[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
THE CURRENT MORTGAGE MARKET:
UNDERMINING HOUSING
AFFORDABILITY WITH POLITICS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON HOUSING
AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
MAY 17, 2023
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-24
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
52-936 PDF WASHINGTON : 2023
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HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking
PETE SESSIONS, Texas Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
FRENCH HILL, Arkansas EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio JUAN VARGAS, California
JOHN ROSE, Tennessee JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California SYLVIA GARCIA, Texas
BYRON DONALDS, Florida NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina
MIKE LAWLER, New York BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
Matt Hoffmann, Staff Director
Subcommittee on Housing and Insurance
WARREN DAVIDSON, Ohio, Chairman
BILL POSEY, Florida EMANUEL CLEAVER, Missouri, Ranking
BLAINE LUETKEMEYER, Missouri Member
RALPH NORMAN, South Carolina NYDIA M. VELAZQUEZ, New York
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York RITCHIE TORRES, New York
MIKE FLOOD, Nebraska AYANNA PRESSLEY, Massachusetts
MIKE LAWLER, New York SYLVIA GARCIA, Texas
MONICA DE LA CRUZ, Texas NIKEMA WILLIAMS, Georgia
ERIN HOUCHIN, Indiana STEVEN HORSFORD, Nevada
BRITTANY PETTERSEN, Colorado
C O N T E N T S
----------
Page
Hearing held on:
May 17, 2023................................................. 1
Appendix:
May 17, 2023................................................. 33
WITNESSES
Wednesday, May 17, 2023
DeMarco, Edward J., President, Housing Policy Council (HPC)...... 4
Parcell, Kenny, 2023 President, National Association of REALTORS
(NAR).......................................................... 6
Ratcliffe, Janneke, Vice President, Housing Finance Policy, Urban
Institute...................................................... 9
Rossi, Clifford V., Professor-of-the-Practice and Executive-in-
Residence, Robert H. Smith School of Business, University of
Maryland....................................................... 7
APPENDIX
Prepared statements:
DeMarco, Edward J............................................ 34
Parcell, Kenny............................................... 53
Ratcliffe, Janneke........................................... 58
Rossi, Clifford V............................................ 71
Additional Material Submitted for the Record
Fitzgerald, Hon. Scott:
Written responses to questions for the record submitted to
Edward J. DeMarco.......................................... 79
Norman, Hon. Ralph:
Written responses to questions for the record submitted to
Edward J. DeMarco.......................................... 80
Written responses to questions for the record submitted to
Janneke Ratcliffe.......................................... 81
Waters, Hon. Maxine:
Written statement of the Credit Union National Association
(CUNA)..................................................... 82
Written statement of Edward Golding, Executive Director, MIT
Golub Center for Finance and Policy, and Senior Lecturer,
MIT Sloan School of Management............................. 84
Written statement of the Mortgage Bankers Association (MBA).. 90
Written responses to questions for the record submitted to
Janneke Ratcliffe.......................................... 97
THE CURRENT MORTGAGE MARKET:
UNDERMINING HOUSING
AFFORDABILITY WITH POLITICS
----------
Wednesday, May 17, 2023
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2220, Rayburn House Office Building, Hon. Warren Davidson
[chairman of the subcommittee] presiding.
Members present: Representatives Davidson, Posey, Norman,
Fitzgerald, Garbarino, Flood, Lawler, De La Cruz, Houchin;
Cleaver, Tlaib, Pressley, Garcia, Williams of Georgia,
Horsford, and Pettersen.
Ex officio present: Representative Waters.
Chairman Davidson. The Subcommittee on Housing and
Insurance will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Today's hearing is entitled, ``The Current Mortgage Market:
Undermining Housing Affordability with Politics.''
I now recognize myself for 5 minutes to give an opening
statement.
Today, we will receive testimony from experts in the
housing industry to discuss recent actions taken by the Federal
Housing Finance Agency (FHFA). Housing affordability is crucial
to giving Americans the opportunity to build wealth through
homeownership. Homeownership, in turn, paves the way for
success in many other aspects of life. In essence, housing
affordability is a cornerstone for pursuing the American Dream.
The importance of maintaining a fair and undistorted
mortgage market cannot be overstated. Currently, residential
consumer mortgage debt accounts for approximately $12 trillion,
which is spread across over 80 million mortgages. Of this $12
trillion, Fannie Mae and Freddie Mac, collectively known as the
Enterprises, guarantee approximately 70 percent of the market.
The FHFA, the entity charged with supervising the Enterprises
and acting as their conservator, must be immune to political
agendas, regardless of how much any Administration pressures
this Agency. The FHFA, therefore, retains an exceptional degree
of authority to impose rules that shape the entire mortgage
market. It is this authority that brings us here today in light
of recent proposals to change the loan-level pricing
adjustments (LLPAs) set forth by FHFA to be implemented by the
Enterprises.
When created in 2008, loan-level price adjustments (LLPAs),
also known as guarantee fees, were put in place to allow the
Enterprises to charge for the credit risk associated with
mortgages which they were guaranteeing. These fees are designed
to cover the risk of standing behind the mortgages and to
protect the solvency of the Enterprises. The recent changes to
these fees that went into effect on May 1st, however, are
alarming because they disproportionately increase fees for
borrowers who have higher credit scores. Any way you slice it,
prices will go up for consumers who have credit scores above
680, and even for some of those with down payments of more than
30 percent of the loan. In other words, this pricing scheme
would shift most of the cost burden to more-creditworthy
borrowers.
The FHFA contends that the loan-level price changes are
attributed to higher capital standards that need to be imposed
on the Enterprises. While this could justify some change in
LLPAs, the change we saw imposed on May 1st clearly targeted
new homebuyers with average credit scores and above. And we
have also heard that the FHFA contends that interpreting the
new LLPA chart must be coupled with mortgage insurance
coverage, so as to paint a full picture for consumers. And
while those with lower credit scores and low down payments are
certainly likely to pay more for mortgage insurance given the
risks they present, this is an entirely different credit
product whose fees cover the cost of the insurance itself, and
go to an entirely separate entity. Mortgage insurance payments
do not help the Enterprises to build capital or to actually
protect the taxpayers from risk.
Make no mistake, these changes to the LLPAs ultimately hurt
housing affordability for the majority of homebuyers. Even if
it is a relatively small cost for some, it is inappropriate to
place the burden on Americans simply because there is a
misguided notion that, ``they can afford it,'' especially with
the high cost of inflation that is plaguing our economy. Now,
to be fair, we have already seen the FHFA reverse course on
some components of the LLPA changes, while also issuing a
request for input on its method for determining LLPAs. These
are positive but small steps in the right direction, and while
we welcome these changes, they are insufficient.
This committee will ensure that we have appropriate risk-
based pricing and an efficient mortgage market. The witnesses
here today will be critical to providing insight into how we
can get that done. So, I thank our witnesses for their
testimony today, and I look forward to the conversation.
The Chair now recognizes the ranking member of the
subcommittee, the gentleman from Missouri, Ranking Member
Cleaver, for 5 minutes for an opening statement.
Mr. Cleaver. Thank you, Mr. Chairman, and I thank you for
calling the hearing.
Let me first start by acknowledging that Government-
Sponsored Enterprises (GSEs) pricing frameworks are not the
most-digestible set of information. Housing finance is complex.
The complexity then lends itself to misunderstandings and
sometimes to deliberate misinformation. I read a Fox News
article last month entitled, ``Real Estate Expert Shreds Biden
Rule Punishing Homebuyers with Good Credit.'' The argument was
presented that pricing changes were a punishment for homebuyers
with good credit, and designed to subsidize loans to higher-
risk borrowers, and the expert, by the way, was a former media
host. I have since seen these claims repeated in several other
media outlets. The Washington Examiner, for example, called it,
``Biden's socialist housing scheme.''
Reasonable minds can disagree resolutely about how to
implement a complex pricing framework, and I appreciate the
request for input released by FHFA Director Thompson earlier
this week. But I fervently disagree with the way in which
individuals have taken the liberty with the motivations of FHFA
or have mischaracterized the FHFA's actions. We will hopefully
get to the bottom of these claims during the hearing.
Last year, I called on the FHFA to do a holistic review of
up-front fees. The old FHFA pricing framework was extremely
unfair. The GSEs were unfairly overcharging borrowers with
lower down payments who had the added protection of private
mortgage insurance, and undercharging others. The new pricing
framework was a recalibration that was warranted, given the
implications of a new capital regime in 2020. The new framework
is not perfect, but it is more fair.
Under both frameworks, no one is rewarded for having a
lower credit score or making a lower down payment. Borrowers
with lower credit scores and lower down payments continue to
pay more than borrowers with higher credit scores and higher
down payments, despite the adjustment made. These borrowers are
some of the highest-credit borrowers in this country. The
average credit score of a borrower in one of the Government-
Sponsored Enterprises' (GSE's) flagship affordable mortgage
programs is 743. These are prime-credit Americans who simply
don't have a great amount of wealth; they just want a
reasonable chance for their family to own a home. In urban
America, in suburban America, and in thousands of rural
communities around this country, the average borrower with an
Enterprise-backed mortgage is expected to receive a minimal
increase of 4 basis points, or 0.5 percent, on their interest
rate with these changes. Yet, the undersupply of housing has
driven a nearly 300 basis point mortgage rate increase.
Mr. Chairman, I appreciate the opportunity for us to
discuss this important issue. The country needs Congress to get
past these narratives that turn Americans against each other.
Thank you.
Chairman Davidson. I thank the ranking member.
We now welcome the testimony of our witnesses.
First, Mr. Edward J. DeMarco. Mr. DeMarco is the president
of the Housing Policy Council (HPC). Prior to joining HPC in
June of 2017, he was a senior fellow in residence at the Milken
Institute's Center for Financial Markets. And from 2009 to
2014, Mr. DeMarco was the Acting Director of the Federal
Housing Finance Agency, where he served as the conservator for
Fannie Mae and Freddie Mac, and as regulator of those companies
and the Federal Home Loan Banks.
Second, Mr. Kenny Parcell. Mr. Parcell is the 2023
president of the National Association of REALTORS (NAR), and
the broker-owner of Equity Real Estate Utah. At the national
level, Mr. Parcell served as NAR's vice president of government
affairs in 2018, and in 2021, REALTOR Magazine named him as one
of its 30 under 30.
Third, Dr. Clifford Rossi. Dr. Rossi is an executive-in-
residence and professor-of-the-practice at the Robert H. Smith
School of Business at the University of Maryland. Prior to
entering academia, Dr. Rossi had nearly 25 years of experience
in banking and government. His most recent position was as
managing director and chief risk officer for Citigroup's
consumer lending group, where he was responsible for overseeing
the risk of a $300-plus billion global portfolio of mortgage
and home equity loans, student loans, and auto loans, with 700
employees under his direction.
Fourth, Ms. Janneke Ratcliffe. Ms. Ratcliffe is vice
president for housing finance policy and leads the Housing
Finance Policy Center at the Urban Institute. Ms. Ratcliffe
came to the Urban Institute from the Consumer Financial
Protection Bureau (CFPB), where she served as an Assistant
Director, leading its Office of Financial Education. Ms.
Ratcliffe serves on the Consumer Affairs Advisory Council of
the Mortgage Bankers Association, and she is a member of the
National Community Stabilization Trust Board of Managers.
We thank you all for taking the time to be here. You will
each be recognized for 5 minutes to give an oral presentation
of your testimony. And without objection, your written
statements will be made a part of the record.
Mr. DeMarco, you are now recognized for 5 minutes to give
your oral remarks.
STATEMENT OF EDWARD J. DeMARCO, PRESIDENT, HOUSING POLICY
COUNCIL (HPC)
Mr. DeMarco. Thank you, Mr. Chairman. Chairman Davidson,
Ranking Member Cleaver, and members of the subcommittee, thank
you for the invitation to participate in today's hearing. I am
here on behalf of the Housing Policy Council (HPC), a trade
association comprised of the leading national mortgage lenders
and servicers; mortgage, property, and title insurers; and
technology and data companies. My written statement provides
HPC's views on today's topic and offers HPC's perspective on
the relationship between pricing, capital, safety and
soundness, and expanding homeownership opportunities.
The statutory purposes of Fannie Mae and Freddie Mac
combined with FHFA's statutory responsibilities indicate that
Congress expects the two companies to advance the stability and
availability of mortgage credit while operating in a safe and
sound manner. In other words, Fannie and Freddie have a mandate
to facilitate and support the liquidity of the secondary
mortgage market. Accomplishing this purpose directly enhances
the availability of mortgage credit throughout the country and
lowers the cost of such credit to homebuyers.
Congress went a step further and instructed that Fannie Mae
and Freddie Mac take steps to meet specific goals to expand
mortgage credit availability in identified geographies and for
low- and moderate-income families. For purposes of today's
discussion, I will divide FHFA's most recently announced
pricing changes into two buckets: first, FHFA introduced and
then rescinded a new up-front fee adjuster based on the
borrower's debt-to-income ratio; and second, FHFA made
adjustments to the pricing grids that establish up-front fees
calibrated to Fannie's and Freddie's risk in a particular
transaction, the risk to Fannie and Freddie.
HPC and others quickly recognized the challenges of the
debt-to-income pricing element, and we asked FHFA for an
implementation delay, which FHFA granted. After additional
evaluation, HPC concluded that the proposed pricing element
simply was not workable. We sent a detailed letter to FHFA on
April 28th outlining our reasons for this conclusion. And on
May 10th, FHFA announced it was rescinding the DTI pricing
element, and HPC is grateful for this reconsideration.
As for the recent changes to the up-front grids, they
appear to be reasonably aligned with credit risk after
accounting for the new capital framework, the cost of private
mortgage insurance, and historical default and loss data. That
said, only FHFA has the detailed data and models to fully
explain how the grids align with risk and the recently-
finalized risk-based capital framework. This opacity may have
contributed to the confusion and misreporting regarding the
January announcement. HPC and its members believe the solution
is to have greater transparency regarding the pricing across
risk categories relative to these capital standards. My
statement elaborates on this point.
I would like to specifically address HPC's views on
expanding sustainable homeownership. HPC and its members do not
believe that either subsidized pricing or more-lenient
underwriting, both of which increase risk and the cost of
losses, is the way to go. Rather than ignoring risk or trying
to compensate for it by charging all borrowers more, the
government would better achieve sustainable expansion in
homeownership with forms of assistance that lower borrower
risk. I have testified on this issue before in front of this
committee, and my written statement also elaborates on this
point.
HPC and its members would also like to point out that this
entire discussion of g-fees reflects how poorly targeted the
pricing framework is for accomplishing the GSE's housing
mission. Congress established GSE housing mission goals to
advance certain affordable housing priorities. It is unknown
how much the goals actually benefit the targeted households,
rather than simply being absorbed by other parties to the
transaction, creating leakage of the intended cross-
subsidization benefit to the consumer. There would be far
greater transparency of how much financial support actually
reaches low- and moderate-income families and communities if
the subsidy were directly allocated to those borrowers, not
embedded in the price between the lender and the GSE.
Thank you again for having me here.
[The prepared statement of Mr. DeMarco can be found on page
34 of the appendix.]
Chairman Davidson. Thank you, Mr. DeMarco.
Mr. Parcell, you are now recognized for 5 minutes to give
your oral remarks.
STATEMENT OF KENNY PARCELL, BROKER-OWNER, EQUITY REAL ESTATE
UTAH, AND 2023 PRESIDENT, NATIONAL ASSOCIATION OF REALTORS
(NAR)
Mr. Parcell. Chairman Davidson, Ranking Member Cleaver, and
members of the Housing and Insurance Subcommittee, thank you
for your service, and, most importantly, thank you for your
time. My name is Kenny Parcell, and I am a broker-owner of
Equity Real Estate Utah. I have been a REALTOR member for over
27 years and I am now president of the National Association of
REALTORS (NAR).
Today, I am here on behalf of our 1.5 million members who
live and work in every ZIP Code in America. We are the nation's
largest trade organization. Thank you for the opportunity to
share our perspective on the housing market and the recent
pricing changes announced by the Federal Housing Finance
Agency.
It is no secret that today's market poses many obstacles
for homebuyers. Typically, first-time buyers make up 40 percent
of all buyers, but it is now at an all-time low of 26 percent.
This is a very concerning statistic. Interest rates have risen
nearly 3 percentage points over the last year. In March of
2022, if you had a loan of $400,000 at a 3-percent interest
rate on a 30-year mortgage, your principal and interest payment
would have been $1,682. Now, that same loan amount at 6 percent
would put your payment at $2,398. That is a 42-percent
increase.
With the cost of inflation, and additional fees, we have a
real concern. Housing affordability and availability remain
extremely restricted. Our members navigate these issues every
day, which is why it's crucial for buyers and sellers to have a
REALTOR on their side.
I learned a hard lesson by not using a REALTOR when I
purchased my first home going into my sophomore year in
college. I was a young student-athlete, and all I wanted to be
was a homeowner. I had 3 years left on my football scholarship,
and I didn't want to rent. I had a dream of being a homeowner.
Although it wasn't easy--when I closed on my first home, the
seller removed the working white refrigerator and replaced it
with a lime green one that didn't work, the kitchen cabinets
were taken, and the AC and the garage door were removed. For
the first 6 months, I lived out of a camping cooler. I would
take the ice from the training room and bring it back to
restock my cooler at home. It was a proud day when I eventually
saved up enough money to buy a used refrigerator. I still own
that home today, and it has increased in value by over
$300,000. This experience led me into real estate, and later,
NAR leadership.
Our members abide by the code of ethics and have consumers'
best interests at heart. REALTORS are committed to making the
American Dream accessible to more people, whether by helping
them navigate a difficult transaction like my family faced, or
finding a solution to the supply and affordability crisis
facing homebuyers nationwide.
A recent report from NAR found that we are at a 5-million
unit shortfall. Underbuilding, high interest rates, and rapid
price increases are eroding housing affordability.
Homeownership is still viewed as a vital part of the American
Dream, but it is becoming increasingly out of reach for many.
The average net worth of a renter is $8,000. The average net
worth of a homeowner is over $320,000. The percentage of
homeownership for Whites is 74.4 percent, 45.8 percent for
Blacks, 61.6 percent for Asians, and 49.7 percent for
Hispanics. We must and should improve the statistics for
minorities. We believe any fee increase right now is not good
for anyone wanting to purchase a home.
This brings me to FHFA's recent loan-level pricing
adjustments or LLPA's. NAR believes this pricing was a missed
opportunity to help Americans who are already struggling to
afford homes. NAR has worked with FHFA on this issue for years
and raised concerns about the fees in January. Given the sharp
rise in interest rates over the past year, we knew these
changes would harm borrowers in an already-tight housing
market. Additionally, with economic concerns mounting as
Congress debates the debt limit, these fees only serve to
further de-incentivize potential buyers.
We are grateful to FHFA for listening to the concerns like
these across the industry and announcing it would rescind its
up-front fee on borrowers whose debt-to-income ratio is greater
than 40 percent, which was set to take effect on August 1st.
NAR will continue to work with FHFA and Congress to find a
solution to lower barriers to homeownership while minimizing
the risk to taxpayers.
It is like we are all in the same boat, but there is a hole
in one side, and the people on the other side yell out, ``Thank
God the hole is not on my side.'' We need everyone's help on
this important issue. It will take a bipartisan approach to
address the housing affordability crisis in our country. Thank
you for the opportunity to testify. We appreciate your time,
and I look forward to your questions. Thank you.
[The prepared statement of Mr. Parcell can be found on page
53 of the appendix.]
Chairman Davidson. Thank you, Mr. Parcell.
Dr. Rossi, you are now recognized for 5 minutes to give
your oral remarks.
STATEMENT OF CLIFFORD V. ROSSI, PROFESSOR-OF-THE-PRACTICE AND
EXECUTIVE-IN-RESIDENCE, ROBERT H. SMITH SCHOOL OF BUSINESS,
UNIVERSITY OF MARYLAND
Mr. Rossi. Thank you, Chairman Davidson, Ranking Member
Cleaver, and members of the subcommittee. My name is Clifford
Rossi, and I am professor-of-the-practice and executive-in-
residence at the Robert H. Smith School of Business at the
University of Maryland. I offer a unique perspective on this
issue, having worked for 23 years in the financial services
industry in a variety of C-level risk management positions,
including 10 years at both Fannie and Freddie, where I actually
helped design and work on the analytical methodologies that we
are here to talk about today, using pricing, Enterprise
guarantee fees, and risk-based underwriting matrices.
There remains much confusion over the process employed to
price credit risk by the Enterprises. Like much of the housing
finance system, that credit pricing process is based on a
legacy structure that, in a perfect world, would likely never
have been designed the way it is today. Of critical importance
to this hearing is the issue of cross-subsidies among mortgage
borrowers.
Changes in the LLPA grids that went into effect on May 1st
sparked enormous controversy over the extent to which high-
credit-quality borrowers are subsidizing low-credit-quality
borrowers. I, too, in opinion pieces, raised concern over the
appearance that fees on some high-credit-quality borrowers
would rise, while reducing fees on a number of low-credit-
quality borrowers. Those are immutable facts. The current and
previous LLPA grids incorporate elements of risk-based pricing,
although the current grids flatten that relationship between
key risk attributes and credit default.
Another fact is that the cross-subsidy and credit pricing
has been in place for decades by way of average guarantee fee
pricing used by both Enterprises. Effectively, then, what we
see is a hybrid form of credit pricing that features flat or
average pricing for the ongoing or guarantee phase and quasi-
risk based pricing. I don't actually call it risk-based pricing
for up-front fees or LLPAs.
About the time of the financial crisis, as both GSEs came
under increasing stress from accelerating credit losses, they
turned to a new device to raise funds to staunch those losses:
LLPAs. The LLPAs are essentially an artifact of a last-ditch
effort by the GSEs to save themselves rather than as a well-
thought-out credit pricing structure. The seminal question here
is whether such a pricing scheme is the best structure to
achieve the FHFA's objectives, cited earlier.
So, when designing an optimal mortgage credit pricing
structure for the Enterprises, I have a set of criteria that
are essential in guiding that, and these principles are as
follows. One, any credit pricing structure must achieve the
FHFA's goal of ensuring the safety and soundness of the
Enterprises. I think we would all agree about that. Credit
pricing must be transparent and straightforward to understand.
Credit pricing must be empirically-based, reflecting a through-
the-cycle view of loan performance, taking key risk attributes
into account. Credit pricing should be operationally-tractable
and designed to minimize implementation burden for the
Enterprises and mortgage originators. And finally, credit
pricing must seek to reduce and/or eliminate perverse
incentives that may pose risks to borrowers or the GSEs.
How do the current LLPAs actually comport with these
criteria? Use of the Enterprise regulatory capital framework,
the ERCF, along with the modeling approach for generating
guarantee phase aligns generally with the first and third
criteria, but the introduction of LLPAs violates the second,
fourth, and fifth. So, while on the surface it can be argued
that the LLPAs are transparent by virtue of pricing by risk
attribute, the exact mechanics are murkier, thus setting the
stage for second-guessing the new LLPA grids and the need for a
new approach.
I actually proposed eliminating the current FICO, LTV, and
LLPA grids altogether, and updating the guarantee fees
consistent with achieving a target rate of return, taking into
account the ERCF, that is the regulatory capital requirements.
My proposal meets all of the stated criteria of mortgage credit
pricing laid out earlier. And a precedent has already been set,
as we said earlier, with the FHFA's announcement of rescinding
the LLPA fee for debt-to-income ratio.
So instead of imposing LLPA fees for FICOs and LTVs, what I
suggest is that a part of the guarantee fee would be determined
by the FHFA to use as a legislatively-capped rebate account of
sorts to borrowers who are income- and/or wealth-challenged.
There is ample precedent for these kinds of guarantee fees for
various reasons, such as the FHFA's requirement over the years
to add 10 basis points to guarantee fees, to provide additional
coverage for credit exposure, and let us not forget the 10
basis points adjustment for TCCA.
The proposal decouples safety and soundness objectives from
affordable housing and credit pricing, and that is important.
We need to decouple credit pricing from these other policy
objectives, and thus, it provides transparency in credit
pricing, reduces operational burden, reduces risk to borrowers
and the Enterprises, and supports the goal of affordable
housing. Thank you very much.
[The prepared statement of Dr. Rossi can be found on page
71 of the appendix.]
Chairman Davidson. Thank you, Dr. Rossi.
Ms. Ratcliffe, you are now recognized for 5 minutes to give
your oral remarks.
STATEMENT OF JANNEKE RATCLIFFE, VICE PRESIDENT, HOUSING FINANCE
POLICY, URBAN INSTITUTE
Ms. Ratcliffe. Thank you. Chairman Davidson, Ranking Member
Cleaver, and members of the subcommittee, thank you for the
opportunity to testify today.
I would like to start by mentioning that what I present
today is based on my own views and should not be attributed to
the Urban Institute, its trustees, or funders. I have been
invited to discuss pricing decisions with regard to the loan-
level price adjustments. This complex topic has generated
concern and confusion, and I hope that analysis by me and my
Urban Institute colleagues will help make things clearer. In my
written testimony, I provide additional context around LLPAs,
which were first introduced in 2008.
First, I want to emphasize that the recent adjustments to
the LLPAs do not in any way compromise the safety and soundness
of the GSEs. All Enterprise loans today are underwritten
according to strict risk criteria and present low risk by
historical standards. Indeed, even those falling in the lower-
right quadrant of the pricing grid, with down payments less
than 20 percent and credit scores between 620 and 680, have low
projected losses. We estimate less than 1 percent. Moreover,
these made up less than 3 percent of Fannie Mae's 30-year,
fixed-rate purchased, single-family-owner-occupied mortgages in
2022, so a relatively small share.
Second, rather than thinking about these adjustments as new
cross-subsidies, they should be viewed in light of a series of
changes made by the Director to better align pricing with the
capital requirements established by the prior Director under
the Enterprise regulatory capital framework (ERCF). The GSEs
exist to support sustainable and affordable homeownership
across communities and across cycles.
GSE pricing is primarily structured so that they can meet
their capital requirements and their overall target return on
capital. They can set different profit margins for different
types of loans, which is a standard business practice in order
to maintain safety and soundness, serve their public mission
and meet their overall return target. For example, they charge
the same fees for loans in all States, even though some States
have higher default rates than others, and are thus less-
profitable. They also have different margins on some products
based on competitive pressures.
Within the current pricing structure, it is helpful to
recognize three categories the GSEs do price differentially.
First, mission-remote loans like second homes, investment
properties, million-dollar loans, and cash-out refinances,
which are seen as less-appropriate for deep public support and
less-central to the basic homeownership mission. For these
loans, they charge as much as they can, while still providing
enough benefit to retain that business. These higher returns
offset lower-return targets on a second category, mission
loans, which include mortgages to people with lower incomes, in
rural markets, manufactured homes, and a few other categories.
For this category, the aim is to price as low a margin as
possible while still meeting profit targets, a practice that
inherently makes these loans less risky.
Then, we come to the third category, the bulk of the loans.
These are purchase and rate-term refinances for all other
owner-occupied homes, which are priced to hit capital
requirements and target return on equity. The May 1st
adjustments applied to the core loans. The May 1st pricing
adjustment is the last in a series of steps taken over the past
year, each to address different objectives. This has led to
some confusion because these steps are being conflated, leading
some to conclude that these changes are supporting mission
business at the expense of the core business, but that is not
correct.
The May 1st changes result in a flatter grid across the
core business. They give more credit where it is due for
private mortgage insurance, and they split up some of the prior
groups into smaller groups. The May 1st additions are
relatively small, adding at most $40 per month to the median
mortgage, and this adjustment applies to less than 1.5 percent
of the core borrowers. Groups within the grid are all still
priced to cover losses and make a profit.
Finally, in the core business, which is the vast majority
of their lending, those who pose more risk pay more, in some
cases a lot more, than borrowers who pose less risk. Borrowers
with low down payments or high loan-to-value (LTV) have to buy
private mortgage insurance. Private mortgage insurance reduces
losses to the GSEs and also raises costs for borrowers with LTV
over 80 percent, who were likely overcharged in the prior grid,
especially those with lower credit scores.
With the May 1st changes, on a $300,000 mortgage, a
borrower with a credit score of 660 and 5 percent down will
still pay around $500 more per month--$500, I just want to
emphasize that--in LLPAs and PMI than a borrower with a credit
score of 700 and a 25-percent down payment. Ultimately, the May
1st changes have little to nothing to do with cross-subsidy.
They better align the core business, LLPAs, with the capital
requirements and losses, and they address previous overcharges
among high-LTV borrowers by accounting for mortgage insurance.
Thank you, and I look forward to your questions.
[The prepared statement of Ms. Ratcliffe can be found on
page 58 of the appendix.]
Chairman Davidson. Thank you, Ms. Ratcliffe.
We will now turn to Member questions, and the Chair now
recognizes himself for 5 minutes for questions.
Regarding FHFA's LLPA changes instituted on May 1st, first,
the pricing changes announced, both the LLPA and the DTI, did
not sit well with many, a bit of an understatement. But second,
the process, such as there was one, that FHFA used to convey
these changes through a couple of press releases was neither
formal nor inclusive. Third, FHFA can, and in the case of DTI,
did make changes to its pricing plans when they fell flat. So,
their argument that they had to do it this way doesn't really
add up. And fourth, the data FHFA says justifies the changes
has either been not available or at least not transparently
presented, so it stoked a lot of opposition.
It is really FHFA's burden to explain its own work, and
FHFA fell far short of those standards, which is why we are
having this hearing. It is also why we have attached a
discussion draft of a bill to this hearing to have FHFA revert
back to the old LLPA pricing for now, and to have GAO do a
study of the process so that we can study what they did do to
get to this point, and then require FHFA to use a transparent
process if future changes are, in fact, merited. Quite simply,
we ought to ensure fairness, oversight, and accountability when
it comes to matters affecting the mortgage market.
Does anyone on the panel disagree with that?
[No response.]
Chairman Davidson. I don't see anyone. Does anyone claim
that it would cause harm to do it this way?
[No response.]
Chairman Davidson. That is the basic goal, and I appreciate
the quiet affirmation of that, and I just want to highlight a
couple of things that were out there.
Mr. DeMarco, if the 2023 price changes were actually about
capital rule compliance, now that FHFA has rescinded its
proposed DTI fee that folks like Ms. Ratcliffe have noted,
``penalizes lower-income borrowers,'' doesn't that mean that
the GSEs will now have some level of capital shortfall since
they are not going to implement the DTI rule? Would you support
FHFA further revising LLPAs to raise fees again on GSE
borrowers to backfill the missing revenue stream, or what are
they going to do to hit the higher capital requirement they
said they were going to try to hit?
Mr. DeMarco. I think FHFA itself, both in its guarantee fee
(g-fee) study published last November, and in particular, they
made it even more clear in the request for input that they
published this week, that in fact, the current g-fee, the new
g-fee framework, is not going to produce the target rate of
return given the increased capital requirements that were
finalized in 2020 and became effective in 2022. I think this is
really a root issue in this whole discussion, right?
What was done under Director Calabria in terms of a
material increase in the capital requirements for Fannie and
Freddie included in those increases, not just a very granular
approach to pricing mortgage credit risk, but also ensuring
that there was a base amount of capital across all mortgages.
So, even lower-risk mortgages, through the way the capital
rules put together, would have a substantial capital
requirement, additional capital requirements. It is not
surprising then that if one comes along afterwards and is
trying to align g-fees to this new capital framework, that one
would see the sort of pricing changes that were done. I think
this really was done to align with the framework, but because
capital is so much higher, I am not going to be surprised if
there are additional capital raises that take place over time.
Chairman Davidson. Yes.
Mr. DeMarco. I'm sorry, g-fee raises that take place over
time.
Chairman Davidson. They may not be done yet, and to the
point, say, well, it is no big deal. Ms. Ratcliffe illustrated
on page 12 of her testimony that about half of all GSE loans,
46 percent, are facing higher LLPA costs, so that less than a
third can wind up with lower costs, and that is on the new
assessment. I understand it is not lower in the aggregate, but
it is this assessment. So, there is kind of this bonus round
where we are going to assess it to try to get higher capital
standards.
Mr. Rossi, does it strike you as something that would sit
well with regular Americans trying to buy a home? Do you see
why many constituents would regard this shift in the balance as
unfair?
Mr. Rossi. Absolutely, and I don't personally like the--
Chairman Davidson. Sorry. I gave you no time to answer. I
am going to run a little tighter gavel, and I would love to get
your answer in writing when you get a chance.
I now recognize the ranking member of the subcommittee, Mr.
Cleaver, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. Ms. Ratcliffe,
leading civil rights agencies and organizations like the Urban
League and many of the housing advocate organizations have, as
long as I have been on this committee, called for the
elimination of LLPAs altogether. The argument that is being
made is that the LLPA pricing framework has had a
disproportionate impact on borrowers of color, and has been
inherently unfair, as it placed the burden of the Enterprises'
financial recovery and future catastrophic risk on borrowers of
color, even though they were the victims of the financial
crisis, not the cause. And I am a card-carrying opponent of the
tendency to blame the victim.
My question is, regardless of what Congress does, there
will always be an argument that something could be done
differently or that there is a different and preferred way to
analyze risk. Should the FHFA do away with LLPAs altogether, as
suggested by some organizations? Do you see the value for
perfecting the current framework, which has been worked on over
the course of several FHFA Directors?
Ms. Ratcliffe. Thank you for the question. I agree that
LLPAs and private mortgage insurance costs will tend to fall
heavier on borrowers with low down payments and those who
haven't had the chance to build as robust a credit history. And
I just want to remind everybody that all GSE loans today
represent fully-underwritten loans with ability to repay, so
these are not bad-credit borrowers by any means. But in any
case, borrowers of color are less likely to have savings, and
especially less intergenerational wealth than White borrowers,
so they are more likely to need high-LTV loans, and thus pay
higher LLPAs and pay for private mortgage insurance.
So, I think that there is a good case to be made for doing
away with LLPAs and just having everybody pay the same for
access to the same benefit. All borrowers who access the GSE
loans are getting a government benefit effectively that our
research estimates amounts to about $6 billion a year. So, it
is not really a tax so much as it is just a question of, how do
we give people access to this benefit?
There has been an argument here today for doing away with
LLPAs, and I agree with that. I just want to say it is complex
because right now, because of the higher LLPAs on the mission
remote loans--the second homes, vacation homes, investor
properties, cash-out refis, and high-balance loans--those are
actually creating the potential to be able to reduce the LLPAs
while still making the loans profitable for some of the more
real mission-oriented loans, so there is a baby in the
bathwater of the LLPAs as well. But other than those cross-
subsidies, I would agree with Dr. Rossi on doing away with the
LLPAs.
Mr. Cleaver. Mr. DeMarco, I am interested in your response
to that question.
Mr. DeMarco. I have a different position. I believe that
risk-based pricing is an important element of operating a safe
and sound financial institution. Fannie Mae and Freddie Mac are
two enormous financial institutions that are integral to our
country's housing finance system and to our financial system.
And I believe that the capital required and then the pricing of
a financial guarantee needs to be done on the prospect of risk.
But, Mr. Cleaver, you raise a very important question about
how we go about providing support to those segments of our
country that Congress has designated as, for whatever
historical or other reasons, warranting support. And what I go
through in my testimony is providing a mortgage rate subsidy to
these homebuyers so that instead of paying 6\1/2\ percent--they
are paying 6\1/2\ percent or 6\1/8\--that I don't believe is
going to get us where we want to go, instead, you think about
the money that is being used to subsidize those rates. If that
money was available and provided directly to the targeted
borrowers, then we can work on enhancing their down payment,
improving their credit position, and providing them with rainy
day reserves so that they are going to be more sustainable when
in their mortgage.
I think these are the sort of steps that we can take rather
than subsidizing the rate. Let's provide that money directly to
these families, and let's make sure we identify which families
we are providing it to.
Mr. Cleaver. Thank you.
Chairman Davidson. I thank the gentlemen. The Chair now
recognizes the gentleman from Florida, Mr. Posey, for 5
minutes.
Mr. Posey. Thank you, Chairman Davidson. When I first read
the proposal that we are going to charge people with good
credit more, and we are going to charge people with poor credit
less, I thought it was a bad joke. How that could possibly pass
anybody's straight-face test is a mystery to me. Dr. Rossi,
explain the principle of risk-based pricing mortgage lending,
and should we preserve such principles?
Mr. Rossi. I am a big believer, just to say at the
beginning, in risk-based pricing in general. Basically, what
happens is that every loan that comes through that the GSEs
purchase will go through their pricing engine. It will take
into account all of the usual variables, such as FICO score,
loan or credit score, loan-to-value ratio, debt-to-income
ratio, and probably another 10 or 15 of those variables that
you see in this LLPA grid. So, we are already pricing for it in
the ongoing g-fee.
And I want to be clear here, there is the ongoing g-fee,
and there is the up-front loan-level pricing adjustment, so
risk-based pricing is inherently good. We all do it every day
with auto insurance, right? We see that we each pay based on
our driving habits and everything else, but it is different in
the GSE world because we have this other dimension to it. So,
it is not the case that I personally believe risk-based pricing
has a purpose. I think it should be risk-based price into the
g-fee. Every loan should be risk-based price, but then we
average it at the end just like we do today. And 45 basis
points, I think, is the average guarantee fee.
Mr. Posey. Mr. Parcell, what are the views of the REALTORS
across the nation on this?
Mr. Parcell. Thank you, Congressman. We are against any
increase in fee, period.
Mr. Posey. In each of your written testimonies, you have
offered some solutions, but, to me, it is so simple. Do we all
agree that inflation drives the price up? Do we all agree that
inflation makes it harder for low-income people to purchase
homes? Do we agree that inflation makes it harder for them just
to pay their bills every month, much less qualify for a home
loan? All hands, I am sure we are unanimous on that.
So, why won't the Administration do something to fix that?
The Administration is raising rates to try and stop the
inflation that it caused because it is trying to kill the
fossil fuel industry. Nothing in this room does not have a
fossil fuel industry component to it. The Federal Government is
causing these problems and then asking people to come in and
help solve it when the Federal Government could solve the
problem relatively quickly.
A housing shortage for everyone to have a home is nothing
new. That has been around since the beginning, and we have
tried to do everything possible, I think, the government, to
make that, as some consider it, the American Dream, possible
for every family. We know every generation is better off until
possibly this one than the generation before because ownership
of the rock has expanded, and we really want to do that. But it
really seems that we are trying to solve a problem that could
easily have been solved. It could easily be solved with almost
a snap of a finger. We could bring prices down. We could bring
affordability down. Does anybody want to dispute that on this
panel?
Mr. DeMarco. No, Congressman. More houses would certainly
help.
Mr. Parcell. Congressman, there are a few things that could
help immediately, including the capital gains exemption for
your primary residence, a law that was passed in 1997. It was
$250,000 if you are filing separately, and $500,000 if you are
filing jointly. There are people who are in their homes and
would like to downsize, but they do not want to take the
capital gains hit. Things have changed since 1997, so you all
could help with that. There is also commercial office space
that is not being utilized with COVID. There are people not
coming in, and we could use some of that commercial space for
conversion to homeownership. So, those are things that we would
all welcome your help with, for sure. Thank you.
Mr. Posey. Anybody else?
Mr. Rossi. I have one. I would say if we eliminated the 10-
basis points on top of guarantee fees today for payroll tax,
that would go a long way, too.
Mr. Posey. Thank you. Mr. Chairman, my time is about to
expire, so I yield back. Thank you.
Chairman Davidson. Thank you, Mr. Posey. The gentlewoman
from Texas, Ms. Garcia, is now recognized for 5 minutes.
Ms. Garcia. Thank you, Mr. Chairman, and thank you to all
of the witnesses for being here today.
I would like to begin by expressing my concern that this is
the first hearing that we have had on housing in this
subcommittee, the Housing and Insurance Subcommittee, in this
Congress. Our nation is facing a housing crisis, and this
committee did constant work on this issue under the leadership
of then-Chairwoman Waters. Now, however, the Republican
Majority has chosen to ignore this very important housing issue
and focus on one political and highly-technical issue. In fact,
as I have been listening to some of your testimony, I think
even I may have gotten a little confused there for a minute.
My first question is about this issue that Republicans have
decided to focus on and why it can actually be an effective
tool. Ms. Ratcliffe, according to the National Fair Housing
Alliance and the National Consumer Law Center, credit scoring
has a history of discrimination. Today's median FICO score is
742, which is much higher than individuals' credit scores
throughout the nation, particularly in the South. Borrowers in
my home State of Texas, and States like Georgia, Mississippi,
Louisiana, Arkansas, and Oklahoma had average credit scores of
less than 720. Do you believe that FHFA's recent pricing
changes will help first-time homebuyers in these States access
homeownership through conventional loans?
Ms. Ratcliffe. Thank you for your question. And I do want
to clarify that LLPAs went down for many borrowers with lower
credit scores and many borrowers with higher loan-to-value
compared to where they were in the previous grid.
Ms. Garcia. When you say, ``many,'' it is not all.
Ms. Ratcliffe. Certainly, it is not all of them.
Ms. Garcia. So, how many, less than half, one-third, 20
percent?
Ms. Ratcliffe. I can work out the numbers while we are
sitting here, but not right off the top of my head. But I am
just emphasizing that when people say people are paying more,
it is not that higher-credit-score borrowers are paying more
than lower-credit-score borrowers. It is that higher-credit-
score borrowers are going to pay a little more than if they had
gotten their mortgage before May 1st, and lower-credit-score
borrowers would be paying less than they did before May 1st,
but they are still paying substantially more than borrowers
with high credit scores. So, I just want to clarify that.
For sure, because of the weight of the fees and the slight
reduction for people with lower credit scores, this should be
more helpful in areas where more borrowers have lower credit
scores. Again, to emphasize, all GSE loans are carefully
underwritten. These are good-quality borrowers, all of whom are
expected to be successful in homeownership.
Ms. Garcia. So, you think it would help first-time
homebuyers?
Ms. Ratcliffe. Marginally, yes, it would.
Ms. Garcia. Okay. I tend to agree with you, and I believe
that supporting first-time homeownership is not only essential
but, in fact, the responsibility of this subcommittee and all
of us to encourage.
I would like to take this opportunity to use the expertise
of these witnesses to focus on other issues that have been
ignored by the Republicans. I would like to discuss how
Congress can support homeownership, particularly for low-income
borrowers of color. My district is 77-percent Latino, and
Latinos are on track to become the largest group of homebuyers
in the nation very soon. Ms. Ratcliffe, how best can we support
homeownership as potential buyers face high down payments, lack
of generational wealth, a housing shortage, and high interest
rates? Easy question.
Ms. Ratcliffe. And I think there are many good answers here
on the panel today. I will say there is no single silver
bullet. I feel like it takes a bipartisan, coherent, across-
the-board effort at the national and local level. The biggest
issue right now is lack of housing supply. I think we have
already heard that, both for rental housing and homeownership,
and this is driving up prices. So, it is really important to
focus on supply. There are many ways in which the Federal
Government can find ways to subsidize the building of
affordable housing, both for rental and homeownership. I won't
go through the whole list.
I just want to say that at the same time that we are
looking at the supply side, we also need to be sure to empower
the borrowers, the homeowners of the future, the generations of
the future to become homeowners. And that can be done through
things like down payment assistance, perhaps interest rate,
buy-down subsidies, things like that to support first-time
homebuyers, as well as to help certain types of housing supply,
like better loan options for manufactured housing, for purchase
rehab lending, perhaps for condominiums as well. So, across-
the-board, these solutions could work together.
Ms. Garcia. Mr. Rossi, you were nodding. Did you want to--
Mr. Rossi. I am nodding because that was very eloquently
stated, and I am not sure that I have much more to say other
than I think that, as she said, there are many ways to get at
this. And one of the ways is to be able to think about
separating credit pricing as part of the mission of FHFA from
the mission.
Ms. Garcia. Okay. Thank you, and I yield back.
Chairman Davidson. The gentlelady's time has expired. The
Chair now recognizes the gentleman from New York, Mr.
Garbarino, for 5 minutes.
Mr. Garbarino. Thank you, Mr. Chairman, and I am going to
yield briefly to my colleague from South Carolina, Mr. Norman.
Mr. Norman. Thank you, Mr. Garbarino. I have a press
conference to go to. This is the stupidest idea, raising these
rates, what they are doing, charging those with good credit. I
have been a REALTOR for 40 years. I built a lot of houses. The
supply shortage is because of what this Administration is doing
with our energy policies. There are no battery-operated dump
trucks, and I don't know what affordable is for housing, I have
no idea, but to penalize people for a good credit report is a
joke.
And also, the credit cards. Try getting a credit card when
you don't pay your bills. You pay a higher rate, and you
should. This isn't a racial issue of Black/White. This is a
common-sense issue. It is a backward way to do things. I yield
back.
Mr. Garbarino. Thank you. I have a couple of questions. Mr.
Parcell, I want to start with you. Prior to getting here, I was
a private practice attorney, and I did hundreds of closings. I
know that the spring is usually the best time for the housing
market. Right now, we have seen the Federal Reserve approve its
10th interest rate increase in just over a year. Can you
describe what you and your members are seeing in today's
housing market? How has it changed? Are we seeing fewer or more
people purchasing homes right now?
Mr. Parcell. Thank you, Congressman. We are seeing fewer
people due to the affordability factor. It will break your
heart when you see that single mom, mother of three children,
with the rent increase, and for them just trying to get into a
home. You are always trying to educate on rural housing loans,
FHA loans, and there are some community grant programs. Many
States are giving down payment assistance grant programs where
you pay that back. But it is a huge issue, and that is why we
are very much against any rate or fee increase at this time.
This is not the time for it.
Mr. Garbarino. Which is why I question why the FHFA is
coming out with this policy change now. Can you tell us who
would mostly be affected by this change?
Mr. Parcell. It affects all buyers. It is going to affect
all of them, and some people you hear say, well, it is only $30
or $40, but $30 or $40 is a significant amount for that single
mom, or the military vet who is just trying to make it, or the
school teacher who is on a fixed income. They don't have that
extra $30 to $40.
Mr. Garbarino. Absolutely. And I think you mentioned it
briefly in your testimony, but can you say again how much more
the average borrower is paying for a mortgage now versus in May
of 2021?
Mr. Parcell. Correct. It was $1,682, and it is now nearly
$2,400 just on that interest rate alone.
Mr. Garbarino. Yes, it is insane. I know a lot of people
are paying 6 percent at closing right now. Six percent a long
time ago, people would have loved, but what we have seen, it is
just raising rates. I am also the lead of the SALT
Deductibility Repeal Act, and I know the REALTORS are very
supportive of that, and that will also help. If we get that
deduction back, I think that will help homeowners as well.
Mr. DeMarco, I have a question for you. This hearing is
entitled, ``The Current Mortgage Market: Undermining Housing
Affordability with Politics,'' and mortgages are the biggest--
usually, the cost and availability of mortgages for middle-
class people allows them to buy what is probably the biggest
asset of their life, but it is not the only cost. Title
insurance is a cost that people face, and I have seen having
title insurance policies save homeowners from possible
mistakes. And the committee has heard a lot about a proposed
pilot where Fannie would waive title insurance requirements and
act essentially as the title insurer to a lender originating a
mortgage. How does such a program or activity fit into Fannie's
statutory mission, in your opinion?
Mr. DeMarco. Title insurance is a primary market function.
It is a critical element of protecting both the lender and the
homeowner. And while there seems to be a lot of murkiness about
what is going on with some potential pilot, from what I have
heard, it certainly is disturbing to think that Fannie Mae or
Freddie Mac might displace title insurance by taking on this
insurance itself.
And I would trust that any such discussions are undergoing
careful scrutiny at FHFA, and would be subject to the new
product rule at FHFA, and, frankly, the GSEs simply do not
belong in the primary market. We have seen attempts by them in
the past to get into private mortgage insurance, hazard
insurance and so forth, and I would caution against that. They
have a big enough job keeping the secondary market working.
Mr. Garbarino. Absolutely. As I said, I was a practicing
attorney, and I did closings back in 2008 before the crash or
during the crash. And I feel like both the rule that we are
talking about today and this possible title insurance rule is
going to be the start of maybe another downturn.
Mr. Chairman, I yield back. Thank you.
Chairman Davidson. Thanks, Mr. Garbarino. The Chair now
recognizes the gentleman from Nevada, Mr. Horsford, for 5
minutes.
Mr. Horsford. I thank the chairman and the ranking member
for the hearing, and I want to thank our witnesses for your
insight. I represent southern Nevada, Nevada's 4th District. It
covers 50,000 square miles in the State of Nevada, both rural
and urban areas. We were one of the hardest-hit States and
regions after the last housing crisis, and housing
affordability continues to be the most important issue that my
constituents are concerned about. In fact, just last week, I
had the opportunity to host, with our Southern Nevada Regional
Housing Authority, a regional housing summit with
representatives from the Congressional Hispanic and Asian
Caucuses. I currently serve as the Chair of the Black Caucus,
and I was fortunate to have the ranking member, Ms. Waters,
there as well.
I just find it interesting that the framing of this with
some of my colleagues is that somehow people with good credit
are overrepresenting and subsidizing in some way the impact to
people with low credit scores. First of all, the credit score
is a joke. We need to reform the credit rating system because
it is biased, and it is inherently flawed in its methodology.
It is not transparent. And I know under the leadership of the
ranking member, this was a priority, and I hope that under this
Congress, it can be as well.
Now, the underlying issue with this LLPA, notwithstanding
it is a factor, but it is not the only factor, as I heard
several of you say. I did want to ask Ms. Ratcliffe if you
could expand more on the historically-underserved communities
who are fighting to keep a roof over their heads. And I agree
with you that the May 1st statement, the LLPA adjustments are
modest in nature and better align the balance and policy and
market requirements that GSEs must consider. In your testimony,
you note that while the number of significant variations is
small, the recent pricing changes will result in some borrowers
facing higher LLPAs and others will pay less. So, can you
elaborate further on which borrowers are in which buckets,
please?
Ms. Ratcliffe. That is a great question. Thank you. And
again, I want to emphasize that some will pay higher LLPAs than
they would have paid before May 1st, and some will pay lower
than they would have paid before May 1st, but the traditional
relationship between higher credit score and lower credit score
borrowers in the grid still remains.
I will just give you some examples. These are some numbers
from page four of my written testimony, but I have three loans
I picked fairly randomly off the grid. Consider a borrower with
a 700 credit score, which is towards the high end of the credit
score distribution in the grid, and a 75 percent LTV or 25
percent down. Before May 1st, they would have paid an LLPA that
would have converted to a monthly payment of $50, and after the
changes, that is going to go down to $44. That is on top of a
mortgage payment--this is on a $300,000 loan--of about $1,877
to begin with. So, the mortgage payment is $1,877. The LLPA
used to be $50. It will now be $44.
Now, I will take another borrower who has a 720 credit
score, even a little better, but has an 80-percent LTV, so they
are putting a little bit less down, 20 percent. They used to
pay $38 per month on that same loan. Now, they will be paying
$63 if they close their loan after May 1st, so that is a little
less than a $30 increase a month.
Finally, we will look at a borrower who has a credit score
of 630 and just 5 percent down, which is pretty far into the
lower right-hand quadrant of the grid. On top of the $1,800
mortgage payment, they used to pay $175 a month in LLPAs, and
that is going to go down to $88 a month, which is still higher
than anybody else's, but they are seeing the biggest decrease,
and that is to take into account mortgage insurance. And I just
want to add this: The mortgage insurance premium on top of that
is $465--$465--in mortgage insurance.
Mr. Horsford. Thank you. I do think we need to look at this
comprehensively. I wanted Mr. Parcell to know that I noted that
the REALTORS were pleased with the adjustment that was made on
the LLPAs' up-front fee on borrowers with debt-to-income ratios
greater than 40 percent. That was slated to go into effect on
August 1st, and I just wanted to give you an opportunity to
elaborate on that.
Mr. Parcell. Thank you, Congressman. Why that is so
important is, if you can put yourself in a mortgage broker's
situation, the loan process comes in, they send it to
underwriting, and the buyers waive their earnest money because
it is going through the underwriting process. That underwriter
may flag that buyer and say, look, we don't like the over time,
we don't like the bonus structure, so you no longer qualify.
Now, it puts you over that 40 percent, and then that buyer is
in a real pickle, and the mortgage broker can't honor that
interest rate. Thank you.
Chairman Davidson. I thank the gentleman. The gentlewoman
from Texas, Ms. De La Cruz, is now recognized for 5 minutes.
Ms. De La Cruz. Thank you, Chairman Davidson, for holding
this hearing today. And I appreciate all of our witnesses being
here today. My district is an unique community down in deep
South Texas. My district is over 80-percent Hispanic, and I am
really concerned about any increases, whether we say the
increase is smaller than someone with a lower credit score or
not. The point is that there are increases to housing. My
question is for Mr. Parcell. In a district like mine that is
over 80-percent Hispanic, how would an increase, no matter how,
``small,'' it is, affect an Hispanic community such as mine?
Mr. Parcell. Thank you, Congresswoman. It goes back to when
I purchased my first home--$30 to $40 would have devastated me
and kept me out of that opportunity, and that is exactly what
is going to happen in your district. It is going to push people
to where they just can't qualify or it is too tight as it is.
It is a skinny margin with the cost of fuel, the cost of
inflation, and the cost of food. Kids are more expensive. It is
going to harm your people.
Ms. De La Cruz. And when I think about housing, housing is
so important for the community around its economy. You are not
only talking about the sale of the house, but a broker who gets
a fee or makes money, plus the city, plus if you go into the
grocery store, things like that. So someone not purchasing a
home in a community, like a rural community such as mine,
actually affects the overall economy of a city. Would you say
that is correct?
Mr. Parcell. One hundred percent. They are buying local
stuff at the hardware store, and they are buying stuff at the
convenience store, which brings more property tax, which brings
more value to your city and county.
Ms. De La Cruz. So, it is important. How likely is it for
someone who is actually purchasing a home in a city? Are they
more likely to stay in that city and invest in that city?
Mr. Parcell. One hundred percent. You are seeing that in
test scores. You are seeing it all across-the-board, crime,
everything. If you are a property owner, a homeowner, things
just go a little smoother.
Ms. De La Cruz. It sounds to me that if you put a barrier
such as an increase of even a, ``small increase,'' on a
potential homeowner, that really this is a layered effect, not
only for the homeowner, but for the economy of the city, is
that correct?
Mr. Parcell. Yes, Congresswoman, 100 percent. The best way
to build wealth is through real estate, but also, the best way
to build back into the community is through real estate.
Ms. De La Cruz. Thank you. With that, I yield back.
Chairman Davidson. The gentlelady yields back. The Chair
now recognizes the ranking member of the full Financial
Services Committee, the gentlewoman from California, Ms.
Waters, for 5 minutes.
Ms. Waters. Before I raise a few questions with you, this
one had not been thought about a lot. We just accepted the fact
that with inflation and the increased interest rates that some
families are faced with, even though they tell me it is not a
huge number, I am getting from individuals who had these
adjustable rate mortgages that their loans have increased over
$1,000 in some cases. Can anything be done about that? Anybody?
Ms. Ratcliffe, do you know?
Ms. Ratcliffe. Congresswoman Waters, you are asking about
people with adjustable rate mortgages who have seen their
payments go up by $1,000?
Ms. Waters. Yes.
Mr. Ratcliffe. I would guess that those are probably not
GSE-insured loans, Fannie Mae and Freddie Mac loans, which
shows the importance of having well-regulated loans that are
structured more safely. Since the great financial crisis, new
rules have been put in place to make sure that borrowers don't
end up with these toxic kind of mortgages that can explode on
them. So, I would be curious to know more about these lenders,
who they are, and how they are operating.
Ms. Waters. I certainly appreciate that because, of course,
all of us were around for what happened in 2008, and the
devastation to not only families, but whole communities, as
they ended up losing their properties, et cetera, et cetera. I
don't know how many fall in this category of adjustable rate
mortgages now, but even if it is only a relatively small
number, they are going to lose their homes. And we don't know
what is happening with inflation, except that thing. I am told
that it is coming down, but these housing costs are basically
what is happening with inflation.
Ms. Ratcliffe, I am going to stay with you. I am so pleased
that finally my colleagues on the other side of the aisle are
becoming concerned about the rising costs of purchasing a home.
Last Congress, Democrats sounded the alarm about rising housing
costs and how these costs are a key driver of inflation. And
that is why I and my colleagues, Committee Democrats, want to
secure substantial new housing investments in the Build Back
Better Act. You are familiar with that, right? We had $150
billion in that Act.
Mr. Ratcliffe. Yes, ma'am.
Ms. Waters. And in that Act, we had money not only for
Section 8 and for public housing, but for the development of
affordable housing through the old Act that we put together in
order to increase units that were so desperately needed, and
money for homelessness, et cetera, et cetera. And I am still
feeling very bad about what happened and the support that we
did not get; we did not get any support from the opposite side
of the aisle.
And that Build Back Better Act, which would have created
1.4 million homes and, in turn, reduced housing prices and
inflation, unfortunately not a single Republican, again, voted
in favor of it. But now I think, and I am hearing, and I am
learning that wealthy homeowners with vacation homes, who were
paying unfairly low fees under the prior FHFA fee structure,
are now faced with the prospect of paying their fair share, and
that maybe some of our friends on the opposite side of the
aisle have seen the light because they are upset about the
housing costs.
Meanwhile, the underlying lack of housing supply due to
years of underinvestment or disinvestment from the Federal
Government and this private sector is continuing to fuel
housing price increases all across the country, hurting those
with lower incomes and lower wealth, and most even when they
have excellent credit. Let's not forget that our friends on the
opposite side of the aisle, their concerns about housing prices
come as they were pressured by the former President of the
United States. President Trump threatened to tank the national
economy by forcing a default on the U.S. debt.
So I am bringing in something different here, a little bit
different, because we are all thinking about what is going to
happen, and are we going to be able to deal with this debt
crisis that we are in. Are we going to be able to raise what we
need? Having said that, there is a lot to think about, and I am
told that my time is up, and that is okay by me. I yield back
the balance of my time.
Chairman Davidson. The gentlelady's time has indeed
expired. The Chair now recognizes the gentleman from Wisconsin,
Mr. Fitzgerald, for 5 minutes.
Mr. Fitzgerald. Thank you, Mr. Chairman. The changes to
LLPAs raise the issue of the GSE system of cross-subsidies,
which are approved by the FHFA. The GSEs generate these cross-
subsidies first by lowering the market rate return on their
lower-income mortgage purchases, which they make up for by
targeting a higher return on their other lending activities.
Next, the GSEs charge higher-credit risk borrowers a lower
guarantee fee than would be warranted purely on a risk-based
pricing basis, while charging selected low-credit risk
borrowers a higher guarantee fee than is justified by their
individual risk profile and loan type or purpose.
Mr. DeMarco, do these cross-subsidies distort the market by
weakening the link between loan price and credit risk, and do
the changes to the LLPAs lead to further distortion?
Mr. DeMarco. Congressman, I believe that, as I state in my
written statement, mixing mission into the pricing is
problematic, and it adds overall risk to the system. I think we
can deliver support to families in a much more direct way than
doing it through the rate. That said, I feel like I really need
to clarify here how this is actually working with what FHFA has
been doing. The cross-subsidy, if you will, is chiefly in what
was announced last fall, where FHFA eliminated what was left in
terms of LLPAs for mortgage holders who meet the affordable
housing goals that are set in statute. And Congress actually
tells FHFA that it can go ahead and have a lower rate of return
on those loans.
The loans that are covered by the grid changes made in
January are driven not by cross-subsidization, but are driven
by the capital rule. And if we want more capital and are
supporting this higher capital framework that was put in place
by Director Calabria, and carried forward by Director Thompson,
we have to come to grips with the fact that capital isn't free.
There is a cost to capital, and I think what is going on in the
grid change announcements that were made in January is focused
not on cross-subsidization; it is focused on making sure across
the grid that we are earning a rate of return sufficient for
the capital that has to be raised, and that is not just for
now. And conservatorship is preparing for a date in which these
companies might be private, and there is actual private capital
there, because that private capital is going to want to earn an
appropriate rate of return.
That is an important question, and it gets complicated
because it is different parts of the books of business that we
are talking about. And I hope that my answer helped to divide
those up properly.
Mr. Fitzgerald. No, that is good. The cross-subsidies are
based on the borrower's credit quality, right? They are
affordable. The housing goals are based on the borrower's
income, right?
Mr. DeMarco. It is based on their income, not on their
credit score. The housing goals are based upon the borrower
income relative to the area median or, in some cases, it is
based upon geography, where the borrower lives, because
Congress has also identified those as target areas.
Mr. Fitzgerald. Yes, and I would further say that--and I
have talked about this before--there is this whole group of
adults right now in America between 25- and 35-years-old who
had been frozen out of the housing market, mainly because of
the increases in real estate, but quite honestly, they couldn't
generate the cash, come up with the down payment if their life
depended on it. So, that is really what we are fighting through
here. It is not a generation obviously, but it is 10 years in
which this group of adults are never going to have the
opportunity to own a home and build wealth. That is our biggest
issue.
Mr. DeMarco. Yes, I think that is absolutely right. In some
ways, we are now paying the cost of having suppressed mortgage
rates for so long, because it did contribute directly to
driving up house prices. We made the cost of mortgage credit so
low, and those who were able to get in, got in, and those who
are coming online now as young families, it is much harder for
them, because now they have the double whammy that house prices
have gone up, and mortgage rates are much higher.
Mr. Fitzgerald. In situations where low-risk borrowers face
higher rates under the new fee structure, could a larger-than-
expected subset of loans be originated away from the GSEs and
open the door for more private market players?
Mr. DeMarco. At the margin, that is possible, but I don't
think that what was done in this last grid change is a needle-
mover with regard to that particular question.
Mr. Fitzgerald. Thank you. I yield back.
Chairman Davidson. The gentleman yields back. The Chair now
recognizes the gentlelady from Colorado, Ms. Pettersen, for 5
minutes.
Ms. Pettersen. Thank you, Mr. Chairman, and thank you all
for being here today and for this very important hearing. It is
hopefully the beginning of many conversations. I think about
this all the time, coming from Colorado. Our secret is out; it
is one of the best places to live. No offense to my colleagues,
but people are moving there at a significantly-high rate. Now,
because it has become so unaffordable, it is starting to move
in the other direction, but especially places in the southern
district, in the rural communities, we saw through the pandemic
people moving when they could work remotely. And we saw some of
these houses increase threefold in just a couple of years, with
people being pushed out of their communities.
This is something that hits every aspect of the challenges
that places across Colorado are facing when it comes to hiring
workforces for small businesses, being able to keep our public
servants in our community, and being able to hire firefighters
or teachers. So, this is why I asked to be on the Financial
Services Committee. This is something that I plan to work with
all of you on and everyone here on this committee to address
accessibility and affordability.
The thing that I oftentimes think about is really the
housing crisis. We still haven't actually come out of that. We
are still seeing some of the effects. We know that home
builders were wiped out during that time. It took us back in
our ability to actually increase capacity to build houses. We
have a housing supply issue, and one of the number-one barriers
that we are facing is, it is not just our ability to produce
and build this. And I can't talk about immigration reform and
our failed policies there and actually fill in the gaps, but it
is also the rising costs with local permitting.
I had the opportunity to visit a business in my district
called Fading West, and their goal is mass production of houses
where they approach it in the way that we do with cars, have
assembly lines in a warehouse, be able to turn them out and
make them unique to the communities that are buying them. They
said that even though they are able to reduce about 20 percent
of the cost there, one of the largest costs ultimately comes
down to the local permitting processes. It is what can we do to
incentivize the mass production of houses, addressing the
workforce shortages, and also incentivizing at the Federal
level some type of local permitting process and streamlining so
that we can actually address some of these significant barriers
that people are facing.
I know I covered a lot there. The last thing that I will
talk about is, you all mentioned mortgage insurance, and we
have talked a little bit about this, and it's something that I
found out about as a homeowner, because I was lucky enough to
get in right before the financial collapse. That is the only
reason that I had any wealth as a public servant. I was paying
mortgage insurance for years that I actually didn't have to
pay. It doesn't automatically come off. You have to be educated
enough to know your equity in your house, and you have to
advocate for yourself.
It seems like a really simple thing if we have that
automatically come off to reduce costs as soon as you hit your
20-percent equity. I would like your opinion on that. And also,
I would like to hear your ideas about what we do around
workforce shortage, how we address our immigration reform,
immigration opportunities here in this country, as well as our
local permitting process.
Ms. Ratcliffe. I did want to jump in and say that mortgage
insurance should now automatically cancel at 78-percent LTV.
Ms. Pettersen. Great.
Mr. DeMarco. Yes. I was going to say the same.
Ms. Pettersen. When did that go into effect?
Mr. DeMarco. That has been in effect for a long time, I
believe.
Ms. Pettersen. That is great.
Mr. DeMarco. But, Congresswoman, I think the point there is
that--
Ms. Pettersen. The idea is gone.
Mr. DeMarco. Right, no. This is where homeowner knowledge
can be helpful because it automatically comes up based upon the
amortization of the mortgage. But if the homeowner knows that
their house price has been appreciating in their community,
they can get it appraised and use that evidence to have the
mortgage insurance removed sooner. It is important to have
educated homebuyers, and that is going to make homebuyers more
sustainable and smarter about the financial decisions they
make.
Ms. Ratcliffe. And again, I just want to emphasize that
because of the new pricing grid, many borrowers will actually
see a decrease in their LLPAs. And a lot of that is
attributable to the fact that in the previous grid, there will
be overprice because they were not being given enough credit
for the capital and the losses that the private mortgage
insurance protects the GSEs and the taxpayers from incurring.
Ms. Pettersen. Great. And then, what I always talk about is
our workforce shortage here in the United States, our inability
to address the visas that we need for people who want to work
here legally and a pathway to do so and how that affects home
builders as well. Can you all talk about the significant--
Chairman Davidson. The gentlelady's time has expired.
Ms. Pettersen. --need in that area?
Chairman Davidson. I am going to ask the witnesses to
respond in writing, if so inclined.
The gentleman from New York, Mr. Lawler, is now recognized
for 5 minutes.
Mr. Lawler. Thank you, Mr. Chairman. I listened with great
intent to the ranking member's comments, and yes, she is
correct. Democrats controlled all branches of government and
passed their housing agenda, and yet here we are still talking
about housing problems, so clearly, the policies have failed.
If you look at New York State, for instance, Democrats
control everything in Albany. Housing policies have created
50,000 vacant units in New York City. Not looking too good. We
talked about debt. The House Republican Majority is the only
one that has actually raised our debt ceiling, thank you,
raised our debt ceiling, and President Biden just yesterday
appointed a committee of three people to finally negotiate
after stalling for several months. So yes, we are going to
avoid default because the President has finally come to the
table to negotiate with Republicans in the House Majority.
While I am glad to see that the FHFA has canceled their
impending fees based on debt-to-income ratio, I find it frankly
absurd that the Administration has chosen to saddle homeowners
who have good credit, with potentially thousands of dollars of
additional costs on mortgage fees in order to subsidize
borrowers with riskier loans. Moreover, the fact that the FHFA
has further chosen to pursue unfair policies that socialize
credit risk and disfavor responsible homeowners under the guise
of making the housing market more equitable at a time when
Americans are facing such a serious affordability crisis is
especially shocking. One key and frustrating aspect of the
FHFA's botched rollout of these changes has been the complete
lack of transparency in the decision-making process.
Mr. DeMarco, given your previous tenure as the Director of
FHFA, can you speak about the process through which these
changes were implemented? What stakeholders were interacted
with, and do you believe the recently-announced RFI is an
important step forward for the public and Congress to provide
commentary on changes to the GSE pricing framework?
Mr. DeMarco. Congressman, I can't speak to what process
FHFA followed in making these changes. I suspect that it was
based upon a lot of careful modeling, analysis of both the
capital rule and historical data on defaults and losses given
default. Obviously, they have quite a capable internal staff. I
don't know what they did in terms of their communication with
the GSEs or anyone else.
I will say FHFA had been communicating and signaling that
these changes were coming, and so the fact that it happened did
not come out of the blue. They have been talking about this in
terms of their scorecards, and the g-fee report that they
issued in November made it clear that these kinds of changes
were needed because g-fees hadn't been changed yet to keep up
with the changes in the capital framework.
Mr. Lawler. All of your testimony made it clear that you
applaud the FHFA's rescission of the debt-to-income up-front
fee proposal. The decision came after significant stakeholder
feedback and congressional oversight, and I am certainly
pleased to see that this unworkable initiative was abandoned.
But can you speak about the specific issues inherent with the
DTI proposal for both lenders and borrowers? Do you see a
scenario where an up-front fee based on DTI could be feasible
for the market, and do you support congressional action to
limit their ability to implement a DTI-based fee in the future?
Mr. DeMarco. I am not sure we need congressional action
here, but I do think that it is unworkable. We spent several
months working with the biggest lenders in the country, and we
tried to find a way to suggest, okay, if you want to do this,
here is how to make it work, and we concluded it simply wasn't
workable.
I credit FHFA for stepping that back, but it is important
to understand why. When a family applies for a mortgage, that
mortgage goes through underwriting, and underwriting is really
critical. And one of the fundamental things an underwriter is
doing is trying to determine what is the borrower's ability to
repay. They do that by wanting to learn how much income does
the borrower have, and how much other debt does the borrower
have, and that is an ongoing process throughout underwriting.
And what we have learned is that the answers to those questions
are not easy. Someone who is not a straight-salary W-2 worker
can have a very complicated income stream, and it takes a while
to figure that out. Hence, it is very hard to know debt-to-
income when the borrower first applies for a loan.
Mr. Lawler. Thank you. I yield back.
Chairman Davidson. Thank you. The gentleman's time has
expired. The gentlewoman from Georgia, Ms. Williams, is now
recognized for 5 minutes.
Ms. Williams of Georgia. Thank you, Mr. Chairman. My
colleagues heard me say this yesterday, and I will probably say
it again and again and again until it changes. I represent the
City of Atlanta, where we unfortunately have the largest racial
wealth gap in the entire country. America and my constituents
are sick and tired of hearing me say it and sick and tired of
living it. And we all know that homeownership is the number-one
way to build generational wealth, and that is why the best way
that we can increase Black generational wealth is through
homeownership. This means we need to be doing more to make
homeownership a possibility and a reality for people who have
less wealth, especially when the same people were subjected to
redlining and racist housing policies not very long ago and are
still feeling the effects of those discriminatory practices
today.
According to the latest data from the Census Bureau, at the
end of 2020, Black homeownership in Atlanta was 48.7 percent,
and White homeownership in Atlanta was 75.6 percent. This isn't
far off from the national rates of 44.1 percent for Black
people and 74.5 percent for White people. As false information
is spread by my colleagues on the other side of the aisle, I
want to make one thing very clear. FHFA's recent mortgage
pricing update helps borrowers with less wealth become
homeowners. It might make it cost a little bit more for wealthy
people to buy that second home, but I am actually okay with
that given the number of my constituents who just want to own
that first home.
As you know, FHFA's pricing grid was first developed in
2008 in the wake of the financial crisis. Housing advocates
have long pointed out that the pricing grid, which relies on
credit scores and loan-to-value ratios, both of which tend to
be predicated on wealth, has locked creditworthy individuals
out of homeownership for generations. As a colleague already
mentioned today, credit scores are steeped in a history of
discrimination. Consumers across every income bracket in the
South typically have much lower credit scores than consumers
living in the Northeast, Midwest, or West.
Ms. Ratcliffe, given that FHFA's recent pricing changes
help more first-time homebuyers in Southern States access
homeownership, do you think it is fair to say that FHFA's
action is creating equity for everyday people who live in the
South, rather than lining the pockets of affluent investors?
Ms. Ratcliffe. Thank you for your question. This is a good
opportunity. What you raised is why it is so concerning that we
are looking at the old grid as though it was the right grid.
The thing is, the old grid overcharged borrowers with lower
credit scores and less wealth to put down on buying a home. And
so, when you run the numbers and you look at the actual losses
by loans, the new grid actually has just a much more consistent
relationship between what people are paying and what their
actual losses are. So, it is really important to recognize that
the old grid was overcharging those very borrowers that you are
talking about, and the new grid rectifies that, given, as Mr.
DeMarco has talked about, the requirements of the capital
regulation that was put in place by the prior Director.
I also want to separate, which I think is useful in the
case of Atlanta, that what I just discussed is not a cross-
subsidy. It is just applying an appropriate price for the risk
of that group. The cross-subsidy, I would describe, is in the
previous pricing changes that happened before that. Take, for
example, investors--borrowers buying investment properties have
to pay a higher-than-average profit margin, and that helps with
the mission business. That helps lower-income borrowers. And I
know Atlanta is a City where it is very hard for a low-income,
first-time homebuyer to compete with the investors that are
there, and so it is appropriate, I think, to think about how
the additional charges and profit margin on that population can
be used to give first-time homebuyers a little more level
playing field.
Ms. Williams of Georgia. I just saw a news alert that came
across my phone yesterday, and I opened it up, and it said,
``Guess which U.S. city has the most unaffordable housing
costs?'' And I opened it up, and it is my home City of Atlanta,
out of every city in the country. So, it is my job to make sure
that we look into this more so that more people can access that
generational wealth that closes the racial wealth gap.
Fannie Mae and Freddie Mac's charters state that they must
promote access to mortgage credit throughout the nation by
increasing the liquidity of mortgage investments and improving
the distribution of investment capital available for
residential mortgage financing. Despite these obligations, huge
disparities remain in terms of who gets access to a
conventional mortgage. For example, in 2021, only 4.7 percent
of Fannie Mae-backed and 4 percent of Freddie Mac-backed
mortgages were taken out by Black homebuyers. And I am sure you
already know, Ms. Ratcliffe, that research from the Urban
Institute suggests that more than 1 million mortgages are
missing from the U.S. financial market each year due to overly-
tight credit markets, and a disproportionate percentage of
those opportunities are missed by borrowers of color.
Ms. Ratcliffe, did the 2008 pricing framework serve to help
or hinder credit access for homebuyers in communities of color?
Oh, is the time up? I can't see the clock. I was going to
keep going until you--
Chairman Davidson. Apologies. I would just ask, Ms.
Ratcliffe, if you could respond in writing.
And the gentlelady's time has expired.
Ms. Williams of Georgia. Thank you, Mr. Chairman.
Chairman Davidson. You are welcome. The gentleman from
Nebraska, Mr. Flood, is now recognized for 5 minutes.
Mr. Flood. Thank you, Mr. Chairman. I would like to begin
by just expressing some of the frustration that I have heard
from my constituents in Nebraska about the Federal Housing
Finance Agency's latest mortgage reassessment. One constituent
in Bellevue, Nebraska, sent me an email which said, ``It
infuriates me that those that have been responsible with their
finances are now being punished to bail out those with lower
credit scores.'' Nebraskans from Lincoln, Columbus, Omaha,
Papillion, Seward, La Vista, and more have been writing into my
office saying the same thing. They are absolutely appalled by
this change. It is effectively a backdoor tax on the American
people.
However, I think that, most importantly, the American
people have a certain natural sense of fairness, a feeling that
if you pay your bills on time and improve your credit score,
you will be rewarded when you need a loan. This fee assessment
is a violation of that basic sense of fairness, and they should
be upset.
I am also deeply concerned that this clearly-political
decision will lead to a future pattern of using the FHFA to
make future decisions based on the same principles. If we are
abandoning the premise that loan-level price adjustment fees
should be based upon a loan risk, what is to stop the FHFA from
taking things further? Could they use Fannie and Freddie to try
and push their favorite social policies or punish individuals
they feel are unworthy of well-priced mortgages? Once you open
this Pandora's box, I fear what will come next. The FHFA's
decision can now be used as a precedent going forward for
whatever ill-conceived idea a future Director of the Agency
comes up with.
Dr. Rossi, do you have any concerns that this change in
LLPA will set a precedent for further politically-motivated
interventions for fees for mortgages?
Mr. Rossi. I will start by saying, I completely agree with
your constituent there, first of all, and it goes back to the
fact that I have said before that we have to separate these
missions that the GSEs have from each other. And I think we
have heard Mr. DeMarco say the same thing, and several others
have been saying the same thing today, which is we have to
separate those from each other because it creates and it
invites this kind of discussion, and I don't think it has to
happen that way.
We can actually meet safety and soundness for both GSEs,
while at the same time doing everything we can to be fair to
our fellow citizens. And I think that comes from being able to
take a closer look at how we have to, I would say, jettison the
LLPAs altogether, replace it, and build it back into a risk-
based pricing within the ongoing g-fee. And if you want to do
something outside of that in terms of affordable housing, make
it clear, make it transparent to the American public what you
are doing.
Mr. Flood. Do you have any concern that further changes,
Dr. Rossi, to weaken the integrity of the credit pricing could
expose the GSEs to greater credit risk?
Mr. Rossi. Yes. There is always that possibility, and,
again, it comes back to, Mr. DeMarco talked about this in terms
of the Enterprise capital framework. We are taking a much
closer look at the GSEs in terms of their risk-based pricing
than ever before, particularly around these stress events. So
again, when I saw the grids when they came out, it first caught
me off guard a little bit, because as I said earlier, I want to
make sure that what we do from differentiating affordable
housing policy is not muddied up with how we actually are doing
credit pricing. When we do credit pricing, it is for risk. It
is for the safety and soundness of those entities. That is
where I am at.
Mr. Flood. I come back to this idea that it is just basic
fairness for Americans, that if you pay your bills on time, you
earn a good credit score, and there are many folks in this
country who have done that, and they should be rewarded for the
lower amount of risk that they pose to the financial
institution. I would say this: This pricing change is a flat-
out disaster. I look forward to working with my colleagues,
including Chairman Davidson, to push legislation that will
rescind these changes.
The people in Nebraska, along with people across the
country who believe in basic fairness, are depending on us to
serve as a check on the Biden Administration on this matter
specifically. I thank you all for your testimony. I yield back.
Chairman Davidson. The gentleman yields back. The
gentlewoman from Michigan, Ms. Tlaib, is now recognized for 5
minutes.
Ms. Tlaib. Thank you, Mr. Chairman. And thank you all so
much for being here. Michigan, especially in Wayne County,
really didn't recover fully from the last recession. You are
all nodding your heads. You probably saw. Some of the things
that we have seen include private equity firms coming and just
swallowing up, not only for mortgage foreclosures, tax
foreclosures. So, we got hit pretty hard and haven't truly been
able to recover, and we also lost more Black homeownership than
any other State in the country. One of the things I have been
looking at on this committee are some structural issues.
Mr. Parcell, one of the things that I have been really
trying to get the Administration to do, the previous one and
the current one, is to look at small-dollar mortgages, because
the majority of homes in my district are less than $100,000,
and it is not profitable for some of the institutions. And what
happens is they become rental properties for those investors
that come in and swallow them up. And I know there was a report
recently, but there are not a lot of recommendations, just
identifying the problems we already know about.
What do you think, Mr. Parcell, we could do as a Federal
Government, and maybe it is a public-private partnership, I
don't know, in trying to help our families, working-class
families, who, if they could get access to those homes that are
$70,000, $80,000, would probably be paying less towards housing
costs than, again, continuing to rent?
Mr. Parcell. Thank you, Congresswoman. I appreciate that.
To be clear, we represent 1.5 million in every ZIP Code, and
yours is one of them. We think that a reduction of all the fees
would be helpful. We also think that if you can make some kind
of an incentive for that investor to sell back to a homeowner,
a first-time homeowner, some kind of a tax break that they may
be able to have. Also, to work with some of the accessory
dwelling units (ADUs), so that maybe they can rent out part of
their basement to help subsidize that payment to start building
wealth. It is the number-one--
Ms. Tlaib. Who is going to give them the loan?
Mr. Parcell. They need to be able to get a loan for--
Ms. Tlaib. That is what I am saying. Who is going to give
them a loan for $70,000 or $80,000? Ms. Ratcliffe, by the way,
we are always going to have frontline workers as our neighbors.
You all know that. There will always be those in hospitality,
and those in agriculture, who will not be in that income class
where they are going to be able to afford $150,000 or more for
a house. Ms. Ratcliffe?
Ms. Ratcliffe. Yes. I think the fundamental challenge we
have there is that the costs to make a new mortgage are the
same, no matter how big the mortgage is. So, when it comes down
to limited resources and loan officers making decisions about
where they are going to spend their time, it is very hard for
them to, for economically working.
Ms. Tlaib. So, would it be an incentive to say, hey, if it
is this amount of money, then we should be--
Ms. Ratcliffe. FHFA recently had a request for information
on low-balance mortgages, and some of the recommendations are,
in fact, to subsidize that. I would also add another tool that
might be useful in a case like this is better financing for
purchase rehab, because a lot of the homes today are older
investors having an advantage because they can come right in
with deep pockets and fix them up. And the buyer can only
borrow based on the as-is value and can't get credit for it.
So, you know this whole story.
Ms. Tlaib. Yes. I think, Ms. Ratcliffe, you are right. I
think it is really important to know that some of those homes
are never move-in ready, especially at that cost. They do need
rehab.
Dr. Rossi, did you have something to say?
Mr. Rossi. No. I was nodding my head vehemently in favor of
what she said about FHFA. I think that is a good response.
Ms. Tlaib. The other important thing that I have been
working on is our credit scoring system. It is broken. Do you
all agree that it needs some sort of overhaul? Let me tell you
why. For instance, medical debt is treated the same way. I know
some are not actually looking at medical debt now, I
understand, but it really does hold back some of my folks
because something they did at 18 is on their credit report for
7 years. I have a bill that reduced it to 4 years, which I
think is a great bipartisan bill. Economists say 4 years is a
better indicator anyway than 7 years. Can any of you talk about
that?
Mr. DeMarco. Medical debt is being adjusted in mortgage
underwriting, but the credit score issue, Congresswoman, is a
serious one. And we have been spending this whole hearing
talking about FHFA, so here is another place where FHFA is
playing a significant role, right? They have come out with a
new framework in which we are going to update the credit score
model that is used. There are going to be two different credit
scoring models used. But the thing I would caution about that
is it holds the potential for improved accuracy and so forth,
but that is a very hard thing to implement given that credit
scores appear in so many different models and uses in housing.
So, having a timeline to get this done right is going to be
really important to it being implemented successful.
Ms. Tlaib. I have so many other questions for you, but I
ran out of time. Thank you, though, I appreciate it.
Chairman Davidson. I would like to thank our witnesses and
my colleagues for their testimony and questions today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record. I ask our witnesses to please respond as promptly
as you are able.
This hearing is now adjourned.
[Whereupon, at 3:40 p.m., the hearing was adjourned.]
A P P E N D I X
May 17, 2023
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