent with
Chairman Crapo's principles.
Market access by lenders of all types and sizes provides
tangible benefits for home buyers through broader competition
and availability of credit in all markets at all times.
In the multifamily market, reform efforts should preserve
those elements of the GSEs' multifamily businesses that have
been successful. Any capital framework under which guarantors
operate should seek to produce comparable treatment of varying
executions and credit risk transfer structures.
One of the greatest challenges to enacting comprehensive
reform has been conflicting views on how best to ensure
widespread availability of affordable housing, particularly to
low- and moderate-income (LMI) households.
Two factors that affect affordability in many parts of the
country are low inventory and home prices that are rising
faster than wages.
In order to best promote sustainable housing for
underserved segments of the population, any future system
should generate the necessary funding to address these access
and affordability challenges. The outline could be enhanced
with quantitative and qualitative evaluations of the secondary
market guarantors.
Another benefit of enacting legislation is cementing
regulatory reforms that have already taken place over the last
decade. The Chairman's outline seeks to accomplish this in a
number of areas, such as a prohibition on volume-based pricing
discounts, ongoing use of credit risk transfers, and
significantly smaller investment portfolios.
If the GSEs were to exit conservatorship without
corresponding legislation, these reforms could be weakened or
even reversed.
Our work with consumer advocates and other market
participants has revealed a growing consensus on the foundation
of the future state of housing finance in America. Access to
affordable, sustainable housing is a necessary for all
Americans, and as such, it requires a system of financing that
is robust in all parts of the country through all parts of the
credit cycle, supporting both home ownership and rental
housing. Legislative reform of the GSEs offers the best path to
reach this desired end-state.
Again, thank you for the opportunity to testify. I look
forward to your questions.
Chairman Crapo. Thank you.
Ms. Johnson.
STATEMENT OF LINDSEY D. JOHNSON, PRESIDENT, U.S. MORTGAGE
INSURERS
Ms. Johnson. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, U.S. Mortgage Insurers (USMI)
appreciate this opportunity to come before you to discuss the
housing finance system and opportunities for reform and to
comment on the Housing Reform Outline released in February by
Chairman Crapo.
USMI agrees with the Chairman and other policymakers who
continue to recognize that meaningful legislative reforms to
address the structural problems of the GSEs are still
necessary.
Importantly, the Chairman's outline recognizes the
importance of maintaining a system where private mortgage
insurance (MI) bridges the gap of saving for a 20 percent down
payment, a requirement that is simply out of reach for many
home-ready borrowers.
Private MI, backed by private capital, works in virtually
every construct for housing finance reform. For over 60 years,
MI has helped more than 30 million creditworthy borrowers
achieve home ownership.
Just last year, USMI members helped more than 1 million
families become homeowners, nearly 60 percent of whom were
first-time home buyers and more than 40 percent had annual
incomes less than $75,000. We are very proud to help these
hardworking middle-income households achieve home ownership.
Our members have decades of experience underwriting,
insuring, and dispersing mortgage credit risk. Private MI is a
form of permanent private-capital risk protection that is
available through all different market cycles and specifically
dedicated to the housing
finance system.
Following the financial crisis, the industry made
significant
improvements to the business model, including new capital and
operational standards, commonly referred to as PMIERs, and new
master policy contracts that clarify when and how an MI pays a
claim.
MI significantly reduces taxpayer risk exposure by assuming
at origination a substantial portion of credit risk at the
individual loan level to companies who are backed by private
capital.
The credit risk protection attaches on the very first day
the mortgage is originated, and it travels with the loan
wherever it goes. According to the Urban Institute, on 30-year
fixed-rate mortgages, the loss severity on loans with private
MI is 40 percent lower than without, despite the higher loan-
to-value of mortgages with private MI.
Chairman Crapo's outline is consistent with USMI's own
principles for a reform system, which include ensuring access
for creditworthy borrowers and all lenders, protecting
taxpayers, promoting stability within the housing finance
system, and fostering greater transparency at the GSEs.
We do have several recommendations to both increase
taxpayer protection and ensure consumers have access to
affordable, sustainable mortgage credit.
First, any future system should rely on loan-level credit
enhancement done at origination by entities who are able to
actively manage that mortgage credit risk through all market
cycles.
USMI commends the approach to use the Ginnie Mae guarantee.
Just like Ginnie Mae today guarantees securities backed by
loans that are insured at the loan level through FHA, VA, and
RHS programs, in a reform system Ginnie Mae could guarantee
conventional mortgages, backed by private MI to cover all
expected losses.
Loan-level credit enhancement is needed to actively manage
mortgage credit risk. It reduces losses at the individual
borrower level. It affords lenders the flexibility for
secondary market execution, and it ensures quality and loan
manufacturing.
A Government guarantee should also be conditional on
private capital covering all expected losses, so that this
guarantee is only drawn on in catastrophic scenarios.
Second, to further protect taxpayers and foster greater
transparency, we must reform the 100 percent taxpayer-backed
FHA and establish a more coordinated and consistent housing
policy between the conventional and the Government-insured
markets.
Last, to promote stability, we must establish a level
playing field and increase transparency and accountability by
separating the issuer and the credit enhancer roles at the
GSEs.
In addition to the important role that MIs play in
providing first-loss loan-level credit protection in the high
LTV market, mortgage insurers could participate as guarantors
providing a guarantee to mortgage securities, under Chairman
Crapo's proposed multiple-guarantor structure.
To enable true competition, legislation should provide for
a level playing field and should address the fact that the GSEs
have decades of Government-conferred advantages that will act
as barriers to competition.
Great care should be taken to ensure that the GSE systems,
technology, and data are made available and maintained through
an open-access and transparent exchange or utility.
A simpler approach and perhaps as a means to help
transition to comprehensive reform is to turn the GSEs
themselves into highly regulated utility-like entities, with
transparent capital and pricing, explicit and limited functions
in the secondary market, and open-access and transparent
underwriting engines. These steps could be done either
legislatively or by the Administration.
I am proud to represent an industry that has helped
millions of families become homeowners. USMI strongly believes
in the reform efforts this Committee is undertaking, and I look
forward to answering your questions.
Chairman Crapo. Thank you very much.
Mr. Malta.
STATEMENT OF VINCE MALTA, CEO AND BROKER, MALTA & CO., INC., ON
BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS
Mr. Malta. Chairman Crapo, Ranking Member Brown, Members of
the Committee, my name is Vince Malta, and I thank you all for
your invitation to allow me to speak before this Committee
today.
As the CEO and broker of Malta & Company, I have over 43
years of experience in the real estate industry in California's
Bay Area.
I am also the 2019 President-Elect of the National
Association of REALTORS (NAR). I am here today to testify on
behalf of 1.3 million members.
NAR is the Nation's largest trade association. Its members
are involved in all aspects of the residential and commercial
real estate industries.
I want to begin by thanking everyone on this Committee for
your work toward responsible, bipartisan reform of our Nation's
housing finance system. In our view, bipartisan congressional
action on GSE reform is imperative, as is the only way to
secure an explicit Government guarantee, which is a critical
component for a robust housing market.
To this end, REALTORS welcome and applaud Chairman Crapo's
proactive efforts to initiate these conversations in Congress
with the unveiling of an outline for reform earlier this year.
By emphasizing explicit Government guarantee, regulatory
flexibility, and strong reasonable regulatory authority, this
outline demonstrates a genuine commitment to ensuring a future
housing finance system that is both safe and vibrant. These
elements should be the back bone of any comprehensive housing
finance reform.
As the Committee continues to examine prudent ways to
reform our housing finance system, it is imperative lawmakers
carefully consider the need for a liquid national mortgage
market that is resilient to stress and supports the home
ownership needs of middle-class Americans.
We also know that middle-class homeowners on the coasts and
everywhere in between, in cities large and small, communities,
rural, and urban, all currently benefit from this foundational
mission of the enterprises.
Today, a home buyer in Springfield, Missouri, and one in
Springfield, Massachusetts, have equal access to a mortgage and
pay nearly identical rates. NAR believes that responsible and
creditworthy Americans should not pay more for a mortgage, or
worse, be unable to secure one at all, simply because of where
they live.
Recently, NAR proposed its own comprehensive vision for
housing finance reform. The vision focused on leveraging
successful
reforms and innovations implemented since the crisis. The
vision explains essential principles that are designed to
promote competition in a secondary market, preserve the 30-year
fixed-rate mortgage, minimize costs to consumers, maximize
access for creditworthy borrowers, and most importantly,
protect U.S. taxpayers.
These NAR priorities are outlined in depth in the official
testimony submitted to this Committee, and I am happy to
discuss any of those principles in more detail should the
opportunity arise during this hearing.
On behalf of NAR, I again want to thank you for the
opportunity to testify today. We urge the Committee to consider
these key principles as you work to develop housing financial
reform legislation that protects taxpayers and appropriately
serves middle America.
Thank you.
Chairman Crapo. Thank you.
Ms. Hunt.
STATEMENT OF CARRIE HUNT, EXECUTIVE VICE PRESIDENT OF
GOVERNMENT AFFAIRS AND GENERAL COUNSEL, NATIONAL ASSOCIATION OF
FEDERALLY-INSURED CREDIT UNIONS
Ms. Hunt. Good morning, Chairman Crapo, Ranking Member
Brown, and Members of the Committee. My name is Carrie Hunt,
and I am testifying today on behalf of the National Association
of Federally-Insured Credit Unions (NAFCU), where I serve as
Executive Vice President of Government Affairs and General
Counsel.
Thank you for the opportunity to appear before you today
and talk about housing finance reform and the Chairman's
Housing Reform Outline.
A healthy secondary market is of utmost importance to
credit unions. Credit unions and other small and community
lenders provide tremendous value to our Nation's economy by
assisting borrowers to achieve home ownership. NAFCU's members
use both Fannie Mae and Freddie Mac to sell unsecuritized
loans. Some of NAFCU members are also approved Ginnie Mae
issuers. In addition, credit unions are active users of the
Federal Home Loan Bank system for liquidity.
Based on the feedback from our members, we have established
certain principles that are important to any housing finance
reform plan, and we hope that the Committee considers those.
Credit unions have to have guaranteed access to the
secondary market, and that access has to be fair. We do not
support a pricing structure based on loan volume, institution
asset size, or any other issue that will put member owners at a
disadvantage.
Credit unions have to be able to participate on a level
playing field, and they have to have access to pricing that is
focused on quality and not quantity.
In addition, we believe that an explicit Government
guarantee should be part of any reform effort.
As we discuss reform, it is important to note that the
current system, while not perfect, is working for credit
unions. Since the financial crisis, credit unions have
benefited from fair pricing and continued access, and
ultimately, we believe that narrowly tailored, rather than
broad reforms to the housing system will likely assist our
members the most.
NAFCU and our member credit unions appreciate the work of
Chairman Crapo in advancing the housing finance reform debate
by releasing his outline and holding these hearings, and from
the credit union perspective, there are a number of positive
proposals in this outline.
One, we support maintaining a cash window with the
guarantors, creating an explicit Government guarantee, and
prohibiting volume-based discounts on pricing.
NAFCU also supports appropriate regulatory oversight of the
secondary market, but we do think there needs to be some
flexibility outside of certain statutory constraints. For
example, Congress should not be mandating a requirement such as
a minimum down-payment percentage. This requirement certainly
can be put in place by the regulator and should be flexible to
account for economic fluctuations in the housing market.
Our principles also include the need for a single
independent regulator that can provide stability and confidence
in the market, and we have seen those benefits with Fannie and
Freddie in conservatorship.
We appreciate the outline's focus on enhancing the FHFA as
a strong regulator with the authority to establish standards
for leverage ratios, concentration risk, and capital
requirements. And, additionally, the outline permits the FHFA
to approve guarantor
pricing, which provides an essential check on the multi-
guarantor model, should that model ultimately be adopted.
Relative to the multi-guarantor model, while we support
competition in general, under the outline, a large number of
guarantors could enter the market, a situation that could be
fraught with
increased overall risk and cost to the system if a number of
guarantors end up jockeying for market share.
It is unclear also whether new guarantors would actively
seek out credit union business, and certainly, having access is
very important to credit union members.
In addition, all of the guarantors would likely be subject
to the same financial stressors during an economic downturn,
and potentially, the benefits of multiple guarantors would be
lost relative to too-big-to-fail.
We also have general concerns about overall cost and
workability, including the transition to any new housing
finance system. Credit unions have not only invested in the
infrastructure to interface with the GSEs, but have really
worked to establish business relationships with them. These
relationships have been built over years and are hard to
replicate overnight.
This example really speaks to how credit unions operate
with any of these other entities, whether they be the Federal
Home Loan Banks, whether they be Fannie Mae/Freddie Mac,
whether it would even be out in the public market. It really is
a relationship business, and it really is difficult to just
flip a switch and start in a different direction.
Credit unions also really value maintaining servicing
rights on their loans. They are optimistic about the potential
benefits of the common securitization platform and uniform MBS,
and we believe that both should be maintained in any future
housing finance system.
Last, I will note that NAFCU supports mechanisms to help
create affordable housing, including the existing Duty-to-Serve
requirements. It is unclear how the new Market Access Fund
proposed in the outline would be administered or how it would
function with these existing programs, and we look forward to
hearing more details on that aspect of reform to understand how
potentially that would help our consumers.
We thank Chairman Crapo for offering this outline that
recognizes the work that has been done in previous Congresses
to consider reform proposals. From our perspective, there is
just not one solution to reform our housing system; but, for
our members, certain solutions will certainly work better than
others.
We are pleased that the Banking Committee has always
approached housing finance reform in a bipartisan manner, and
NAFCU stands ready to continue this work on this important
issue.
Thank you for the opportunity, for your input, and I
welcome any questions.
Chairman Crapo. Thank you.
Mr. Calhoun.
STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER FOR
RESPONSIBLE LENDING
Mr. Calhoun. Thank you, Chairman Crapo, Ranking Member
Brown, Members of the Committee.
I am the 12th witness this week on this technical and
incredibly important topic. You have learned a lot from the
previous witnesses, from their questions and the dialogue, and
I do not want to repeat any of that covered ground. So my
remarks will focus on three things.
First, I will set out the settled part of the landscape of
where we are on housing finance reform today. Second, I will
frame the essential question before us; that is, how do you
best harness the necessary Government guarantee to further the
public mission that it is intended to accomplish? Finally, I
will set out a path forward that best serves that public
mission while protecting taxpayers and the private market.
A quick description of the Center for Responsible Lending,
we are the policy arm of a community-based lender that has
focused on home lending for nearly 40 years. Through our direct
lending program and our partnership programs with national
regional banks, we have provided over $5 billion in financing
for first-time home buyers of modest means. I previously worked
in and headed those programs.
First, on where we are on housing financial reform, as you
heard yesterday, measures have thankfully been put in place to
make our housing finance system safe and protect taxpayers.
Mandatory mortgage standards, strict limits on loan
portfolios, and robust capital standards and g-fees raise
sufficient funds to date to fully recover a repeat of the 2008
crisis and far more, we owe thanks to those who did the hard
work to accomplish that.
Second, the essential question for housing finance reform,
we need a Government guarantee in order to preserve the 30-year
fixed-rate mortgage and enable home buyers to lock into a rate
when they are buying a home or refinancing a mortgage.
However, that guarantee can be used by entities to maximize
revenues by focusing on only the most lucrative market failing
to serve rural areas, low-wealth borrowers, and community
banks, and the guarantee can also be used to unfairly compete
with other parts of the housing market.
One approach is the multi-guarantor model. It comes up with
several tradeoffs. It is a major change, as you heard, from the
current system and injects risk into the transition.
Also--and this is the key part--multi-guarantors will face
heavy pressure to fight for the most lucrative parts of the
market. This doubles down on that conflict between the
Government guarantee and the use of it to maximize private
gain.
Now, specifically on an issue that has come up a lot,
community banks, it is not enough to simply prohibit volume
discounts and have a cash window. That does not get the job
done. It is far more lucrative for a multi-guarantor to buy
loans by the tens of thousands and securitize them from a large
lender versus buying a handful of loans from a community bank
or a credit union.
Today's system mandates pooled pricing at those windows so
those are equivalent transactions. That does not happen without
that substantial intervention, and it is a reason why there is
a dearth of small-lender support for the multi-guarantor model.
The multi-guarantor model also frustrates affordable
housing. It takes away the current level pricing in the system
at a cost of $4 to $6 billion of affordable-housing assistance
every year.
The last thing we need today is more headwinds for
affordable housing. We need to address the affordable-housing
crisis and, in particular, correct the decades of housing
discrimination.
This leads me to my final and optimistic point, a path
forward. In order to make sure the Government guarantee is used
to further and focus on the public mission, the entities need
to function as utilities, with utility oversight, as you have
heard from two of the previous witnesses today. That prevents
misuse of the guarantee and also delivers far lower prices for
all borrowers and particularly for lower-wealth borrowers.
A wide variety of organizations have endorsed utility
regulation. As you have heard today, these include diverse
groups such as the Independent Community Banks, the National
Association of REALTORS, a broad array of Civil Rights groups,
the Mortgage Bankers Association, and more. Some of these
groups call for one entity, a single utility, some for the
current two, some for multiple entities. For the reasons I have
discussed, we believe there is a compelling case to continue
with the two current GSEs but with utility regulation and other
reforms detailed in our written testimony imposed before there
is any release from conservatorship.
Thank you again for the opportunity to testify today, and
we look forward to working with the Committee in this important
project.
Chairman Crapo. Thank you very much.
I will begin the questions. My first question is to you,
Mr. Bright. You have led Ginnie Mae, and obviously, Ginnie
Mae's role in the outline that I put out is significant, as
basically the wrap for the guarantors.
Could you just discuss whether you think that is the right
approach in reforming our system?
Mr. Bright. Sure. Thank you.
Well, definitely, I think that the use of the Ginnie Mae
brand makes a lot of sense, and it would be very silly to try
and create a second full faith and credit wrap. That view has
evolved over the last few years.
I kind of came into that view watching Ginnie Mae's market
share grow and then, of course, running the agency.
So a big part of the job was going and speaking to a lot of
the investors in the bonds, globally and domestically, and
especially in places like Japan and China and the Eurozone,
they have very strict investor guides on what they can buy,
especially as it relates to the U.S. mortgage-backed
securities. There is still a hangover in terms of willingness
to invest, and Ginnie Mae is written into these guides.
So you do not have to actually do this entire process of
going around the world and saying there is this new borrower-
backed security. It is full faith and credit. Here is how it
works. If you say this is a Ginnie and they are all Ginnies and
they are regulated by Ginnie and Ginnie is the one that is
going to ensure that you get timely payment and P&I, you are
shaking hands with Ginnie. Ginnie already has a bunch of MOUs
in place with these central banks.
So, yes, I think it is the right thing to do to use them.
Chairman Crapo. Well, thank you.
To Mr. Broeksmit, you mentioned that we need--or an
improvement could be a qualitative and quantitative enhancement
of the funding for affordable housing. Could you explain a
little more what you meant there?
Mr. Broeksmit. Yes. We believe that in addition to the
funds as envisioned in the outline that some sort of--perhaps a
scorecard akin to how FHFA is treating the GSEs today with some
of their requirements, that has both quantitative and
qualitative elements, and that it is more integrated. It would
give credit for activities like partnerships and education and
outreach as well as for purchasing loans because we do believe
that it is vital that the guarantors serve the full spectrum of
borrowers and that they would have an obligation by virtue of
their full faith and credit Government guarantee to do so
Chairman Crapo. All right. Thank you.
An issue that has been raised here in this hearing is
whether we should have more than two guarantors and what role
they should serve in, whether a utility role versus the
guarantor role as contemplated in some of the other proposals
that are available.
I would invite--I only have 2 minutes left, so I would like
you to be brief. But I would like to hear the opinion of all of
our witnesses on this.
You just have rendered yours, Mr. Calhoun. If you do not
want to add any to it, fine, but let us start over here.
Mr. Calhoun. Yes. A utility role in regulation would
regulate returns for the two current GSEs.
Chairman Crapo. OK. Ms. Hunt.
Ms. Hunt. For credit unions, the current system with two
entities, whether you want to call them utilities or something
else, in a heavily regulated role works for credit unions.
Chairman Crapo. All right. Mr. Malta.
Mr. Malta. A utility model highly regulated and two or
more. However, we believe the competition belongs in the TBA
and credit markets and not at the guarantor level, so not too
many.
Chairman Crapo. All right. Ms. Johnson.
Ms. Johnson. So we can appreciate the interesting
competition. I think we have got concerns about if you can
really ever strip enough away from the GSEs to allow other
guarantors into the market, and we think a viable option would
be to transition the system, either turning the GSEs themselves
into a utility for the long term or simply as a transition
step.
Chairman Crapo. Mr. Broeksmit.
Mr. Broeksmit. MBA has long held that there should be two
or more guarantors. We do not know whether private capital will
come in with the billions of dollars of capital that would be
required. We think the FHFA capital standards are a helpful
step so that private--other private entities could decide.
But we think that just the ability for private capital to
come in, other than Fannie and Freddie, is helpful and healthy
for competition in the market.
Chairman Crapo. Thank you.
Mr. Bright.
Mr. Bright. Yes. It is difficult to say what the exact
right number is. I think as a principle, I agree with Mr.
Calhoun that the point of all of this is to ensure that all
markets nationally are served.
The point again of us being here, the point of the
Government being involved in this, is to make sure that
underserved markets are served.
So I think as a starting principle, you need to make sure
that whatever system you design, the focus is to make sure that
you serve underserved markets.
The net effect of that is that you probably will end up
with only a few national-type institutions, just because of
economies of scale.
There is part of me that hopes that you preserve the idea
that if an institution wants to specialize in serving an
underserved market, a designated underserved market, that maybe
they can do it better than a big national utility could. And I
do not know that I want to throw away that as an idea, but the
reality is you probably will get a few large national markets.
But the point is making sure that all kind of communities are
served.
One last thing is it is important to remember that this
idea of utility and volume for g-fees and all these things, a
lot of these are constructs right now of conservatorship, and
so I support codifying them in legislation so that we make sure
that these gains are kept.
Chairman Crapo. Thank you.
Senator Brown.
Senator Brown. Thank you.
The witnesses for the Committee yesterday obviously had a
wide range of opinion on a number of issues, but they did seem
to agree on a couple of things. They agreed--and I believe all
of you state in your written testimony--there must be a
catastrophic Government guarantee to ensure that borrowers have
access to credit at all times.
Most of our witnesses--second, most of our witnesses also
agree that all guarantors must serve a broad national market,
and I would like to ask, yes or no from each of you, if you
agree with that, that all guarantors should be required to
serve a national market. And please give a yes or no, if
possible.
I will start with Witness number 12, Mr. Calhoun, and go
that way.
[Laughter.]
Mr. Calhoun. Yes.
Ms. Hunt. Yes.
Mr. Malta. Absolutely yes.
Ms. Johnson. Yes.
Mr. Broeksmit. Yes.
Mr. Bright. Yes. I wish I did not have to give yes or no,
but yes.
[Laughter.]
Senator Brown. Well, take a little longer, then, if you do
not.
Mr. Bright. Well, what I said is I think the point is you
have a national market and that all communities are served, but
if you had a concept of a guarantor that wanted to focus on an
underserved market, a rural market or Puerto Rico or a place
that is underserved, it is possible that they could do it
better and that they could innovate and serve that market and
then, likely, a national guarantor maybe take over doing that.
So I think you would end up with national guarantors, but I
think if they wanted to serve an underserved market that there
should potentially be some allowance for that.
Senator Brown. That would be the Puerto Rico that the
President of the United States does not recognize as part of
the United States.
Mr. Calhoun, you have expressed concern that in any system
with multiple private guarantors, without an affirmative duty
to serve all markets, guarantors would be motivated to cherry-
pick the most profitable loans in the market.
We heard similar things yesterday from Mr. Levitin and Mr.
Shelton and Dr. Zandi.
The question is this. If guarantors were driven by profit
and had no affirmative obligations, what borrowers or markets
do you expect would go unserved, and what would that mean for
pricing for all borrowers, if you would answer both questions?
Mr. Calhoun. Yes. This is not casting these multiple
guarantors as evil entities. It is just the competitive
pressures that they face. It costs more money to serve
dispersed rural borrowers. The easiest, most profitable loans
are in concentrated, robust urban markets with high-wealth
borrowers and doing it in high volumes that are huge.
One of the themes you are hearing from us community lenders
is that this market tilts toward the largest lenders naturally
because of those huge economies of scale.
The GSEs are an important counterweight to that because
they are required to serve small lenders. So the borrowers that
would potentially go unserved include rural borrowers. It would
be lower-wealth borrowers in particular, borrowers of color,
and for institutions, it is very much smaller lenders cannot
swim in a system that tilts heavily to the large lenders.
Senator Brown. Ms. Hunt, yesterday we heard from some of
the witnesses that represent large institutions. They said they
believe small lenders--they believe small lenders would be
better off in a multiple-guarantor system. In your testimony,
you state that NAFCU has concerns about moving our housing
finance system to a multiple-guarantor model.
ICBA, CMLA, which represent community banks and community
mortgage lenders, submitted written testimony that expressed
concerns about the impact that a multiple guarantor model would
have on community lender access and on market stability.
Your last answer to Chairman Crapo's question--or your
answer to his last question touches on this. So would you
expand more on--I heard what you said in response to him, but
would you expand more on why small lenders would or would not
be better off in a system with multiple guarantors?
Ms. Hunt. So credit unions and other small lenders are
focused on making the loan, and the benefit of accessing the
secondary market is that they have a channel to help them
mitigate risk, help them work on balance sheet liquidity, and
knowing that there is an avenue and channel and guaranteed
avenue and channel helps them make the loan in the first place.
And when you add additional players into the system and it
is unclear as to whether or not you are going to have those
business relationships to actually be able to sell them the
loan--Mr. Calhoun mentioned that it is likely that it is easier
to work with a big player who is going to give you lots of
loans than smaller lenders, and I would reiterate that.
I think that, ultimately, if we moved to a multiple
guarantor system, we could see some positives, and likely some
positives for investors in the good times. But when the economy
ultimately turns, which it ultimately will because we always go
in cycles, what happens then? Do those multiple guarantors not
seek out business of small lenders? Do those multiple
guarantors constrict? And what happens with all of this
jockeying for position?
So for us, a multiple guarantor model creates a lot of
uncertainty, with not a lot of positives over how things
operate today.
Senator Brown. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Kennedy.
Senator Kennedy. I want to listen a while longer, Mr.
Chairman.
Chairman Crapo. Senator Warner.
Senator Warner. I have been listening for a long time.
[Laughter.]
Senator Warner. I want to start with what I think--I
actually hear more agreement from yesterday and today,
including all 12 participants, in terms of maybe us inching
closer. I hear a broad set agreement around a Government
guarantee. I hear a broad set agreement around additional
support for low- and moderate-income, and while there are
challenges with the Chairman's proposal, I think on a factual
basis, the fact that there is increased support for low- and
moderate-income on a dollar basis, how we make sure that is
fair, but I think that is a step in the right direction.
I think we hear enormous concerns about making sure that--
and I am sure Senator Tester will emphasize this--access for
smaller lenders, credit unions, rural community.
I think we still have a lot of questions around how many
guarantors and enormous fear, even if we got the model right on
the transition. I particularly think about some of our previous
iterations with our friends at the REALTORS and the credit
unions on this.
I want to come back, and I want to reserve 30 seconds at
the end to make a final comment. But yesterday, I spent a lot
of time emphasizing that we are not doing this in a vacuum. The
new FHFA Director has enormous, broad powers, and when he gets
put in very shortly--matter of fact, there was a segment from
Politico today saying that Treasury may start offering
executive action in terms of an outline as early as today. So
the notion that this may be taken away from Congress is I think
a concern.
Mr. Calhoun, you and I have gone round and round on a lot
of these ideas. I think we actually share 98 percent of the
same goals, but I would like you to speak for a moment, though,
with the new FHFA Director, this Administration coming in,
taking more control of the housing market. What concerns you
most? An aggressive new capital regime? Cut back on the
existing subsidy supports? Getting rid of the patch if we take
these, the GSEs, arbitrarily out of conservatorship? What are--
you put out some of the challenges, but what are the challenges
of inaction, particularly if we have an Administration that may
not share the same goals, particularly for low- and moderate-
income folks?
Mr. Calhoun. There are certainly risks there.
As you know, HERA was passed in 2008, and one of the
fundamental reforms was a bipartisan bill. It was to have a
very robust regulator to make sure, as we are talking today,
that the entities pursue the public mission, not just
maximizing private gain. So there is a lot of discretion there.
At the same time----
Senator Warner. But if you can speak to the question of
what--an FHFA that may not have the same they had in the past--
--
Mr. Calhoun. They could redo affordable housing. They could
raise pricing. They could cut back on access to certain kinds
of mortgages.
I will say we have worked with Mark Calabria for decades
now and believe that he comes at this with considerable
experience and knowledge and a level approach. Also, everyone
wants a housing market to work and not be disrupted.
So I think all of us believe that Mr. Calabria will be very
careful to not come in--and he has said this in conversations--
not come in and disrupt the housing market, and he has also
voiced explicit support for the affordable-housing goals.
Senator Warner. Let me just--Mr. Broeksmit or Ms. Johnson,
one of the questions here is about the national footprint. I
spent a lot of time with Michael Brighton. I am intrigued with
some of his ideas about making sure if there was an expertise,
it could focus on rural or low income. I know it is easy to
say, hard to prove, but this notion of trying to make sure that
we have got a national footprint, we clearly do not want LMI or
rural communities to be cut out of this. If you can both
quickly--because I am going to add 30 seconds at the end.
Mr. Broeksmit. Yes. I would agree with that and say that
the Chairman's outline has quite strong powers for the FHFA to
regulate these entities in such a way that they could not
cherry-pick, and there would be no race to the bottom because
the FHFA would define an eligible mortgage as something like
the qualified mortgage would govern risk management and
liquidity and capital.
Senator Warner. Ms. Johnson, quickly.
Ms. Johnson. So one of the things that we comment on in our
written testimony is loan-level credit enhancement, and one of
the benefits of loan-level credit enhancement is it is done at
origination.
So our members, for example, work with 5,000-plus lenders
across the country to make sure that the credit protection is
put in place before it ever gets to the GSEs and receives a
Federal Government backstop. So we think that that is an
approach that should be taken as going forward as well.
Senator Warner. Mr. Chairman, can I have 30 seconds?
Chairman Crapo. Thirty seconds.
Senator Warner. All right. I have been a strong advocate of
reform for a long, long time, and I think I understand most of
the concerns.
What I am wondering is--and I am intrigued with the
Chairman's efforts--some of the these are such fundamentally
large kind of leaps of trust, though. That I wonder whether
there maybe even possibilities of some interim step where we
provide more support for LMI, where we strengthen the Common
Securitization Platform (CSP), and may not get to the full-
utility model. But a lot of those components could be enhanced.
That we make sure--this is where Mr. Calhoun and I may
disagree, but we had pretty broad unanimity, bipartisan,
yesterday that recap and release would simply re-create the old
status quo, and that does not make a lot of sense.
So I am a strong advocate of reform, and having tried
swallowing the whole enchilada a couple times and getting it
kicked back, we may think in interim steps. But I welcome the
Chairman's efforts and look forward to working with him and
folks on both sides of the aisle to try to get this right.
I think for most of us, this does not come with an
ideological bend. As I said yesterday, I would never want to
know this much about housing finance. To me, at the end of the
day, it is just plumbing, but the plumbing has got to be done
in the right way, particularly when we have so many people.
And I share the Ranking Member's view that we have such a
housing crisis in this country for low- and moderate-income
folks, and we do not want to do anything to exacerbate that.
Thank you for the extra time, Mr. Chairman.
Chairman Crapo. You are welcome.
[Laughter.]
Chairman Crapo. We finally found out how to increase the
time. No, never mind.
Senator Tester.
Senator Tester. Well, thank you, Mr. Chairman. That is the
longest damn 30 seconds I have ever seen in my life.
[Laughter.]
Senator Tester. Time is money, though, Warner.
So I do not want to put words back in your mouth, Mr.
Broeksmit, but I just heard you say that the Chairman's outline
would stop cherry-picking. Is that what I heard you say?
Mr. Broeksmit. It would prevent a race to the bottom, and
it would also, with the national footprint, require that
guarantors operate nationally and not just region by region or
loan size by loan size.
Senator Tester. And I do not want to put words in your
mouth, but is not that basically what you said? It would stop
the cherry-picking? And I am not being critical. I hope it
does. If it does, then I want to get the other people's input
to see if they feel the same way.
Mr. Broeksmit. Sure.
Senator Tester. Mr. Bright.
Mr. Bright. Yes. I think that is an objective clearly of
the outline.
Senator Tester. OK.
Mr. Bright. And I think you need to do it in legislation.
Senator Tester. OK.
Ms. Johnson. We think that you have got to really address
the competitive advantages if you are going to have the GSEs in
the marketplace because lenders--even as Carrie mentioned,
whether you transfer data and technology in some of those----
Senator Tester. But if the competitive advantages were
addressed, it would stop it?
Ms. Johnson. Yes.
Senator Tester. OK.
Mr. Malta. Pretty much the same.
Senator Tester. OK. Ms. Hunt.
Ms. Hunt. We would agree.
Mr. Calhoun. I have spent--part of my background--spent
several years litigating the kickbacks that market participants
give to the big lenders----
Senator Tester. Yes.
Mr. Calhoun.----on a national basis, and there is a whole
cottage industry there because that----
Senator Tester. Do you think there is a way to stop that?
Mr. Calhoun. That is why I think you are hearing many of
the smaller lenders say having two utilities is a lot better to
be able to control than having a dispersed group of multi-
guarantors. It simply is more profitable for them to serve the
biggest lenders. That is the inherent challenge.
Senator Tester. I will stick with you, Mr. Calhoun.
I think you talked about Mr. Calabria about not wanting to
upset the apple cart on the housing industry, disrupt the
housing market. Do you believe this Administration will take
the steps that will make low-income borrowers worse off? Do you
believe that they will not do that?
Mr. Calhoun. I think it is yet to be determined. I think
they recognize that serving those borrowers is a very high
priority of both this Committee and at least equally so on the
House side. They are cognizant of that.
Senator Tester. So would it be fair to say that you are
just fine leaving things the way they are right now?
Mr. Calhoun. No. Let me be clear. We support strong, robust
reform. We want the current GSEs ring-fenced. We do not want to
turn them loose in their current status or in their prior
status. We are calling for much more robust conservatorship--
plus----
Senator Tester. OK.
Mr. Calhoun.----for GSEs before there would be any release
from conservatorship.
Senator Tester. OK. Since--the only proposal we have out
here--and I think I really do hope--and I have talked to
Senator Brown about this and Senator Crapo about this--that the
Ranking Member and Chairman can get together on a reform bill,
but could you get me a list of the things that are wrong with
the Chairman's proposal?
Mr. Calhoun. We would be happy to do that and meet with you
or your staff.
Senator Tester. And could I get the rest of you to do that,
too, and if there is nothing wrong with it, tell me that? And
if there is a whole bunch wrong with it, make the list long,
and then we will take it up with Senator Crapo.
Senator Kennedy. Can we all get a copy?
Senator Tester. What is that?
Senator Kennedy. Can we all get a copy?
Senator Tester. Oh, hell yes--excuse me. Yes, you can.
[Laughter.]
Senator Tester. OK. This is for Malta and Hunt. In a reform
system, is the cash window enough to ensure equal and fair
access for small lenders?
Mr. Malta. So it is a start, and we want to make sure that
that actually happens.
Senator Tester. But if that happens, is that enough, or do
we need to do more? And if we do, tell me.
Mr. Malta. We need to do more.
Senator Tester. What would it be?
Mr. Malta. We need to make sure that there are proper
regulations that even the playing field. That they are not put
at a competitive disadvantage from the very outset from the
model. That we have an environment where they can compete again
in all markets and at all times, and that will create an equal,
level playing field.
Senator Tester. Ms. Hunt.
Ms. Hunt. For credit unions, access to the cash window is
important relative to maintaining servicing rights, but it does
not necessarily get us where we need to be relative to fair
access.
I mean, there just needs to be an affirmative duty that if
you are a guarantor or you are a GSE or a utility or whatever
we are calling these entities, you have a duty to not just
serve all markets, but serve all lenders. And that will
hopefully get us where we need to be.
Senator Tester. Well, look, I think along with the panel
yesterday, everybody here is going to be really important as
this process proceeds, and your input is going to be critically
important. So I want to thank you all for being here today.
And I just want this to be reflected in the record. Bright,
you are still my favorite Republican staffer.
[Laughter.]
Mr. Bright. I have a lot of favorite Democrat Senators.
[Laughter.]
Senator Tester. Very good.
[Laughter.]
Chairman Crapo. Senator Jones.
Senator Jones. Thank you, Mr. Chairman, and I promise to
hold down the profanity in my questions.
[Laughter.]
Senator Jones. I would like to talk a minute about
addressing the future of the Federal Government's flagship
housing tool, the FHA, Federal Housing Authority, which plays a
critical role in helping facilitate mortgage credit.
In Alabama, where relatively lower-priced real estate, FHA
still plays a huge role. I think a quarter of all loan
originations in Alabama are FHA-backed loans. So it is a tool
that we really cannot do without.
Clearly, as I understand it, the infrastructure for FHA is
pretty antiquated. To say the least, it is pretty antiquated.
We are still dealing with old 8-by-12 calculators versus
computers, essentially, and there are certain legal impediments
with FHA.
Mr. Calhoun and Mr. Bright, I think you might want to both
address this. How can, as part of this, we modernize the FHA?
Looking beyond infrastructure, what is the proper role for FHA
in a reformed housing finance system?
I will go with you, Mr. Calhoun, first and you, Mr. Bright.
Mr. Calhoun. FHA plays a critical role for first-time home
buyers. It should not be the only option. We have seen that
before, and so there needs to be a conventional market as well.
In terms of what you need to do to fix it, you nailed them.
Their computer system is 40-years old. It breaks down for up to
a week at a time when it cannot take in new loans. They use
extensive paper products and have warehouses full of paper
files. It is nuts.
You all provided funding for the first time in many years
for upgrading that computer system. It needs to be provided,
and we have been working with a number of folks on both sides
of the aisle to provide it more secured on like a 5-year basis
because it is the 5-year plan that you need.
Then, finally, what you are alluding to I think on the
legal grounds, we have got to clean up the unnecessary
uncertainty and risk from the False Claims Act that has chased
virtually all of the major banks out of FHA lending.
I will note that is a challenge also with the Ginnie model,
and it raises concerns in the market that that False Claims Act
liability could arise in a Ginnie model that is not present in
the current model.
Senator Jones. Thank you.
Mr. Bright.
Mr. Bright. I agree with much of what Mr. Calhoun said.
The False Claims Act thing, as soon as you create an
explicit guarantee, that False Claims Act enters the picture.
So just to be clear, it is not just Ginnie, but any time you
claim an explicit guarantee.
I definitely agree that for FHA specifically, they need
more money for technology, so it is a big problem. It would be
nice if they did not spend all--you know, I was at Ginnie in
December and January, and we did not work for 35 days. I mean,
that is not a good process to have for a big part of our
economy, so we have to stop doing that.
Then this is a Ginnie plug a little, but they are under HUD
along with FHA. They need the ability to pay salaries that are
comparable to other skill sets in this town. Literally, the
FHFA is three blocks down from Ginnie Mae, and they have a lot
of overlapping functions, and their pay is 50 percent higher
than Ginnie's pay. And it was a constant challenge to keep
talented--these are technical issues--to keep talented folks at
Ginnie when they could literally go three blocks down and get
another $50,000.
And the irony of that is that Ginnie is supposed to be
serving this very vital part of the market, not borrowers who
may have otherwise gotten served and now are just getting a
little bit of a lower mortgage. They are supposed to be serving
this very important first-time home buyer part, and they were
all furloughed. And you lose talent all the time.
So I think that there needs to be pay comparability.
Senator Jones. Thank you.
Another issue that I think is a real impediment to home
ownership right now is the ability to come up with a down
payment. Clearly, statistics are showing we are not saving the
money that we should, and even when people do, they do not want
to give a whole chunk of that savings out to put on a down
payment.
How can we address that issue? Is there something that we
can do? Are there models out there for a down-payment
assistance program where people can afford--I think if they get
that first house, they can then use equity, but getting that
first house is tough. And I would just kind of open that up to
anybody who wants to chime in the remaining--I got everybody
raising their hand. That is good.
[Laughter.]
Ms. Johnson. So I would just comment we think that is an
enormous challenge. It is specifically what our industry has
focused on is bridging that gap between an individual bringing
20 percent to the closing table and actually having access to
the conventional market.
And you think about sort of the time that it takes for an
individual to save that down payment, we track that data, and
we found that it takes two decades for a firefighter or a
teacher in many areas to save that up. For minorities, we know
that it is even longer.
Senator Jones. Right.
Ms. Johnson. So we really have to make sure that there are
options available in the market.
Senator Jones. Real quick. I am a little bit over, but does
anybody got something? Yes, sir.
Mr. Malta. So, basically, we are always concerns regarding
arbitrary limits on down payments, et cetera, or requirements
on down payments, and that there are vehicles out there that
could assist with lower-down-payment loans that are working
very well in the marketplace, a combination of private capital
through MI, sound underwriting standards. Those are the guides
to home ownership.
Also, it was brought up regarding student loan debt being a
real challenge to many first-time buyers, and our research
indicates that it delays home ownership by at least 5 years.
Senator Jones. Wow.
OK. All right. Well, thank you. Thank you, Mr. Chairman,
and thanks to the Senator from Louisiana for deferring to
somebody from Alabama. I have been looking over my shoulder
because of that, but thank you.
[Laughter.]
Chairman Crapo. Senator Moran.
Senator Moran. Mr. Chairman, thank you. Thank you and the
Ranking Member for your diligence on this topic.
You and I and others were involved in an effort years ago
trying to see if we could address this issue in a significant
way then, and perhaps we can do so now. I certainly want to
commit to you to work with you to accomplish that.
A couple of things about rural America, and this is the
theme of my question here. Mr. Bright, you suggested that there
could be some advantages to regionalized guarantors. Would you
expand on that for me?
And my follow-up question to all of you will be, What
should I be paying attention to, to make sure that community
banks, what I call ``relationship bankers,'' have the necessary
equal access to the secondary market and also to access the
loan-level credit enhancement?
Mr. Bright. So the idea that I was sort of suggesting is
that you want a national market, and there needs to be rules to
make sure there is a national market. In all likelihood, what
that is going to mean is national guarantors.
But if you had a process for designating underserved
markets and you said if you wanted to be a specialized
guarantor in an underserved market, there is a potential that
you could get some helpful innovation and some guarantors that
say I understand rural lending or I understand lending in this
particular part of the country. I would not want to completely
shut off the possibility of doing that, but you would want it
to be for underserved markets, not so that you could cherry-
pick from the good stuff.
Senator Moran. If we were listing the underserved markets
today, what would be on that list? What would come to mind?
Mr. Bright. That is the communities that have been
underserved for decades. Urban minority communities, I think
the NAACP spokesperson yesterday did a very good job of
explaining that the home-ownership rate in black communities is
the same as it was when redlining and discrimination was legal
and encouraged. That means we are failing somewhere, obviously.
Definitely in rural communities, mortgages are not being
made right now for under about $50,000 or $60,000.
So, in a lot of communities, we have an affordability
crisis, but you can get maybe a small house, but you cannot get
a mortgage because a lender is not making a mortgage for under
$50,000 in a lot of communities. So very low income, urban
communities, minority communities, and rural communities all
need to be better served.
Senator Moran. Would there be consensus that rural
communities fit into that? Is there empirical evidence--
certainly no anecdotal. I see it in my own community, but that
is true among the industry and the specialists here.
Mr. Broeksmit. Yes. And I think appraisals are a real issue
in the real communities, too.
Senator Moran. That is absolutely the case.
I cannot see name tags, but others had comments to respond
to my question.
Thank you, Mr. Malta. I think you wanted to say something?
Mr. Malta. So, yes, underserved, and it was brought up
regarding some of the impediments, the loan amounts, the
appraisals, et cetera, have been a detriment as well as some
areas that are dealing with flood, the costs associated with
that, costs of insurance. There is no silver bullet. It is
across the board that is affecting these areas.
Senator Moran. Thank you.
Ms. Johnson.
Ms. Johnson. Yes. I would just mention that you mentioned
specifically loan-level credit enhancement and its ability to
make sure that there is access for all lenders of all sizes and
types, and we think that that is one of the benefits, is that
you could have a guarantee at the national level, either at
Ginnie Mae or through Federal guarantors, the GSEs, but by
having loan-level credit enhancement, by private companies who
are taking on that first-loss risk, who have relationships with
5,000-plus lenders, you really are able to ensure that there is
access equally across the country.
Senator Moran. Mr. Calhoun.
Mr. Calhoun. The GSEs today are the largest provider of
home financing for community rural banks.
In our testimony, we detail extensive research we did using
HMDA data and large data bases to show that.
So I would just say as you go forward in housing finance
reform, you need to preserve those guardrails and requirements
that have pushed them to continue that lending, even though it
is not the most lucrative part of the market.
And I think you have heard that today from the testimony of
a lot of witnesses.
Senator Moran. Do any of you have any sense that--I do not
know whether this is a question that you can answer. But do you
have any sense that 2155 made a difference in particularly HMDA
and real estate lending in rural America and community banks?
Ms. Hunt. Senator, I represent credit unions. In my written
testimony, I outline how post-financial crisis, credit unions
were able to use Fannie and Freddie more, were able to use the
secondary market, and our footprint in underserved areas
increased.
So, for in the credit union space, having that channel to
manage risk at the loan level has been incredibly helpful to
try to reach as many Americans as possible.
Senator Moran. I thank you very much.
I would just ask that if any of you have suggestions,
please talk to me or my staff about how I can make certain that
I do the things necessary that enhance the chances that all
Americans have access, regardless of where they live.
Thank you.
Chairman Crapo. Thank you.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman.
I think we are all grateful to Senator Crapo for bringing
forth this bill.
I want to give each of you about 40, 45 seconds to tell me
with specificity what is wrong and how you would fix it.
Mr. Calhoun.
Mr. Calhoun. The two big areas that you should go to, as
has been suggested by others, you should transition the two
current GSEs into heavily regulated utilities. That ring-fences
them so that you get the benefit of a Government guarantee, but
you do not have them overreaching for private gain, including
unnecessarily competing and leveraging their position to
compete with the private market. And that would move us there.
You should also lock in and expand the reforms under
conservatorship, which have made huge progress and need to be
locked in.
We also suggest things like they should have public
positions on their boards for the realtors, for the
homebuilders, to make sure that they stay to the public mission
and that there is transparency and oversight there, and we list
other particulars.
Senator Kennedy. Ms. Hunt.
Ms. Hunt. For us, it all comes down to fair pricing for
access and ensuring that we have a Government guarantee.
There are different variations of various models that
potentially could work for credit unions but for us, it
absolutely is having that consistent channel, so that we can
continue to lend.
Senator Kennedy. Mr. Malta.
Mr. Malta. So the importance is the availability to have
access to credit in all markets at all times. So not enough is
being put into countercyclical times that we could potentially
have. That we need a fund to be set aside for those times to
make sure that we have enough financing for when those
countercyclical periods happen.
So, again, with the utility model, highly regulated, a
fund, we believe that we could accomplish access to credit to
all markets at all times.
Senator Kennedy. Ms. Johnson.
Ms. Johnson. So a lot has been done in the mortgage finance
system generally, but the GSEs are still quasi-Government
entities, and we think that that creates a lot of conflict.
You hear people say all the time public loss and private
gain, and that still is a reality that we would be faced with,
especially if they were recapped and released. So we think the
structure needs to be addressed.
There is a lot of competition with private market
participants in the primary market that we think is not only
unnecessarily but unhealthy.
And also, just at the end of the day making sure that there
is a transparent explicit Government guarantee that ensures
that consumers are going to have steady access to the
conventional market.
Mr. Broeksmit. Senator Kennedy, I think the good news is
that there is a lot of ``me too'' on this panel. You asked for
specifics. Eliminating the implicit guarantee and making it
explicit and paid for, codifying the gains that were made
during conservatorship, which have a lot to do with a level
playing field, which we, of course, support for all community
lenders, including independent mortgage banks, credit unions,
and community banks, and unlocking the private capital that is
currently on the sidelines pending the resolution of Fannie Mae
and Freddie Mac structure, so those are all things that should
be done.
Senator Kennedy. Mr. Bright.
Mr. Bright. In urban areas, there is a lack of affordable-
housing supply. That is absolutely something that needs to be
addressed and be put front and center.
In rural areas, low-dollar volume mortgages are not being
made, so there is affordable supply, but the dollar volume is
not being made.
And third and importantly, a lot of gains have been made in
the structure of our housing finance system over the last 10
years, and without legislation codifying them, they could erode
either all at once or slowly over time. So all of these volume
for g-fee discounts and serving small lenders, things that we
think are working well now could go away if they are not locked
in.
Senator Kennedy. Has Duty to Serve worked?
Mr. Bright. Well, the Duty-to-Serve regs specifically are
pretty small in their scope. There are three, I think, defined
areas. I think that as a concept, it can work and be scaled to
more, and I have suggested to so.
Mr. Broeksmit. I think duty to serve, with a small ``d''
and a small ``s,'' as opposed to the specific rules for Fannie
Mae and Freddie Mac as it relates to the capital ``D'' Duty to
Serve can be improved tremendously by having it be a more
cohesive scorecard-type thing as opposed to just how many loans
did you buy in which areas. So I think there are lots of
improvements, as I mentioned earlier, that could be made in
that regard.
Senator Kennedy. Anybody else? I got 9 seconds there. Go
ahead.
Ms. Hunt. I would say that credit unions exist to provide
provident credit, so it is in our DNA. It is what credit unions
try to do every single day. So having a Duty to Serve is
incredibly important. Whether it be exactly how it is defined
today or whether it ultimately gets expanded remains to be
seen, but it all comes down to the lender looking the person
across the table from them in the eye and trying to help them
get that loan. And, fundamentally, it is what credit unions do.
Senator Kennedy. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
First, I just want to say thank you to the Chairman for
bringing this up. I think it is time that we approach this
during this time period in which we do not see a crisis on our
hands, and it is better to do it now than to wait until such
time as we do have a crisis.
In looking and trying, a number of us have talked back and
forth across the aisle about how we build a coalition, part of
that means that we have to understand what our colleagues on
the other side of the aisle see as important to them as well in
this discussion.
And it has become pretty clear that the price for reform
for some of my friends on the other side of the aisle is
keeping the Government guarantee, maintaining the GSEs' Duty to
Serve, and providing a stream of funding for affordable
housing.
My question--and it does not have to be long and extended,
but just simply, is that price--is that price worth it? If I
could just go down the line, a yes or a no is fine, but your
thoughts?
Mr. Bright. I think so, especially if you bring in more
private capital ahead of the Government guarantee.
Mr. Broeksmit. I think with the qualification that Duty to
Serve, as I just mentioned, has a lot of facets, and if we can
get a workable scorecard, I do think that is an effective way
to do it.
Ms. Johnson. Obviously, it matters what is in the details
in affordable housing, but I absolutely agree with Michael's
comment that you have got to have more private capital standing
in front of that Government guarantee.
Mr. Malta. Yes, it is, and more private capital, better
regulatory structure, better than what we have had, and
ultimately protecting the U.S. taxpayer.
Ms. Hunt. Ultimately, we all benefit from an extremely
robust housing market that reaches all different people across
this country, whether you are in urban areas or not, so very
important.
Mr. Calhoun. We are in a deep crisis in affordable housing,
both home ownership and rental housing. It is really a hardship
on families, and it is also holding back our whole economy. And
it has been raised several times here. The housing market is
also 20 percent of the overall economy, and having this work
right is really important for a lot of reasons.
And then, finally, we have to address the history of many
decades of extreme discrimination in the housing market that
has led to the greatest--I want to add on to Michael's
statistic. The housing home-ownership gap today between black
and white houses is not just equal to--it is far greater than
it was in the early 1960s. We have got to address that.
Senator Rounds. Thank you.
My next question would be directly to Mr. Broeksmit. I have
worked with my colleague, Senator Warner, on an issue that your
association has taken an interest in, the Appendix Q patch. Our
bill on Appendix Q is an incremental step toward GSE reform,
but it is an important acknowledgement that reform is an issue
that Congress must tackle long term.
I would like to ask you basically--well, let me just put it
this way. Are there additional incremental steps like our
Appendix Q that could support the Chairman's outline or fill in
some of the gaps?
Mr. Broeksmit. Yes. Thank you, Senator Rounds, and thank
you for your leadership on that bill, which would make it
easier for self-employed borrowers to get the mortgage credit
for which they qualify. And in an era where we have more than
20 percent of the country is self-employed or having some sort
of additional income through the gig economy through self-
employment, it is an important step that would make
underwriting those loans much easier.
And more broadly with Appendix Q and the Ability-to-Repay
rule, we have an unlevel playing field where the patch says
that if the loan gets a GSE automated underwriting approval, it
is in a safe harbor, but if the loan amount is too high for the
GSEs, then the patch does not apply. So we think that that
needs to be fixed, and we are working closely with the CFPB and
others on that. And it would make a big difference.
Senator Rounds. Thank you.
I would also like to direct one question to Mr. Bright. Mr.
Bright, the South Dakota Housing Development Authority stopped
by my office recently, and one of the recommendations they had
for promoting affordable housing in rural areas was to
authorize Ginnie Mae securitization of FHA-HFA risk-sharing
loans. Given your recent experience as the president of Ginnie
Mae, I thought you would be uniquely qualified to comment on
this particular issue.
Mr. Bright. Yes.
Senator Rounds. If included in the legislation that follows
the Chairman's outline, how would Ginnie's securitization of
these loans support affordable housing?
Mr. Bright. I will admit I am not an expert on the topic,
but at Ginnie, several FHAs came through sort of broadly
proposing the idea. And I think it is the seed of a very good
idea. So I do think that allowing them access to the Ginnie
security makes a lot of sense.
Some have done that in the Ginnie I security. There are
some technicals about moving it over to the Ginnie II, but I
think that it could be a very expanded and helpful program.
They are looking at it right now.
Senator Rounds. Thank you.
Mr. Chairman, I think this is one of those areas where we
might have some bipartisan support on.
Thank you, Mr. Chairman.
Chairman Crapo. Good. Thank you.
Senator Brown has asked for the last word on this in this
hearing and----
Senator Brown. Not necessarily the last world, but a final
word from me.
On this, this has been helpful. I thank the Chairman for
convening these 2 days of discussions and hearings.
I want to highlight a couple of important takeaways, four
things in particular, that guarantors that must serve a broad
national market, that guarantors must all serve all lenders
equitably, and that takes more than a cash window. Third, we
must preserve a duty to serve, and fourth, having guarantors
that are regulated utilities with regulated rates of return
would serve all lenders and avoid a race to the bottom, as many
of you talked about.
So thank you, Mr. Chairman.
Chairman Crapo. Well, thank you, and I will let that be the
last word.
Senator Brown. Thank you.
Chairman Crapo. I do have a little bit of instructions for
both the witnesses.
Senator Brown. It is not really the last word.
Chairman Crapo. Yes, it is not actually.
[Laughter.]
Chairman Crapo. It is the last substantive as opposed to
procedural word, like a regular second and a Warner second.
[Laughter.]
Chairman Crapo. What I would like to do at this point,
Senators do submit questions off the record, and those will be
due next Wednesday. And we ask that you respond to those
questions as quickly as you can.
Again, as many Senators have said, we appreciate the advice
and frankly the expertise that you bring to this issue. The
purpose of this in yesterday's hearing was to identify where we
need to tweak and remove and refine the proposal that I put
forward and see if we can find bipartisan support and consensus
on a movement forward.
As the 2 days have concluded, obviously we have identified
some areas where there are some needs for further discussion.
On that note, however, I do not think I have seen anything that
tells me that we cannot get bipartisan or should not be able to
get some bipartisan support for a common approach to solving
this issue.
I do agree with a number of the comments that have been
left, that have been made by Senators yesterday and today that
we need to have reform, that we need to do it, and that now is
the time for us to do it. And it is Congress that ought to do
it.
So let us all try to work together and get ourselves to
that point.
With that, this hearing is adjourned.
[Whereupon, at 11:27 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
Today, the Committee continues the conversation about the state of
our housing finance system, and how we can set it on a permanent,
sustainable course that protects taxpayers and fosters greater
competition.
Yesterday, we received input on my Housing Reform Outline from six
different stakeholders and thought leaders representing a variety of
perspectives.
Former Acting FHFA Director Ed DeMarco stated that the outline
``captures the consensus elements of prior reform proposals, and serves
as a solid workable foundation from which to develop legislation.''
Dr. Mark Zandi noted that ``the housing finance system is in
critical need of reform,'' that my framework is ``an excellent place to
begin,''and that ``policymakers should use it as a framework to finish
the job of reform.''
The National Association of Home Builders, meanwhile, expressed
support for the broad concepts of the outline, while also stressing the
urgency of reform.
The National Multifamily Housing Council expressed an eagerness to
participate in the process going forward, and a belief that the outline
would ensure a competitive marketplace without increasing the cost of
multifamily mortgage credit.
Today, we will hear the perspective of six more stakeholders:
Michael Bright, President of the Structured Finance Industry Group;
Robert Broeksmit, President and CEO of the Mortgage Bankers
Association; Lindsey Johnson, President of U.S. Mortgage Insurers;
Vince Malta, President-Elect of the National Association of REALTORS;
Carrie Hunt, Executive Vice President and General Counsel at the
National Association of federally Insured Credit Unions; and Mike
Calhoun, President of the Center for Responsible Lending.
Thank you all for sharing your time and expertise with all of us.
Your input is incredibly valuable as we look to flesh out some of
the details of a comprehensive plan.
As I stated yesterday, I consider housing finance reform to be my
top priority for the Banking Committee this Congress.
The status quo simply is not a viable option.
We have a real opportunity to act, and I am committed to getting it
done.
I look forward to working with all of you in the days ahead, and
anyone else willing to join this long-overdue effort.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you, Mr. Chairman, and thank you to all of our witnesses for
being here today.
As I said yesterday, housing is simply unaffordable for far too
many Americans. They can't make rent without working two jobs, let
alone save enough to get a mortgage and build wealth through home
ownership.
American families are the most important part of the housing
finance system, yet reform proposals and outlines often fail to mention
them altogether.
All Americans should be able to afford a safe place to call home,
whether they live in a rural community or the center of a city, whether
they're making a salary or working for an hourly wage or earning tips.
Families need access to affordable mortgages from lenders of all
sizes who compete for their business by offering safe products and the
best service, and who will be there to help families get through if
they fall on hard times.
Last Congress, this Committee heard from six community lenders.
They represented small banks, credit unions, and independent
mortgage banks in Idaho, Ohio, South Dakota, Georgia, North Carolina,
and Illinois that help their customers receive those sustainable loans.
They all agreed on the following:
That preferential treatment based on the volume of loans a
lender delivers, whether in the form of volume discounts or
underwriting exceptions or the cost to retain servicing, hurts
small lenders and ultimately consumers;
That we need a guarantor that pools costs across the market
and that has a duty to serve all lenders;
That small lenders benefit from consistency in the
secondary market; and
That the system does not need more than two guarantors in
the secondary market.
We are hearing from one of those organizations today, and several
of the associations represented that day have submitted statements for
the hearings this week reiterating these points. I'd like to request
that statements from the Independent Community Bankers of America and
the Community Mortgage Lenders of America be included in the record of
today's hearing.
Since 2008, the FHFA has implemented policies at the GSEs to
provide equitable treatment to lenders of all types and sizes across
all markets.
FHFA has also made sure that the GSEs continue to serve a broad,
national market and set market standards.
We have heard time and again that this system is working for small
lenders and their customers.
We shouldn't take steps that will create uncertainty for small
lenders or drive unhealthy competition on quality and standards.
This includes any changes that would allow the largest institutions
to be one-stop-shops for lending, guarantees, and securitization with a
Government backstop.
When this Committee last considered housing finance reform
legislation in 2014, many market participants made clear that allowing
a single institution to perform primary and secondary market functions
would undermine standards and competition.
I hope we can all still agree on that point today.
Any structural changes that we consider must not take us backward
to a system where lenders and the secondary market pump up volume to
satisfy Wall Street, with a race to the bottom when it comes to
protections.
We also cannot create a structure where we restrict consumers'
options by putting local lenders who are serving their communities
today on an uneven playing field.
Finally, as we discuss broad changes to our housing finance system,
we should also consider how any changes would reduce or increase the
hurdles borrowers and renters already face in markets nationwide.
Some of our witnesses this morning have focused on the growing
challenges facing prospective homeowners.
For example, Mr. Malta's organization, the National Association of
REALTORS, has studied the burden that student loan debt has placed on
potential home buyers.
I have also heard from the Housing Assistance Counsel and the
National Low Income Housing Coalition about the unique housing needs of
rural households and low-income renters, as well as a coalition of 22
civil rights groups, affordable-housing advocates, and community
development organizations on the key elements of any housing finance
reform proposal.
I would ask that all of their written statements also be made part
of the hearing record.
American families are confronted with new types of housing
challenges, from mountains of student debt to increasing rents in
communities across the country. As I said yesterday, 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.
Thank you, Mr. Chairman.
______
PREPARED STATEMENT OF MICHAEL BRIGHT
President and CEO, Structured Finance Industry Group
March 27, 2019
Chairman Crapo, Ranking Member Brown, Members of this Committee, my
name is Michael Bright and I represent the Structured Finance Industry
Group, or ``SFIG.'' On behalf of SFIG and its thousands of members in
the securitization industry, I very much appreciate the opportunity to
speak to you today.
SFIG was formed in 2013 with the goal of convening the many diverse
institutions involved in securitization--including consumer and
commercial lenders, data providers, auto and equipment finance
companies, rating agencies, law firms, trustees, banks, and--very
importantly--end investors.\1\ This structure forces SFIG to convene
all parties--both those involved with the creation of a fixed-income
security and those who invest in them. When SFIG takes a position, we
have a broad range of perspectives incorporated into our view. Since
SFIG represents all participants in a transaction, long-term financial
stability--in the mortgage market as well as other markets--is a core
principle of ours.\2\
---------------------------------------------------------------------------
\1\ ``End investors'' includes firms such as: asset managers, life
insurance companies, and pension funds.
\2\ SFIG's governing bylaws go to great lengths to differentiate
its operating rules from those of other trade associations. A policy
position is only advocated by SFIG if consensus is achieved by all
relevant members of a committee, and each committee has representation
across all relevant aspects of such market. This natural tension is an
important Governor on SFIG's policy positions and supports longer-term,
market-wide solutions.
---------------------------------------------------------------------------
The purpose of today's hearing is to discuss reform of our Nation's
secondary mortgage market. I thank Chairman Crapo and many other
Members of this Committee for their continued work on this issue. The
latest outline touches upon many of the principles that are important
to SFIG, including: creating a clear role for private capital,
establishing a clear and explicitly defined role for the Government,
the preservation of a liquid TBA market, the preservation of a 30-year
fixed-rate mortgage, and making use of already-existing securitization
infrastructure.\3\
---------------------------------------------------------------------------
\3\ The agency and Government mortgage markets both rely on
securitization, as the basic function of the GSEs and Ginnie issuers
are to finance operations through the transformation--or
securitization--of mortgage loans into mortgage-backed securities.
Building off what already exists the way the Chairman's outline
suggests is a sensible approach.
---------------------------------------------------------------------------
There is a substantial ongoing role for Congress to help finish the
job of housing reform for many reasons. First, as the former head of
Ginnie Mae, I can attest that global investors will allocate much more
capital and at a much lower cost to the U.S. mortgage market if
Congress puts a seal of approval on a new end State. One major lesson I
learned at Ginnie is that, when speaking to a non-U.S. investor, the
first thing they will ask is, ``Is the law clear?'' Any lack of clarity
on the Government's role versus private capital's role adds ambiguity,
and ambiguity adds to costs.\4\ These costs are ultimately borne by the
homeowner. There are many additional considerations relating to the use
of Ginnie Mae, and I am happy to discuss those with you in more detail.
---------------------------------------------------------------------------
\4\ Global investors account for a larger and larger share of U.S.
MBS purchases, especially as the Fed winds down its balance sheet.
---------------------------------------------------------------------------
Additionally, as I said to this Committee when I appeared before it
in 2018, we have a housing affordability crisis in our country, both in
rental and home ownership. Over the past decade asset prices have
increased substantially faster than wages. This creates an imbalance in
our economy that is felt particularly strongly in the housing sector.
SFIG membership supports, and wants to help provide, broader
accessibility to mortgage credit throughout the country. Ultimately, a
role for Congress here is critical.
Going forward, SFIG believes that private capital can, and should
be, productively channeled to further sound public policy objectives.
Private capital is today very much available to support America's
housing market and to augment the role of the GSEs and the FHA.
Today private investor appetite for mortgage credit risk is counted
in the tens of billions of dollars per month. Insurance companies, for
example, had roughly $500 billion of residential whole loans on their
balance sheet at year-end 2017, and this number has been growing. $50
billion of non-agency PLS \5\ was issued in 2018, and this number
continues to grow as well. Non-agency whole loan sales have been
comparable in size. CRT \6\ transactions have also provided roughly $70
billion of first-loss private capital to the market to-date.\7\ The
pool of additional private capital is today quite deep.\8\ Reform
should build upon this dynamic so that private capital can help enhance
safe and responsible access to mortgage credit within the guardrails
established by law and the CFPB.
---------------------------------------------------------------------------
\5\ ``PLS'' is short for ``private label securitization,'' or a
security that is issued by a company other than a GSE and does not have
FHA insurance.
\6\ This includes all credit risk transfer (``CRT'') transactions
done to-date by the enterprises.
\7\ This $70 billion in first-loss capital stands in front of
nearly $2 trillion in total mortgage unpaid principal balance (UPB).
\8\ For example, see: https://www.wsj.com/articles/private-
investors-encroach-on-fannie-and-freddies-domain-
11552132801?shareToken=st1e2068f01cbd4b87a1595cef380c53ed&reflink=
article_email_share.
---------------------------------------------------------------------------
As we seek to enhance the role of private capital, I would like to
cite three issues that we suggest Congress address.
Number one, an event that looms on the horizon is the end of the
so-called ``QM patch'' in 2021. Private capital can absolutely help to
fill in once this transpires, but some policy changes would be very
helpful to ensure the continued availability of mortgage credit. Most
importantly, there needs to be a process of determining what qualifies
for QM that is independent of whether or not the GSEs' underwriting
systems accept the loan. There are numerous ways this could be done,
and I would be happy to discuss some of those ideas in further detail
if you would like.\9\
---------------------------------------------------------------------------
\9\ See, for example: https://www.urban.org/research/publication/
what-if-anything-should-replace-qm-gse-patch.
---------------------------------------------------------------------------
Number two, policymakers should strive for better alignment of
regulatory capital requirements between the GSEs and banks. For
example, the GSEs get substantial capital relief--and rightly so--for
the credit risk transfer transactions they issue. Banks, however, do
not. By allowing banks to make a loan, hold it on balance sheet, and--
if they choose--hedge some of the credit risk in return for appropriate
capital relief--bank lending can play a more prominent role in our
mortgage market and help fill in where sometimes the GSEs cannot.\10\
---------------------------------------------------------------------------
\10\ The ECB has recently made substantial strides on this for
European banks, and SFIG believes that U.S. regulators should follow
suit. See: https://eba.europa.eu/regulation-and-policy/securitisation-
and-covered-bonds/draft-guidelines-on-significant-risk-transfer-srt-
for-securitisa-
tion-transactions/-/regulatory-activity/press-release.
---------------------------------------------------------------------------
Finally, as policymakers look to reduce total reliance on Fannie,
Freddie and FHA while ensuring access to home ownership, a proper
mechanism for allowing REITs to access the Home Loan Bank system makes
sense.\11\
---------------------------------------------------------------------------
\11\ If properly capitalized, REIT borrowing from the Home Loan
Banks via collateralized loans represents materially less risk to the
taxpayer than selling to FHA, Fannie, or Freddie, and the existing
rules that effectively bar REITs should be re-examined.
---------------------------------------------------------------------------
There are, of course, many more challenges to discuss. In the
meantime, Mr. Chairman, I want to thank you again for continuing to
work on this important issue. We look forward to working with you and
with everyone on this Committee to ensure that our country's secondary
mortgage market can better serve all Americans.
Thank you.
______
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM MICHAEL
BRIGHT
Q.1. SFIG/MBA/USMI represents organizations that would be
eligible to be guarantors under the Chairman's outline.
Q.1.a. Would any type of institution in the market today be
well-suited to being a guarantor?
A.1.a. Large, diversified insurance companies or re-insurance
companies could probably take on this role. Some MI's who have
been active and innovative in CRT transactions likely could as
well.
Q.1.b. Do you believe any of your members would be interested
in becoming guarantors?
A.1.b. Possibly, but it's hard to know without more clarity on
what that would require. SFIG does have some members who have
been active in mortgage credit investing, and this business
could be a natural extension for them.
Q.1.c. What is it about the mortgage guarantee business that
appeals or does not appeal to your members?
A.1.c. Quite a few financial institutions feel comfortable with
their ability to take on and manage mortgage credit risk. A lot
of evolution has occurred in this market since the financial
crisis, giving investors some degree of confidence in their
ability to invest in this asset class.
Q.2. In your testimony before the House Financial Services
Subcommittee on Housing, Community Development, and Insurance,
you noted that Ginnie Mae uses contractors in securities
operations functions and in performing bond administration.
In addition to bond administration, for what other
functions does Ginnie Mae rely on contractors?
A.2. As with any large entity, there are quite a few small
contracts in place. In terms of large contracts, Deloitte helps
with data aggregation and dissemination. Ginnie also uses
subservicers Selene and Carrington to service legacy books from
failed issuers that Ginnie has had to take over.
Q.3. During your testimony, you spoke about the need to make
permanent improvements that were made to Fannie Mae and Freddie
Mac during conservatorship.
What improvements or gains do you believe must be made
permanent as part of any reform effort?
A.3. G'fee for volume discounts, a focus on underserved
markets, the need to work together on certain initiatives, a
regulator that is accountable to Congress, CRT transactions.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR MORAN FROM MICHAEL
BRIGHT
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. It is absolutely true that all futures contracts--
including the TBA market--typically trade at the ``cheapest to
deliver'' price. If prepayment speeds differ between seller-
servicers or if the market questions the solvency of either
Fannie Mae or Freddie Mac (if they were privatized and absent a
resolution mechanism), the UMBS price would fall, all else
being equal. I would refer you to SFIG's letter of November 30,
2018, where we raised these very concerns with the FHFA, as
well as FHFA's final rule in which they acknowledged such
concerns and outlined what steps they are taking to reduce such
instances of ``racing to the bottom'' and remediating them when
they appear.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
MICHAEL BRIGHT
Q.1. In its current form, do you think Ginnie Mae could play
the role the Chairman's proposal envisions?
A.1. As I said on March 27th as well as during my confirmation
hearing in 2018 for the role of Ginnie Mae President, it is
important that Ginnie Mae have comparable pay authority so that
it can compensate employees at similar levels to the FHFA and
other regulators. This is true even if Ginnie is not tasked
with a greater role, in my view. If legislation permitted a
Ginnie full faith and credit wrap on conventional mortgages,
Ginnie is certainly up to this task, but compensation becomes
even more critical.
Q.2. 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.2. I wouldn't say I have concerns, as much as I would say
that more detail is needed. The CSP (more specifically, the
entity ``CSS, LLC'') plays a very similar role for Fannie Mae
and Freddie Mac as does BNY for Ginnie Mae. That is, they both
perform bond administration, or the calculation of what
principal and interest (``P&I'') is due each month and to
whom--e.g., which investor of record--P&I should be paid. It is
not clear to me that CSS, LLC as built is substantially better
at performing this function than BNY is, but having the
platform governed by Ginnie Mae is not a problem, in my view.
Q.3. Is Ginnie Mae's staff adequately trained and compensated
to take on a large new market?
A.3. Ginnie Mae needs additional pay flexibility to retain the
requisite talent. The Ginnie staff is very knowledgeable and
mission focused and administering a full faith and credit wrap
is a function for which Ginnie is uniquely qualified. But
employee retention is a perpetual challenge due to pay
disparity between Ginnie, the FHFA, the GSEs, and other
regulators in Washington. (Ginnie Mae has quite a bit of
internal data on this, and I am sure they would be willing to
share it with you.)
Q.4. Do you support or oppose creating a single utility to take
on the catastrophic risk? Please elaborate on your response.
LIf 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?
LHow will small institutions' business practices and
compliance costs change under a single utility vs. a
single guarantor vs. multiple guarantors?
A.4. I think it would make sense to have an entity like Ginnie
Mae help to manage catastrophic risk. I do not think that this
would in any way impact the business practices of small
lenders, who would remain as seller-servicers to Fannie,
Freddie, or an approved new entrant. The manager of
catastrophic risk would be standing behind the enterprises
taking on first loss and mezzanine credit risk as guarantors.
Ahead of a catastrophic wrap I do not think that
competition at the guarantor level is a problem for small
lenders so long as g'fee for volume discounts are prohibited in
law. Today this prohibition is a feature of conservatorship and
is, at times, inadequately enforced.
Q.5. Do you support or oppose Fannie and Freddie selling their
multifamily housing businesses?
A.5. The GSE multifamily market worked well in large part
because it requires a great degree of first-loss credit
enhancement before being backed by a GSE. It's not clear that
major changes are needed, although separating them is not a
problem, either.
Q.6. If the multifamily housing guarantee businesses were sold,
who would buy them?
A.6. I am not sure what ownership structure the Chairman's
outline envisions, but presumably they would be owned to some
extent by new shareholders with a Government resolution fund
and full faith and credit wrap on their securities.
Q.7. How would the new guarantee structure affect the
multifamily housing market? Please be specific.
A.7. Likely the market would be unaffected, either for the good
or the bad.
Q.8. 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.8. As I mentioned at the hearing, I think that if we are
opening the secondary market to some additional competitive
forces, it would make sense to have the FHFA designate areas as
``underserved'' and allow/require new entrants to focus their
attention on these areas. The secondary market currently works
very well for many Americans, but not for all Americans. As
demographics change in the coming decades, this will be an
increasing problem. I do not think the current model will
achieve the needed creativity to adapt to shifting
demographics, nor do I think it adequately addresses
underserved markets today.
Q.9. Do you think Chairman 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.9. A dedicated revenue stream to the capital magnet fund
would be helpful, but I hope that as housing reform progresses
this issue, which is very real, gets more attention.
Q.10. 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.10. Absolutely. Limitations on portfolios, limitations on
lobbying, and a regulator that is stronger than OFHEO are
largely features of conservatorship. The prohibition of g'fee
for volume discounts is also a feature of conservatorship, but
it could cease to exist if the GSEs were privatized absent
legislation. LLPA grids are today subject to public scrutiny
and debate. The QM patch would be very awkward if it continued
to be outsourced to privatized entities; it should reside with
a regulator or market self-regulatory organization (``SRO'').
Q.11. Do you have concerns with the Chairman's proposal? If so,
please explain why and what amendment you would suggest to
remedy these concerns.
A.11. Needed improvements include: a deeper focus on finding
ways to successfully lend in underserved markets, a QM process
governed by a regulator or SRO instead of a particular company,
and improvements need to be made to Appendix Q. It's also not
clear that market share caps are the right approach.
Q.12. Are there any proposed changes in the Chairman's proposal
you think make our housing finance system better? Please define
those.
A.12. An explicit guarantee that is transparent and paid for
and administered by Ginnie Mae, a dedicated funding stream to
the capital magnet fund, and allowing for new entrants are all
positive ideas.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM ROBERT D.
BROEKSMIT
Q.1. SFIG/MBA/USMI represents organizations that would be
eligible to be guarantors under the Chairman's outline.
Q.1.a. Would any type of institution in the market today be
well-suited to being a guarantor?
A.1.a. Yes, we believe many types of institutions could be
well-suited to serving as guarantors in a reformed housing
finance system. Entities that already understand mortgage
credit risk, such as reinsurance companies, mortgage insurance
companies, and other financial guarantors would be well-suited
to be guarantors. The number and type of institutions
interested in pursuing this option will be dictated by the
exact contours of any reform efforts.
It is important that institutions operating as lenders in
the primary market (including any affiliates, subsidiaries, or
parent companies of lenders) not be allowed to serve as
guarantors in the secondary market. Such a scenario would blur
the lines between the primary and secondary markets,
potentially allowing institutions to use their presence in one
market to gain a competitive advantage in the other market. Any
new system should expressly maintain a distinction between the
primary and secondary mortgage markets, with the new
guarantors' allowable activities being limited to the secondary
market. This would guard against systemic risk concentration
and would facilitate competition. MBA therefore supports a
strict prohibition on lenders serving as guarantors in a
reformed housing finance system.
Q.1.b. Do you believe any of your members would be interested
in becoming guarantors? What is it about the mortgage guarantee
business that appeals or does not appeal to your members?
A.1.b. Yes, there is interest from certain of our members in
becoming guarantors in a reformed housing finance system. There
is broad demand for investment in mortgage credit risk, as is
evidenced by the strength of the GSEs' credit risk transfer
programs. The relative appeal of becoming a guarantor and the
number of new guarantors will be determined by the details of
any reform efforts. These details include, but are not limited
to, market structure, regulatory oversight, capital
requirements, and access to relevant data and technology.
Q.2. In response to a question from Senator Tester, you stated
that the Chairman's outline would not lead to cherry-picking,
but you also noted that guarantors would have to serve a broad
national market, which is not required by the outline as
currently written.
Q.2.a. Do you believe guarantors must be required to serve a
national market to prevent cherry-picking?
A.2.a. Yes, it is critical that guarantors be required to serve
a national market. Without such a requirement, there can be no
assurance that all consumers in all parts of the country will
be served by the conventional market. One of the primary
purposes for the creation of what is now our established
secondary market was to smooth credit pricing and availability
across geographies. This objective should be remembered and
maintained in any reformed housing finance system.
Q.2.b. What other structural features or requirements are
necessary in a new system to prevent cherry-picking of risk and
ensure that all borrowers are served?
A.2.b. Guarantors should have affirmative requirements to serve
a broad array of consumers through all parts of the credit
cycle,
including those consumers in underserved market segments.
In addition to these requirements, FHFA should establish a
tangible, achievable set of affordable-housing obligations for
guarantors that benefit from Federal charters. These
obligations could include establishing partnerships with
community organizations that focus on sustainable home
ownership, housing counseling, community development, and
development of affordable rental housing, among others.
Q.3. During your testimony, you spoke about the need to make
permanent improvements that were made to Fannie Mae and Freddie
Mac during conservatorship.
What improvements or gains do you believe must be made
permanent as part of any reform effort?
A.3. Over a decade has passed since the GSEs were placed into
Government conservatorship, in what was described by then-
Treasury Secretary Paulson as a ``time out.'' Despite the
intent that conservatorship would serve as a temporary bridge
to stabilize the GSEs, the conservatorship persists, and the
GSEs' long-term status remains unresolved.
During that time, FHFA began implementing some of the
necessary reforms in its role as conservator of the GSEs. These
reforms include efforts to prohibit volume-based discounts and
credit variances only available to certain lenders, new
mechanisms for credit risk transfer to the private sector, an
improved infrastructure for the single-family secondary market,
a substantial reduction in the retained mortgage portfolios,
and support for continued liquidity in the multifamily rental
housing market.
These reforms, while critical, are not sufficient to fully
address the problems that led to conservatorship. Instead,
legislative reform is needed--both to bring about the remaining
structural changes to the GSEs and to ``lock in'' the reforms
instituted by FHFA through its authorities as conservator.
Importantly, reform should also modify the FHFA's regulatory
mission to focus on establishing a utility style of regulation
that focuses on key principles such as:
Lensuring a level playing field for all GSE
customers,
Lmaintaining clear distinctions between primary and
secondary market activities,
Llimiting the GSEs' retained portfolios, and
Limplementing a utility-style regulatory framework
for guarantors.
Q.4.a. In your written testimony, you state that ``any capital
framework under which the Enterprises operate while in
conservatorship, as well as in a reformed system, should seek
to produce comparable treatment of the multifamily executions
of the Enterprises, including the treatment of CRT structures.
A level playing field and diversification in available
multifamily executions are vital for a competitive and stable
market that serves rental households throughout the credit
cycle.''
Could you elaborate on this statement?
A.4.a. My testimony notes that, to fulfill their mission to
increase the liquidity of mortgage investments and improve the
distribution of investment capital available for multifamily
mortgage financing, each of the GSEs' respective multifamily
businesses has developed distinct multifamily executions.
The existence of multiple executions in the secondary
mortgage market for multifamily housing enhances the GSEs'
ability to fulfill their statutory purposes, individually and
collectively. For example, having two different multifamily
executions increases liquidity by providing investment vehicles
that attract different sources of mortgage capital. Also,
because the different executions may perform differently under
varying economic circumstances, the diversification effect of
multiple executions helps bolster the systemic resilience of
multifamily capital markets--helping to ensure that,
collectively, the GSEs can provide liquidity throughout the
credit cycle.
As a result, a capital framework for the GSEs that produces
comparable treatment of their differing multifamily executions,
including the treatment of credit risk transfer structures,
will be a necessary element of any reformed regulatory
structure that fosters a level playing field and promotes the
beneficial diversification of available multifamily executions.
Q.4.b. Do you have any concerns about how the FHFA's proposed
capital rule treats the Enterprises' multifamily executions?
A.4.b. In light of the public policy benefits of having
multiple GSE multifamily programs, particularly while the GSEs
remain in conservatorship, a risk-based capital rule should not
systematically favor one execution over another.
The possibility of inconsistent risk-based capital
treatment exists because of the manner in which the FHFA
proposal takes credit risk transfers into account when
calculating required capital levels, and more specifically,
because the two GSEs employ different approaches to credit risk
transfer. Specifically, the proposed rule would reduce the
amount of capital required to be held against credit risk in
recognition of the extent to which a GSE transfers multifamily
mortgage credit risk to a third party by applying a four-step
process: (1) distribute risk across tranches; (2) calculate
capital relief (e.g., as a result of credit risk transfer) by
tranche; (3) apply haircuts to reduce the level of capital
relief for each tranche to account for counterparty credit
risk, where applicable; and (4) calculate net capital relief
for each tranche.
The counterparty credit risk haircuts in Step 3 would be
based on a combination of a counterparty rating and a
concentration risk assessment. The resulting haircuts to the
level of capital that would otherwise result from the credit
risk transfer would apply to the uncollateralized portion of
the relevant tranche, after also partially taking into account
the impacts of GSE contractual control over the lender's
guarantee fee revenue (e.g., the ability of a GSE to mitigate
losses by taking control of servicing rights).
Because Fannie Mae's Delegated Underwriting and Servicing
(DUS) multifamily program involves counterparty credit risk and
Freddie Mac's K-Deal multifamily program does not, Step 3 would
apply only to Fannie Mae's DUS program. As a result, accurate
and appropriate specifications in Step 3 will be critical to
calibrating the proposed capital standard across the two GSEs
as a matter of risk, and accurate calibration will be necessary
to avoid systematically favoring one execution over another.
Unfortunately, the methodology underlying Step 3 is not
entirely clear. For example, the proposed rule does not
describe in detail the analysis that would underlie the
counterparty ratings, or the factual or analytical basis for
the particular haircut values. As a result, there is not enough
available information to fully analyze and provide feedback on
this critical element of the proposal, which warrants
additional information followed by additional opportunity for
public input. See MBA's comment letter on the FHFA proposed
capital rule for further details at https://www.fhfa.gov/
SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?Com-
mentId=15307.
Q.4.c. How does diversification of the Enterprises' respective
credit risk transfer mechanisms benefit the stability of the
market?
A.4.c. As described in response to Item B above, the existence
of two primary multifamily executions enhances the GSEs'
ability to fulfill their statutory purposes, individually and
collectively, in several ways. For example, having two
different multifamily executions increases liquidity by
providing investment vehicles that attract different sources of
mortgage capital. Also, because the different executions may
perform differently under varying economic circumstances, the
diversification effect of multiple executions helps bolster the
systemic resilience of multifamily capital markets. This
diversification of capital sources and credit risk transfer
structures enhances the resilience of liquidity across the
credit cycle.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM ROBERT
D. BROEKSMIT
Q.1. A fair housing finance system ensures broad affordability
and access, including for those homeowners in high-cost States
like New Jersey. Last time the Committee considered reform,
there was discussion of lowering conforming loan limits. Isn't
it critical that borrowers in high-cost States maintain fair
access to affordable mortgage credit?
A.1. Absolutely. The housing finance system needs to reflect
the vast differences in real estate markets across the country
and in various types of communities. Borrowers should have fair
access to affordable mortgage credit, regardless of where they
live.
Q.2. Would you oppose or have concerns about a system in which
borrowers in high-cost States faced pricing discrimination?
A.2. Guarantors should be required to serve all markets
equitably. In a new housing finance model, guarantors must be
able to appropriately price their guarantee fees based on the
underlying risk of each loan. To prevent pricing
discrimination, MBA believes that in any new housing finance
system, a guarantors' rate of return should be regulated using
a utility regulation framework, with posted and transparent
guarantee fee pricing designed to produce a reasonable rate of
return for investors. The expectation is that the guarantors
will be low-volatility companies that would pay steady
dividends over time, not growth companies that aggressively
seek to expand market share or generate above-market returns.
Q.3. For households who do not have the resources for a
substantial down payment, lower down-payment products are often
the only option for otherwise creditworthy borrowers to obtain
a mortgage. Should the housing finance system continue to
support programs that provide access to creditworthy borrowers
who can sustain monthly mortgage payments, but who may not have
the wealth for a large down payment?
A.3. In many areas of the country, home prices have been rising
faster than wages in recent years, which makes it all the more
difficult for many consumers to make substantial down payments.
Any reformed system should combine the ability for borrowers to
make down payments below 20 percent with the presence of
reliable private credit enhancement, such as mortgage
insurance, on these loans to protect taxpayers.
MBA supports the continued availability of low-down-payment
products that can be sold in the conventional secondary market.
It is also important that loans include proper documentation of
borrower assets, income, and debts to ensure that they are
sustainable over the long term.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR MORAN FROM ROBERT D.
BROEKSMIT
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. While these are noteworthy concerns that need to be
addressed, the development of the Common Securitization
Platform (CSP) and the Uniform Mortgage-Backed Security (UMBS)
should improve the overall liquidity of the conventional
secondary market and potentially facilitate increased
competition in the future.
It is important to remember that Freddie Mac has been using
the CSP for issuance, settlement, and bond administration on
certain securities since November 2016 without any disruptions
to the market. In the To-Be-Announced (TBA) market as it
already exists, investors do not know the exact mortgages (or
even the exact
details of the mortgage pools) underlying the securities they
are receiving until shortly before delivery. This dynamic is
already reflected in the ``cheapest-to-deliver'' construct that
characterizes the market today.
Investors should realize the benefits of merging two
already-
liquid markets into a market with even greater liquidity. This
improved liquidity should result in greater demand for these
securities and, ultimately, lower average mortgage interest
rates for consumers.
FHFA and the GSEs have conducted extensive work to better
align cash-flows across securities issued by Fannie Mae and
Freddie Mac, including through the recent finalization of a
rule to implement the UMBS. It is critical that FHFA continue
to closely monitor these cash-flows and take action, as needed,
to better align cash-flows if divergences occur.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
ROBERT D. BROEKSMIT
Q.1. In its current form, do you think Ginnie Mae could play
the role the Chairman's proposal envisions?
A.1. If the responsibility for guaranteeing securities in the
conventional market is placed on Ginnie Mae, any legislative
efforts should also ensure that sufficient resources are
provided to Ginnie Mae so that it can adequately perform these
duties. Chairman Crapo's housing reform outline proposes that
the explicit guaranty be provided and managed by Ginnie Mae.
This structure is viable, as Ginnie Mae is designed to perform
this function and has a proven history of ensuring payments on
Government-guaranteed securities. Ginnie Mae's responsibilities
in the new system must be carefully defined in order for the
system to flourish, including determining whether Ginnie Mae
has the capacity and independence to operate as envisioned.
Q.2. 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.2. The outline directs Ginnie Mae to operate the
securitization platform for Government-guaranteed securities,
which may entail use of the Common Securitization Platform
(CSP). Over the past few years, as FHFA and the GSEs sought to
improve the infrastructure of the conventional market, they
developed the CSP as a modern, scalable platform rather than
rebuilding the GSEs' antiquated back office securitization
systems. Freddie Mac is already issuing securities via the CSP,
and both GSEs will soon be using it to issue Uniform Mortgage-
Backed Securities.
By contrast, moving the conventional market to the Ginnie
Mae infrastructure would require an entirely new build, as
Ginnie Mae's systems are not designed for this purpose, either
in terms of scale or the structure of the securities. Ginnie
Mae also currently outsources a significant portion of its
securitization functions, further calling into question whether
it maintains the capacity to support the conventional market. A
reformed housing finance system should therefore leverage this
considerable investment by requiring the use of the CSP as the
platform for issuance of conventional securities. Given that
FHFA has been far more deeply involved in the development of
the CSP, it is more appropriate that FHFA oversee and regulate
the operations of the CSP.
Q.3. Is Ginnie Mae's staff adequately trained and compensated
to take on a large new market?
A.3. As stated above, defining Ginnie Mae's responsibilities in
the new system is essential to determining how the system will
perform and whether Ginnie Mae has the capacity and
independence to operate as envisioned. Ginnie Mae's staff are
experts in the agency's core activities surrounding its
guarantee of timely payment on securities backed by Government-
insured loans. In recent years, Ginnie Mae's staff has been
balancing the need to execute the functions necessary for a
growing program with ongoing efforts to recalibrate business
operations and address aging technological systems. Given the
proper funding, staffing levels and technology, Ginnie Mae
staff could successfully take on certain new responsibilities,
such as the catastrophic guarantee functions of a large new
market.
Q.4. Do you support or oppose creating a single utility to take
on the catastrophic risk? Please elaborate on your response.
A.4. MBA supports the concept envisioned in the outline of a
multi-guarantor market that features well-regulated, privately
owned institutions aggregating loans in a fair, transparent
manner and issuing securities with a full-faith-and-credit
Federal guaranty that stands behind substantial private
capital. These guarantors would be regulated under a ``utility-
style'' framework that prevents excessive risk-taking while
promoting competition along dimensions such as product
offerings, technology, and customer service. This competition
should benefit borrowers, lenders, investors, and taxpayers.
While the guarantors would be responsible for guaranteeing
the credit risk of the mortgage securities they issue, the
losses from a catastrophic stress event would be covered by the
explicit guaranty on the mortgage securities. Ideally, an
insurance fund similar to the Deposit Insurance Fund would be
developed as an additional buffer standing ahead of taxpayers.
MBA believes that a Federal, full-faith-and-credit guaranty
would best protect the housing market, investors, and the
economy from catastrophic risk. This guaranty could be
administered by a single entity such as Ginnie Mae, as is
envisioned in the Chairman's outline.
Q.5. 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.5. When considering future models of the secondary market, it
is important to distinguish between the number of guarantors
and the manner in which they are regulated. MBA supports a
multi-guarantor model rather than a single-guarantor model. MBA
also support ``utility-style'' regulation of the guarantors to
ensure they are not engaging in excessive risk-taking or other
behavior that would be detrimental to the primary market,
investors, or taxpayers.
In any housing finance system, MBA believes that consumers
benefit from a large and diverse base of lenders. Smaller
lenders, including community banks, credit unions, and
independent mortgage banks, which make up a majority of MBA
lender membership, play a key role in strengthening the system
for consumers by focusing on discrete markets and leveraging
unique knowledge of local consumer needs. Recent post-crisis
research shows that highly concentrated mortgage markets
through the 2000s reduced the sensitivity of mortgage rates to
movements in the secondary market, and that more competitive
local markets tended to narrow primary-secondary market rate
spreads and deliver lower rates to consumers.
To that end, MBA supports several key principles featured
in Chairman Crapo's housing reform outline: 1) Ensure
equitable, transparent and direct access to secondary market
programs; 2) Prohibit g-fee pricing based on loan volume or
asset size of single-family lenders; 3) Preserve cash window
and small pool execution options for smaller lenders; 4)
Maintain a strict distinction between the primary and secondary
markets to ensure that guarantors do not compete with lenders;
and 5) Prevent vertical integration by prohibiting lenders from
owning or controlling guarantors.
Q.6. How will small institutions' business practices and
compliance costs change under a single utility vs. a single
guarantor vs. multiple guarantors?
A.6. Again, the number of guarantors and the manner in which
they are regulated are different elements of any housing
finance system. Guarantors should be regulated in a manner akin
to utilities, which would better ensure that they are serving
the public purposes for which they were created. A multi-
guarantor model would facilitate greater competition, which
should lead to guarantors actively competing for the business
of all types of lenders, including small lenders.
Small lenders should be allowed the opportunity to access
the secondary market on a level playing field with their larger
competitors. To do so, guarantors should be required to offer a
cash window execution, by which lenders can sell them
individual loans. This execution should not be disadvantaged,
either through pricing or operational capacity, relative to
other types of executions.
In addition, FHFA has worked with the GSEs in recent years
under the conservatorship to align many of the GSEs' standards
and requirements, including servicing standards and bond
administration standards through the CSP and the UMBS. Under a
utility style regulatory system, alignment on these kinds of
operational issues should continue in order to reduce
unnecessary friction and costs for small lenders.
Because the guarantors would serve as conduits to the
secondary market, much as they do today, the business practices
of small lenders (and also larger lenders) should not be
materially affected under a reformed housing finance system.
Q.7. Do you support or oppose Fannie Mae and Freddie Mac
selling their multifamily housing businesses?
A.7. The outline suggests that the multifamily businesses of
the GSEs will be sold and operated as independent guarantors.
Rather than imposing such a mandate, in order to promote
competition and diversity across guarantors, MBA recommends
that all guarantors, including any successors to the GSEs, be
allowed to operate solely in the single-family market, solely
in the multifamily market, or in both markets. This flexibility
should lower barriers to entry, creating more opportunities for
competition that, in turn, would lead to a more dynamic
environment, benefiting borrowers, renters, and lenders.
Q.8. If the multifamily housing guarantee businesses were sold,
who would buy them?
A.8. It is unclear whether Chairman Crapo's outline envisions
the GSEs selling their multifamily businesses or simply
creating an independent multifamily guarantor. The details of
the reformed housing finance system would dictate any interest
from investors in purchasing these businesses.
Q.9. How would the new guarantee structure affect the
multifamily housing market? Please be specific.
A.9. Multifamily housing is a critical part of the U.S. housing
market and is vital to our communities. Capital sources that
finance the multifamily housing market include Fannie Mae and
Freddie Mac, life insurance companies, commercial banks,
commercial mortgage-backed securities (CMBS) issuers, real
estate investment trusts (REITs), pension funds, FHA and
others. While all sources play an integral role in supporting
the multifamily market, each has its own focus, strength, and
limitations.
Our Nation's multifamily housing finance system should rely
on private capital, and it should be a primary source of
financing for multifamily rental housing. A broad range of
lending institutions should compete in the multifamily finance
market and Government policies should maintain this reliance on
private capital.
Past experience shows that the Federal Government is the
only entity that can ensure the availability of liquidity in
all parts of the credit cycle. MBA recommends that any
legislation clearly provide that eligible securities backed by
multifamily loans be subject to an explicit Federal Government
guaranty. In any new structure, the benefits conferred by such
a guaranty in terms of investor demand will sustain liquidity
and stability in the multifamily market.
Policymakers should protect taxpayers and the mortgage
finance system through a strong regulatory framework and
multiple layers of private capital, including the equity in the
multifamily property itself and the entity-level capital of the
security-issuing institution and any risk sharing it may
undertake. Only when all layers of capital are exhausted would
the U.S. Treasury provide a catastrophic backstop.
Q.10. 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.10. In order to promote wealth building through home
ownership, the housing finance system should ensure that loans
are made in a sustainable manner. As such, the underwriting
guidelines and credit standards of the guarantors in the
secondary market should reflect this principle. The market
regulator should use an approach that prevents deterioration of
underwriting or credit standards, which would ultimately harm
borrowers.
More robust competition in the secondary market would
benefit borrowers and lead to wealth-building opportunities, as
well. Guarantors should compete on factors such as product
offerings, technology, and customer service. These are the
areas in which
competition leads to innovation and/or better execution, which
then produces more efficient markets, lowers costs, and
provides
sustainable home-ownership opportunities for a greater number
of borrowers.
Finally, borrowers should be able to access mortgage credit
in all parts of the country, through all parts of the credit
cycle. To better ensure this outcome, guarantors should be
well-capitalized and well-managed, such that they are able to
play a stable role in the market consistently.
Q.11. Do you think Chairman 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.11. Access and affordability should serve as a key foundation
for any reforms to the housing finance system. We believe that
comprehensive reform, as envisioned in Chairman Crapo's
proposal, should include an improved national affordable-
housing strategy that meets the needs of the full continuum of
households. This strategy should focus on three goals: 1)
expanding access to affordable mortgage credit; 2) preserving
and developing affordable rental housing; and 3) improving
liquidity for underserved segments of the mortgage market.
We also believe that there are many other potential
improvements that can be made in a new housing finance system
that would responsibly increase access to affordable housing.
These include updating credit-scoring models to leverage
changes in technology, data, and analytics, as well as updating
documentation and derivation of income requirements to better
capture self-employed or nontraditional household income.
More broadly, housing finance reform efforts should seek to
address the concentration of intergenerational wealth that is
attributable to many factors, including historical Government
policies. As household income increases at a rate that is
slower than the
increase in home values, the home-ownership gap will only grow.
Responsible policies that make first-time home-ownership more
affordable, such as tax credits or HUD-approved down-payment
assistance, as well as increased flexibility in local land use
policies to expand affordable rental housing, can all
contribute to closing that stubbornly persistent gap.
Q.12. 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.12. One of the contributing factors to the near-collapse of
the GSEs in 2008 was the weak regulatory and supervisory
framework under which they operated prior to the crisis, and
HERA and the creation of FHFA was a direct response to that
crisis. Any comprehensive reforms to the housing finance system
must include mechanisms to provide stronger oversight
authorities for the secondary market regulator.
MBA believes that an appropriate regulatory and supervisory
framework for secondary market guarantors would be akin to a
utility-style framework, in which guarantors operate as low-
volatility companies with regulated rates of return that pay
steady dividends over the long term. Private ownership would
better encourage ongoing investment to keep pace with market
demands and technological developments, but the regulator must
have the authority to ensure the companies do not engage in
excessive risk taking.
The outline provides a number of measures by which such a
regulatory framework would more effectively be realized. FHFA
would be granted authority to charter, regulate, and supervise
guarantors, as well as to develop and enforce the prudential
standards to which guarantors are subject. These standards
include requirements pertaining to risk-based and minimum
leverage capital, liquidity, credit risk transfer structures,
stress testing, and resolution planning.
Q.13. Do you have concerns with the Chairman's proposal? If so,
please explain why and what amendment you would suggest to
remedy these concerns.
A.13. Chairman Crapo's housing reform outline represents a firm
foundation from which to build consensus and legislative text.
As the Committee begins to move from an outline to legislation,
many details and policy choices will affect the feasibility of
the proposed reforms. MBA stands ready to provide assistance
and support to resolve any issues, questions, or concerns as
they arise during this process. We feel confident, however,
that any challenges will not be insurmountable to producing a
bipartisan legislative reform package.
Q.14. Are there any proposed changes in the Chairman's proposal
you think make our housing finance system better? Please define
those.
A.14. Numerous ideas, proposals, and bills have been put
forward on housing finance reform, and in recent years there
has been significant convergence toward a future housing
finance system featuring well-underwritten loans securitized in
the secondary market with ample private capital provided by
tightly regulated entities standing ahead of an explicit, full-
faith-and-credit Federal Government guaranty. The Chairman's
outline supports such a structure.
MBA has considered and analyzed the critical elements of
housing finance reform for many years. In particular, much of
this work was undertaken by our Task Force for a Future
Secondary Mortgage Market. The Task Force, composed of members
covering a broad cross-section of the real estate finance
industry, developed a comprehensive set of recommendations for
an improved secondary market.
Chairman Crapo's housing reform outline shares many of the
core principles identified by the MBA Task Force, such as the
need to:
LPreserve the 30-year, fixed-rate, prepayable
single-family mortgage, as well as long-term financing
for multifamily mortgages;
LMaintain a deep, liquid to-be-announced (TBA)
market for securities backed by conventional single-
family loans;
LAttract global capital and preserve liquidity
during times of economic stress through an explicit
Government guaranty for eligible mortgage-backed
securities collateralized by single-family and
multifamily mortgages;
LLimit the explicit Government guaranty to the
eligible mortgage-backed securities, while prohibiting
the extension of the guaranty to institutional debt;
LRequire an effective national affordable-housing
strategy that helps meet the needs of low-income and
underserved households and communities;
LSupport a competitive and diverse primary market
for lenders of all sizes and business models;
LEnable a robust, innovative, and purely private
mortgage market to exist alongside the Government-
backed market;
LPreserve existing multifamily financing executions
and permit new options;
LEstablish a strong, transparent regulatory
framework that promotes liquidity while protecting the
taxpayers;
LEnsure that private capital assumes significant
amounts of the credit risk;
LEnsure liquidity in the event of a full-blown
systemic crisis; and
LMinimize risks to the liquidity and stability of
the mortgage markets during the transition.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM LINDSEY D.
JOHNSON
Q.1. SFIG/MBA/USMI represents organizations that would be
eligible to be guarantors under the Chairman's outline.
Q.1.a. Would any type of institution in the market today be
well-suited to being a guarantor?
A.1.a. To best promote stability and ensure that the
Government's exposure to mortgage credit risk is remote,
entities that guaranty or insure mortgages should have the
expertise and capital/operational capacity to actively manage
long-tail credit risk. USMI firmly believes that it is
essential for credit protection to be loan level and provided
at the time of origination by entities available through all
economic cycles. Further, the Federal Housing Finance Agency
(FHFA) should set comparable standards for market participants
(including all guarantors) using a transparent Administrative
Procedure Act (APA)\1\ process. Further, entities assuming
mortgage credit risk must be able to onboard and manage that
risk during all market cycles, not only when yields are high
and credit quality is pristine. To best protect taxpayers from
mortgage credit risk and to facilitate access to affordable
mortgage finance, guarantors should not be entering and exiting
the housing finance system based on yield and appetite. For
example, private mortgage insurance (MI) is required to be a
monoline form of insurance because, unlike other forms of
capital markets executions and reinsurance, policymakers wanted
to ensure a dedicated form of credit enhancement would be
available across all housing market cycles.
---------------------------------------------------------------------------
\1\ 5 USC 553.
---------------------------------------------------------------------------
Private MI is a time-tested and sophisticated form of
private capital exclusively dedicated to the housing finance
system that has provided taxpayer protection and facilitated
borrower access to low-down-payment mortgage credit for more
than 60 years through all market cycles. USMI members have
decades of experience independently underwriting, insuring, and
dispersing mortgage credit risk to the global reinsurance and
capital markets. MI reduces taxpayer exposure by transferring,
at origination, a substantial portion of mortgage credit risk
to MI companies backed by private capital.
Q.1.b. Do you believe any of your members would be interested
in becoming guarantors?
A.1.b. Yes. USMI members could be guarantors in a future
reformed system. Private MIs are uniquely situated and possess
the institutional knowledge to actively manage--including
underwriting and/or reviewing, holding appropriate capital
against, and distributing single-family mortgage credit risk to
other credit risk takers such as reinsurers and capital
markets. Contrary to the idea that credit risk transfer (CRT)
began in 2013 with the GSEs, private MIs have decades of
experience managing their risk exposures by dispersing mortgage
credit risk to the global markets. MIs participate in
reinsurance contracts in the normal course of business to
disperse risk and manage capital efficiency and, in recent
years, MIs have used credit-linked notes to further lay off
credit risk to other private market participants. In fact,
since 2013, USMI members have transferred to the global
reinsurance and capital markets $34 billion of risk, covering
$160 of primary risk written.
As previously stated, USMI members firmly believe that it
is essential that credit protection be loan level and provided
at the time of origination by entities available through all
economic cycles. USMI also believes that a reformed system
should address conflicts of interest and establish a level
playing field. The best way to accomplish those goals and
ensure that the broadest swath of home ready borrowers is
served by a reformed system is to expressly limit guarantors'
activities to secondary market functions and prohibit them from
engaging in other lines of business.\2\ In this regard, USMI
believes the separation of issuer and credit enhancer roles is
a critical first step that should be applied to the GSEs post-
conservatorship. While the Outline does prohibit ``insured
depositories'' from becoming guarantors it does not prohibit
the guarantors from originating or servicing loans. Further,
the Outline leaves open the possibility of a guarantor,
including the GSEs, being the issuer for the mortgages it
purchases through the cash window, which should also be
addressed in a reformed system.
---------------------------------------------------------------------------
\2\ Private mortgage insurers are monoline entities that are only
permitted to insure mortgage credit risk, meaning that MIs are sources
of private financial and human capital dedicated exclusively to
residential mortgage markets and available across market cycles.
---------------------------------------------------------------------------
In order to truly enable fair competition among guarantors
and encourage new entrants, the GSEs' numerous Government-
conferred advantages, including lower borrowing rates,
thousands of existing lender relationships, intellectual
capital, historical loan performance data, and proprietary
technologies (much of which was developed during
conservatorship), would need to be addressed and made
transparent and available to the private market. All of these
represent significant barriers to entry for new guarantors. To
reduce the GSEs' duopolistic market dominance and clear the way
for fair competition, many stakeholders, including trade
associations, consumer organizations, and think tanks, have
proposed a utility-like concept whereby the GSEs would have
transparent pricing, capital requirements, open-access
underwriting engines, and industry access to historical data.
Q.1.c. What is it about the mortgage guarantee business that
appeals or does not appeal to your members?
A.1.c. Private mortgage insurers are designed and solely
dedicated to facilitating sustainable low-down-payment mortgage
finance to home-ready borrowers while also protecting lenders,
the GSEs, and taxpayers against mortgage credit risk. Private
MI is required to be a monoline form of insurance because,
unlike other forms of capital markets executions and
reinsurance, policymakers wanted to ensure a dedicated form of
credit enhancement would be available across all housing market
cycles. MI is a source of permanent private capital--capital
provided through all market cycles--that does not rely on
Government backing. Throughout our 60-year history, including
through the Great Recession, the private MI industry never
stopped paying claims, never stopped writing new insurance, and
never received a ``too big to fail'' Federal bailout. In fact,
the MI industry has covered more than $50 billion in claims
since Fannie Mae and Freddie Mac, the GSEs, entered
conservatorship in 2008.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM LINDSEY
D. JOHNSON
Q.1. For households who do not have the resources for a
substantial down payment, lower down-payment products are often
the only option for otherwise creditworthy borrowers to obtain
a mortgage. Should the housing finance system continue to
support programs that provide access to creditworthy borrowers
who can sustain monthly mortgage payments, but who may not have
the wealth for a large down payment?
A.1. It is critical that borrowers continue to have access to
low-down-payment mortgage products. This is especially true for
first-time home buyers, 80 percent of whom relied on low-down-
payment mortgages to purchase their homes in 2018.\1\ Consumers
routinely cite down payment as one of the chief barriers to
home ownership and Americans' capacity to save for a 20 percent
down payment is hindered by rising rents, high home price
appreciation, and student debt.
---------------------------------------------------------------------------
\1\ Genworth Mortgage Insurance, First-Time Home Buyer Market
Report--4Q2018 (February 28, 2019).
---------------------------------------------------------------------------
Furthermore, the demographic landscape of U.S. home
ownership is forecasted to look significantly different than in
past decades, with the share of minority households projected
to increase from 30 percent in 2010 to 38 percent by 2030 \2\
and account for approximately 80 percent of household formation
for 2015-2035.\3\ Minority families tend to overwhelmingly rely
on low-down-payment mortgage options to secure mortgage
financing due to limited assets and savings for a large down
payment. USMI strongly supports policies, both legislative and
administrative, that support prudently underwritten low-down-
payment mortgages and promote sustainable home ownership.
---------------------------------------------------------------------------
\2\ Urban Institute, ``Can the mortgage market handle the surge in
minority home ownership?'' (July 1, 2015).
\3\ Harvard Joint Center for Housing Studies, Updated Household
Projections, 2015-2035: Methodology and Results (December 12, 2016).
---------------------------------------------------------------------------
Conventional mortgages with private MI are one low-down-
payment mortgage product that, for over 60 years, have enabled
families to purchase their homes with less than 20 percent down
payments.
MI has helped millions of Americans become homeowners
sooner in both a prudent and affordable way by assuming a
portion of the credit risk on their loans. According to
research from USMI, it could take approximately 26 years for
the average firefighter or nearly 22 years for the average
middle school teacher to save for a 20 percent down payment
plus closing costs.\4\ Research by the National Association of
REALTORS' suggests that Americans continuously cite
saving for a down payment as one of the biggest hurdles for
attaining home ownership and first-time home buyers on average
have a down payment of 7 percent.\5\
---------------------------------------------------------------------------
\4\ U.S. Mortgage Insurers, Private Mortgage Insurance: A State-by-
State Report (June 2019).
\5\ National Association of REALTORS', 2018 Profile of
Home Buyers and Sellers (October 29, 2018).
---------------------------------------------------------------------------
Private MI is a reliable and prudent option to enable many
of these low-down-payment borrowers achieve home ownership
sooner. In the past year alone, our industry has helped more
than one million families purchase or refinance their mortgage
with less than a 20 percent down payment.\6\ Nearly 60 percent
of purchase borrowers who had private MI were first-time home
buyers \7\ and MI is focused on low- to moderate-income
borrowers with more than 40 percent of borrowers with MI having
incomes below $75,000 per year.\8\
---------------------------------------------------------------------------
\6\ GSE Aggregate Data.
\7\ GSE Aggregate Data.
\8\ USMI member data.
Q.2. A key focus of the housing finance reform discussion
should be expanding access to home ownership among underserved
communities. One responsible method to increase home ownership
would be to expand access to pre-purchase housing counseling.
Should pre-purchasing counseling be used as a risk reducing
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tool for low down-payment loans?
A.2. Purchasing a home is one of the biggest decisions and
investments for most Americans. Obtaining mortgage financing is
also a complex transaction and consumers can benefit from
housing counseling and home-ownership education programs. While
MI is a business-to-business industry, all USMI members provide
educational resources including access to HUD-approved housing
counselors for pre-purchase counseling options for consumers.
Links to all of these services can be found at; Essent
Guaranty, Genworth Mortgage Insurance, MGIC, NMI, and Radian.
Q.3. Pre-purchase counseling reduces risk of default, helps
underserved communities access home ownership, and promotes
self-sufficiency by teaching families how to take charge of
their finances. How can we ensure that the future housing
finance system fully
integrates housing counseling as part of any effort to expand
sustainable home ownership, especially through low-down-payment
mortgages?
A.3. USMI believes pre-purchase counseling can be effective for
many first-time home buyers. As previously mentioned, while MI
is a business-to-business industry, all USMI members provide
educational resources including access to HUD-approved housing
counselors for pre-purchase counseling options for consumers.
Links to all of these services can be found at; Essent
Guaranty, Genworth Mortgage Insurance, MGIC, NMI, and Radian.
Further, for programs that aim to expand access to borrowers,
counseling is even more important. For example, as the GSEs
have looked to expand access to credit through their HomeReady
(Fannie Mae) and Home Possible (Freddie Mac) programs, both of
these programs require the borrower to complete financial
literacy education. Efforts like those of MI--and any future
guarantors should be maintained.
Further, it is also essential that counseling programs
exist for those homeowners who run into trouble paying their
mortgage--so that these borrowers understand their options. One
of the benefits of private MI as loan-level credit enhancement
is that MIs can more easily work with lenders, the GSEs and the
end investor, and MIs have strong business incentives to help
borrowers achieve a workout to stay in their home when
possible.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
LINDSEY D. JOHNSON
Q.1. In its current form, do you think Ginnie Mae could play
the role the Chairman's proposal envisions?
A.1. USMI commends the Outline's approach to use the Ginnie Mae
platform and believes that Ginnie Mae could play an important,
and even larger, role in a future system. As stated in USMI's
testimony, the Chairman's Outline promotes stability within the
marketplace by incorporating parts of the mortgage finance
system that exist and work well--notably by using the existing
infrastructure of Ginnie Mae, preserving the requirement for
loan-level credit enhancement, and ensuring market access to
tools and systems that support a large and liquid secondary
market for housing. Further, it is possible that the Ginnie Mae
wrap (guaranty by Ginnie Mae) could also instill stability and
help ensure liquid and stable markets.
In addition, Ginnie Mae has long recognized through their
existing Government insurance programs--Federal Housing
Administration (FHA), Veterans Affairs (VA), and Rural Housing
Services (RHS)--that loan-level credit enhancement is needed to
actively manage credit risk. After this loan-level protection
is provided by FHA, VA, or RHS, then Ginnie Mae serves to
guaranty the securities. Loan-level insurance reduces losses at
the individual borrower level, affords lenders the flexibility
for secondary market execution, provides borrowers with easier
access to workouts/modifications, and ensures quality in loan
manufacturing. A reformed system could modify Ginnie Mae's
current operating model by substituting private capital/
entities for the FHA, VA, or RHS as the primary insurers for
conventional mortgages.
Q.2. 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.2. If playing a larger role in a future system, Ginnie Mae
would need additional resources--including staff and tools--to
accommodate supporting the conventional market in addition to
the Government-insured market. However, with these resources
Ginnie Mae can provide a seamless transition to a reformed
system due to its globally recognized brand and a scalable
platform.
Q.3. Is Ginnie Mae's staff adequately trained and compensated
to take on a large new market?
A.3. In order to attract and retain personnel that would be
tasked with operating and overseeing a significantly larger
market, Ginnie Mae would need the ability to increase its
compensation capabilities. For 2018, the median total
compensation at Fannie Mae and Freddie Mac were approximately
$148,000 and $140,000, respectively.\1\ Further, five named
executives at Fannie Mae and four named executive officers at
Freddie Mac each made more than $1.75 million in 2018 (all four
at Freddie Mac made over $3 million).\2\ Ginnie Mae employees,
however, are compensated at lower levels and for fiscal year
2017, the average salary was approximately $128,000.\3\ Even
within the Government, Ginnie Mae's average compensation is
markedly lower than other financial Federal agencies, including
the Securities and Exchange Commission ($186,000), FHFA
($174,000), and Commodity Futures Trading Commission
($163,000).\4\ The current pay disparity between Ginnie Mae and
the GSEs and other Federal agencies puts Ginnie Mae at a
significant disadvantage for attracting and retaining the best
talent.
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\1\ Fannie Mae and Freddie Mac 2018 10-K Filings.
\2\ Fannie Mae and Freddie Mac 2018 10-K Filings
\3\ https://www.federalpay.org/employees/government-national-
mortgage-association.
\4\ https://www.federalpay.org/employees/agencies/2017.
Q.4. Do you support or oppose creating a single utility to take
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on the catastrophic risk? Please elaborate on your response.
A.4. USMI supports a utility for purposes of providing the
platform, infrastructure, standardization, and data collection
for conventional secondary mortgage market execution. USMI
believes that highly regulated entities backed by private
capital could assume all expected mortgage credit risk ahead of
any governmental exposure. The utility--whether it is the GSEs
or Ginnie Mae can provide the explicit guaranty, covering all
unexpected losses.
Given that recent proposals in both the Senate and House
envision some role for the GSEs going forward, USMI offers two
observations. First, the GSEs have clearly been Government
instrumentalities since their inception, having been chartered
by Congress in 1938 and 1968. Over the years, the GSEs have
developed additional public policy objectives and functions.
Second, during their more than 10 years in conservatorship, the
GSEs have made significant investments in proprietary systems
and technologies that have made the mortgage finance system
even more reliant on the GSEs. As more proposals envision the
GSEs existing in a future state, a utility construct has
emerged as a reform option.
Several recent legislative proposals \5\ envision a role
for the GSEs in a future housing system that supports an
explicit Government guaranty at the security level, calls for
the GSEs to ensure access for smaller lenders, and includes
affordable-housing requirements. These proposals signify that
Congress feels there are critical functions at the GSEs and
deem these functions/features necessary in a future housing
finance system--either within the GSEs or placed in a separate
utility of public exchange such as the CSP or within Ginnie
Mae.
---------------------------------------------------------------------------
\5\ ``Bipartisan Housing Finance Reform Act of 2018'' discussion
draft (Hensarling-Delaney-Himes) and Chairman Crapo's Housing Reform
Outline.
---------------------------------------------------------------------------
Further, Congress benefits from the multitude of proposals
from both progressive and conservative organizations on housing
finance reform. And, while different reform proposals may call
it different things and rely specifically on different
infrastructures to achieve it, many of the leading legislative
and administrative proposals for GSE reform have leaned on some
utility-like secondary mortgage market function to reduce the
GSEs' current duopoly and market power in the mortgage finance
system. One approach--and as a means to help transition to a
comprehensively reformed system--is to turn the GSEs into
highly regulated utility-like entities, with transparent
capital and pricing, explicit and limited functions in the
secondary market, and open-access and transparent underwriting
engines and systems. These steps could be taken by incremental
legislation or by administrative actions.
Q.5. 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.5. USMI does not oppose a highly regulated open-access
utility-like construct for the GSEs (or Ginnie Mae).
While a multiple guarantor construct can work for a future
housing finance system, there are significant challenges that
would need to be addressed. The primary rationale provided for
using a ``multiple guarantor'' model has been that it decreases
the GSEs' duopoly by increasing competition with other FHFA-
approved and regulated private guarantors. USMI supports the
free market and competition, but it must be done on a truly
level playing field. There are significant challenges to
enabling competition in a system that allows the GSEs to exist
in a future state and simultaneously allows for or requires
more competition. The GSEs have decades of Government-conferred
advantages, including lower borrowing rates, thousands of
lender relationships, intellectual capital, historic loan
performance data, and proprietary technologies--all creating
significant barriers for new guarantors into the market. Since
being placed in conservatorship, the GSEs have made substantial
investments, at the expense of tax payers, in technology and
systems to support their business operations and the broader
housing finance industry. These include the Common
Securitization Platform (CSP), the Single Security Initiative,
and Day One Certainty/Loan Product Advisor. USMI agrees that
all GSE technology and systems should be made available to
Ginnie Mae (or whatever successor entity provides the
Government guarantee). However, even after sharing access to
the GSE ``infrastructure'' there will be questions about a
level playing field given the decades of experience and
relationships that reside in both GSEs.
Q.6. How will small institutions' business practices and
compliance costs change under a single utility vs. a single
guarantor vs. multiple guarantors?
A.6. While there are advantages and disadvantages to both
approaches, one possible disadvantage of a having multiple
guarantors in the marketplace is the lack of standardization
that exists with the GSEs today, and that could exist with a
utility-like system in the future. A reformed system that
relies on multiple guarantors creates the possibility for each
guarantor to possibly compete on different credit standards,
and to create and implement distinct requirements/guides/
handbooks for lenders who would in turn be required to dedicate
resources--time, money, personnel--to ensuring compliance with
each set of requirements. While many aspects of guarantors'
requirements would likely be harmonized, there would still
exist the potential for significant discrepancies in
requirements and processes.
Q.7. Do you support or oppose Fannie Mae and Freddie Mac
selling their multifamily housing businesses?
A.7. Private mortgage insurers operate exclusively in the
single-family residential mortgage market and, as such, USMI
and our member companies have neither the expertise nor data to
opine on this matter.
Q.8. If the multifamily housing guarantee businesses were sold,
who would buy them?
A.8. Private mortgage insurers operate exclusively in the
single-family residential mortgage market and, as such, USMI
and our member companies have neither the expertise nor data to
opine on this matter.
Q.9. How would the new guarantee structure affect the
multifamily housing market? Please be specific.
A.9. Private mortgage insurers operate exclusively in the
single-family residential mortgage market and, as such, USMI
and our member companies have neither the expertise nor data to
opine on this matter.
Q.10. 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.10. It is critical that borrowers continue to have access to
low-down-payment mortgage products. This is especially true for
first-time home buyers, 80 percent of whom relied on low-down-
payment mortgages to purchase their homes in 2018.\6\ Consumers
routinely cite down payment as one of the chief barriers to
home ownership and Americans' capacity to save for a 20 percent
down payment is hindered by rising rents, high home price
appreciation, and student debt.
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\6\ Genworth Mortgage Insurance, First-Time Home Buyer Market
Report--4Q2018 (February 28, 2019).
---------------------------------------------------------------------------
As entities with more than 60 years of experience of taking
first-loss mortgage credit risk, private MIs are acutely aware
of the need to balance taxpayer protection with enabling
borrowers to access affordable mortgage financing. The private
MI industry is dedicated to helping borrowers, many of whom are
first-time home buyers and low- or moderate-income household,
purchase homes with low down payments and enable them to begin
building the long-term wealth that is associated with home
ownership. In fact, in the past year alone, our industry has
helped more than one million families purchase or refinance
their mortgage with less than a 20 percent down payment.\7\
Nearly 60 percent of purchase borrowers who had private MI were
first-time home buyers \8\ and more than 40 percent of
borrowers with MI had incomes below $75,000 per year.\9\
---------------------------------------------------------------------------
\7\ GSE Aggregate Data.
\8\ GSE Aggregate Data.
\9\ USMI member data.
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Furthermore, the demographic landscape of U.S. home
ownership is forecasted to look significantly different than in
past decades, with the share of minority households projected
to increase from 30 percent in 2010 to 38 percent by 2030 \10\
and account for approximately 80 percent of household formation
for 2015-2035.\11\ Minority families tend to overwhelmingly
rely on low-down-payment mortgage options to secure mortgage
financing due to limited assets and savings for a large down
payment. USMI strongly supports policies, both legislative and
administrative, that support prudently underwritten low-down-
payment mortgages and promote sustainable home ownership.
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\10\ Urban Institute, ``Can the mortgage market handle the surge in
minority home ownership?'' (July 1, 2015).
\11\ Harvard Joint Center for Housing Studies, Updated Household
Projections, 2015-2035: Methodology and Results (December 12, 2016).
Q.11. Do you think Chairman Crapo's housing finance reform
proposal would shrink the home-ownership gap between white and
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minority households in this country? If not, what would?
A.11. USMI appreciates that Chairman Crapo's Outline recognizes
the value of and need for borrowers' continued access to low-
down-payment mortgage options. First-time home buyers and
borrowers of color disproportionately rely on low-down-payment
mortgages, either conventional mortgages with private mortgage
insurance (MI) or mortgages insured by the Federal Housing
Administration (FHA). Private MI's more than 60 years of
experience in underwriting and insuring mortgages is a
testament to the conventional market's ability to prudently and
sustainably enable access to low-down-payment mortgage finance.
As the Senate Banking Committee continues to work on
legislation to strengthen the housing finance system, it is
worth exploring how to safely expand low-down-payment mortgage
options, including through the use of products that use deeper
cover MI to reduce the credit risk associated with individual
mortgages. The utilization of deeper cover MI on low-down-
payment conventional
mortgage would allow for greater transparency, provide for more
product options across market cycles, ensure that lenders of
all types and sizes could offer low-down-payment mortgages, and
reduce taxpayer risk.
Federal policymakers could also examine underwriting
guidelines and make modifications to better analyze
nontraditional sources of income and utilization of credit.
Borrowers of color tend to have higher rates of nontraditional
income, including self-employment, supplemental income (non-W-
2), and multi-generational pooled income/assets, and use cash
rather than credit for household expenses. Both of these
characteristics are often not fully appreciated/accommodated by
underwriting guidelines currently in use.\12\
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\12\ National Association of Hispanic Real Estate Professionals,
2018 State of Hispanic Home-Ownership Report (April 2019); National
Association of Hispanic Real Estate Professionals, testimony before the
House Committee on Financial Services Subcommittee on Housing,
Community Development and Insurance for hearing entitled ``A Review of
the State of and Barriers to Minority Home Ownership'' (May 8, 2019).
Q.12. 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.12. The Housing and Economic Recovery Act of 2008 (HERA)\13\
established the FHFA as an independent agency with supervisory
and regulatory authority over the GSEs and the Federal Home
Loan Bank System. Further, HERA authorized FHFA to act as
conservator or receiver for a regulated entity and the agency
currently serves as the regulator and conservator of the GSEs.
In its role as regulator, it is critical in a reformed system
that the FHFA (or successor Federal regulatory agency) be the
entity that sets standards for market participants, rather than
the GSEs and any new guarantors--as this prevents the system
that exists today where a quasi-regulator (i.e., the GSEs) sets
standards, including capital and operational standards and then
competes with the industries for which they've set standards.
The FHFA should promulgate prudential standards for guarantors
and establish capital and operational standards for GSE
counterparties, most notably first-loss credit enhancement
providers. FHFA should issue these requirements only after
following Administrative Procedure Act (APA)\14\ guidelines for
public notice and comment. It is important that the FHFA create
uniform and transparent standards that promote a level playing
field.
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\13\ Pub. L. 110-289, 122 Stat. 2654 (July 2008).
\14\ 5 USC 553.
Q.13. Do you have concerns with the Chairman's proposal? If so,
please explain why and what amendment you would suggest to
---------------------------------------------------------------------------
remedy these concerns.
A.13. The Chairman's Outline represents an important marker in
the discussion on housing finance reform and we strongly
encourage Members of the Senate Banking Committee to continue
to work toward bipartisan legislation to strengthen the housing
finance system. There are some areas, however, that we believe
warrant further discussion and modifications.
LGuarantor Structure: While the Outline prohibits
insured depositories from being guarantors, it is
unclear whether affiliates of insured depositories
(including bank-holding companies) can be guarantors.
Further, insured depositories may not become
guarantors, but the Outline does not expressly prohibit
them from originating or servicing mortgage loans. It
leaves open the possibility of a guarantor being the
lender and /or servicer for mortgages it guarantees.
This vertical integration would constitute a major blow
to the decades-long ``bright line'' separating the
primary and secondary mortgage markets.
LCompetition: The Outline's multi-guarantor system
envisions (and requires) new guarantors to enter the
market but allows the GSEs to retain their significant
Government-conferred competitive advantages and thus
prevents a true level playing field for fair
competition between guarantors. Also, the Outline's
proposed statutory caps on guarantor market share could
lead to regional guarantors which would be more
susceptible to localized housing trends and credit risk
events. In its current form, the Outline does not
require guarantors to serve a national market,
something that USMI believes should be a characteristic
of any reformed system.
LCredit Enhancement: The Outline calls for ``private
mortgage insurance as currently required by GSEs'' on
>80 LTV mortgages. USMI strongly encourages that
legislation require that credit enhancement attach at
the time the loan is originated as this facilitates
active risk management, allows the credit risk
protection to follow the loan (securitize, hold in
portfolio, sell to another market participant, et
cetera), and increases loss mitigation opportunities
(workouts and loan modifications for borrowers who
become late on their payments).
LComprehensive Reform: The Outline limits reforms to
the GSEs and does not address the FHA and other
Government-backed programs. Rather than reforming the
GSEs in a vacuum, housing finance reform should take a
holistic approach and include FHA Reform. Without
simultaneously addressing the conventional and FHA
markets, the Outline could distort the market and
arbitrarily drive borrowers to a specific market--this
would merely shift, rather than reduce, the
Government's exposure to mortgage credit risk.
Q.14. Are there any proposed changes in the Chairman's proposal
you think make our housing finance system better? Please define
those.
A.14. With the aim of strengthening the country's housing
finance system, the Chairman's Outline rightly acknowledges the
need to limits the GSEs' market power, better shield taxpayers
from mortgage credit risk, and incentivizes prudent and
sustainable mortgage lending. More specifically, the Outline
recognizes the value of private MI in bridging the down-payment
gap for borrowers while simultaneously protecting lenders,
GSEs, and taxpayers from mortgage credit risk.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM VINCE
MALTA
Q.1. During the hearing, some witnesses suggested that
guarantors might not be required to serve a broad, national
market if they were serving specific underserved markets.
Do you believe that private market guarantors are likely to
specialize in rural markets, an underserved area, or any other
types of underserved markets?
A.1. NAR firmly supports competition in the housing finance
system. However, NAR believes that the best place for
competition is among lenders, servicers, and the investors in
credit risk and mortgage-backed securities. A guarantor(s) may
in fact be willing to specialize in underserved markets, but
without the large scale of guarantors with a national
requirement, they may not be able to provide the cross-
subsidization needed to support access to these markets in good
times and in bad. Furthermore, guarantors specializing in
facets of the market will not be able to diversify risk, in
both regional and economic dimensions, the way investors in
mortgage pools expect and demand.
Q.2. If a guarantor specialized in an underserved segment of
the market, would you expect their business costs to be higher
or lower than the costs for guarantors serving a national
market? If the costs were higher, how would any specialized
guarantors offer competitive pricing and remain economically
viable?
A.2. The costs to a guarantor that specializes in an
underserved market would likely be higher than to a more
diversified guarantor. As a result, assuming a fixed return for
investors, the cost would be passed onto consumers. Likewise,
as risk rises over a typical economic cycle, those costs would
increase. This pattern would undermine the intent and/or push
borrowers in this space to the Federal Housing Administration's
program.
Q.3. Do you have any concerns about allowing guarantors to
specialize in certain segments of the market?
A.3. NAR is concerned that allowing guarantors to specialize in
certain market segments would undermine the national market for
housing finance, placing the GSEs in clearer competition with
Government programs like the RHS, VA, and FHA, and undermining
the homogeneity and diversification of mortgage pools in the
current GSEs system that are demanded by investors.
Furthermore, specialized guarantors exist in the private sector
such as verticals like Angel Oak, which originate, guarantee,
service, and securitize certain underserved markets, but on a
smaller scale, and which do not fit as easily in the GSE's
homogeneous footprint.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM VINCE
MALTA
Q.1. Do you agree that conforming loan limits should be
retained as Congress contemplates changes to the housing
finance system?
A.1. NAR firmly agrees that the conforming loan limits as
defined under HERA should be maintained in the future, with
reformed guarantors.
Q.2. A fair housing finance system ensures broad affordability
and access, including for those homeowners in high-cost States
like New Jersey. Last time the Committee considered reform,
there was discussion of lowering conforming loan limits. Isn't
it critical that borrowers in high-cost States maintain fair
access to affordable mortgage credit?
A.2. Middle class America is not restricted to small towns.
Middle class America is in every town from coast to coast.
Middle class Americans should not be punished with higher costs
and limited access based on where they live and preserving the
conforming loan limits and high cost limits as defined in HERA
is critical to prevent this.
Q.3. Would you oppose or have concerns about a system in which
borrowers in high-cost States faced pricing discrimination?
A.3. NAR believes that credit-worthy borrowers in all markets
and at all times should have access to affordable credit and
the conforming and high-cost limits are central to this
providing this.
Q.4. For households who do not have the resources for a
substantial down payment, lower down-payment products are often
the only option for otherwise creditworthy borrowers to obtain
a mortgage. Should the housing finance system continue to
support programs that provide access to creditworthy borrowers
who can sustain monthly mortgage payments, but who may not have
the wealth for a large down payment?
A.4. NAR believes that down payment is not the primary
indicator of ability to repay. Creditworthy borrowers with the
ability to repay their mortgage, but lacking significant
resources for down payment should have access to affordable
credit also. NAR is supportive of our housing finance system
that provides programs buttressing responsible Americans with
the ability to sustain monthly mortgage payments, but may not
have the wealth for a large down payment.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
VINCE MALTA
Q.1. In its current form, do you think Ginnie Mae could play
the role the Chairman's proposal envisions?
A.1. NAR is concerned that Ginnie Mae (GNMA) does not currently
support the role as outlined in the Chairman's proposal and it
may not be able to scale up to the task. Furthermore, the
counter-party risk to GNMA would increase dramatically and it
would need to work in collaboration with the regulator of
future guarantors, much as the GSEs do today, to continually
update and maintain measures to counter that risk.
Q.2. 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.2. Placing the CSP at GNMA would greatly expand its duties
beyond current operations, stressing both its current staff and
resources, while also raising questions as to its ability to
scale-up operations to support and sustain such programmatic
needs. It would need to be appropriately resourced if
transferred.
Q.3. Is Ginnie Mae's staff adequately trained and compensated
to take on a large new market?
A.3. An ongoing concern is the small in-house staff of GNMA and
the low pay that limits the ability to attract the highly
technical candidates needed to staff the GNMA envisioned in
this plan.
Q.4. Do you support or oppose creating a single utility to take
on the catastrophic risk? Please elaborate on your response.
A.4. NAR is opposed to a single utility. Competition is a
critical part of creating aligned incentives and enforcing
market responses. While true competition is unlikely to occur
in the market for guarantors, having a minimum of two allows
for competition on products and services to lenders, servicers,
PMIs, and reinsurers, as well as investors in MBS and CRTs,
while incentivizing the GSEs to monitor each other and hold
accountable for any deviations of the rules and regulations.
Q.5. 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.5. As discussed in question 4, NAR favors a minimum of two
utilities at the guarantor level to incentivize a level of
competition in the secondary market and responsiveness to their
customers; lenders, servicers, front-end insurers, as well as,
credit and rate investors. However, the temptation to expand
guarantors must be tempered by the understanding that adding
guarantors could reduce diversification of mortgage pools,
create regional guarantors and reduce access to credit, and
drastically increase the difficulty to maintain the critical
oversight that forced transparency and accountability in the
secondary market under conservatorship.
Q.6. How will small institutions' business practices and
compliance costs change under a single utility vs. a single
guarantor vs. multiple guarantors?
A.6. As envisioned in NAR's proposal for secondary market
reform, the GSE would be converted to Systemically Important
Mortgage Market Utilities (SIMMUs), essentially transitioning
parts of the current system with additional, stronger
regulations. All of the functions and public mission would
continue, but with private capital at risk operating the
companies. These operations include a cash window, providing
equal access and services for small lenders, and dynamically
responding to the needs of small lenders as they arise. What's
more, the funding for the cash window would be structured to
maintain low costs for small lenders in both normal times and a
crisis. In short, small lenders would be as well off if not
better under NAR's vision.
Q.7. Do you support or oppose Fannie Mae and Freddie Mac
selling their multifamily housing businesses?
A.7. NAR believes that the multifamily business should remain
with the GSEs after they are converted to SIMMUs under the NAR
plan. The GSE's diversification of product areas helps ensure
for a more robust multifamily and housing market, especially
during economic downturns.
Q.8. If the multifamily housing guarantee businesses were sold,
who would buy them?
A.8. N/A.
Q.9. How would the new guarantee structure affect the
multifamily housing market? Please be specific.
A.9. N/A.
Q.10. 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.10. NAR supports access to credit in all markets, at all
times, and for all credit-worthy home buyers. NAR believes that
home ownership is an integral part of the American Dream that
shouldn't be out of reach for low-income, rural, and minority
borrowers who lack access to traditional forms of credit. Under
NAR's proposal, the SIMMUs would be chartered by Congress with
a public mission to support underserved markets as part of
their mission. Their charters would be coupled with HERA and
stronger oversight to make sure that the SIMMUs continue to
research and develop new methods of extending credit to
underserved markets in the future.
Q.11. Do you think Chairman 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.11. NAR applauds the Chairman for his effort to include a
market mechanism to support low- and moderate-income borrowers.
However, NAR is concerned that there is not enough information
on this part of the proposal to answer the question. The GSE's
mission to support underserved communities and its
countercyclical role is important to the market, the economy,
and the aspirations of homeowners across the country.
Furthermore, the mission extends to supporting small- and mid-
sized communities in all markets, including regional recessions
and natural disasters. A rigid, undersized, and/or untested
system could jeopardize that.
Q.12. 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.12. HERA created strong oversight, clear guidelines for loan
limits, and tools to support underserved groups. HERA should be
maintained and potentially improved to include regional support
and other points of clarification around the public mission.
Q.13. Do you have concerns with the Chairman's proposal? If so,
please explain why and what amendment you would suggest to
remedy these concerns.
A.13. NAR firmly supports competition in the housing finance
system. However, NAR believes that the best place for
competition is among lenders, servicers, and the investors in
credit risk and mortgage-backed securities. As discussed in
question 5, NAR believes that raising the number of guarantors
could still result in an oligopoly that could undermine the
system. Rather, competition in the primary market and among CRT
and MBS participants should be maximized. The strong regulator
can enforce pricing and quality at the guarantors, while the
guarantors compete to provide services and value to the primary
market and CRT and MBS investors.
Second, NAR shares the Chairman's concern that oversight of
the entities must be strong in order to maintain quality and
standards for the benefit of the primary, CRT, and MBS markets,
but also to protect the Government guarantee. Too many
guarantors could undermine these concerns or a weak oversight
structure could undermine competition in other markets, so
additional discussion and structure in this area would help.
Finally, support for underserved markets should be fluid
and inclusive enough to support the needs of today's market as
well as demographic, income, and economic challenges in the
future. To this end, the outline would benefit from more
clarity on how it would support all groups and economic
circumstances.
Q.14. Are there any proposed changes in the Chairman's proposal
you think make our housing finance system better? Please define
those.
A.14. We appreciate the Chairman's stipulation of an explicit
Government guarantee, strong and flexible oversight, as well as
protecting taxpayers with appropriate private capital.
Furthermore, NAR believes any future guarantors must have an
explicit mission to serve middle America and the underserved.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM CARRIE
HUNT
Q.1. During your testimony, you spoke about the need to make
permanent improvements that were made to Fannie Mae and Freddie
Mac during conservatorship.
What improvements or gains do you believe must be made
permanent as part of any reform effort?
A.1. The fair pricing and guaranteed access to the secondary
market that credit unions have enjoyed during conservatorship
must be made part of any reform. We do not want to see a
regression to the previous aggregation model used before
conservatorship, where market share agreements with the largest
lenders created underwriting exceptions and lower guarantee
fees based on volume, not on the underlying loan risk. This
priced out smaller lenders and forced them to sell to larger
lenders, instead of directly to the GSEs. These practices
created huge volumes of underpriced risk that were a part of
the predatory culture that precipitated the financial crisis.
Instead, we want a system that ensures equal market access for
lenders of all sizes and business models and maintains a deep,
liquid market for long-term options. Furthermore, the functions
of the cash window at the GSEs (as a single loan execution
process and best-efforts loan commitments) are also vital to
many credit unions and should be maintained in any new system.
The cash window serves as a quick and efficient means of
liquidity for credit unions that would otherwise be unable to
sell to the GSEs.
Access to such technology and underwriting programs for
small lenders must be preserved in any new model. The GSEs'
tools provide critical benefits to small lenders.
Q.2. During the hearing, some witnesses suggested that
guarantors might not be required to serve a broad, national
market if they were serving specific underserved markets.
Do you believe that private market guarantors are likely to
specialize in rural markets, an underserved area, or any other
types of underserved markets?
A.2. It is unclear how this would work without some type of an
incentive. They could start with that goal, but it would seem
to be unrealistic given the volume and scale they would likely
need to reach to succeed.
Q.3. If a guarantor specialized in an underserved segment of
the market, would you expect their business costs to be higher
or lower than the costs for guarantors serving a national
market? If the costs were higher, how would any specialized
guarantors offer competitive pricing and remain economically
viable?
A.3. It would seem reasonable to expect that business costs
would be higher as they would have to price for the risk of a
more homogenous portfolio. Remaining economically viable could
be challenging.
Q.4. Do you have any concerns about allowing guarantors to
specialize in certain segments of the market?
A.4. In theory, having specific guarantors focus on certain
segments of the market is a noble concept. However, in
practice, it would seem reasonable to expect that business
costs would be higher for them. This could lead them to drop
their specialization and chase more profitable segments of the
market, or create risk for the system if they fail.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM CARRIE
HUNT
Q.1. An important element of the current system that helps
small lenders to participate is FHFA's cash window, which
allows small lenders to sell individual loans directly to
Fannie Mae and Freddie Mac receiving competitive pricing with
the securities option. For small lenders to continue to
maintain access to the housing finance system, is it necessary
to maintain competitive pricing for loan sales with the
securities option, or some other comparable pricing parity
option?
A.1. Yes, fair pricing for loans based of quality and not on
volume is a key principle of NAFCU and must be maintained in
any reform.
Q.2. In order to facilitate competitive pricing, does the
housing finance system need guarantors that can pool costs
across the market and that have a duty to serve all lenders?
A.2. We believe a statutory protection for fair pricing for
small lenders must be included in any reform. In order to
maintain a competitive pricing for small lenders, it is
reasonable to expect that guarantors would need to pool costs
across the market and have a duty to serve all lenders.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
CARRIE HUNT
Q.1. In its current form, do you think Ginnie Mae could play
the role the Chairman's proposal envisions?
A.1. NAFCU is concerned about the rate at which Ginnie Mae's
systems, processes, and procedures can be brought up to the
standards envisioned under the bill. The outline proposes a
new, much more extensive role for Ginnie Mae in the secondary
mortgage market, yet Ginnie Mae currently lags behind Fannie
Mae and Freddie Mac in its technological capabilities and focus
on services available to lenders. Although Ginnie Mae, in
recent years, has made substantial efforts to conduct outreach
and provide more service to credit unions, it is important to
note that asking Ginnie Mae to step in and fill such a major
role in the market would be a huge challenge requiring
significant transition time, oversight and flexibility.
Q.2. 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.2. Although use of the CSP could simplify the transition to
Ginnie Mae as well as reduce barriers to entry for new market
participants, other technological improvements would still be
necessary GSE for an efficient and effective transition given
our concerns outlined above. We have not taken a position of
the specifics of any sale. However, as the Committee considers
questions of how to ensure a smooth transition to a future
state, NAFCU would like to stress the importance of getting it
done right, versus getting it done quickly.
Q.3. Is Ginnie Mae's staff adequately trained and compensated
to take on a large new market?
A.3. I can't speak to the specific qualifications of Ginnie Mae
staff, but we have the general concerns that are outlined
above.
Q.4. Do you support or oppose creating a single utility to take
on the catastrophic risk? Please elaborate on your response.
A.4. NAFCU members supports a path to reform that creates as
least disruption to the current secondary market system as
possible. Of all of the models that have been currently
discussed, a utility model seems to provide the least
disruption. There are other models that could work, such as the
multi-guarantor model, but without specific details, the
unknowns and uncertainties with such a move are concerning.
Q.5. 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.5. N/A.
Q.6. How will small institutions' business practices and
compliance costs change under a single utility vs. a single
guarantor vs. multiple guarantors?
A.6. Maintaining existing technologies and processes will be of
benefit to credit unions. The more dramatic the change to the
current system, the more costs will likely increase.
Q.7. Do you support or oppose Fannie Mae and Freddie Mac
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.7. NAFCU has not taken a position on the multifamily aspect
of GSE reform.
Q.8. 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.8. NAFCU supports the Duty-to-Serve requirements of the
Federal Housing Enterprise Financial Safety and Soundness Act
of 1992, as amended by HERA, and appreciates the inclusion of a
new Market Access Fund (MAF) in the Chairman's outline to
account for the difficulties in providing financial services to
underserved and low-income communities. However, there are a
number of unknowns about the proposed MAF that would need to be
addressed. For credit unions, providing provident credit to
those who need it is why credit unions exist. Providing
additional flexibility to credit unions to reach underserved
and rural areas will help our overall housing problem. Credit
unions have been seeking a legislative change to the Federal
Credit Union Act to clarify the ability of all credit unions to
add underserved areas to their field of membership.
Q.9. Do you think Chairman 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.9. As noted above, without more details about the MAF (and
the bill itself) it would be hard to speculate. Credit unions
are trying to reach more underserved areas and populations and
serve those individuals.
Q.10. 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.10. The fair pricing and guaranteed access to the secondary
market that credit unions have enjoyed during conservatorship
must be made part of any reform. We do not want to see a
regression to the previous aggregation model used before
conservatorship, where market share agreements with the largest
lenders created underwriting exceptions and lower guarantee
fees based on volume, not on the underlying loan risk. This
priced out smaller lenders and forced them to sell to larger
lenders, instead of directly to the GSEs. These practices
created huge volumes of underpriced risk that were a part of
the predatory culture that precipitated the
financial crisis. Instead, we want a system that ensures equal
market access for lenders of all sizes and business models and
maintains a deep, liquid market for long-term options.
Furthermore, the functions of the cash window at the GSEs (as a
single loan execution process and best-efforts loan
commitments) are also vital to many credit unions and should be
maintained in any new system. The cash window serves as a quick
and efficient means of liquidity for credit unions that would
otherwise be unable to sell to the GSEs.
As you consider reform, it is important to note that there
are many key elements to the current system. Credit union
partnerships with the GSEs play an important role in their
mortgage lending functions. Programs such as Fannie Mae's
Desktop Underwriter' platform and Freddie Mac's Loan
Prospector' are important tools for credit unions.
They help ensure conformity and
consistency across portfolios, whether credit unions sell the
loan or not. Using these tools provides credit unions with a
level of efficiency that they might not otherwise achieve.
Additionally, it enhances the member experience by automating
and expediting parts of the loan process. If comprehensive
housing finance reform includes any significant changes to
these programs, it could have widespread adverse effects on
credit union operations.
Access to such technology must be preserved in any new
model. The GSEs' tools provide critical benefits to small
lenders.
Q.11. Do you have concerns with the Chairman's proposal? If so,
please explain why and what amendment you would suggest to
remedy these concerns.
A.11. I outline NAFCU's thoughts in detail on pages 10-14 of my
written testimony, but we have some level of concerns about the
multi-guarantor model, the use of Ginnie Mae, the lack of
clarity for credit unions retaining servicing rights, statutory
down-payment requirements, and the overall transition to a new
housing finance system, among other things.
Q.12. Are there any proposed changes in the Chairman's proposal
you think make our housing finance system better? Please define
those.
A.12. NAFCU also recognizes a number of strengths of the
outline, including the requirement of strong capital standards,
a guaranteed cash window for small lenders, the prohibition of
volume-based discounts, and the preservation of credit risk
transfer transactions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM MICHAEL D.
CALHOUN
Q.1. During your testimony, you spoke about the need to make
permanent improvements that were made to Fannie Mae and Freddie
Mac during conservatorship.
What improvements or gains do you believe must be made
permanent as part of any reform effort?
A.1. Reform should include continuing and expanding permanent
utility-type oversight and regulation of the GSEs, their
products, and pricing; the prohibitions on lobbying and
political contributions; the reductions and limitations on
portfolios; and strong capitalization of the GSEs. The GSEs
should also continue and expand their credit risk transfer
programs to reduce and diversify their risk. Finally,
affordable-housing measures must be dramatically increased,
preserving current programs and significantly adding to them.
Section 4 of the testimony provides the details for improving
affordability for home ownership and rental housing (see pages
15-28).
Q.2. During the hearing, some witnesses suggested that
guarantors might not be required to serve a broad, national
market if they were serving specific underserved markets.
Do you believe that private market guarantors are likely to
specialize in rural markets, an underserved area, or any other
types of underserved markets?
A.2. It is unlikely that private market guarantors will
specialize in serving underserved markets. Rather, it is likely
that guarantors would be strongly incentivized to ``cream'' the
market, serving the wealthiest housing markets and borrowers,
and avoiding places like more dispersed rural markets and
borrowers of modest means in many regions across the country.
Q.3. If a guarantor specialized in an underserved segment of
the market, would you expect their business costs to be higher
or lower than the costs for guarantors serving a national
market? If the costs were higher, how would any specialized
guarantors offer competitive pricing and remain economically
viable?
A.3. Business costs would likely be higher for guarantors
serving an underserved segment of the market. The easiest and
most profitable loans are in concentrated urban markets with
high-wealth borrowers in coastal regions. It would be difficult
for a specialized guarantor to offer competitive pricing and
remain economically viable. The current GSEs lower costs for
all borrowers by providing access to a national market and by
pooling risk.
Q.4. Do you have any concerns about allowing guarantors to
specialize in certain segments of the market?
A.4. Yes. It is likely that specializing in underserved
segments of the market could put guarantors out of business, as
they could not effectively compete with private guarantors that
are able to purchase the most lucrative loans from the
wealthiest borrowers. It costs much more to serve dispersed
rural borrowers, for instance. Thus, pooling of loan risk must
be maintained to ensure broad access to affordable mortgage
loans.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM MICHAEL
D. CALHOUN
Q.1. For households who do not have the resources for a
substantial down payment, lower down-payment products are often
the only option for otherwise creditworthy borrowers to obtain
a mortgage. Should the housing finance system continue to
support programs that provide access to creditworthy borrowers
who can sustain monthly mortgage payments, but who may not have
the wealth for a large down payment?
A.1. Yes. Removing regulator flexibility in establishing down
payments in housing finance reform and mandating down payments
would unnecessarily restrict access to credit for lower-wealth
families. These mandates overlook the fact that borrowers must
also save for closing costs--roughly 3 percent of the loan
amount--on top of any down payment required. The mandates would
increase the number of years that borrowers would need to save
for a down payment. An analysis by the Center for Responsible
Lending demonstrates that it would take the typical family 17
years to save for a 10 percent down payment and 11 years to
save for a 5 percent down payment. This timeframe is greatly
expanded for African American and Latino borrowers. Considering
that many of these households have limited wealth due to
historic discrimination in the housing finance system and
broader society, down-payment mandates could significantly
reduce the number of future first-time home buyers. Harvard's
Joint Center for Housing Studies predicts that 7 out of 10
future first-time buyers will be families of color, mostly
Latinx families. Limiting access for families of color harms
them and injects safety and soundness risk to the entire
market, which can have a dampening impact on the overall
economy.
Not only is there a huge cost to legislatively mandating
down payments, but there is also a limited benefit in terms of
reducing default rates. When looking at loans that already meet
the product requirements for a Qualified Mortgage, a UNC Center
for Community Capital and CRL study shows that these
requirements cut the overall default rate by almost half
compared with loans that did not. Layering on a down-payment
requirement on top of these protections produces only a
marginal benefit.
Q.2. A key focus of the housing finance reform discussion
should be expanding access to home ownership among underserved
communities. One responsible method to increase home ownership
would be to expand access to pre-purchase housing counseling.
Should pre-purchasing counseling be used as a risk-reducing
tool for low-down-payment loans?
A.2. Yes, CRL supports pre-purchase counseling to reduce risk
for low-down-payment loans. The primary protections for these
loans are fully documented underwriting and stable, fixed-rate
prime loans. Even through the crisis, these loans performed
well.
Q.3. Pre-purchase counseling reduces risk of default, helps
underserved communities access home ownership, and promotes
self-sufficiency by teaching families how to take charge of
their finances. How can we ensure that the future housing
finance system fully
integrates housing counseling as part of any effort to expand
sustainable home ownership, especially through low-down-payment
mortgages?
A.3. CRL supports further integrating housing counseling into
the home purchase process. There are several ways that this
counseling can be more fully utilized. Programs that provide
reduced rates or other financial benefits for borrowers who
complete counseling have shown to be attractive to borrowers
and effective. Notably, FHA attempted to implement such a
program, but was blocked from doing so. Counseling can also
help prepare families to become ready for home ownership when
it is not immediately a suitable option.
Q.4. 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.4. Yes, guarantors must be mandated to serve a national
market. The GSEs' charters currently state that they must
``promote access to mortgage credit throughout the Nation
(including central cities, rural areas, and underserved areas)
by increasing the liquidity of mortgage investments and
improving the distribution of investment capital available for
residential mortgage financing.'' By bundling and securitizing
mortgages with an implied Federal Government guarantee, the
GSEs have increased the flow of credit to all parts of the
Nation. We now have a national mortgage market, investor
confidence, increased loan volume, and widespread use of the
30-year fixed-rate mortgage. This, in turn, has resulted in
more affordable loans for consumers. Without a duty to serve a
national market, guarantors will be able to serve only
particular regions or borrowers.
Q.5. 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.5. Yes. Without a duty to serve a national market, guarantors
would be strongly incentivized to serve the wealthiest housing
markets and borrowers, and avoid more dispersed rural markets
and borrowers of modest means in many regions across the
country. Without this duty, guarantors would also focus on the
largest, most profitable lenders, disadvantaging community
lenders, such as community banks. This makes it harder for
community banks to provide mortgages and to be successful
overall. In many areas, especially rural communities, these
banks are often the only financial institutions present to
serve residents.
Q.6. 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.6. Yes. CRL is in favor of standards that ensure servicers
offer homeowners affordable loan modifications. There are also
opportunities to require the GSEs or other guarantors to pool
the risk and cost of distressed loan servicing. This would
ensure that qualified special servicing would be provided and
that the cost of this servicing would be pooled across the
system rather than imposed on small lenders who are less able
to spread such costs and thus may place credit overlays on loan
standards and applicants.
Q.7. 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.7. The Real Estate Settlement Procedures Act prohibits
mortgage lenders from conducting foreclosure proceedings while
a loan modification application is under consideration. If a
lender fails to follow the rules, the borrower may bring a
lawsuit. However, the onus should not be on the borrower to
stop the lender's unlawful actions. CRL welcomes stronger
standards that ensure the lender is unable to foreclose on a
homeowner while a potential loan modification is pending.
Q.8. What, if any, other mortgage servicing standards or
requirements should Congress consider as it contemplates
reforming the housing finance system?
A.8. A major area of dysfunctional servicing is with FHA loans.
While the GSEs buy loans out of the pools, FHA servicers are
required to do this themselves and bear the loss of reductions
in the value of a restructured loans. This and other current
FHA requirements discourage lenders from pursuing
modifications, and the result is much poorer outcomes for
borrowers and the FHA insurance fund. This could be corrected
by matching the FHA requirements to the reformed GSEs loan
modification requirements, which perform much better.
Additionally, FHA's antiquated technology makes servicing much
more difficult for lenders and borrowers alike.
Q.9. 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.9. In CRL's view, utility regulation appropriately focuses
the GSEs' activities on safely meeting their mission and
prevents incentives to maximize revenues by serving the most
lucrative borrowers and lenders or take unnecessary risks. This
also prevents unfair competition with private market companies.
The Housing and Economic Recovery Act of 2008 and Federal
Housing Finance Agency actions under conservatorship embody
much of this type of regulation. It should be continued and
expanded upon.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
MICHAEL D. CALHOUN
Q.1. In its current form, do you think Ginnie Mae could play
the role the Chairman's proposal envisions?
A.1. No. Expanding Ginnie Mae's role would substantially
increase costs. Ginnie guarantees the servicing performance of
the issuer and not the underlying collateral. It has a full
Government wrap on the loans that it insures. Extending this
wrap is likely to drive up fees as the market will respond to
the increased number of participants in the Ginnie program with
anxiety. Further, smaller lenders are disadvantaged with this
model as Ginnie has inherent operational complexities that
could deter smaller lenders from becoming issuers.
The servicing within the Ginnie program is also far more
complex than the existing system and puts enormous financial
pressure on servicers, especially in times of economic
distress. Ginnie servicers are required to advance missed
payments to investors for an unlimited amount of time until the
loan is resolved or buy it out of the pool using the servicer's
resources. This buyback scenario requires servicer financing in
times of economic distress when loan defaults are heightened.
In addition to these structural problems, as discussed below,
Ginnie does not have the resources or systems to meet the
operational and infrastructure needs of the system.
Q.2. 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.2. The best structure for the CSP is for it be structured and
operated as a utility through its ownership by the GSEs, which
themselves should be reformed as utilities. This preserves the
public mission of the CSP and would provide the transparency
and level playing field needed for the CSP.
Q.3. Is Ginnie Mae's staff adequately trained and compensated
to take on a large new market?
A.3. Ginnie already faces difficulty suitably overseeing its
large roster of issuers and servicers, which are mostly
nonbanks. A recent HUD Inspector General report details these
concerns and found that Ginnie was not prepared for the rise in
nonbank lending and did not respond to the changes in its
lender base. Further, Ginnie does not currently evaluate credit
risk. Currently, Ginnie relies on FHA, VA, and Rural Housing to
determine that program underwriting standards are met. Under
Chairman Crapo's approach, Ginnie would take on the role of
determining underwriting and risk on privately guaranteed
mortgages along with having to determine and manage the
counterparty risk of the many issuers (it has a limited amount
of risk today on VA loans, which do not have 100 percent
insurance, but the counterparty risk is small).
Q.4. Do you support or oppose creating a single utility to take
on the catastrophic risk? Please elaborate on your response.
A.4. CRL supports making the two current GSEs utilities. The
catastrophic risk of a repeat of the 2008 crisis should be
managed by well capitalizing these entities, using CRTs and
other risk-sharing measures to reduce the risk held by the
GSEs, and having a paid for back up guarantee provided by the
Federal Government.
Q.5. 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.5. CRL supports the safeguards in the current system. Small
lenders are disproportionately dependent on the GSEs' cash
window, which provides lenders the option of selling individual
loans. This means that smaller institutions do not have to
trade their loans for securities or sell their loans to other
large banks. To provide pricing parity to smaller lenders, the
guarantor/issuer must have the ability to pool costs across the
market and must provide equal pricing for cash and security
transactions. This makes it essential that guarantor/issuers
serve a national market and have a duty to equitably serve all
lenders. Otherwise, if some guarantors/issuers can choose to
cream the market, serving only the large lenders and the most
lucrative markets, the remaining guarantors will not have
sufficient loans from the full market to be able to provide
pricing parity to small lenders and still compete in the
overall market. Also, since security transactions are more
profitable for guarantors than small cash window transactions,
equal pricing for these transactions must be required by the
regulator.
Q.6. How will small institutions' business practices and
compliance costs change under a single utility vs. a single
guarantor vs. multiple guarantors?
A.6. A multi-guarantor model imposes higher costs on the
housing finance system. There is a distinct risk that multiple
guarantors would require a significantly higher rate of return
than the more constrained current GSEs or the GSEs structured
as utilities. Furthermore, expanding the number of new
guarantors is likely to
increase operating and marketing costs compared to the current
system. The guarantors in the new system would also carry more
risk due to their smaller and less geographically diversified
pools of loans, further adding to their cost and volatility. A
single utility would limit lenders to a single option and would
not provide as much incentive to innovate as structuring the
two GSEs as utilities.
Q.7. Do you support or oppose Fannie Mae and Freddie Mac
selling their multifamily housing businesses?
A.7. The GSEs play a critical role in the multifamily market.
Selling this business creates unnecessary risks that would be
easily managed with the GSEs structured as utilities.
Q.8. If the multifamily housing guarantee businesses were sold,
who would buy them?
A.8. There have been proposals to spin the GSEs' multifamily
business off to a new entity or to have it be the sole business
of one of the current GSEs. Preserving the role of both GSEs in
this market with utility oversight would appropriately support
the market while providing the necessary limits to ensure that
the LMI market was supported, but that the GSEs did not have an
excessive footprint.
Q.9. How would the new guarantee structure affect the
multifamily housing market? Please be specific.
A.9. A new guarantee structure would add unnecessary risk to a
currently strong market. As others have noted, the GSEs'
multifamily business performed well, including through the
financial crisis. Substantially changing this structure could
impact both access and costs, especially in crisis conditions,
when private capital withdraws from the market. Enhanced
utility regulation of the GSEs and these multifamily programs
would maintain and enhance the performance of the programs and
target it to the appropriate multifamily housing.
Q.10. 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.10. First, Congress must maintain current protections,
including the duty to serve a national market and the
affordable-housing goals. The current leveling of g-fees must
be preserved and expanded. Additionally, substantial new
resources are needed to provide for sustainable home-ownership
opportunities for underserved communities. For example, one
idea is to provide down-payment assistance for home ownership
reentry by families wrongfully harmed by the subprime lending
crisis. Communities of color lost trillions of dollars during
the foreclosure crisis, and evidence shows that many of those
borrowers were steered into toxic mortgages even when they
qualified for safer and more responsible loans with cheaper
costs. The scale of this down-payment assistance program must
match the huge harm inflicted on these families and
communities. Furthermore, the Government should fund down-
payment assistance for first-time home buyers with lower wealth
and/or credit scores in recognition of the Federal Government's
historic role in fostering mortgage lending discrimination, an
effort that will start addressing the resulting racial wealth
gap.
Q.11. Do you think Chairman 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.11. No, and in fact the proposal would likely widen the home-
ownership gap between white households and households of color.
Substantial resources and bold ideas are needed to address the
centuries of discrimination against communities of color in
this country and the resulting racial wealth gap. To start, CRL
encourages Congress to consider the ideas discussed in our
testimony (see pages 19-28).
Q.12. 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.12. Further reform should include continuing and expanding
permanent utility-type oversight and regulation of the GSEs,
their products, and pricing; the prohibitions on lobbying and
political contributions; the reductions and limitations on
portfolios; and strong capitalization of the GSEs. The GSEs
should continue and expand their credit risk transfer programs
to reduce and diversify their risk. HERA also carried forward
the GSEs' public interest obligations and they must be
preserved.
Q.13. Do you have concerns with the Chairman's proposal? If so,
please explain why and what amendment you would suggest to
remedy these concerns.
A.13. Although we are glad to see the prohibition on volume
discounts and the preservation of the cash window in the
Chairman's outline, these protections are not enough to ensure
small lenders have equal access to the secondary market.
Furthermore, we
oppose eliminating the affordable-housing goals and the broad
duty-to-serve mandate. The proposed market access fund is not a
sufficient replacement. We oppose minimum down-payment
requirements, as well as turning FHFA into a commission rather
than a single director. We are glad to see a provision on FHFA
approving guarantor pricing. However, this is insufficient to
prevent guarantors from only serving the most profitable areas
or wealthy borrowers. A national duty-to-serve mandate is
necessary to ensure broad access to credit across the United
States.
Q.14. Are there any proposed changes in the Chairman's proposal
you think make our housing finance system better? Please define
those.
A.14. CRL supports the prohibition on volume discounts, the
preservation of the cash window, and regulator approval of
pricing. However, as stated above, we do not believe these
provisions are sufficient on their own.
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