[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

LEGISLATIVE HEARING ON IMMEDIATE STEPS
TO PROTECT TAXPAYERS FROM THE ONGOING
BAILOUT OF FANNIE MAE AND FREDDIE MAC

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

HEARING

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

__________

MARCH 31, 2011

__________

Printed for the use of the Committee on Financial Services

Serial No. 112-22

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HOUSE COMMITTEE ON FINANCIAL SERVICES

SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio

Larry C. Lavender, Chief of Staff
Subcommittee on Capital Markets and Government Sponsored Enterprises

SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice MAXINE WATERS, California, Ranking
Chairman Member
PETER T. KING, New York GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois BRAD MILLER, North Carolina
JEB HENSARLING, Texas CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin
JOHN CAMPBELL, California ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan JOE DONNELLY, Indiana
KEVIN McCARTHY, California ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico JAMES A. HIMES, Connecticut
BILL POSEY, Florida GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK, AL GREEN, Texas
Pennsylvania KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio

C O N T E N T S

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Page
Hearing held on:
March 31, 2011............................................... 1
Appendix:
March 31, 2011............................................... 87

WITNESSES
Thursday, March 31, 2011

Dalton, Hon. John H., President, Housing Policy Council, The
Financial Services Roundtable.................................. 47
DeMarco, Edward J., Acting Director, Federal Housing Finance
Agency (FHFA).................................................. 7
Nielsen, Robert, Chairman of the Board, National Association of
Home Builders (NAHB)........................................... 51
Papagianis, Christopher, Managing Director, Economics21.......... 48
Phipps, Ronald, President, National Association of REALTORS..... 53
Pinto, Edward J., Resident Fellow, American Enterprise Institute. 49
Wachter, Susan M., Professor, The Wharton School, University of
Pennsylvania................................................... 54

APPENDIX

Prepared statements:
Dalton, Hon. John H.......................................... 88
DeMarco, Edward J............................................ 97
Nielsen, Robert.............................................. 113
Papagianis, Christopher...................................... 128
Phipps, Ronald............................................... 138
Pinto, Edward J.............................................. 145
Wachter, Susan M............................................. 213

Additional Material Submitted for the Record

Garrett, Hon. Scott:
Written statement of the National Association of Federal
Credit Unions (NAFCU)...................................... 218
Written statement of the Office of Inspector General, Federal
Housing Finance Agency (FHFA).............................. 221
Biggert, Hon. Judy:
Washington Post article entitled, ``Rush to foreclose by
Fannie, Freddie helped feed problems with legal
paperwork,'' dated December 23, 2010....................... 235
Stivers, Hon. Steve:
Additional information provided by the Honorable John H.
Dalton, President, Housing Policy Council of the Financial
Services Roundtable, in response to questions posed during
the hearing................................................ 240

LEGISLATIVE HEARING ON IMMEDIATE
STEPS TO PROTECT TAXPAYERS
FROM THE ONGOING BAILOUT OF
FANNIE MAE AND FREDDIE MAC

----------

Thursday, March 31, 2011

U.S. House of Representatives,
Subcommittee on Capital Markets and
Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Scott Garrett
[chairman of the subcommittee] presiding.
Members present: Representatives Garrett, Schweikert,
Royce, Biggert, Hensarling, Neugebauer, McCotter, Pearce,
Fitzpatrick, Hayworth, Hurt, Grimm, Stivers; Waters, Sherman,
Lynch, Miller of North Carolina, Moore, Perlmutter, Donnelly,
Carson, Himes, Peters, Green, and Ellison.
Ex officio present: Representatives Bachus and Frank.
Also present: Representatives Miller of California,
Renacci; and Watt.
Chairman Garrett. Good morning. This hearing of the
Subcommittee on Capital Markets and Government Sponsored
Enterprises is hereby called to order.
Without objection, all members' opening statements will be
made a part of the record. And at this point, I yield myself 1
minute for my opening statement.
And now that we actually have a gavel, it is official.
Today, we begin the process of considering specific
legislation that will take immediate steps to protect taxpayers
from the ongoing multi-billion dollar bailout of Fannie Mae and
Freddie Mac.
I know those on the other side of the aisle will be
critical of this Congress about the pace in which this
committee has formally considered legislation to address Fannie
and Freddie. However, unlike the last Congress, this committee
is actually going to hold hearings and allow members to study
and examine legislative proposals to end the bailouts and not
simply pass legislation that actually would do the opposite,
encourage more of them.
Last Congress, our friends across the aisle refused to have
any real hearings on specific bills to address the largest
bailouts of the financial crisis. And so with the complete
disregard by our Democratic colleagues of this bailout, we were
compelled then to offer a bill absent any time, really, to
fully debate and formally examine legislative proposals
addressing the GSEs.
It was literally the only opportunity that we have had to
offer an alternative to respond to the complete absence by our
Democratic counterparts to address the issues at all in the now
sacrosanct Dodd-Frank Act.
Today, we begin to do this process the right way, with our
first hearing on specific legislative proposals regarding the
GSEs. And we are going to have these hearings and go through
regular order to consider a wide array of proposals that this
committee didn't have the opportunity to do last Congress.
So I look forward to reviewing the eight proposals before
us today, many of which I believe and hope the Obama
Administration will support. And I thank you all and look
forward to the witnesses' testimony.
And with that, I yield to the gentleman from Massachusetts.
Mr. Frank. Thank you. Let me just preliminarily, before I
start, the ranking member of the subcommittee is on her way
over from the Whip meeting, so she, Ms. Waters, will be here.
I will now begin my statement. I am not surprised that the
chairman of the subcommittee began not with any positive
statement about what he is planning to do, but by a defense of
what they are doing. The contrast between their rhetoric of
last year and their reality this year is overwhelming.
I am now hearing that the bill that they were very critical
of us for not incorporating into legislation last year wasn't
really ready for primetime and that was the best they could do.
They had all year. The gentleman from Texas, Mr. Hensarling,
introduced it in March. It was in July when they asked us to
act on it, and were very critical when we didn't.
I have seen the extraordinary spectacle this year of people
on the Republican side, Senator Corker, for one, asking for
adult supervision from Secretaries Geithner and Donovan, people
here being critical because the Obama Administration hasn't
given them more guidance on what to do.
And it reminds me of the kind of classic scene of the man
in the bar who is all ready to fight a very big guy and is
being held back by his friends and insists that his friends
turn him loose, and then they turn him loose, and he is
immediately looking for somebody else to hold him back.
The Republicans spent all last year telling us that they
were just ready to take on this tough issue of what to do about
housing finance, after you get rid of Fannie Mae and Freddie
Mac, and we said it is a very tough issue and we should get to
it this year, and that was the way to deal with it, but they
were raring to go, and they were very critical that we hadn't
moved. They filed a bill in March, a comprehensive bill, and
were very critical of us in July for not acting on this bill.
And the notion that because we didn't let them perfect it,
they couldn't get it perfected, of course makes no sense. They
could have talked to anyone they wanted to talk to. They could
have had whatever conversations they wanted.
What happened, of course, is it turns out it is a tougher
issue than they were prepared to acknowledge. And so what
happens is, all last year, they were, ``Let me at him, let me
at him,'' and they were being held back. They were being held
back by their Minority status.
And then they got Majority status. Going from Minority to
Majority status was equivalent to having your friend let go of
your coat, and now you have no excuse not to go fight the guy.
And so, they have been looking very much for someone to be the
substitute coat-holder, and they found it, the Obama
Administration.
It is extraordinary to me that my Republicans colleagues,
who have been so disrespectful of virtually anything the Obama
Administration has said, on this very difficult issue are
trying to hide behind it and are trying to say that they can't
really deal with this until the Obama Administration tells them
how to do it.
There are some specific pieces today, many of which I can
support, and one or two which, I think, need some further work.
But it is a far cry from the comprehensive solution they had. I
am, however, prepared to take ``yes'' for an answer.
I will give myself--if I can take another minute out of our
time, Mr. Chairman--I am prepared to take yes for an answer.
Chairman Garrett. The gentleman is recognized for one
additional minute.
Mr. Frank. Thank you, Mr. Chairman. I have learned to take
``yes'' for an answer.
What the Majority is now saying is that it is not as urgent
as they said. It is important, but the losses are not mounting.
They appear, in fact, to be somewhat diminishing. Yes, we
should deal with this. And much of what they are talking about
now is relatively non-controversial. There are one or two
controversial pieces, in the portfolio area mainly.
But the key question of, what do you do to replace Fannie
and Freddie, which will be abolished and should be abolished,
remains untouched. And so that tough issue, which they were so
eager to tackle last year, they are now acknowledging is harder
than they were prepared to acknowledge last year, and they are
counting on the Obama Administration to hold them back until
they can get some more time to figure out what to do.
We would reserve the balance of our time, Mr. Chairman,
until the ranking member can get here.
Chairman Garrett. Thank you. And we so appreciate the
gentleman from Massachusetts exchanging his experiences in
saloons.
And with that, I yield now to the gentleman from Alabama
for 1 minute.
Chairman Bachus. Thank you, Chairman Garrett.
As recent statistics and reports show, our housing markets
remain very fragile, and housing is an important part of our
overall economy and of consumer spending. We are not going to
be able to revive our economy until we fix the housing market.
And that is why Congress must take some action to bring some
certainty.
But it has to be thoughtful and deliberative action. And we
have started that with this process of introducing a number of
measures to address the failures of Fannie and Freddie.
The main thrust of this is the--Freddie and Fannie had
tremendous advantages over the private market, and over a
several-year period, it drove everything into Fannie and
Freddie, which were government-run funds. And, of course, what
happened in 2008 and 2009 only precipitated that.
Going forward, what we need to do, bottom line, is diminish
in a thoughtful way those advantages that Freddie and Fannie
have and ultimately get the government out of the mortgage
financing market and particularly the guarantee market.
So I appreciate that.
Chairman Garrett. I thank the gentleman.
The gentleman from Massachusetts for 2 minutes.
Mr. Lynch. Thank you, Mr. Chairman. I want to begin by
thanking all the witnesses for coming before us here today and
helping the committee with this work.
I just want to remind everyone that, together, Fannie and
Freddie now provide about 90 percent of the financing or
guaranteeing of all residential mortgages in the country today.
This is an enormous market share, up from about 40 percent in
2006. And without the financial support of the Department of
the Treasury and American taxpayers in 2008, the residential
mortgage market would be in even more desperate shape than it
currently remains.
I understand that my colleagues on the other side have
introduced eight bills to eliminate the GSEs and wind down
their prominence in the mortgage market. The question is, as my
colleague from Massachusetts has asked, what will take their
place?
I hope together we can devise a replacement for the GSE
system that allows the 30-year fixed-rate mortgage to remain
available at reasonable rates for creditworthy borrowers in a
way that does not continue to put the taxpayer at tremendous
risk.
I look forward to hearing from our witnesses on how we can
move to the next generation of mortgage finance and wind down
the taxpayers' investments in these GSEs.
Thank you, Mr. Chairman. I yield back.
Chairman Garrett. And I thank you.
The gentleman from California, Mr. Royce, for 1 minute.
Mr. Royce. Thank you, Mr. Chairman. I thank you, also, for
your continued leadership on this issue.
The level of government intervention which contributed to
the housing boom is well documented. As a matter of fact, what
is often swept under the rug is the level of government
intervention in the junk loan market during the boom years.
Over the years, the GSEs acquired more than $1 trillion
worth of subprime and Alt-A loans, making them the largest
buyer of junk loans. Much of it goes back to the 1992 GSE Act
and the affordable housing goals, which for the first time
mandated that the GSEs dedicate a sizable portion of their
business to affordable housing.
This mandate on government-backed private institutions was
a recipe for disaster. As former Chairman of the Federal
Reserve Alan Greenspan said, their failure, Fannie and Freddie,
is because they paid whatever price was necessary to reach the
goal. And clearly, this was a mistake inspired by Congress.
That is why I introduced legislation to eliminate these
goals and correct one of the many errors in the GSE charter. It
should be made clear that the group of bills introduced this
week is merely a first step. Over the coming months, it is my
hope that we will move additional legislation, and I think this
is the only way to end what Jamie Dimon labeled the biggest
disaster of all time.
I yield back.
Chairman Garrett. Thank you. The gentleman yields back.
The gentlelady from Illinois for 1 minute?
Mrs. Biggert. Thank you, Mr. Chairman.
As one of these eight bills, I have introduced H.R. 31, the
Fannie Mae and Freddie Mac Accountability and Transparency for
Taxpayers Act. H.R. 31 establishes in statute an inspector
general with FHFA, something that Congress failed to do
originally, and this is one agency that needs an independent
watchdog.
It also gives this new IG authority--new authority to
enforce the law and hire expert investigators that expose fraud
and abuse within the GSEs and their regulator.
Three, it requires that this information be provided to the
public in regular reports that outline taxpayer liabilities,
investment decisions, and management details of Fannie and
Freddie.
For example, one problem we found with Freddie and Fannie
is that they maintain a short list of just a few law firms that
are allowed to monopolize the foreclosure process by offering
the quickest, cheapest, and probably the least reliable
service. This has contributed to a broad array of problems,
paperwork discrepancies and fraud. These issues have to be
investigated and resolved for the sake of homeowners, for the
sake of taxpayers, and for the sake of housing recovery.
This bill would ensure that effective oversight tools are
in place. And with this bill, waste, fraud and abuse will no
longer fly under the radar.
I yield back.
Chairman Garrett. And the gentlelady yields back.
Mrs. Biggert. Mr. Chairman, if I may, could I ask unanimous
consent to include a letter from the FHFA Inspector General on
H.R. 31 in the record?
Chairman Garrett. Without objection, it is so ordered.
And to the gentlelady from California for 3 minutes. Yes, 3
minutes.
Ms. Waters. Thank you, Mr. Chairman, for organizing this
hearing.
This is now our third hearing on GSE reform during the
112th Congress. As I have stated at those previous hearings, I
am committed to working with my colleagues on a practical,
comprehensive reform proposal to reshape our housing finance
system.
That comprehensive proposal will inevitably need to include
shorter-term provisions to address how we transition from where
we are to where we want to be. Those measures must both
encourage the return of private capital to the market, while
also ensuring that we do not disrupt our housing finance system
and shake our nascent economic recovery.
I think it is important to note that some shorter-term
steps are already being addressed as the GSEs go into
conservatorship. For example, the Federal Housing Finance
Agency has raised guarantee fees, making GSE mortgages more
expensive for borrowers, and more accurately pricing risk. FHFA
has also prohibited the GSEs from launching new product lines.
The office of the FHFA Inspector General has been
established, and the portfolios of Fannie Mae and Freddie Mac
are being wound down. Many of the proposals that we will
consider today are to a certain degree restatements of what is
already occurring, and I am willing to work with my colleagues
on some reasonable refinements of current practices. Some other
aspects of the proposal accelerate what is already being done
or include more prescriptive direction to regulators for how
they should manage the conservatorships.
I think these are important debates for us to have, but we
must consider that if we move too precipitously, we run the
risk of destabilizing our economy. Three million more
foreclosures are expected in the next year, and home prices are
3 percent lower than they were last year. Like many observers,
I believe that the housing crisis is far from over.
I am also eager for the committee to consider whether
adopting these shorter-term measures without considering
comprehensive reform is the best strategy. I think that most
stakeholders would like to know what is coming next before we
start accelerating the wind-down of what we have now. We must
also ensure that our regulators have the flexibility they need
to respond to our still-volatile housing market conditions and
that their hands are not tied by legislation that is too rigid.
Again, Mr. Chairman, I thank you for holding this hearing,
and I look forward to learning more about these proposals. And,
of course, I yield back the balance of my time.
Chairman Garrett. And I thank the gentlelady.
The gentleman from Texas for 1 minute?
Mr. Neugebauer. Thank you, Mr. Chairman.
This is an important hearing. One of the things that was
brought out is that 98 percent of the mortgages that are being
originated in this country today have some form of government
backing. And as my colleagues on the other side of the aisle
said, we don't have anything to replace it with. That is
because these entities enjoy a subsidized monopoly.
So what we need to do is to begin to provide space and
opportunity for the private capital to come into the market, as
long as we provide lower guarantee fees to sanitize these
mortgages, and there is no incentive for private capital to
come into these markets.
Our goal here is two things: first, to make sure that we
shore up and reduce any additional losses that Fannie and
Freddie may have; and second, to also provide opportunity for
private capital to come back in so that we will have robust
housing finance markets in this country.
But if we keep what we have been doing, we are going to
keep getting what we have been getting. And I think the
American people have spoken pretty loudly; they are tired of
not only making their mortgage payment, but they don't want to
make their neighbor's mortgage payment, as well, and basically
if we continue down the road that we are on right now, that is
the direction we are headed.
So I think this is a very important hearing, Mr. Chairman.
And I will look forward to hearing from our witnesses today.
Chairman Garrett. Thank you.
Mr. Pearce for 1 minute?
Mr. Pearce. Thank you, Mr. Chairman. I appreciate the
hearing today. I am looking forward to it.
And we have one of the pieces of legislation that simply
says the debt has to be approved with each new issuance, and it
is what used to be, and we are simply requesting that we go
back to that kind of stable approach. But I am looking forward
to the hearing today, and thank you very much.
Chairman Garrett. The gentleman yields back.
Mr. Fitzpatrick, for 30 seconds.
Mr. Fitzpatrick. Thank you, Mr. Chairman, for the hearing.
Today marks an important first step toward a major correction
in our housing market and in our financial system. Fannie Mae
and Freddie Mac control about 95 percent of the secondary
mortgage market, and its access to easy capital has helped spur
an unprecedented run on mortgages that, once it caught up to
us, nearly brought the economy to its knees, and as the house
of cards began to fall and implied government backing became a
real one, to the tune of $150 billion.
So let's discuss how to get private capital back into the
system and immediately in the bailouts, while protecting
current and future homeowners.
Thank you, Mr. Chairman.
Chairman Garrett. And I thank you.
And for the remainder of the time, which is, I think, 30
seconds, the gentleman from California, Mr. Miller?
Mr. Miller of California. Thank you, Mr. Chairman.
I hope this can be a bipartisan issue, because it is
definitely a national issue. We need to be very cautious in
what we do. We need comprehensive reform. But we need to look
and ask, ``What did Freddie and Fannie do wrong? And how can we
correct that?''
Without a doubt, they are outperforming the non-agency
loans. So irrespective of that, they are losing money, and we
have to determine what they did wrong to correct the problem.
But we need to be sensitive as this industry has been
dramatically impacted in recent years. And what we do here is
going to have an impact. My goal is to make sure it has a
positive impact, rather than a negative impact.
And so I hope we will look at this issue in a comprehensive
way, understanding the complexity that we are facing, and the
impact of the results of what we do.
I yield back the balance of my time.
Chairman Garrett. Thank you.
Mr. DeMarco, once again, we welcome you back to our
committee. And as you know, your full statement will be made a
part of the record. You are recognized for 5 minutes, and we
welcome you to the committee.

STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, FEDERAL
HOUSING FINANCE AGENCY (FHFA)

Mr. DeMarco. Very good. Thank you. Thank you, Mr. Chairman.
Chairman Garrett, Ranking Member Waters, and members of the
subcommittee, thank you for inviting me here. My written
statement covers the financial condition of Fannie Mae and
Freddie Mac, how FHFA is carrying out its conservatorship
responsibilities, and FHFA's views on certain proposals made
this week by subcommittee members. I will touch on just the
last two at this point.
As conservator, FHFA has a statutory responsibility to
preserve and conserve the Enterprises' assets, which I would
group into four broad categories: the legacy, pre-
conservatorship book of business, including investments,
mortgages owned and mortgages guaranteed; the post-
conservatorship book of business; the business platforms,
operations and processes of the two companies; and the people
who work at the Enterprises, the human capital who run the
business, manage the risk, and support the operations.
Preserving and conserving Enterprise assets protects
taxpayers from further losses, ensures market stability and
liquidity, gives lawmakers options for the future, and protects
the future value of the Enterprises' intangible assets for
future utilization and value recognition for the benefit of
taxpayers and markets.
As conservator, we oversee these assets so that value may
be returned to taxpayers from them in a manner to be determined
by financial market developments and the decisions of
lawmakers. These responsibilities entail challenging risk
management issues.
For the legacy book of business, the key risk is further
credit losses from delinquent mortgages. For the post-
conservatorship book of business, the key risk management
challenge is establishing appropriate underwriting standards
and risk-based pricing. The Enterprises' business platforms,
operations and processes present multiple risk management
challenges. We need to develop and maintain the infrastructure
supporting ongoing business in order to preserve and conserve
the value of the securities being issued today, which have 30-
year maturities backed by the taxpayer.
Finally, preserving and conserving assets includes
maintaining each company's human capital in the face of a very
uncertain future. Protecting taxpayer interests in the
Enterprises requires each company having experienced, qualified
people managing the day-to-day business operations.
I will now briefly summarize a few of my written comments
on the bills introduced earlier this week. I will begin with
risk retention.
The proposed rule on risk retention issued by the agencies
this week does not classify Enterprise loans as qualified
residential mortgages. It stipulates that Enterprise single-
family mortgage securities are structured with a 100 percent
risk retention by the securitizer, that is, the Enterprise,
obviously, the maximum possible and far beyond the 5 percent
retention required by Dodd-Frank.
If the Enterprises were subject to the risk retention
requirements for non-QRM loans, they could be forced to hold on
their balance sheet 5 percent of the securities they issue. To
impose such a requirement would add nothing further to the
Enterprises' skin-in-the-game or credit risk exposure. They
already have 100 percent of the credit exposure. However, such
a requirement would require the Enterprises to increase their
portfolios by financing 5 percent of their mortgage-backed
securities themselves.
Retained portfolios. We are on a path to reduce the
retained portfolio of each Enterprise by at least 10 percent
per year. The only material additions to the retained
portfolios today come from removing delinquent mortgages from
the Enterprises' mortgage-backed securities. While some faster
reduction of the Enterprises' retained portfolios may be
possible, a congressional mandate for a significantly faster
reduction could cost taxpayers unnecessarily.
New activities. FHFA is not permitting the Enterprises to
offer any new products or enter new lines of business. Their
operations are focused on their existing core businesses and on
loss mitigation. I support in principle a bill to codify this
position of the agency. As the subcommittee deliberates such a
mandate, it may wish to consider whether exceptions should be
provided for products that advance other purposes of the
transition.
Compensation. Retaining human capital and setting a
compensation strategy in an environment of uncertainty requires
a delicate balancing act. I am concerned that overhauling the
compensation programs in place today by applying the Federal
pay system to non-Federal employees carries risk for the
conservatorship and, hence, the taxpayer. In my view, such an
approach would increase costs to the taxpayers and risk further
disruption in housing markets.
And finally, guarantee fees. Since the beginning of
conservatorship, FHFA has been steadily--has been overseeing
steady increases in guarantee fees for the Enterprises. FHFA
expects to continue to evaluate further changes along these
lines, and we look forward to working with Congress on
legislative approaches for determining appropriate changes for
the Enterprises' strategy for setting guarantee fees.
Thank you again for this invitation, and I look forward to
our discussion.
[The prepared statement of Acting Director DeMarco can be
found on page 97 of the appendix.]
Chairman Garrett. I thank the gentleman for his testimony
and his full testimony, which we have seen previously. And I
would at this point yield myself 5 minutes.
Let's go to the first point and the legislation that I have
dropped in, which deals with risk retention. This goes with
Section 941, 15(g)(e)(3)(B) of the act of the law, which
specifically exempts all assets which are insured or guaranteed
by the United States toward any agency of the United States,
but then the rest of the section specifically says what? That
Freddie and Fannie are not agencies of the United States, and
you, of course, agree with that.
So what is hard for me to see is that it is--Congress was
explicit in what that they are saying, that these are not
agencies of the United States, and therefore they should be
under the same requirement as in the private sector. But you
are claiming in your testimony here that you don't have to
worry about that. Why? Because of the, what, 100 percent
guarantee functionality for this type of risk, right?
Mr. DeMarco. What I am stating, Mr. Chairman, is that what
Section 941 is designed to do is to have securitizers--that is,
issuers of an asset-backed security, including mortgage-backed
securities, to retain a portion--some economic interest in the
credit risk of the loans that are underlying that security.
The way Fannie Mae and Freddie Mac undertake their
securitization, they are providing a 100 percent corporate
guarantee of timely payment of principal and interest. That is
retaining 100 percent of the credit risk. It can't retain more
of the credit risk than that.
Chairman Garrett. Yes, I understand that. I appreciate
that. So what happens, then, on the private-sector side is
what? If they are issuing an QRM, there is no problem? If they
are issuing a non-QRM, that is when the--under the rule, it
comes out, what, they have to retain the additional 5 percent?
Mr. DeMarco. They have to retain 5 percent.
Chairman Garrett. Right. And if they do that, what happens
then? They have to have additional capital with regard to that
5 percent. What happens there? That means that there is an
additional cost, right, to that transaction?
Mr. DeMarco. Right.
Chairman Garrett. Now, if the goal I think we have agreed
on here, if the goal is to try to get them to be able to
facilitate that marketplace and not simply have all the markets
just continue to go over to the GSEs, we can't have that cost
higher, right, than what is over the GSEs. So that is why set--
at least in my legislation--we would want to try to bring them
on par.
So if your position is such as it is, walk through it with
me, what are some of the alternatives that we could do in order
to make it on par? Could we, for example--what could we do?
Could we raise the dividends that the GSEs are responsible
paying back to the Treasury, for example, in which case there
would be a higher cost here that would effectively go back and
make these on a level playing field? There is other legislation
with regard to G-fees, correct? Could we do something with G-
fees, elevate them to an additional point, again, to make it on
a level playing field?
If my legislation as it is crafted right now doesn't solve
the problem on this area in risk retention, how can we do it,
in your mind, that is equal--takes care of the problem?
Mr. DeMarco. Right. Three things, Mr. Chairman. I
appreciate the question. And you have already started to
outline the answer.
Chairman Garrett. Okay.
Mr. DeMarco. The first is, in fact, G-fees. I do believe
guarantee fee pricing and continuing to make gradual
adjustments there is an important step. The second thing has to
do with, whatever path is taken to gradually recede back to the
private market a portion of the universe of mortgages
originated that is not eligible for Enterprise purchase. And
the conforming loan limit is the obvious mechanism for doing
that.
So making adjustments with respect to the universe of
mortgages originated that are eligible for Enterprise purchase
would be the second way to gradually reintroduce a portion of
the market that would have to be financed out of the private
sector.
And the third is fundamentally what you are trying to do at
this hearing and what the subcommittee is aiming to do over the
long term, which is comprehensive housing finance reform, so
that for private capital to truly come back into the mortgage
market, it is not just about removing Fannie and Freddie.
Private capital is going to want to know what the rules of the
game are going forward--what is going to be the role of the
government? What is going to be the kind of oversight and
regulation requirements that are in place for private firms
that want to enter into the secondary mortgage market?
Now, the Dodd-Frank Act and the some of the provisions
being implemented--not just risk retention, but others--are
part of that step of providing clarity to private financial
institutions that would be considering re-entry in the market.
So those are the three things.
Chairman Garrett. And in just the last 10 seconds, outside
of your field, what about the FHA, with the whole argument with
regard to the exemption? Should we be doing actions over there
so we don't have everything simply flow over to the FHA?
Mr. DeMarco. I think that the role of the FHA is a very
important aspect of what I would expect the subcommittee to be
looking at in terms of housing finance reform. Whether risk
retention is the way to get at articulating the role of the
FHA, I would think maybe not. But I would really defer to the
HUD Secretary on that.
Chairman Garrett. Great. Thank you for your answers.
The gentlelady from California?
Ms. Waters. Thank you very much, Mr. Chairman.
Let me wade into an area that has emerged as rather
controversial. Mr. Royce has the GSE Mission Improvement Act.
The bill would immediately repeal the GSEs' affordable housing
goals. And you know what this is all about. In this whole
discussion of the subprime meltdown, it has been said more than
once, I suppose by Mr. Royce and others, that the GSEs'
affordable housing goals are responsible for the GSEs' problems
and its meltdown.
I know that there are those who believe that somehow there
were too many people who could not afford mortgages who were
extended mortgage opportunities. I want to know, did the GSEs
change its criteria--its underwriting criteria, I suppose you
would call it--for buying up these mortgages from Countrywide
and other places? Did they somehow do something that would
cause these goals to be undermined?
Mr. DeMarco. Congresswoman Waters, I think it is pretty
clear that Fannie Mae and Freddie Mac both took steps to reduce
their underwriting standards, particularly in the 2005 to 2008
period. So, yes, they reduced their underwriting standards.
They took on more risk. They did invest in mortgages of a
quality that they, in earlier days, would not have.
And I believe that their pursuit of some of these riskier
mortgages was motivated by three things: a loss of market
share; wanting to make money; and housing goals.
Ms. Waters. All right. If they had stayed with their
criteria, would that have been a different story? Would the
results have been different if they had maintained the criteria
that had been established for purchasing these mortgages?
Mr. DeMarco. If they had not reduced their underwriting
standards, I think that the housing crisis that we have had,
the losses they have had would not have been as great. But they
still were taking on a lot of credit risk, and a lot of the
losses that they have absorbed have come from prime,
traditional mortgages, because of just the tremendous decline
in house prices, and the tremendous and persistent unemployment
that we have had, and because of the tremendous amount of
leverage on the balance sheet of households--
Ms. Waters. Can you tell me what percentage of the loss can
be directly traced to the change in the underwriting criteria
or just the economy? Do you know the difference?
Mr. DeMarco. Sitting right here, Congresswoman Waters, I
cannot tell you that breakdown.
Ms. Waters. All right. Are you familiar with any threats to
the GSEs by Countrywide or any of the other big banks
indicating that if they did not take everything that they were
writing that they would pull back all of their business and
this would make the GSEs less profitable, less competitive?
Have you heard that?
Mr. DeMarco. I am not aware of such threats.
Ms. Waters. Are you aware of any conversation from
Countrywide that was reported in the newspapers of that nature?
Mr. DeMarco. I am not recalling it. I am not saying it
hasn't been reported and that I haven't even read about it. I
am sorry, Congresswoman Waters. I am not recalling it just
sitting here.
Ms. Waters. I know you may not be recalling it, but what I
am trying to find out is, as this meltdown took place, there
was a lot written about what was going on. One of the stories
that emerged--a lot of stories emerged, for example, around
Countrywide. And one of those stories had to do Countrywide,
because of the volume that they had involved with the GSEs,
that they were in a position to either work with the GSEs and
allow them to purchase these mortgages, or to block them and to
not work with them, and thus put the GSEs in a less competitive
situation. Are you not aware of that--those reports in any
shape, form or fashion?
Mr. DeMarco. I am aware that Countrywide was a major
provider of mortgages to both Enterprises. I am aware that book
of business has been particularly costly to both Enterprises.
And I am aware that the Enterprises were concerned about the
loss of market share as a result of mortgage originations by
Countrywide and others being financed or securitized through
mechanisms other than the two of them.
Ms. Waters. All right. Thank you. I yield back.
Chairman Garrett. Okay, thanks.
To the gentleman from Alabama, the chairman of the full
committee.
Chairman Bachus. Thank you. And I appreciate your
appearance.
Two days ago, James Pressley wrote an article in Bloomberg
where he reviewed a book by four professors from the NYU Stern
School of Business. The title of the article is, ``Godzilla
Hedge Funds Fannie Mae and Freddie Mac Were Guaranteed to
Fail.''
It is a fascinating article about how they went from 4
percent of the mortgage market to about 42 percent right before
the meltdown in 2008. And now they are financing well above
that, 80 percent or 90 percent. It is fascinating.
And Pressley at the end asked two questions, which we have
discussed for really 2 years. And one--and these are authors of
the book, and I think most people on both sides of the aisle
agree that we have to wind down Fannie and Freddie.
So my first question would be, how do you do that? Now,
these professors--I don't know if you have read their book--
Mr. DeMarco. I have not, Mr. Chairman.
Chairman Bachus. Yes, they propose a bad bank, a good bank
and a bad bank. But the second thing they say--and it is a
trickier question, maybe--is what to do about Fannie Mae and
Freddie Mac's second main function, to guarantee mortgages
against default. So let's focus on that, because I only have
about 4 minutes.
Mr. DeMarco. Okay. So--
Chairman Bachus. Government continued to guarantee these
mortgages, whether they are private or public. And let me say
this, you disputed the view that explicit government guarantees
of mortgages could rectify the problems created by the GSEs. In
your testimony to the last Congress you said that the argument
for creating an explicit guarantee was built on the presumption
that the market either cannot evaluate and price the risk of
mortgage default, at least not at an acceptable cost, or that
the private market cannot manage that amount of risk on its
own.
And you added, ``We might ask whether there is a reason to
believe that the government will do better. If the government
backstop is underpriced, taxpayers eventually may foot the bill
again.'' And, that is the main concern on this side of the
aisle, that if it is not priced right, it won't be the sellers
or the buyers. It will be the taxpayers.
Mr. DeMarco. Right. So several things there. In terms of
what we can be doing now, I think the steps that we are taking
are, in fact, designed to assist the Congress in preparing for
an ultimate transformation.
And so that is why as conservator, we have taken the
following steps, that we are restricting the Enterprises to
their core business activities, we are gradually raising prices
so as not to disrupt markets, but to move towards a more risk-
based mechanism and a mechanism more reflective of what purely
private firms would do. We are gradually shrinking the
portfolio. As I said, the only thing that really is being added
to the portfolio are delinquent mortgages being pulled from
pools.
In terms of next steps, what we need is a clearer path
forward. The path that is available to me in the legislation,
in the law that exists today, would require us ultimately to--
we are really at a stalemate. The only alternative left is to
put them in receivership, which creates a limited life entity--
which is, in essence, the bad bank that you were referring to--
but it requires the FHFA to then re-issue the two charters as
they exist under current law.
And, if I hear one consensus in the whole GSE realm, it was
nobody wants that, and so we are awaiting Congress to give
further direction in terms of what is the role of the
government, including whether there is going to be a role for
limited or maybe not even limited guarantee of mortgage credits
in the United States, but to define that. Getting that
definition clear is going to be one of the things that is going
to allow private financial institutions to make a better
business determination about where it is they can enter and
actually apply their capital and make money in serving this
sector.
So I think that while incremental steps are important and
really can help move us, fundamentally the market is going to
want to know what is the whole picture in order to know how
they can deploy private capital to serve the mortgage market.
And with respect to your--the quotes from my testimony last
year on guarantees, it can very well be a legitimate conclusion
of lawmakers for there to be some form government guarantee of
some portion of the mortgage market. I was trying to raise that
it is not without costs and without risk, and that is what
everyone is looking to lawmakers to sort of make those
judgments.
Chairman Bachus. And I guess what you have said is that the
Congress needs to act or the Administration?
Mr. DeMarco. Yes, sir.
Chairman Bachus. Thank you.
Chairman Garrett. And I thank you. Thank you.
The gentleman from Massachusetts?
Mr. Frank. Thank you.
Mr. DeMarco, as I--and I appreciate your very specific
testimony on the legislation. This is very helpful testimony.
And I would say, there is a fairly--on the whole moderate
package--and as been noted, a lot that the Administration
agrees with--some of them are tying down what is already being
done.
So I am supportive of--the one question I had--first of
all, let me say, on risk retention, the gentleman from New
Jersey is quite correct. He read the article--he read the bill.
We covered them under risk retention. And I am sometimes told,
oh, well, but they really are. Don't worry about it. And I go
back to my fundamental principle of legislation: Prefer
redundancy to ambiguity. If they really are, what is the
problem with saying so?
And as I listen to your testimony--the one problem appeared
to be--and I hope this is the only one that you see--that it
would complicate the portfolio situation, because you would
have to hedge--you would have to hold against them.
If we exempted--if we explicitly said--of this bill that
you were covered by the risk retention 5 percent, and exempted
anything held specifically for that from the portfolio, would
that remove any objections you would have?
Mr. DeMarco. I would have to think about that, Congressman
Frank. This is really not about whether they hold a piece of
the MBS. I don't think--as I understand, what is explicitly
written in Dodd-Frank, the point of--
Mr. Frank. Mr. DeMarco, let me put it this way. Look,
nobody ever likes to be told what to do. I understand that. But
I am trying to figure out what harm can come. I have to say, I
am--
Mr. DeMarco. There is no harm.
Mr. Frank. No harm? If we--
Mr. DeMarco. If the Congress of the United States is not
concerned about them building or retaining a larger retained
portfolio--
Mr. Frank. But, Mr. DeMarco, though, in other words, if we
were to exempt or add to the retained portfolio allowance an
amount specifically equivalent to that 5 percent, then you
would have no--it would not cause you any problem?
Mr. DeMarco. As I understand the question, yes, sir, that
is right.
Mr. Frank. Okay. I thought the question was pretty clear.
Mr. DeMarco. Well--
Mr. Frank. Okay. The other issue, then, is on the retained
portfolio. And I say that because I am struck by this notion--
people are making this mistake that, oh, the downpayment
percentage in the qualified residential mortgage is too high.
The notion that people will not be able to make loans unless
they can securitize without risk retention I think is a great
mistake.
Mr. DeMarco. I agree.
Mr. Frank. Wells Fargo has said they will. Smaller banks--
portfolio. We didn't use to have securitization, so--but I
appreciate that, that it is only the portfolio.
The other impact in the portfolio--because the major
difference between this set of bills and the Administration, as
I read it in substance, is the rate at which the portfolios get
reduced--now, your point is that a major--the offset to
reducing the portfolios is the need to take some bad mortgages
and put them in portfolio. And as I read your testimony, the
problem is, you believe, if I am correct, that a requirement
that you accelerate the sell-off will require you to sell
prematurely some assets which you might be able to get more
from if you held them. Is that accurate?
Mr. DeMarco. Yes, sir.
Mr. Frank. So if we were, again, in the portfolio
limitation, in the portfolio reduction, to make some allowance,
some distinction between sort of the good and the bad assets
and gave you more time to sell off the bad assets so that the
reduction would be unrestricted with regard to the good ones,
but give you some discretion of the time you are selling the
bad ones, again, that would meet your problem?
Mr. DeMarco. That would be much easier for us to implement.
I think it would be better for taxpayers.
Mr. Frank. Okay, I appreciate that. Last point. I just want
to talk appropriately in your testimony--this is not about the
bill--about the legacy book of business and the post-
conservatorship book of business, because this goes to the
urgency of moving right away. And I believe that, since
Congress gave the Bush Administration the power to establish
the conservatorship--and that was done by Secretary Paulson in
2008--you are really talking about a very different set of
GSEs.
You say here, since conservatorship, underwriting standards
have been strengthened and several price increases have been
initiated to better align pricing with risk. I know we can't be
certain, but based on what has been done, is it reasonable to
assume that you are not going to see future losses from the
business now, anything like what we saw before the
conservatorship?
Mr. DeMarco. That is certainly our anticipation.
Mr. Frank. You are not likely to see that?
Mr. DeMarco. Right.
Mr. Frank. Thank you. I yield back.
Chairman Garrett. And if the gentleman will yield just
for--
Mr. Frank. Yes, I would yield to the chairman.
Chairman Garrett. On your second point, with regard to
putting some sort of language in there, with regard to saying
they would have additional discretion for the bad book, for the
bad loans, okay, I understand that. But is there something in
the proposal now that would tie their hands in that regard?
Mr. Frank. As I understand it--and I will be--
Chairman Garrett. Yes, sure.
Mr. Frank. As I understand it, if you have a general
reduction of the portfolio, it doesn't differentiate.
Chairman Garrett. Right.
Mr. Frank. And that what they are saying is it--at the
level at which the portfolio would be mandated by this bill--
and I generally support portfolio reduction--that might force
them to sell bad assets--
Chairman Garrett. In one year, and then something might go
wrong--
Mr. Frank. Yes.
Chairman Garrett. Okay.
Mr. Frank. And so that they could have some discretion,
maybe to make an exception with the bad assets. So, it doesn't
specifically say it, but by covering the whole portfolio, it
doesn't give them the ability to differentiate.
Chairman Garrett. I understand. Thanks. I appreciate it.
And with that, I yield to the vice chair of the
subcommittee, the gentleman from Arizona.
Mr. Schweikert. Thank you, Mr. Chairman.
Mr. DeMarco--and, first off, thank you. You have always--
you have been very kind to me and very forthcoming with many of
the questions we keep throwing at you. In sort of rapid fire,
just as it helps me understand some things, how many units, how
many residential units do you believe the GSEs presently have
the deed to? How many do you own?
Mr. DeMarco. A couple hundred thousand.
Mr. Schweikert. Are we over 200,000 now?
Mr. DeMarco. Yes, indeed. You mean REO properties?
Mr. Schweikert. Yes, REO properties.
Mr. DeMarco. A couple hundred thousand.
Mr. Schweikert. What is the mechanics right now? How many
units are you getting sold every month? Any idea?
Mr. DeMarco. The intake has slowed down a bit because of
some of the foreclosure processing problems. And I know that
they have been coming in at a faster rate than we have been
able to get them back out. I could get you the exact number,
Congressman. I don't know it off the top of my head.
Mr. Schweikert. Because even in my short time here, that
number looks like it is already up--I have been here, what,
about 84 days, 85 days, and I think that is up about 20,000
from where we were at the beginning of this year.
Mr. DeMarco. That could well be.
Mr. Schweikert. And do you think some of the growth in
inventory is--you are processing foreclosures faster? Your
short sales aren't going as quickly? Or just the process has
cleaned up and you are actually taking down the ones that had
to be taken down?
Mr. DeMarco. All of the above, plus the seasonality of the
time of year we are in with respect to sales.
Mr. Schweikert. Mr. Chairman, Mr. DeMarco, on the non-
performing portfolio of loans, how big is that? What is your
best guess?
Mr. DeMarco. About 5 percent of their book, 5 percent on 30
million mortgages.
Mr. Schweikert. And mechanically you hold those, and if you
can't mitigate something out, they go into the foreclosure
queue?
Mr. DeMarco. That is correct. But, the real emphasis and
priority is, when loans start to go delinquent, Fannie and
Freddie want their mortgage servicers to be reaching out to
delinquent borrowers immediately and beginning loss mitigation
procedures. That is very, very important to us, and I think it
is very important to the taxpayer that it be done. And there is
a great of effort and energy on that effort.
Mr. Schweikert. I am hopeful I get to a second round of
questions, because I have a whole bunch of things on the
servicer side that--I am wondering if there are some better
mechanics out there we could help.
On principal write-down, your opinion? And would you also--
for many of us who have a great concern that--if that sort of
becomes aggressive stated policy, the moral hazard of, do we
also start to create an additional cascade of non-performing
debt?
Mr. DeMarco. Sir, I think the question of principal
reduction is one for, really, the investor in the mortgage.
There are investors in private-label securities who, as I
understand it, at least some of them have expressed a desire
and an interest that there is a way of doing a principal write-
down with an underwater mortgage, particularly if that mortgage
can then be, through an FHA short refi program, that the
borrower goes over to FHA for a new mortgage, is one example,
that allows them to cut their losses, get their principal back,
and take that remaining principal and invest it elsewhere.
We have looked at that as conservator of Fannie and
Freddie, and we have examined it relative to the loss
mitigation tools that are available and their position in the
marketplace as a more longer-term participant. And it has been
our conclusion that it is not loss minimizing for Fannie and
Freddie to be engaging in a general program of principal
reductions.
I would say a couple of things. Fannie and Freddie's
mortgage book--the portion of it that is underwater today is
much less than the case in private-label securities. And the
majority of it--the vast majority of it is still performing, so
these are performing mortgages today, and we expect these
households to continue to honor their financial commitment.
And, frankly, I think the households themselves are
anticipating and fully expect to fulfill their commitment.
So the moral hazard question that you raise is one that if
you create an incentive for someone to find a way to not
continue to make a mortgage payment that they are capable of
making, in the Fannie and Freddie context, that would be
shifting that loss to the taxpayer, and that is something we
are trying to avoid.
In fact, what we are experiencing is that the loss
mitigation programs through loan modifications are households
that have income and are committed to staying in their house
can and should be a very useful way to adjust the mortgage
payments so that they can retain homeownership and we can
minimize losses. And, frankly, the performance rate on loan
modifications does not seem to be variant to what the current
loan-to-value of those mortgages are.
The final point I would say about Fannie and Freddie, with
respect to principal forgiveness, is that the way that book of
business has been done by Fannie and Freddie, a lot of the
underwater mortgages have mortgage insurance in front of them.
So there is a loss mitigant there for taxpayers that I want to
make sure that protection stays there, and principal
forgiveness can complicate that, as can second liens.
Mr. Schweikert. I thank you, Mr. Chairman. And for my next
half-an-hour of questions--oops, out of time.
Chairman Garrett. Yes, okay.
Oh, the gentleman from California?
Mr. Sherman. Thank you, Mr. Chairman.
I can see how, once this crisis is over, we can divide up
on philosophical lines. I have read the complete works of Ayn
Rand, or at least I will claim I have, because I can state with
confidence that Ayn Rand says nothing positive about either
Fannie Mae or Freddie Mac. And if we were not in a crisis, we
could divide up on the role of government and overall
philosophy.
But we are in a crisis. The economy is fragile. And we need
to be practical.
A double-dip recession is a very real possibility, and the
most likely way that will occur is another precipitous drop or
long slide in home prices. And loose talk here in Washington
can add to that crisis.
There are those on another committee talking about ending
the home mortgage deduction. That is a great philosophical
debate for good times. But right now, what it means is, why
should anybody in my district buy a home if a couple of years
from now they are going to lose their home mortgage deduction,
and 5 or 10 years after that, when they go to sell their home,
it is going to sell 10 percent, 20 percent, 30 percent less
than what it would otherwise, some would see an even greater
drop?
If we were to end the system whereby a Federal agency
guarantees qualifying conforming mortgage loans, we would see a
dramatic increase in home mortgage costs, a dramatic decline in
values. The dramatic decline in values would then lead to a
dramatic increase in defaults, and we would have a double-dip
recession.
That is why I am a little concerned about the title of
these hearings, which talk about protecting taxpayers from the
ongoing bailout of Fannie Mae and Freddie Mac. That may be a
noble goal, but we also have to protect taxpayers from the
precipitous removal of Fannie Mae and Freddie Mac from the
housing system in this country, and we have to protect
taxpayers from a double-dip recession. A second dip could mean
double-digit unemployment and could make our situation even
worse than that which we have recently experienced.
Now, Mr. DeMarco, one issue is the size of the portfolio
held in the safes of Fannie Mae and Freddie Mac. How large is
that portfolio, adding the two agencies together?
Mr. DeMarco. $1.3 billion to $1.4 billion.
Mr. Sherman. Now if all of that was dumped on the market--
Mr. DeMarco. Trillion. Sorry about that.
Mr. Sherman. What?
Mr. DeMarco. Trillion dollars.
Mr. Sherman. Yes, I--I knew you meant trillion even without
the correction. If that was precipitously dropped on the
market, would Fannie Mae and Freddie Mac secure full value for
the assets they were selling?
Mr. DeMarco. No, sir, if you are talking about selling $1.3
trillion all at once, no.
Mr. Sherman. In fact, if there was even a precipitous
decline in the size of that portfolio within any particular
month, wouldn't that affect the market price of the assets
being sold and cause Fannie and Freddie to not be able to
secure full value?
Mr. DeMarco. It could.
Mr. Sherman. I yield back.
Chairman Garrett. I thank the gentleman.
The gentleman from Texas?
Mr. Hensarling. Thank you, Mr. Chairman.
Welcome, Mr. DeMarco. Forgive me. I was at another meeting,
missed part of your testimony, and came in on part of the
questioning of the ranking member. So if we are covering a
little bit of old ground, I apologize.
Following up on the questioning of the gentleman from
California dealing in the reduction of their portfolio
holdings, the GSE report from the Obama Administration itself
says the PFPAs required reduction in this risk-taking by
winding down their investment portfolios and an annual pace of
no less than 10 percent. So I suppose that would be a minimum
of a 10-year plan.
I think you mentioned in your written testimony--I didn't
hear your oral testimony--I believe it was in your written
testimony that the GSEs are ``on track to meet or exceed the 10
percent reduction.''
Mr. DeMarco. Yes.
Mr. Hensarling. I assume by definition, you do not define
10 years as acting precipitously. Is that correct?
Mr. DeMarco. Ten years would not be precipitous,
Congressman.
Mr. Hensarling. Okay. Let's talk about 5 years, for
example. One of the witnesses on the panel to follow you, Mr.
Pinto, has said in his testimony, ``The natural liquidation
rate being experienced by these portfolios for 2010 had an
annualized rate of 21 percent and continued at the same
annualized rate in January of 2011.'' I think you also noted in
your written testimony, ``Some faster reduction of the
Enterprises' retained portfolios may be possible.''
So if I am--and I looked forward to questioning Mr. Pinto,
when he--I see him sitting there now--on the second panel, but
he seems to be under the impression that already these are
being reduced on a 5-year timeframe, so was the 5-year
timeframe too precipitous, yet 10 years is just right?
Mr. DeMarco. Congressman, that question is basically
impossible to answer, because one doesn't know what market
conditions are going to be, and I can't tell you what is going
to--or how much is going to be added to the portfolio--
Mr. Hensarling. Thank you. I thought that was the answer,
so you clarified that for me.
In the Administration's proposal--I say proposal, their
list of three options that I know you are very well familiar
with--it seems that option two and option three clearly include
some form or facet of Federal guarantee mechanism in the
secondary market.
About 6 months ago, I believe it was before the full
committee in September, you seemed to question--call into
question the government's ability to accurately price these
guarantees. Reading from your testimony, you said the
presumption behind the need for an explicit Federal guarantee
is that the market either cannot evaluate and price the tail
risk of mortgage default, at least at any price that most would
consider reasonable or cannot manage that amount of mortgage
credit risk on its own.
You went on to say, but we might ask whether there is a
reason to believe that the government will do better. If the
government backstop is underpriced, taxpayers eventually may
foot the bill again.
When I look at the record of the National Flood Insurance
Program, which is $19 billion in debt, when I look at the
Federal Crop Insurance Program, which has cost the Federal
Government almost $40 billion over the past decade, when I look
at the PBGC, which has a debt, I believe the last number I have
is $23 billion and counting, with an exposure of over $190
billion, I would seem to agree that the track record of
government for accurately pricing this risk is questionable at
best.
So my question to you is this. Have you changed your
opinion in the last 6 months on whether or not there is a
credible reason to believe that government could accurately
price risk in the context of the Administration's proposal
number two and three?
Mr. DeMarco. Excuse me, Congressman. I have not changed my
opinion in the context of what I stated in that testimony, that
there would be risks and challenges for the government being
able to do that. I have not changed that opinion.
Mr. Hensarling. Thank you, last question. I see my time is
winding down. I have heard many on the other side of the aisle
offer criticisms of those who are proposing reform plans, but
isn't it true that if we don't have a reform plan, the
conservatorship that Fannie and Freddie are presently in could
not continue in perpetuity? Is there a termination date--
Mr. DeMarco. There is not a termination date set, no, sir.
Mr. Hensarling. Okay. So if we don't bring forth a reform
plan, we go to the status quo, and the status quo is
conservatorship in perpetuity. And I think the last estimate
from CBO is that, as opposed to $150 billion of taxpayer
exposure, we would eventually end up at $400 billion. I see my
time has expired. Thank you.
Chairman Garrett. And I thank the gentleman from Texas.
The gentlelady from Wisconsin?
Oh, I am sorry. The gentleman from Massachusetts? You were
preempted before by the gentleman from California.
Mr. Lynch. No problem. Thank you, Mr. Chairman.
I want to thank Mr. DeMarco for your good work in helping
the committee.
One of the bills--one of the eight bills that has been
proffered by my friends on the other side of the aisle includes
a provision offered by Mr. Royce of California, my friend, that
is called the GSE Mission Improvement Act. However, part of
this bill would repeal the mission of the GSEs to serve the
section 202 elderly market. These are folks who are 62 years of
age and older. We have a huge demographic in this country of
people 62 years and over. As baby boomers retire, this is going
to be a very critical part of the population served by section
202 housing.
As someone who grew up in the old colony housing projects
in south Boston, and my involvement on the housing committee
the last few years, this section 202 housing happens to be some
of the most successful housing that we have in the country. It
is the best-managed. It is the cleanest. It is the safest. It
is the most desirable. And, again, with that demographic of
folks coming into 62 years of age and older, it is desperately
needed.
In my district, I have half the City of Boston, I have the
City of Brockton, and 19 towns in between. I am at my wit's end
trying to get more 202 housing in there.
I am very concerned about what this bill would do by
eliminating the mission of serving this market. And I am hoping
that you might be able to shed some light on that, what the
impact would be for that market and for those seniors who are
served. What happens? What happens when we stop serving this
market and this 202 housing goes away?
Mr. DeMarco. Congressman, I am not--I could do some
research and get back to you about the particulars of the
current activity of Fannie and Freddie with respect to the 202
program. What I would say is that, as I understand Congressman
Royce's bill, this would be consistent with what the approach
we are already taking in conservatorship, which is, if it is a
line of business that Fannie and Freddie are not already in,
that they would not start doing it.
I presume from your question that this is something where
they are already active. And so my view of this that Fannie and
Freddie's charter acts fundamentally require them to serve the
full range of markets that is available to them, that is, for
which they are eligible to participate, and I believe it would
be our responsibility as both regulator and conservator to
ensure that they remained active in serving all segments of the
market that are available to them, that are part of their core
business activities.
So I would not expect a reduction or elimination in housing
goals to necessarily alter what it is that they would be doing,
because I think that they have an overriding charter
responsibility to be served in the housing market.
Mr. Lynch. I appreciate that. I just hope that we don't
forget the history here. Section 202 housing was developed for
seniors. You have to be 62 years of age or older. You can't--
Mr. DeMarco. Yes, sir.
Mr. Lynch. There is no other way to get into that housing.
And the reason that we had to come up with that model was
because, in the general family housing and elderly handicapped
housing model, because of the laws in this country, we had to
include a lot of people in the old handicap/elderly model that
their needs were much different than elderly people.
If they were drug-addicted, handicapped, we had some
horrific experiences when we put seniors in the same housing
with very young people who were handicapped because of
addiction to heroin and whatnot. So we created this model to
protect seniors and also to better serve those people who were
in addiction, because they have a different set of needs. We
bifurcated this. And so that is why have 202 housing.
Mr. DeMarco. Thank you, Congressman. That helps. And so,
again, to reiterate, my understanding of Congressman Royce's
bill is it--the extent to which Fannie and Freddie are serving
that market today, I do not understand that bill would preclude
them from continuing to serve it, nor would I view it as
responsible as either regulator or conservator for them to be
walking away from a segment of the market just because the
housing goals--
Mr. Lynch. The bill would eliminate the provisions of HERA,
which established a duty of the GSE to serve the 202 elderly
market.
Mr. DeMarco. And that is why--
Mr. Lynch. If they are not going to serve that market, I
think it goes away.
Mr. DeMarco. So that is what I am trying to be--
Mr. Lynch. You are doing 90 percent of the mortgages
through the GSEs right now, so--
Chairman Garrett. We will let the gentleman answer, and
this will be the--
Mr. DeMarco. I am simply trying to express that--I am not
personally aware of what portion of activity Fannie and Freddie
have in a 202 market today. If they are not serving it already,
we are not going to get them to start serving it. But if they
are serving it, I don't see how removing the duty to serve
requirement would cause any change in their continued service
to that segment of the market.
Chairman Garrett. Okay, thank you.
Mr. DeMarco. And that is being consistent in what we have
set forth as conservator, that we are not getting them into new
lines of business.
Chairman Garrett. I thank the gentleman.
Mr. Lynch. I have exhausted my time. Thank you, Mr.
Chairman.
Chairman Garrett. Thanks a lot. I appreciate it.
The gentlelady from Illinois?
Mrs. Biggert. Thank you, Mr. Chairman.
Mr. DeMarco, for a couple of years now, I think I have been
asking this question. You probably know what it is. It is about
Fannie and Freddie's exclusive list of law firms that have
handled the foreclosures.
Reports have indicated that there are--that these few firms
get paid by the foreclosure, and there has been a rush to
process those foreclosures to increase earnings. And meanwhile,
there are reports of fraudulent paperwork among other paperwork
problems. And these have also been reported.
I would actually ask to submit for the record the
Washington Post story dated December 23, 2010, ``Rush to
foreclose by Fannie, Freddie helped feed problems with legal
paperwork.''
Chairman Garrett. I am sorry?
Mrs. Biggert. I asked to submit--
Chairman Garrett. Without objection, it is so orderd.
Mrs. Biggert. Thank you. Back to the question.
What have you done to review the need for this exclusive
list or whether it should exist? Have you initiated audits of
these law firms? And how many?
Mr. DeMarco. We have been doing a lot, in terms of taking a
close review of these law firms. Fannie and Freddie certainly
have. I think it is well known that a couple of them have
caused a great deal of difficulty and loss to the Enterprises.
They have been taking steps to expand, and they have been
expanding the range of firms that are participating.
But, Congresswoman, to the core of your question, we are
taking a fundamental look at the use of and reliance on these
firms as part of the foreclosure process and process.
Mrs. Biggert. Has there been any--not just a review, but
are they being charged with anything?
Mr. DeMarco. There are several firms that have been
dismissed, if you will, no further business is being done, and
ongoing business has been transferred. And, yes, there has been
a heightened scrutiny of those that are continuing.
Mrs. Biggert. And did you do audits of these law firms? Is
that proper to do?
Mr. DeMarco. We do audits of Freddie and Fannie in terms of
how they manage counterparty risk. So as part of our
examinations, we have been undertaking additional exam
activities to look at how Fannie and Freddie are managing those
counterparties. Fannie and Freddie in turn have been taking a
closer look at the performance and controls of their law firm.
Mrs. Biggert. Okay. And should the FHFA Inspector General
have access to all of FHFA's records, reports, audits, reviews,
documents, papers, recommendations, or other material that is
available to FHFA?
Mr. DeMarco. As any other inspector general, yes, ma'am,
and they do.
Mrs. Biggert. Okay. And that is provided in section 6(a)(1)
of the Inspector General Act of 1978?
Mr. DeMarco. I believe that is right. Our Inspector
General, with all reference to the authorities there in the
Inspector General Act of 1978, as amended.
Mrs. Biggert. Okay. Would this also include the books and
records of the GSEs, which are available to FHFA?
Mr. DeMarco. The books and records of the GSEs are
available to FHFA, as both the regulator and the conservator.
The role of FHFA's Inspector General is to oversee FHFA and how
we are conducting and carrying out our responsibilities as both
the regulator and now as the conservator. I think that our IG
has been under way for 6 or 7 months, and has been very active.
And I think we have been developing a good process for ensuring
that the IG has access to the information he needs to carry out
his audits and evaluations of FHFA.
Mrs. Biggert. But the answer would be ``no?''
Mr. DeMarco. The books and records are available to FHFA,
yes, not to the IG.
Mrs. Biggert. Okay. Thank you.
Mr. DeMarco. I will say that there are certain exceptions.
Questions like that are difficult because there are
circumstances and particular activities, such as criminal
investigations and so forth, for which different answers apply.
Mrs. Biggert. So there would be some limitations?
Mr. DeMarco. Yes.
Mrs. Biggert. Yes, okay. And then you have--in looking at
the three options that the Treasury has proposed, has said
there is a privatized system of housing finance, with the
government insurance role limited to FHA, USDA, and Department
of Veterans Affairs assistance. Could you provide us with some
ideas as to how option one could work specifically for multi-
family housing?
Chairman Garrett. And the gentleman's answer is your final
answer.
Mr. DeMarco. Honestly, Congresswoman, that is a challenging
question. I would like a little more opportunity to think about
that.
Mrs. Biggert. Maybe you could put that into writing?
Mr. DeMarco. I would be happy to get back to you on that.
Mrs. Biggert. Thank you. I yield back.
Chairman Garrett. I thank the gentlelady.
The gentlelady now from Wisconsin is recognized.
Ms. Moore. Thank you so much, Mr. Chairman.
I actually would like to follow up on Mrs. Biggert's
questions. I have three specific questions. First, how does the
absence of GSEs, what impact would that have on affordable
housing? Isn't it sort of oxymoronic to talk about producing
affordable housing and yet having a private entity provide the
securitization?
Second, I wanted to ask you about the liquidity. On page
four of your testimony, you talked about the importance of
keeping the GSEs focused on their existing core business and
generating earnings, therefore benefiting taxpayers. And you
also say that, because the private mortgage securitization
market is already banished by this time, there were no other
effective secondary market mechanisms in place. So I would like
your view on whether or not the private sector and
privatization really can take the place of providing secondary
mortgage markets.
And on page six, you talk about how the Nation's housing
finance structure depends on institutions capable of absorbing
the flows that a market of that magnitude generates. You talk
about, for example, the single-family market being a $10
trillion market. So if we were to privatize the secondary
securitization, would we not be, indeed, creating too-big-to-
fail institutions?
Mr. DeMarco. Congresswoman, let me take the questions in
order. With respect to affordable housing, as I understood it,
you were asking whether I thought that the affordable housing
segment of the mortgage market would be served or could be
served if we were operating with secondary mortgage market
entities that were fully private, that it did not operate with
a government guarantee. I think that the answer to that is
``yes.'' I don't see why it wouldn't, because that is a large
market segment. It is one where profits can be made and where
customers can be served.
Ms. Moore. Without a lot of fees? What would the fee
structure be?
Mr. DeMarco. Congresswoman, I can't answer that, except to
say that I would assume that the fees would be risk-based. And,
there is a lot that has changed in our mortgage market in terms
of private institutions serving low- and moderate-income
households and serving the rental market.
This market has long had and continues to have today a
great deal of government involvement, not just at the Federal
level, but also at the State level. So in considering your
question, assuming that there is still an array of Federal
through FHA, State through State and local housing finance
agencies, actors still involved, but I do think that in terms
of thinking about the role that Fannie and Freddie have played
in the conventional conforming mortgage market over the years,
including serving low- and moderate-income households, I do
think a portion of that can be served by private institutions.
With respect to your second question about, can the private
sector take the place of Fannie and Freddie in the secondary
mortgage market? I think fundamentally that is really, in
essence, the question the Administration--
Ms. Moore. Liquidity.
Mr. DeMarco. --its White Paper.
Ms. Moore. Would it wipe out the small banks, the community
banks? How would they fare in this market with respect to
liquidity?
Mr. DeMarco. With fully private, I think that the more
competitive that market is, the better served small- and mid-
sized lenders would be. And so I would commend to the
subcommittee that, in thinking about each reform of the
secondary mortgage market, that the more competitive this
marketplace is, I think the better for borrowers and the better
for small- and mid-sized loan originators.
I think that this is really the core question. And I must
say that, in terms of market participants that I talk to, I
find an array of views about this, as to just how much of a $10
trillion or $11 trillion single-family mortgage market can be
effectively financed by capital markets, whether domestic
investors or foreign investors in U.S. mortgages, how much of
that can be done without any connection or backstop or
guarantee from the government?
So if you view the range as being between zero on the one
hand and we have about an $11 trillion single-family mortgage
market on the other, somewhere in there is an answer or a range
of answers of how much can be done effectively by fully private
firms. And I think that is the core question that the Congress
is going to have to grapple with in determining the future of
the secondary mortgage market.
Chairman Garrett. I thank the gentlelady.
The gentleman from California?
Mr. Royce. Thank you, Mr. Chairman.
I wanted to ask you, Mr. DeMarco, I want to thank you for
your testimony, but briefly, on the affordable housing goals
legislation, you mentioned in your testimony that, ``Similar to
the housing goals, eliminating the duty to serve requirements
could be consistent with the realities associated with the
Enterprises operating in conservatorship.''
Could you please elaborate on that point? Walk us through
that.
Mr. DeMarco. Certainly. Congressman, the duty to serve
requirement was new in the HERA legislation enacted in 2008. It
does not set quantitative--Congress did not want FHFA to set
quantitative goals, but instead identified three areas of the
housing market where it identified Fannie and Freddie as having
a duty to serve them, and the legislation was encouraging them
to take innovative steps to develop more product and activity
in that area.
In conservatorship, we are restricting Fannie and Freddie
to their existing core business activities. It is inconsistent
with conservatorship, in my view, to engage in new lines of
business where you have to develop new infrastructure, new risk
controls, new underwriting, and so forth, and new technology to
service.
And so the approach we took in our proposed rule on duty to
serve was to implement the duty to serve requirement in areas
that Fannie and Freddie were already providing support and to
those particular market segments, but not to require them to
develop new products in order to satisfy duty to serve, because
that was what was in an inherent conflict with the approach we
are taking in conservatorship.
Mr. Royce. And also, with the experiences in the past, let
me ask you--and we touched a little on this issue--but last
month, the president of the Richmond Federal Reserve, Jeff
Lacker, criticized proposals similar to the ones that will be
touted on the second panel. And what Richmond President Jeff
Lacker said was that many proposals would make government
guarantees on home mortgages explicit and priced. Such
proposals differ mainly in the nature of the intermediaries
through which such guarantees would be channeled, but
perpetuating guarantees for housing-related debt will continue
to artificially stimulate the risky leverage that critically
fueled the disastrous housing boom we have just experienced.
The devastating consequences of the housing bust suggest
that government backstops for housing finance are not worth the
price of overbuilt, overleveraged, and at times overheated
housing markets, on top of the fiscal burden of large
contingent liabilities.
You have made comments raising concerns with simply making
a government guarantee explicit, rather than implicit. I wonder
if you would comment on some of the other aspects of Mr.
Lacker's statement there. I would like to get your thoughts on
that.
Mr. DeMarco. Certainly. As an economist, I would share the
general principles that Mr. Lacker has set forth. I would add
to that--certainly economists recognize that where there are
either market failures or where there are public policy
objectives that are to be served, there can be a role for
guarantees, subsidies, or other incentives provided by
government to incentivize greater activity in an area relative
to what purely private actors would create. And that is really
a determination for lawmakers to make, not regulators.
Mr. Royce. My time is up, but, Mr. DeMarco, thank you very
much.
Thank you, Mr. Chairman.
Chairman Garrett. The gentleman has one more minute. Do you
have another question? Okay.
The gentleman from Colorado?
Mr. Perlmutter. Thank you, Mr. Chairman.
Mr. DeMarco, let me begin with a couple of comments you
made. In the conservatorship, you are not taking on any new
products, new approaches. It is just trying to keep things
going, right?
Mr. DeMarco. We are trying to restrict the Enterprises to
their existing core business activities, to remediate where
they had weaknesses in those business activities, and to keep
them from getting into new lines of business or new products,
yes, sir.
Mr. Perlmutter. Anecdotally, I hear out there, 5, 6, 7
years ago, that 2003 to 2007 timeframe, anybody could get a
mortgage if they were breathing. Obviously in this
conservatorship mode, Freddie Mac and Fannie Mae are much more
restrictive in what they will buy. Is that a fair statement?
Mr. DeMarco. Their underwriting standards have been
appropriately strengthened, yes, sir.
Mr. Perlmutter. What I have heard is the pendulum was very
easy back in that 2003 to 2007 timeframe, much more difficult
now.
Mr. DeMarco. I would say that underwriting standards have
strengthened and pricing has become more risk-based. And I
would say, Congressman, that is probably where it is actually
seen its effects, is we were under pricing credit risk, and now
we are getting at least closer to having appropriate pricing of
credit risk.
Mr. Perlmutter. Okay, and I will take your answer as a
``yes.''
Mr. DeMarco. Yes, sir.
Mr. Perlmutter. I ask those questions because of some
questions Mr. Hensarling posed to you, that there were some
$150 billion in troubled loans that are part of the
conservator's package and responsibility, but have those
developed during the term of the conservator? Or were those
things that preceded the conservatorship?
Mr. DeMarco. Most of the troubled loans and delinquent
mortgages we are dealing with, sir, were originated pre-
conservatorship.
Mr. Perlmutter. Okay. So at this point, based on the
underwriting standards, you wouldn't expect to have that level
of troubled loans on a going-forward basis, would you?
Mr. DeMarco. That is correct.
Mr. Perlmutter. Okay. There were a couple of areas where I
did agree with Mr. Hensarling. Obviously, we have some
financial issues we must confront in this country. He and I
absolutely disagree as to how we got here. I believe when the
Bush Administration took a voluntary pay cut, in effect, cut
our taxes substantially in 2001, 2002, prosecuted a couple of
wars to the tune of $1 trillion, and then we don't have enough
police on Wall Street in 2008 and that put this country behind
the financial eight ball.
But we are behind the financial eight ball, which brings me
to a second question. Obviously, in this conservatorship, you
are not taking on anything new, but there are places, I
believe, and your counsel and I have talked about this in the
past, which are called real estate mortgage investment
conduits. Are you familiar with that concept, sir?
Mr. DeMarco. With REMICs? Yes, sir.
Mr. Perlmutter. Okay. And the reason I am asking it is,
there are certain portfolios--there are certain bonds that you
have sold, either Fannie Mae or Freddie Mac has sold, that had
very substantial interest rates back in the 1980s and the
1990s, compared to the interest rates today. So there is an
opportunity in those older bonds to call those bonds and make
some money. Are you familiar with that?
Mr. DeMarco. I am familiar with this issue, yes, sir.
Mr. Perlmutter. Okay, I just want to bring it to your
attention, because at least a couple of the proposals that the
Republicans have brought forward--particularly for me, Mr.
Schweikert's, and Mrs. Biggert's, have real merit in kind of
advancing and continuing to build Fannie Mae and Freddie Mac.
But I probably will want to reiterate the fact that the
American taxpayer could make some money if some of those loans
that are at higher interest rates were called today.
And so I will--don't be surprised if you see an amendment
that, instead of focusing on NPR or Planned Parenthood or
things that, in my opinion, didn't cause the debt this country
faces, we actually do something where there is money on the
table that would benefit the American taxpayer.
So I thank you for your service in this difficult time. I
really do. And I thank you for your testimony today.
Mr. DeMarco. Thank you.
Chairman Garrett. The gentleman yields back. And we look
forward to working with the gentleman on a number of those
bills.
And with that, I yield to the gentleman from Texas.
Mr. Neugebauer. Yes, thank you, Mr. Chairman. Thank you,
Mr. Demarco, for being here.
A couple of thoughts here. One is, I appreciated your
thoughts on raising the guarantee fee. You and I have had a
number of conversations about that. And I guess the question
is, is from a strategy standpoint, is the goal here to just
keep raising the G-fee until you start to see some private
activity foregoing sanitizing these mortgages through Freddie
and Fannie and begin to see some private activity? Or what is
going to be your criteria and your goal in your G-fee strategy?
Mr. DeMarco. The approach we have been taking is to ensure,
first of all, we have been focused on enhancing the risk-based
characteristics of pricing, so that riskier mortgages are, in
fact, charged a higher price. In the pre-conservatorship world,
there is a tremendous amount of cross-subsidization going on
from low-risk borrowers to high-risk borrowers, and we are
trying to gradually correct that by enhancing the risk-based
characteristics of the pricing.
And the other is that we are continuing to move in a
direction of looking at the risk characteristics of a
particular group of loans based on their characteristics,
determine what is the appropriate amount of economic capital
that would be required to back that, if these were operated as
private entities, and then what the rate--at least getting to a
rate of against that sort of imputed capital that would be
needed to back that. So that is really the benchmark that we
are looking at as we take these gradual steps with price
adjustments.
Mr. Neugebauer. I think you brought up something else that
I agree with, and that is that, in order to continue to create
some space for the private market, lowering the conforming loan
limits has to be a part of that strategy, because basically
what we have done is we have pushed the jumbo market way up
there now with the current limits, and so basically all of the
private activity that seems to be going on in the marketplace
right now is at the jumbo level.
So I guess if you bring the jumbo level down some, you
begin to create some space for the--do you have the authority
as the conservator to say to the entities, ``I am establishing
new conforming loan limits, and from this point forward, this
will be your conforming loan limit?''
Mr. DeMarco. The conforming loan limit is driven by
statutory direction and formula, and we simply implement that.
Mr. Neugebauer. I think the man behind you is going to
disagree with you here.
Mr. DeMarco. Oh, okay, thank you. I am being advised that
my answer is partially correct. It is established by formula,
but apparently I have authority to go lower.
Mr. Neugebauer. Would you consider doing that?
Mr. DeMarco. Since I have just discovered that I have this
authority, I would have to--I suppose I would consider it. What
I would do with it, Congressman, I am not sure.
This has traditionally been something that has been really
directed by Congress. The adjustments have been directed by
Congress. And for me to make a change in that, as a regulator,
I really want to think hard about that.
Mr. Neugebauer. I would just say this to you, Mr. DeMarco,
that you are a conservator for the taxpayers of the United
States of America. And so if you feel like it is in the best
interests of the American taxpayers to begin a process of
lowering those conforming loan limits, we certainly would
expect you to fill your fiduciary responsibility and consider
that.
I want to go to another area where we were talking about
the portfolio. And I agree with a number of my colleagues. I
think the sooner we reduce our portfolio, the better. And I
think sometimes--and there is an old banking saying that your
first loss is sometimes your cheapest loss.
One of the things that I am concerned about is--and you and
I have talked about this a little bit--that basically your
portfolio reduction is actually being slowed down some by the
fact that you are purchasing some of these troubled loans
rather than paying the principal and the interest deficiency on
those loans. And I guess you have been bringing them into your
portfolio and trying to rework them. I think in some cases you
are selling those properties and putting new borrowers in
there.
And so my feeling is that, as we are really bringing the
troubled loans into the portfolio, we are probably selling the
better quality loans, and so basically the quality of the
portfolio is probably deteriorating. Would that be a correct
assumption?
Mr. DeMarco. Certainly, the liquidity of the assets are
deteriorating, because just as you quite rightly point out, the
shift in the share of the mortgages that are financed on
balance sheets by Fannie and Freddie are modified loans or
otherwise troubled loans. And so that makes them much more
difficult to sell.
Mr. Neugebauer. Just one quick question. Have you
considered looking at a liquidation of some of the portfolio
loans without a Freddie or Fannie guarantee?
Mr. DeMarco. The idea--
Mr. Neugebauer. Kind of--
Mr. DeMarco. The idea, in terms of REO, most of that is
sold--
Mr. DeMarco. You are talking about loans. The idea has
occurred to us. And actually, in my written statement, my
commentary about one of the bills, about no new products, was,
in fact, making really by inference--that was one of the things
I had in mind, Congressman--is that while I remain steadfast in
my view that as conservator we should not have the Enterprises
entering new businesses and new product lines, that at some
point, we might want to revisit that question, if it is part of
a considered transition mechanism, really worked out with the
Congress, about moving from Fannie and Freddie as we have them
today to greater private participation.
That is one mechanism that could be considered. And that
needs to be balanced against the fact that it would be
considered a new product.
Chairman Garrett. I thank the gentleman. And perhaps just
on that, if you have specific ideas in that area, the gentleman
and the committee would probably like to hear as to what those
specific areas would be needed in order to get into that
transitional phase, that might want to be excluded from any
area limited--with the limitation on new products.
Mr. DeMarco. Certainly. I would welcome that discussion
with any members of the committee. It is not something where I
have a plan today. I am simply anticipating where we might find
ourselves.
Chairman Garrett. Okay. The gentleman from North Carolina
is recognized.
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
Mr. DeMarco, you and I agree that the principal
consideration, perhaps the only consideration for FHFA as
conservator of Fannie and Freddie should be reducing the losses
of taxpayers, but it appears pretty clear that the cycle we
have of foreclosures leading to declining home values,
declining home values leading to more borrowers, more
homeowners being underwater, leads to more foreclosures, and on
and on, it clearly is in the interest of taxpayers for FHFA, as
conservator of Fannie and Freddie, to minimize the continuing
decline in home values. Isn't that correct?
Mr. DeMarco. Yes, sir.
Mr. Miller of North Carolina. Okay. The power--and you and
I have corresponded about this, and I appreciate your response
to my earlier letter, that more than 50 other members signed.
The GSEs, Fannie and Freddie, obviously have enormous market
power in the mortgage market now. Not only are they 50 percent
of legacy loans, but they are in essence the entire market for
new loans. There is no PLS market now.
Mr. DeMarco. Right. It is Fannie, Freddie, and the FHA,
basically.
Mr. Miller of North Carolina. Okay. Why would it not be in
the taxpayers' interest for FHFA, as conservator of Fannie and
Freddie, to use that market power to try to reform the market
for servicers, servicers' conduct, with respect to your own
servicers, that they not do all of the things that we have
heard complained about, the dual track, the lack of a single
point of contact, the failure to terminate the contracts with
those servicers who keep losing paper, for instance.
Why is FHFA as conservator not using your market power to
reform the servicing industry, which seems to be in dire need
of reform?
Mr. DeMarco. Indeed, I agree with you. And I would say that
we are working very hard on the very set of things you just
described. I made a presentation in the Mortgage Bankers
Association's annual servicing conference last month, and I
told them rather directly that we were working with Fannie and
Freddie to revise and make consistent a whole set of practices,
timelines, and penalties, with regard to mortgage servicing, so
we wouldn't have this--Fannie wants it this way, but Freddie
wants it that way. No, we are not doing that.
We are getting them consistent. We are going to be
rigorous, and there are going to be penalties associated with
failure to service properly based on this, and we are very much
engaged in that activity.
Mr. Miller of North Carolina. And are you using--are you
applying those expectations, those standards to the same
servicers in how they handle PLS mortgages?
Mr. DeMarco. No, sir, I don't have regulatory authority
over what mortgage servicers are doing.
Mr. Miller of North Carolina. You have contractual
authority.
Mr. DeMarco. Pardon?
Mr. Miller of North Carolina. Contractual authority.
Mr. DeMarco. My contractual authority is what we were
trying to exercise, yes.
Mr. Miller of North Carolina. Your contract can say--why
can't it not say that, with respect to your servicing standards
generally, with respect to all clients, you must do these
things?
Mr. DeMarco. I will take that under consideration, check--
and I will go back and see if that is feasible for us.
Mr. Miller of North Carolina. Okay. And you and I have
corresponded about principal reductions and the value of that.
It seems that every study that has looked at the success of
modifications has found that modifications that reduce
principal, particularly--especially for those underwater, are
much more successful if they reduce principal.
And you said that actually not that many of FHFA's--of
Fannie and Freddie, the Enterprises' mortgages are underwater,
and it certainly makes sense that your book of business would
be substantially better than the PLS book of business.
But why are you not pushing them to reduce principal to the
extent it is consistent with their contracts, PLS contracts?
Mr. DeMarco. First of all, Congressman, some of these
studies that purport to show principal forgiveness as superior,
as minimizing losses, are actually combining principal
forgiveness and principal forbearance, which are different
concepts and matter a lot to me as conservator.
As conservator, some of the loan modifications that Fannie
and Freddie are doing, in fact, include principal forbearance,
which means that you are basically being charged a zero rate of
interest on the principal, but we are retaining--the principal
value is still owed.
And what that does, essentially, is that over time it
retains for the Enterprises an upside should markets continue
to improve, that households be able to maintain a good, steady
payment on the modified loan. It has the potential to improve
the net realized value on that mortgage for the Enterprise,
whereas principal forgiveness, once it is forgiven, then that
is it. There is no upside potential.
The other thing, in response to an earlier question, the
vast majority of the Enterprises' underwater mortgages are
continuing to perform. They are paying timely, and we would
like to continue that, and it is our expectation that those
households will continue to honor their financial commitments.
So we are using principal forbearance as a tool in the loan
modification process as a way of getting an affordable payment
for consumers.
The other thing--the comment I had made earlier before you
arrived, in response to another question, is that in our
examination of data of households that have received loan
modifications, the performance rate on those modified loans
does not seem to vary much with what the actual current loan-
to-value is.
So we see that there is a value in getting the borrower
that is committed to their home into a payment that they can
afford, and they then succeed in paying that modified loan
regardless of what their loan-to-value ratio is.
So we have been trying very hard to take an empirical
approach to looking at this--at this important question,
because I agree with you. This is a very important question.
And as I said in my correspondence to you, there may be well be
other segments of the market, and particularly in the private-
label realm, where principal forgiveness makes more sense.
Mr. Miller of North Carolina. And, Mr. Chairman, my time
has expired, but--
Chairman Garrett. Your time is--
Mr. Miller of North Carolina. If I could have 30 seconds?
Chairman Garrett. You are a minute and 40 seconds over, so
let me go to the gentleman from New Mexico, please.
Mr. Pearce. Thank you. Thank you, Mr. Chairman.
Thank you, Mr. DeMarco. On page one, you refer to the
business as doing much better, but you also refer to
substantial credit losses. How much are those credit losses?
Mr. DeMarco. The credit losses have been--I am sorry, on
the order of $180 billion, I think--
Mr. Pearce. --$180 billion, in this past year?
Mr. DeMarco. No, sir. I am talking since--the losses
against capital from 2008.
Mr. Pearce. I understand, but you say it is significantly
better, but it still has credit losses during the current--
Mr. DeMarco. Oh, credit losses in 2010 were much smaller
than in prior years.
Mr. Pearce. How much are those?
Mr. DeMarco. I am sorry, Congressman. I will get you the
number.
Mr. Pearce. You have an approximate ballpark?
Mr. DeMarco. It is in the order of $20 billion to $30
billion.
Mr. Pearce. Okay, so on page three, you refer to $28
billion drawdown, right?
Mr. DeMarco. Yes, sir.
Mr. Pearce. Is that then the amount of the credit losses?
Mr. DeMarco. That is pretty close to it, sir, because some
of the draws are due to having to make dividend payments--
Mr. Pearce. Okay, that is--that will--
Mr. DeMarco. --to make dividend payments.
Mr. Pearce. So let me try to get this business model in
mind. You have 30 million loans, and 1.5 million are
nonperforming, right? And those are creating losses of $28
billion, which you drew down from the Treasury. Is that more or
less correct? I see somebody shaking their head.
Mr. DeMarco. We have been reserving for those losses as we
go along, so they have built-up loan-loss reserves that have
been reflected in part--
Mr. Pearce. Okay. So you have basically 28.5 million loans
that are performing, right?
Mr. DeMarco. That would seem about right.
Mr. Pearce. Yes. And those loans have the value of about
$5.5 trillion. Is that right? That is on page four of your
testimony.
Mr. DeMarco. Yes, sir.
Mr. Pearce. So how much do you make on the $5.5 trillion?
What are your revenues off the $5.5 trillion? And where 90
percent, 95 percent are performing, what are your revenues
then?
Mr. DeMarco. The revenues that we are making on that are
basically the guarantee fees that are being charged.
Mr. Pearce. No, how much? What quantity?
Mr. DeMarco. I am sorry, Congressman. I don't keep these
numbers straight in my head--quite available.
Mr. Pearce. Excuse me, sir. You are a conservator of $5.5
trillion, and you don't know how much money you are making? Can
any of the people behind you tell us how--because what I am
getting at is that, if you make 10 percent--and 10 percent is a
very low value for a business model--you are sitting at $550
billion and yet you are drawing down from the Treasury. And I
think the American people have a right to know that.
And for you to come to a meeting here on a business model
where you are talking about conserving the value for the
taxpayers, I think that is one of the most basic questions of a
business model. You are in the business of business, and you
don't know how much money you made in the last 12 months. Do
any of the four people behind you know that?
Mr. DeMarco. Total credit-related expenses for Fannie Mae
last year was about $27 billion. Total credit-related expenses
for Freddie Mac in 2010 was $21 billion. The net income for
Fannie Mae last year was negative $14 billion, and it was the
same for Freddie, a negative $14 billion.
Mr. Pearce. Okay, let's hold up right here then. So let me
get this clear. You have 28.5 million performing loans, and you
have 1.5 million nonperforming loans, and your performing loans
are outweighed so that you have $114 million net loss in
revenue, net income.
Mr. DeMarco. $14 billion net loss for the year.
Mr. Pearce. $14 billion net loss. So you have 95 percent
performing loans and 5 percent nonperforming loans. I think
there are some serious flaws. If I have a business and I am
performing at 95 percent capacity, I can go to 0 percent on the
others and they should never, never, never outweigh.
So what you are asking me to believe is that the losses
from 5 percent of your loans, from 1.5 million loans, outweighs
the revenues from 28.5 million loans? That seems to me to be
preposterous. If you look at it in large terms, you have $5.5
trillion of performing loans minus 5 percent. When I do the
math, they are worth about $200,000 apiece, and I assume that
$200,000 per loan goes across to the other side.
So you have 1.5 million nonperforming loans at $200,000
apiece, that is about $300 billion on our portfolio, thinking
of $5.5 trillion? Something stretches--what is it that I am
missing here?
Mr. DeMarco. Congressman, I think--so I would welcome the
opportunity to sit down with you and walk through this. But the
thing about it is, I can't be making $200,000 on a loan when
the average loan size is itself less than--
Mr. Pearce. No, I am not saying you are making it. I am
saying the loan size itself. The loan size itself--
Mr. DeMarco. And so the earnings that the companies are
making, they are securitizing these mortgages, and so they are
making maybe--they are charging maybe 20 basis points, 15, 20,
25 basis points on a mortgage as the guarantee fee. And from
the guarantee fee, they have to pay their operating expenses,
cover their credit losses, and then the rest is their income.
Mr. Pearce. I welcome the opportunity to visit with you in
the office to look at it, because I don't see a market where
you have 1.5 percent nonperforming, 1.5 million, 5 percent
nonperforming, sinking the 95 percent performing.
Thank you, Mr. Chairman.
Mr. DeMarco. Congressman--
Chairman Garrett. And I thank you.
The gentleman from Texas?
Mr. Green. Thank you, Mr. Chairman. I thank the witnesses
for appearing. And I think that we all agree that we have to do
something with reference to Fannie and Freddie. The question
becomes, what do we do? And also, when do we do it?
Would it be prudent to simply eliminate Fannie and Freddie
and not have some idea as to what the market structure will be
upon elimination?
Mr. DeMarco. No, Congressman, I think the better course
would be to have some sense of what the legal framework and
institutional arrangements would be for the country's secondary
mortgage market.
Mr. Green. And can you give some indication as to what we
might have to confront if we don't give some prudent thought to
this process, such that at the end of the day we have in place
some structure that we can at least associate some degree of
predictability with, in terms of how the market will react to
it and how it will impact the market? What could be some of the
consequences of simply repealing, capping, eliminating, without
having some idea as to what the structure will be?
Mr. DeMarco. One would expect that the implications would
be higher mortgage rates and less liquidity in the mortgage
markets.
Mr. Green. And what would these higher rates and the lack
of liquidity or not as much as we might have, how would that
impact an economy that is recovering?
Mr. DeMarco. All else being equal, obviously, those things
would make the recovery more difficult.
Mr. Green. I am asking you to give these kinds of answers,
sir, because I think that while efforts to repeal, eliminate,
and downsize are noble, I don't question the motives. I do
think that we need to have a comprehensive approach that
addresses not only what we would like to do in terms of
downsizing Fannie and Freddie, but also what the structure is
going to be at the end of the day if that happens.
Because my fear is that we may end up with a market that
has much higher interest rates than we want. Many persons will
not be able to afford a home, which will then impact other
organizations. You have REALTORS who do business and who
depend on the opportunity to have interest rates that are
reasonable, so that people can buy. And as a result, they have
businesses that can continue to flourish. The domino impact of
this can be huge.
And I am concerned about how that domino impact can impact
the market. Do you have any thoughts on the impact that--we
will go beyond simply just eliminating Fannie and Freddie and
move to the broader economy and the dominos and how they may
start to fall and collide with each other?
Mr. DeMarco. Congressman, I actually have a great deal of--
though I have been challenged the last few years--faith in the
resiliency and robustness of private financial institutions and
the financial system of this country.
I think that a gradual program of moving away from the
degree of government support for the mortgage market to one
that involves greater reliance on private capital and private
institutions is something that is achievable and it is
something to--that I understand most to be wanting to work
towards.
Precipitous action in the economic state we are in could be
problematic and could raise costs to taxpayers and could be
further disruptive to the housing market.
But I agree with you that working on a gradual transition
and transformation, something that we are doing as conservator
of Fannie and Freddie would be helpful to the housing market,
but we can move over time--
Mr. Green. If I may, because my time is about to expire.
Would you simply define a phrase that you utilized,
``precipitous action?'' Would you define that, please?
Mr. DeMarco. If I was told to shut things down tomorrow at
Fannie and Freddie and they were no longer purchasing or
securitizing mortgages, I would view that as a precipitous
action.
Mr. Green. That would be an extreme action, obviously. Can
you give me something that would be not quite as extreme, but
also precipitous?
Mr. DeMarco. Certainly, Congressman, there is a range of
things.
Mr. Green. If you would, just give me the range, and I will
yield back the balance of my time after you have done so, time
that I do not have, by the way.
[laughter]
Mr. DeMarco. There is a range of things that are being done
as part of the unwind, so if we wanted to unwind the portfolio
in 6 months, that would be precipitous.
Chairman Garrett. I appreciate the gentleman's answer.
The gentleman from Virginia is recognized for 5 minutes.
Mr. Hurt. Thank you, Mr. Chairman.
Mr. DeMarco, thank you for being here and helping us work
through these eight bills, legislative proposals. I don't want
to cut too much into my time, but I was very intrigued by Mr.
Pearce's line of questioning. And it seems like you might have
had an answer.
I would like for the benefit of the committee to hear
briefly your response to the numbers that he set forth, if you
can.
Mr. DeMarco. What I was trying to explain, I think maybe I
was just either misunderstanding the Congressman or--but in
thinking about the revenue stream that Fannie and Freddie get
on $5.5 trillion of mortgages, that revenue stream is measured
in fractions of a percentage point that is in the guarantee fee
that is earned. And it is from that guarantee fee that they
pay, they cover their credit losses, and they cover their
operational and administrative expenses. That is all I was
trying to get to. And we can do a breakdown of how the
economics of that business works.
But the other point I was trying to make, so thank you for
the opportunity, is that, prior to conservatorship, I think one
of the things that has contributed to these dramatic losses is
that the Enterprises substantially underprice credit risk that
they were taking on.
And so the revenue stream that should have been coming off
of these mortgages that were originated in the period prior to
conservatorship has been inadequate to the losses that have
been realized, because they were underpricing risk and,
furthermore, they were operating with substantially less
capital than would have been appropriate, something that the
predecessor agency to FHFA had testified to numerous times, but
was unable to materially change because the capital
requirements were set in statute.
Mr. Hurt. Do you think that what you have just set forth
underscores the importance of trying to wind down Freddie Mac
and Fannie Mae?
Mr. DeMarco. I think it underscores the importance of what
we are doing to try to adjust the pricing and the underwriting
standards at the companies operating in conservatorship--that
is being written now provides support to the country's mortgage
market, but does so without creating risk to the taxpayer.
Mr. Hurt. Obviously, we are here looking at eight
legislative proposals that are being considered by this
subcommittee. In the White Paper that the Administration and
Treasury made public recently, there were identified four
different things that could be done, it was stated, without
legislative action, increasing the guarantee fees, which you
have discussed, winding down the portfolios, which you have
discussed.
The two other things were reducing conforming loan limits,
which you indicated that you all had not considered. I would
like to know why you haven't considered that. And then,
finally, is increasing the downpayments. I would like to hear
about that.
And I would also like to just--if you could speak generally
about the objectives of the conservator in attempting to take
some of these actions proactively, knowing that is where this
legislation seems to be headed, it seems to be what the
Administration may or may not be aggressively pursuing, but it
seems to me that getting the GSEs out of the marketplace--or
reducing--certainly diminishing their role is important.
So I would like to know what your objectives are as
conservator in taking actions in advance of any legislation,
because I think it would serve the marketplace generally, at
least provide some of that--or reduce the precipitous action
that you are talking about, helps us ease into it.
Mr. DeMarco. Right. So I believe, in fact, as conservator,
FHFA has been marching down this path for quite some time prior
to either these particular bills or the Administration's White
Paper. And some of the ways in which we have done that have
been, in fact, through increasing G-fees, improving
underwriting standards, and the reduction in the portfolio, and
restricting the company's core business.
And you asked me about two other things, downpayments and--
Mr. Hurt. Conforming loan limits.
Mr. DeMarco. --conforming loan limits. So the question on
conforming loan limit, this is--so whether FHFA has authority
or not--and my staff is telling me we do--this has
traditionally been something that the Congress and the United
States has taken a very deep and specific interest in. And the
practice for decades has been that the conforming loan limit
has been something that has been stipulated by Congress and has
simply been implemented by the regulator.
And, in fact, in each of the last several years, Congress
has enacted temporary provisions to state what it wants the
conforming loan limit to be, based upon its judgment of the
condition of the economy and housing markets, and it has
allowed for a series of temporary increases in the conforming
loan limit as part of Congress' approach to providing support
to the country's economy and to its housing market.
And that is why I think it is quite prudent for me to have
a good bit of deference to Congress to determine what the
conforming loan limit ought to be. Where we are in current laws
is the conforming loan limit will come down October 1st of this
year, if there is no further action by Congress.
I would be happy to provide you and all the members of the
subcommittee--we put out a research note just this week
describing the parts of the country that would be affected, if
the--if Congress takes no further action with the conforming
loan limits. So I have that research out already.
I am happy to share with you so you can see where these
changes would take place. There are about 250 counties in the
United States that would experience a reduction in the loan
limits.
With respect to downpayments, we have, in fact, been
taking--just like with pricing--gradual steps to increase
downpayment requirements. I testified before the House
Financial Services Committee last year about a particular
program that I had made clear we were not going to continue
with, and that was very low downpayment mortgages. Now that we
have the Administration's White Paper, we are examining what
would be appropriate gradual steps with respect to further
tightening with respect to minimum downpayment requirements.
Chairman Garrett. The gentleman's time has expired. And I
thank you for your answer.
The gentleman is recognized for 5 minutes.
Mr. Ellison. Thank you, Mr. Chairman.
Mr. DeMarco, we have had a lot of dialogue about whether
Fannie and Freddie take up too much of the secondary mortgage
market, and I think maybe there is a consensus that they do.
But my question is, after reform, what would be the proper
balance? What should a GSE share of the secondary market be in,
say, 10 years, assuming we were to have responsive reform?
Mr. DeMarco. Congressman, I would like to, if I may, answer
the question differently. The way I would approach the thought
process is, what part of an $11 trillion single-family mortgage
market should have the benefit of a government credit support?
Mr. Ellison. Yes, that seems a good way to put it.
Mr. DeMarco. And then that credit support can be provided
through the existing government programs, the FHA, G.A.,
rural--VA, excuse me, rural housing, and Congress is free to
look at making alterations to the scope or targeting of those
particular programs, because here is where we want to have
government credit support.
With respect to what the GSEs do today, then the question
on the table is, does the government want to--or feel it is
appropriate and is in the best public interest to provide some
portion of the rest of that universe with a government
guarantee that would somehow wrap a private guarantee of the
mortgages that are being written in that space?
So whatever replaced Fannie and Freddie, whatever these
private-sector securitizers are, presumably they would be in
the first loss position with respect to mortgage credit. And
the question is, can the capital market sufficiently and
appropriately finance all of that without there being--
Mr. Ellison. Mr. DeMarco, the analysis you are going
through does make sense to me, but they only give us 5 minutes.
So I guess--
Mr. DeMarco. Sorry, sir.
Mr. Ellison. I guess my question is, so it is clear to me,
based on your answer to me, that you do see a role for a
public-sector or quasi-public-sector institution in the
mortgage market?
Mr. DeMarco. Yes, sir. I continue to see a role for the
FHA, the VA, the rural housing, that can be defined up or down
from where it exists today, but I envision that would continue.
Mr. Ellison. Let me ask you this. We have a lot of dialogue
about the role Fannie and Freddie may or may not have played in
the recent crisis, and the Financial Crisis Inquiry Commission
said that GSEs played a contributing role, but certainly were
not the primary cause.
Let me ask you the question this way. Do you believe that
there is a public interest in the United States Government,
through its programs for housing, having homeownership as a
laudable and meritorious goal?
Mr. DeMarco. Certainly, the evidence would suggest that the
answer to that is yes, because there are numerous ways in which
the Federal Government--and, frankly, State governments--
provide subsidies, incentives, or otherwise support home
ownership activity.
Mr. Ellison. Yes. And it sounds--and I was reading in the
document where it states that--where basically, I am wondering
whether--I wanted to get your answer on that, because I was not
sure where the Administration was coming from on homeownership
as a laudable goal of a government program. It sounds to me
like you are saying it is an important goal, and you don't plan
on joining with any forces that want to eliminate it as
something that we should pursue?
Mr. DeMarco. I can affirmatively say yes to that question.
But my role as the regulator is to implement what is being told
to me by--
Mr. Ellison. I know. I understand that.
Mr. DeMarco. I am not a policymaker, per se--
Mr. Ellison. Right.
Mr. DeMarco. --in terms of being an advocate for the degree
or form of government support for housing.
Mr. Ellison. So you are saying that you don't really have
any position on whether or not we should--I am just trying to
get an understanding. I am not trying to--
Mr. DeMarco. I understand.
Mr. Ellison. --trick you or anything. I just want to--
Mr. DeMarco. And I am not trying to be cagey. I am trying
to respect that I am not a policymaker. I am a regulator. And I
am trying to provide advice and perspective, where apt.
But in terms of being able to say what I think is the right
spot in that spectrum for the government support, I don't feel
comfortable answering that.
Mr. Ellison. All right. Fair enough.
Chairman Garrett. I think your time has expired, actually.
Mr. Ellison. That quickly?
Chairman Garrett. It goes by quickly when you are asking
good questions.
Mr. Ellison. I guess that is it.
Chairman Garrett. When you are on the point with the
questions, it just flies by.
The gentlelady from New York?
Dr. Hayworth. Thank you, Mr. Chairman.
Mr. DeMarco, this is more of a comment, I guess, than a
question. And it is about something rather different. Perhaps
it will be refreshing. But there is a great program called--it
goes by the acronym PACE, the Property Assessed Clean Energy
program. And as you know, it allows property holders to make
energy-saving improvements on their homes via loans that are
financed through their local property taxes. And it actually is
a program that was designed to allow these improvements to be
made for the sake of our general good, if you will, without
costing taxpayers money.
I understand that there have been problems fitting PACE in
with the GSE programs because that would be senior debt, but I
know that there are efforts underway to see how we can fit PACE
into the mortgage program for people who have Fannie Mae or
Freddie Mac-related--GSE-related secondary mortgages.
So is your staff willing to work with us in the legislature
about trying to get PACE going for these folks so that we can
really do some good?
Mr. DeMarco. Yes, we would be pleased to work with you and
anyone on the Hill who would like to engage in this issue. And
I appreciate the way you framed it, because I appreciate that
in the way you framed it, you have recognized what our
fundamental concern is. It is not that we are opposed to energy
efficiency. It is that we are looking at mortgages that are
done with a first lien, where it has been underwritten with the
presumption that here is what the borrower's capacity to pay is
and here is what the security is on this loan. And by a PACE
loan then coming in after that and having a senior position for
the first lien, ups that whole thing and creates credit risk
where--after the loan has been finalized.
With that understanding, we would be very happy to try to
work with--a way to make these energy efficiency loans more
available to folks.
Dr. Hayworth. Great. I think it would just be a terrific
good for all of us. Our staff is working on trying to get that
PACE legislation going, so perhaps we can coordinate with your
staff.
Mr. DeMarco. We would be glad to meet with your team.
Dr. Hayworth. I appreciate it. And I yield back the balance
of my time, Mr. Chairman. I think Mr. Fitzpatrick graciously
allowed me to take his place in the order, so I am happy to
yield my time to him, with your permission.
Chairman Garrett. Since you were so gracious, then I will
be, as well.
Mr. Fitzpatrick?
Mr. Fitzpatrick. Thank you.
And I thank the Director for his testimony.
Sir, you mentioned just a little while ago that revenue
that Fannie Mae gets is measured in the G-fee. It was in
response to questions from Mr. Hurt and Mr. Pearce. You say in
your written testimony that FHFA supports the principle
advanced by both the Administration and Representative
Neugebauer that guarantee fees should continue to be gradually
increased.
And so my question would be, what effect, if any, might an
increase in the guarantee fee have on the market?
Mr. DeMarco. An increase in the G-fee is going to translate
to some increase in mortgage rates.
Mr. Fitzpatrick. But you recommend an increase in the G-
fees, a gradual increase?
Mr. DeMarco. I think that putting us on a path so that G-
fees and, hence, mortgage rates are such that they are
appropriate to the cost of capital and to the credit risk
involved is an appropriate place to be moving towards. And we
are trying to do so incrementally in a way that is less
disruptive to the market and it is appropriate to the risk. So
in response to an earlier question, I noted that one of the key
things we have been doing is trying to enhance the risk-based
characteristics of pricing.
Mr. Fitzpatrick. How and when is the Administration, FHFA
going to require the Enterprises to revise their pricing so
that the private market does not continue to be crowded out of
the secondary market--
Mr. DeMarco. We are actively working on that. And, in fact,
both Enterprises had a round of G-fee price increases that just
have gone into effect this month or this past month.
Mr. Fitzpatrick. Thank you.
Chairman Garrett. The gentleman yields back.
The gentleman from Ohio, for 5 minutes.
Mr. Stivers. Thank you, Mr. Chairman.
I would like to thank Mr. DeMarco for being here today. And
I want to thank you for what you are doing on G-fees, on
portfolio reduction, and strengthening underwriting standards
as conservator. I think we need to have a thoughtful approach
that creates a legal framework for a post-Fannie and Freddie
world, and I think that you bring--obviously, your key function
is to protect the taxpayers, but the other advantage you bring
to us is to help us with that transition, so I want to thank
you for what you are doing there.
Mr. DeMarco. Thank you, sir.
Mr. Stivers. I have a couple of concerns about a couple of
the proposals, similar to your concerns. And I want to focus on
Mr. Schweikert's--new activities for a second, because I am a
little concerned that your portfolios are becoming a little
more nonperforming and a little more illiquid.
And my question to you is, do you have all the tools you
need and the powers you need to deal with those loans and
either get those loans in a position where they are performing
or get them in productive hands again and, obviously, recapture
whatever capital you can in that process? And does the
Schweikert bill limit you in that ability?
Mr. DeMarco. Very good. Thank you, Congressman. I
appreciate the question. And the answer is, I don't believe it
does.
I do not view loss mitigation activities that we undertake
to be either a product of the firm.
Mr. Stivers. Okay.
Mr. DeMarco. That is not a line of business. It is not a
product. It is loss mitigation. And so I don't view that as
being covered by--
Mr. Stivers. Perfect. That is good stuff.
And the second thing that I think you can sort of help us
with is, as we sort of move to a new framework, I think we are
on the right track with G-fees. You are already on that track,
as well. I think the chairman of the subcommittee, his goal on
risk retention is at least to make sure we level the playing
field. And maybe you can help us with that in other ways.
I think the thing we need to try to do is to try to pave
the way to a more private-sector market. And I guess my
question for you is, do you see a role for Fannie and Freddie
without a government guarantee as aggregators and securitizers
in the marketplace potentially?
Mr. DeMarco. Not as we have known Fannie and Freddie in the
past. I do see a role for firms that are operating and
specializing in the process of securitizing mortgages, because,
again, in an $11 trillion market, that is not going to be
financed on the balance sheets of depository institutions. We
need to tap into capital markets, including global capital
markets, and that requires securitization processes. It means
you need entities that are engaged in the business of
securitizing mortgages.
Mr. Stivers. And that may not be the Fannie and Freddie?
Certainly not in their current form, but a lot of the expertise
that Fannie and Freddie have, I guess my point is, can be
transferred to these new private entities that don't have a
government--
Mr. DeMarco. Absolutely, Congressman. I think that is an
important consideration here, is that the single biggest
economic stakeholder now in Fannie and Freddie is the American
taxpayer. As I said my written statement, the business
processes and platforms and the human capital of these
companies are intangible assets for the company and are
available for disposition as Congress figures out what the
ultimate resolution of Fannie and Freddie are, but they are
platforms and expertise that can be put back out into the
marketplace in some fashion and perhaps some value realized
back for the taxpayer in that process.
Mr. Stivers. Great. And I think the conforming loan limits
are an important part of that, so again, like a lot of other
members, I would urge you to look at what your authority is and
consider it.
Obviously, we are going to consider that as policymakers
here, but our number is the top number, and you can certainly
go below that. I believe you have the authority to, so I hope
you would consider that, as well. And I am not going to ask you
a question about that, because I think you have already
answered that it is new to you, and that is certainly okay, and
I appreciate what you are doing to focus on protecting the
taxpayers.
The only other concern I guess I have is about the bill
that forces Fannie and Freddie to be compensated as government
employees. My goal is to have them move away from the
government, not toward the government, and so I actually don't
think I am going to be able to support that bill. And I guess
if you could give us your thoughts, I know you mentioned them
briefly earlier.
Mr. DeMarco. I think to your point that if we are looking
to put Fannie and Freddie and its employees in business
platforms back out into the private sector, that keeping a
private-sector compensation program in place would certainly be
consistent with that. And my more immediate concern is the
disruptiveness of making a change like that.
There is already tremendous uncertainty on the part of the
12,000-plus employees of these companies about what does it
mean and kind of repeatedly hears we are going to be wound down
and we are getting rid of Fannie and Freddie. But, the
government has an exposure here on $5 trillion worth of
mortgage securities, and as conservator, I would like to make
sure that we have qualified people continuing to service that
book of business on behalf of the taxpayer.
Mr. Stivers. Thank you.
Thank you, Mr. Chairman. I yield back my nonexistent time.
Chairman Garrett. The gentleman from New York?
Mr. Grimm. Thank you, Mr. Chairman. I appreciate that.
Thank you, Mr. DeMarco, for coming today and for fielding
these questions. They are extremely important to just about
everyone I speak to within banking and mortgage business and my
constituents back home in Staten Island and Brooklyn. They are
concerned about the values of their homes and where we are
going overall.
Just to piggyback, Mr. Stivers mentioned something that I
had a question about. Many of those in the industry have spoken
about the meltdown and the housing bust. And they talk about
how some--a big part of the problem is unrelated brokers
dealing with unregulated aggregators, and 60 out of 100 loans
being done without a bank.
Specifically to the DUS program, how now is Fannie Mae
being involved in aggregating and multi-family homes? What role
is that playing? And is that not consistent with some of the
problems we have seen?
Mr. DeMarco. So, actually, the Fannie Mae DUS program,
which is a program for financing multi-family loans where the
underwriting is delegated to the loan originator, has been a
pretty successful model, and it is one, actually, that builds
in some fashion on some of the provisions of the risk retention
rules we were talking about earlier in Dodd-Frank, with respect
to there being exposure by the originator, credit exposure by
the originator, but I think that program is continuing to work
successfully. Both firms are continuing to provide service to
the multi-family market.
And the other thing I would note about the multi-family--it
hasn't gotten much attention in this hearing--but virtually all
of the multi-family business both companies are doing is, in
fact, being securitized today.
Mr. Grimm. Just to switch back to maybe bring it back to
the 30,000-foot level. Can you talk a little bit about the
impact that a narrow qualified residential mortgage definition
could have on excluding first-time homebuyers from purchasing a
home?
Mr. DeMarco. Congressman, the rule is out for comment. And
as one of the agencies that has signed off on issuing this
rule, I look forward to the public comments that are coming in.
But the concept here, actually, is we understand what we were
directed to do in Dodd-Frank was to establish an exemption
through this qualified residential mortgage designation that
was supposed to be reflecting very low-risk characteristics on
the mortgages. And we think we have done that.
And, in fact, I think it helps first-time homebuyers that
the QRM definition not be too liberal, because this--we fully
expect there to be a robust market for mortgage lending that is
not meeting the definition of QRM. And the richer that market
is, the healthier it is, the better it is going--the more
easily private firms are going to be able to make those loans
and ultimately, when we resolve Fannie and Freddie, to be able
for there to be a re-emergence of a private securitization
market that securitized them.
This is not a penalty or an expectation that we will not
have loans that don't have at least 20 percent down. Not at
all. That is not the expectation, nor the intent.
And so I think that the issue of first-time homebuyers can
be one that policymakers want to take a careful look at in the
context of looking at the U.S. housing finance system, and in
terms of visiting questions about, as a matter of public
policy, do we want to have support or incentives for that?
But I don't view the QRM rule as proposed as being one that
is directed at creating harm for first-time homebuyers. I think
it is meant--what it is really meant to do is to address the
problems Congress saw with securitization and with
securitization activity taking place, whereas where the
securitizers did not have a risk exposure to the mortgages they
were making.
Mr. Grimm. A little bit about your opinion regarding the
impact of lowering the current loan limits on high-cost
markets, such as California, New York, my district. Can you
just elaborate a little bit on the impact this will have on
housing affordability?
Mr. DeMarco. I would be happy to provide you the mortgage
research note we just issued that goes through the counties in
the United States that would see a decline in the conforming
loan limit if Congress takes no further action this year.
Frankly, for what Fannie and Freddie have been doing, they
are not doing a whole lot of mortgages in that space. So I
think that the--if you happen to be a buyer in that particular
space, in that part of the country, you may feel like I have
been affected here. But in terms of the overall--thinking about
the country's housing mortgage market, this is not a very big
piece of it.
Mr. Grimm. My time--
Chairman Garrett. Your time has expired. Thank you. The
gentleman from California?
Mr. Miller of California. Thank you, Mr. Chairman.
It has been an interesting conversation today, especially
the last comments on that if you got it out of the high-cost
areas, it would not be significant, then why get out of them?
Speaking from a high-cost area, it would have a huge impact on
the housing market in the areas that are high cost. If you are
not there, nobody is there. When you are making 92 percent of
the loans in those areas, it is dramatic.
I would encourage you--just going back to risk-based loans,
underwriting standards have increased. And I remember going
back to the 1970s when I was introduced--I would go to get a
construction loan from a lender, and they made sure I met
conforming standards, design criteria, sales criteria, because
if we didn't do that, there was not an assured takeout on the
other end when the home was sold, because there was not the
guaranteed liquidity in the marketplace to be able to make that
loan.
Now, if we are trying to stabilize Fannie and Freddie, I
guess my main question to you is, under TARP, we charged banks
5 percent. Why are we charging Freddie and Fannie 10 percent
interest on the money we lend them? Is that risk-based?
Mr. DeMarco. Congressman, that was a determination made by
the Treasury Department--
Mr. Miller of California. Okay, thank you. I just wondered,
because it seems like we are trying to doom them to failure. If
you go back to 1970, 1980, 1990, prior to 2005, do you believe
that the GSEs crowded the private sector out of the
marketplace?
Mr. DeMarco. Over that time period, increasingly, sir.
Mr. Miller of California. What years?
Mr. DeMarco. I think that the Enterprises' market share
grows gradually over that time period, until we got to the mid
2000s, and the emergence of the private-label market and the
rapid growth in subprime and non-traditional lending saw
substantial decline in their market share.
Mr. Miller of California. Yes. And they made bad loans to
pick their market share back up, which was a huge mistake on
their part.
Mr. DeMarco. Yes, sir.
Mr. Miller of California. Where would the housing market
have been in mid-2007 if the GSEs weren't there? In a
disastrous situation. And instead of lending the GSEs $120
billion, we might have lost $2 trillion in home equity, because
you couldn't have bought a home or sold a home because there
was no money in the marketplace to make a loan for a home. Is
that not correct? Today they are only making 8 percent of the
loans, the private sector. And those are very difficult at
that. And FHA, Freddie and Fannie are picking up 92 percent.
But I am really gratified that you are using a risk-based
loan criteria and you are assessing the risks you are lending
on and you are using good underwriting standards, which should
have been done all along.
Mr. DeMarco. Yes, sir.
Mr. Miller of California. It is inexcusable that an agency
like that--understanding their purpose and their intent--would
go out and make stupid loans just to pick up a larger
percentage of the marketplace. But my concern is, if we say
there is a private sector there to fulfill the void that the
GSEs would create by backing out, I have never seen it. And if
at any time in history, it would have been there, it would have
been probably 2005, 2006, and 2007.
The only alternative we had was Countrywide and other
groups like that. And I remember going back to 2001,
introducing amendments to bills, and I probably got it into
four bills defining predatory versus subprime. Had we defined
predatory versus subprime in 2001, 2003, or 2005, Countrywide
would have not done what they did, nor would the other
organizations have done what they did to pass off these junk
mortgage-backed securities, trying to replicate what a GSE
mortgage-backed security was, which was safe and sound.
And if you invested in them, you were guaranteed a greater
return, to the point at where the GSEs--most of their losses
are taking those bad loans, nonperforming out, and replacing
them with performing loans, so you--I have demonstrated
integrity that the private sector abused during those periods
of time.
And my concern is, if we look at what the purpose of GSEs
has been to provide liquidity to the marketplace, they have
done a pretty good job, but especially in recent years. And
having been in the building industry since the 1970s, and
looking at the criteria by most lenders that they placed on you
to even get a loan, and the intent of that was that if, once
your product was on the market, that there would be a secondary
market to sell the loan off to, because the major market did
not have the liquidity to make fixed 30-year loans and sit on
those loans, because that took their capital and put them in
loans that were sitting there that they were virtually out of
business for any new accounts, so they could close down and
just wait for their loans to pay back on those loans.
So when you say that they are in the 1970s, 1980s, and
1990s, that the GSEs played a more predominant role in the
marketplace, I would say appropriately so, because there was no
alternative to that. And if you had allowed the private market
that went from about--4 lenders had 25 percent of the market to
today those 4 have 75 percent of the market, that is dangerous,
having 4 lenders control 75 percent of the marketplace.
And if it were not for the option of a GSE out there today,
if something went wrong in those four, this country could be in
serious, serious trouble. And--
Chairman Garrett. And with that, I thank the gentleman.
Mr. Miller of California. My time has expired?
Chairman Garrett. Some time ago, actually.
Mr. Miller of California. You are very generous. Thank you.
Chairman Garrett. But I understand the other side of the
aisle was probably encouraged--
Mr. Miller of California. Can I have a point of order? I
want to wish Mr. Frank a happy 71st birthday today.
Chairman Garrett. Happy birthday.
[applause]
And I yield to the gentleman for a retort.
Mr. Frank. I would simply say that, while the gentleman's
time has expired, I am pleased to say that at least I have not,
as yet.
[laughter]
Chairman Garrett. And so with that--Mr. DeMarco, again, I
appreciate your coming to the hearing, and I appreciate your
forthright answers and the detail that you provided for those
answers, as well.
Mr. DeMarco. Thank you, Mr. Chairman. And I appreciate the
opportunity. I look forward to continuing to work with all the
members of the subcommittee.
Mr. Frank. Mr. Chairman, if you would yield briefly?
Chairman Garrett. I will yield, yes.
Mr. Frank. I would just like to add, Mr. DeMarco's
testimony was exactly what we need from witnesses. It was
responsive, it was aimed at helping us legislate, and I not
only want to express my appreciation, I hope other people will
follow his example.
Chairman Garrett. Thank you. I appreciate it.
Mr. DeMarco. Thank you, Congressman Frank.
Chairman Garrett. Thank you.
This panel is dismissed and everyone with it. And we will
at this point bring up the next panel.
Okay. While you comport yourself there and get your papers
in order, I welcome the second panel to this hearing. And I see
we have six of you before us. So for the next half-hour, we
will be listening eagerly to your testimony.
And as always, without any objections, your written
statements, of course, will be made a part of the record. You
will be each recognized for 5 minutes. And I know many of you
have been here before, so you follow the lights.
Mr. Dalton, you are recognized for 5 minutes. And welcome
to the panel.

STATEMENT OF THE HONORABLE JOHN H. DALTON, PRESIDENT, HOUSING
POLICY COUNCIL, THE FINANCIAL SERVICES ROUNDTABLE

Mr. Dalton. Thank you very much, Mr. Chairman, Ranking
Member Waters, and members of the subcommittee. Thank you for
holding this important hearing, and thank you for the
opportunity to participate.
My name is John Dalton, and I am the president of the
Housing Policy Council of the Financial Services Roundtable.
Our 32 member originate, service, and insure mortgages, and we
do business with Fannie Mae and Freddie Mac.
Mr. Chairman, we see an emerging consensus that private
capital needs to be the primary insurer of mortgage risk. The
future system must have two goals: servicing homebuyers; and
protecting taxpayers.
Homeownership is a pillar of the U.S. economy and the
American way of life. A new housing finance system built on
private capital and clear rules would deliver sound financing
and keep homeownership within the reach of most Americans.
Without an approach like this, owning a home in America could
become a luxury for the few.
To make sure this does not happen, Congress needs to ensure
reform enables the continuing availability of the 30-year
fixed-rate mortgage, which has been the bedrock of our Nation's
housing finance system for more than half a century. The 30-
year fixed-rate mortgage is as American as opening day in
baseball.
A fixed-rate mortgage provides peace of mind, because
homeowners know that their biggest monthly bill is not going to
change from month to month and year to year. Without this
popular financing tool, many homeowners would experience in
their mortgages the same wild swings they now feel at the gas
pump. This is a rollercoaster ride most Americans would like to
avoid.
Today, approximately 90 percent of newly originated
mortgages and 95 percent of refinances are fixed-rate loans.
Homeowners are clearly voting with their checkbooks. The
predictability of a fixed-rate mortgage needs to be preserved
for homebuyers, and peace of mind needs to be returned to the
American taxpayer.
Several of the bills introduced this week by committee
members would begin to limit the role of the current GSEs. This
is part of a needed reform process toward a new stronger
housing finance system. They are a good first step, but it must
be accompanied by a comprehensive plan.
Important issues are addressed in the bills introduced this
week. The Housing Policy Council agrees that G-fees gradually
need to be increased, portfolios need to be wound down, a
strong regulator needs to be in place, and specific housing
goals need to be eliminated. These bills are a start, but
simply cannot be the end of GSE reform.
The Housing Policy Council has laid out a comprehensive
proposal to reform the secondary mortgage market, and we
commend it to you. Our plan creates a new private-sector system
that serves American homebuyers and it protects the American
taxpayer. Our system ensures that multiple layers of private
capital bear the risk of securing mortgages while setting clear
rules for capital, licensing, and mortgage security investment.
These multiple layers include the downpayments on
mortgages, private mortgage insurance, the capital of the
private guarantee companies, and a reserve fund paid into by
these companies. The layers of private capital would protect
taxpayers from risk and come before a Federal backstop or
guarantee.
Our full plan is in my written testimony.
Mr. Chairman, I appreciate your leadership and each of you
on the committee for tackling this difficult issue. It is
complicated, and I support your efforts to return private
capital to the housing market. In order to have a full economic
recovery, it is very important for reform of the housing
finance system to move forward comprehensively.
There is much uncertainty in the housing market today, and
a complete roadmap for GSE reform would go a long way to help
lessen that uncertainty. The Housing Policy Council stands
ready to work with this committee and other stakeholders to
assist wherever we can.
Thank you very much for the opportunity to testify, and I
look forward to responding to your questions.
[The prepared statement of Mr. Dalton can be found on page
88 of the appendix.]
Chairman Garrett. I thank you for your testimony.
The gentleman is recognized for 5 minutes. And I will let
you introduce--say your name correctly for me.

STATEMENT OF CHRISTOPHER PAPAGIANIS, MANAGING DIRECTOR,
ECONOMICS21

Mr. Papagianis. Sure. My name is pronounced ``Papagianis,''
Chris Papagianis.
Chairman Garrett, Ranking Member Waters, and members of the
subcommittee, thank you for the opportunity to testify today. I
am the managing director of a nonprofit think tank, e21,
Economic Policies for the 21st Century.
Drawing on the expertise of practitioners and academics,
our mission at Economics21 is to help foster a spirit of debate
about the way forward on issues like housing finance.
Previously, I was Special Assistant for Domestic Policy to
President George Bush. In this role, I helped guide the
collaborative process within the Executive Branch to develop
and implement policies, legislation, and regulations across
numerous agencies, including Treasury and HUD.
Fannie Mae and Freddie Mac have been in conservatorship now
for the past 30 months. Over this period, numerous proposals
have been offered for how to reform or re-envision the
Government-Sponsored Enterprises. Given how dominant Fannie and
Freddie are in terms of market share today, reform of these
institutions will have a significant impact on the future of
the $11 trillion mortgage market.
In short, the stakes are quite high, and I agree with this
committee's approach in assessing long-term solutions while at
the same time considering reforms that could be advanced in the
short term to protect taxpayers.
Importantly, some of the proposals before this committee,
if enacted, would accomplish two distinct things. They would
protect taxpayers in the near term, and the implementation
experience would provide invaluable lessons and data that could
inform the broader debate about the future of housing finance
in this country.
One of the big analytical challenges before this committee
is that the most egregious excesses of the previous GSE model
are not necessarily the primary sources of taxpayer losses thus
far. From my vantage point, this means that there is still a
lot of taxpayer risk in the GSE system and that near-term
reform proposals can have a positive impact.
It is for these reasons that I support near-term measures
to try and hold the GSEs to the same standards as other private
market participants, to improve the pricing practices for
mortgage guarantees, to limit the types of mortgages that can
be guaranteed or purchased, and to add new oversight measures
that shed more light on how the GSEs issue debt to fund their
activities.
In the end, important decisions still need to be made about
the future of the GSEs and the government generally in the
housing market. It might take some time to come to an agreement
on a wind-down strategy or a lasting structure for housing
finance. Ahead of these decisions, however, it is still
important to make practice in protecting taxpayers and reducing
the risk presented by the GSEs, while at the same time ensuring
that families have adequate access to mortgages.
Thank you again for the opportunity to testify today.
[The prepared statement of Mr. Papagianis can be found on
page 128 of the appendix.]
Chairman Garrett. I thank the gentleman very much.
Mr. Pinto, for 5 minutes?

STATEMENT OF EDWARD J. PINTO, RESIDENT FELLOW, AMERICAN
ENTERPRISE INSTITUTE

Mr. Pinto. Chairman Garrett, Ranking Member Waters, thank
you for the opportunity to testify.
In its February 11th report to Congress, the Obama
Administration asked Congress to work with it to fashion
legislation to accomplish three broad goals: the winding down
of Fannie Mae and Freddie Mac; the returning of FHA to its
traditional role as a targeted lender of affordable mortgages;
and a largely privatized system of housing finance, with an
open question as to the level of government involvement as to a
particular guarantee.
These three goals provide an opportunity for a bipartisan
solution that truly reforms our housing finance market.
Secretary Geithner, in testimony before the Financial Services
Committee on March 1st, asked that these three goals be
accomplished sooner rather than later during this Congress.
I, along with my co-authors, Peter Wallison and Alex
Pollock, released a White Paper last week detailing a
comprehensive approach for reforming the housing finance market
under the Administration's option one. It builds on the
foundation provided by the Administration and forcefully and
directly addresses each perceived shortcoming.
It meets the principles for restoring stability to the
Nation's housing finance system, as recently outlined by 16
industry groups. It demonstrates that a government guarantee is
both unnecessary and undesirable. It provides a bipartisan
solution that can and should be enacted by this Congress. It is
the only plan that both creates a housing finance market we can
be proud of and protects the taxpayers, and I commend it to
your consideration.
My written testimony covers each of the eight bills. I will
limit my oral remarks to a few key points.
First, increasing guarantee fees. Enactment of this bill is
appropriate, as it would implement a key step recommended by
the Administration to responsibly reduce the role of the GSEs
in the mortgage marketplace and ultimately wind them down. It
would eliminate the unfair capital advantages that the GSEs
enjoy and reduce the gap between Fannie and Freddie subsidized
pricing and private rates.
This increase in capital requirements would require the
GSEs to raise their guarantee fee by perhaps 15, 25 basis
points, and would be phased in over 2 years. The bill wisely
stipulates that guarantees be set uniformly among lenders.
The Administration has also just suggested that the GSEs
rely more on private capital. This subcommittee and the
Administration should request that the FHFA Director explore
various means of credit enhancement to reduce the liability of
the GSEs for losses on mortgages, including the possibility of
increased use of mortgage guarantee insurance.
Chairman Garrett and Ranking Member Waters, I commend you
and over 30 other members for the letter on this topic that you
sent to Acting Director DeMarco last October.
I am told--excuse me, subjecting GSEs to credit risk
retention requirements in the Security Exchange Act of 1934.
Enactment of a bill addressing this topic is essential, as it
is needed to sort out the previously noted perpetuation of
Fannie, Freddie, and FHA. This is an unfortunate consequence of
the Dodd-Frank Act and is being reinforced by the proposed
rulemaking that just came out this week.
I would recommend that the qualified residential mortgage
standards be set by legislation, rather than by administrative
rule. In appendix one, we set forth a proposed definition.
I would also suggest that you limit collateral backing
private MBS to loans that meet the definition, as we have
suggested. This would obviate the need for any risk retention
and its attendant complexity and potential gaming of the
system. Taking this step would return capital to the housing
finance system in both a prudent and speedy manner.
Repeal of affordable housing goals clearly is appropriate,
and I would also recommend you consider repealing affordable
housing support fees enacted under HERA and currently suspended
by FHFA. Compensation of certain Fannie-Freddie employees, I
cover that in more detail in my testimony. But in light of the
need to wind down Fannie and Freddie, I would suggest that you
focus on how to incent employees over the long term to
accomplish that goal.
Prohibit the GSEs from engaging in new activities or
offering new products. Given their wind-down status, this bill
is appropriate. It particularly needs to focus on efforts that
might be undertaken to force the GSEs to undertake potentially
risky activities such as energy retrofit programs, manufactured
housing programs, and other programs involving mortgage write-
down.
Finally, turning briefly to the recently introduced
Hensarling bill, I would commend Representative Hensarling for
his early and prescient attempts to wind down Fannie and
Freddie. His bill provides the basis for undertaking a frank
but crucial discussion between this subcommittee and the
Administration. This discussion has been requested by Secretary
Geithner and Representative Biggert. It is my hope it will lead
to a privatized system of housing finance under option one.
Thank you.
[The prepared statement of Mr. Pinto can be found on page
145 of the appendix.]
Chairman Garrett. Thank you. Mr. Nielsen, for 5 minutes.

STATEMENT OF ROBERT NIELSEN, CHAIRMAN OF THE BOARD, NATIONAL
ASSOCIATION OF HOME BUILDERS (NAHB)

Mr. Nielsen. Chairman Garrett, Ranking Member Waters, and
members of the subcommittee, thank you for the opportunity to
testify today. My name is Bob Nielsen. I am the 2011 National
Association of Home Builders chairman of the board and a
builder and a developer from Reno, Nevada.
Credit is the lifeblood of the housing sector. A reliable
and adequate flow of affordable funds is necessary in order to
achieve the Nation's housing and economic goals. Establishing a
financing system that provides liquidity for the housing sector
in all markets throughout the economic cycle is a prerequisite
to achieving housing policy objectives.
Furthermore, a stable, effective, and efficient housing
finance system is critical to the housing industry's important
contribution to the Nation's economic performance and to the
achievement of America's social goals.
The housing finance system is currently under a cloud of
uncertainty. The Federal Government, through FHA and the
housing GSEs, is currently accounting for nearly all mortgage
credit flowing to homebuyers and rental properties. Even with
the current heavy dose of Federal backing, fewer mortgage
products are available, and loans are being underwritten on
much more stringent terms.
In addition, Congress and regulators are piling on layers
of regulation in an attempt to plug gaps in a system of
mortgage regulation and prevent a recurrence of the mortgage
finance debacle that is still playing out. This is not an
arrangement that can continue indefinitely, and there is no
clear picture of the future shape of the conforming
conventional mortgage market.
One thing is clear. The status quo cannot be maintained.
NAHB has been actively involved in discussions on changes to
the financing framework for homebuyers and producers of
housing. We presented our thoughts on the future of the housing
finance system to this committee nearly one year ago today. And
since then, Congress has passed the Dodd-Frank Act, and
regulators are now busy implementing this massive law that has
the potential to reduce the availability and increase the cost
of housing and credit.
The housing landscape has seen little change during this
period, as the housing market remains extremely weak. In fact,
while economic growth has been weak by historic standards for
an economic recovery, housing's performance has been even
weaker. Unlike a typical recovery where housing grows at 28
percent in the first year after the end of a recession,
housing's growth has been a paltry 5 percent in the first year
of the current recovery.
Adding to the current housing crisis, decisions about
comprehensive structural reforms to the U.S. housing finance
system are stuck in a quagmire, despite the Administration's
recent report outlining options for reforming the housing
finance market.
Recently, NAHB joined a coalition with 15 other
organizations outlining principles for restoring stability to
the Nation's housing finance system. NAHB strongly supports
these principles, which highlight the need for the continuing
and predictable government role in housing finance to promote
investor confidence and ensure liquidity and stability for
homeownership and rental housing.
NAHB strongly supports efforts to modernize the Nation's
housing finance system, including reforms to the Government-
Sponsored Enterprises, Fannie Mae and Freddie Mac. Like the
principles outlined earlier, NAHB believes strongly that a
Federal backstop is needed to ensure the continued availability
of affordable mortgage credit specifically to 30-year, long-
term, fixed-rate mortgages.
We cannot go back to the system that existed before this
great recession, but it is critical that any reforms be well
conceived, orderly, and phased in over time. Proposals offered
by this subcommittee for short-term dissolution of Fannie Mae
and Freddie Mac and the support they provide for the housing
finance system represent a piecemeal approach to reform that
would disrupt the housing market even further and could push
the Nation back into a deep recession.
These proposals, along with similar plans announced by the
Obama Administration in February, show that many policymakers
have clearly forgotten housing's importance to the economy.
America's homebuilders urge policymakers in the
Administration and Congress to consider the potential
consequences of their proposal. The subcommittee should not
move forward with policies that would further destabilize a
housing market that is already struggling. Housing can be a key
engine of job growth that this country needs, but it cannot
fill that vital role if Congress and the Administration make
damaging, ill-advised changes to the housing system at such a
critical time.
Thank you for the opportunity to testify today.
[The prepared statement of Mr. Nielsen can be found on page
113 of the appendix.]
Chairman Garrett. I thank you for your testimony.
Mr. Phipps please, for 5 minutes?

STATEMENT OF RONALD PHIPPS, PRESIDENT, NATIONAL ASSOCIATION OF
REALTORS

Mr. Phipps. Good afternoon.
Chairman Garrett, Ranking Member Waters, and members of the
subcommittee, thank you for inviting me to testify today
regarding GSE reform. My name is Ron Phipps. I am the 2011
president of the National Association of REALTORS.
My family, now in Rhode Island, has been in the business of
residential real estate for 4 generations. My passion is making
the dream of homeownership a reality for American families. I
am proud to testify on behalf of the more than 1.1 million
REALTORS who share that passion, as 75 million American
families who own homes, and the 310 million Americans who
require shelter.
REALTORS agree that the existing system failed and reforms
are needed. However, we caution you to heed the words of
Treasury Secretary Timothy Geithner and Senator Richard Shelby
that, ``Housing finance must be addressed and reform passed.
However, proper homework must be done before action is taken
and Federal housing policies must be adequately assessed.''
Today, we ask you to slow down the legislative process and
begin a methodological, measured effort in order to yield a
comprehensive solution that is in the best interests of all,
most importantly, the taxpayers. Therefore, we oppose the GSE
bills recently introduced to reform GSEs, because they
represent a piecemeal approach to reforming the housing finance
system and effectively work to make Fannie Mae and Freddie Mac
not viable, without putting forth an adequate replacement
secondary mortgage market mechanism.
NAR is collaborating with the offices of Congressmen Gary
Miller and Brad Sherman to develop an alternative comprehensive
approach to reform the secondary market. This legislation will
be introduced shortly.
As you consider the future of Federal housing policies, we
ask you to keep two things in mind: first, the immense value
that sustainable homeownership provides for this country; and
second, investors require certainty in order for markets to
perform.
The proposed legislation introduces uncertainty that will
cause our fragile recovery to slow and possibly stop. Right
now, the market is not working as many believe it should, and
change is required. Additionally, REALTORS believe that the
pendulum on mortgage credit has swung too far in the wrong
direction and is hurting consumers and the economy. Quick
decisions aimed at punishing certain market players or
fostering theoretical ideology will only act to punish
taxpayers by constraining their ability to access affordable
mortgage financing and locking in current losses.
Let me be clear. REALTORS agree that reforms are required
to prevent a recurrence of the housing meltdown, but
unnecessary implementation of rules that curtail access to
affordable credit, i.e. raising downpayments or other mortgage
costs, will have stark ramifications for that overall economy.
Let me speak specifically to a couple of proposed bills.
The QRM is likely to shape housing finance for the foreseeable
future. REALTORS believe that Federal regulators and members
of the House Financial Services Committee should honor the
intentions of Senators Isakson and Landrieu by crafting
qualified residential mortgage exemptions that accommodate a
wide variety of staid, well-underwritten products such as 30-,
15-, and 10-year fixed-rate loans, 7/1 and 5/1 ARMs, and loans
with flexible downpayments that require mortgage insurance.
A poor QRM policy that does not heed their intentions will
displace a large portion of homeowners and could once again
slow economic recovery and hamper job creation. As noted in
American Banker yesterday, 69.5 percent of all loans originated
in 2009 would not qualify under the QRM standard. Furthermore,
increased GSE fees could really cause additional problems with
up to 10 percent to 15 percent of other qualified buyers not
being able to meet those stringent requirements. Approximately
500,000 sales would not happen.
In World War II, President Franklin Delano Roosevelt said
the nation of homeowners is unconquerable. In the 1980s,
President Ronald Reagan said the need to preserve the mortgage
interest deduction in order to promote the most important asset
of the American dream, homeownership, should be protected. We
REALTORS agree.
We ask you to be positive in your future. I thank you for
this opportunity to present our thoughts on GSE reform. And as
always, the National Association of REALTORS is ready,
willing, and able to work with you and our partners to make a
bright future for America.
Housing is not a partisan issue, nor is it simply in the
common interest. It is the national interest. Thank you.
[The prepared statement of Mr. Phipps can be found on page
138 of the appendix.]
Chairman Garrett. Thank you.
And we look now to the professor, Professor Wachter, for 5
minutes.

STATEMENT OF SUSAN M. WACHTER, PROFESSOR, THE WHARTON SCHOOL,
UNIVERSITY OF PENNSYLVANIA

Ms. Wachter. Chairman Garrett, Ranking Member Waters, and
other distinguished members of the subcommittee, thank you for
the opportunity to testify at today's hearing. I am honored to
be here to discuss the proposed legislative initiatives and the
broader need for a reinvented housing finance system.
While comprehensive reform is necessary for a stable
housing finance system, the transition must be accomplished
while taking into consideration the current extraordinary
fragility of housing markets. With January prices in real
dollars breaching the 2009 bottom and still falling, there is a
danger of a double dip.
In the reformed system, private capital must be accountable
and at-risk. However, today, in that part of the market in
which Fannie and Freddie cannot operate, the jumbo market,
there is still only a very limited supply of private capital.
This points to the need for comprehensive reform to bring back
private capital.
There is a need for rules of the game, standards and
transparency to counter the information failures that caused
reckless mortgage products and underwriting practices to drive
the system to failure. There is an important role for
collective or government action to mandate transparency
standards and information to allow for all market
participants--borrowers, regulators, and investors--to prevent
risks from becoming uncontrollable. Investors are asking for
this before they enter the market.
My written testimony addresses each of the legislative
initiatives. I will limit my comments to two. First, the GSE
Mission Improvement Act repeals affordable housing goals
without suggesting what might replace them going forward. As we
re-envision the housing finance system, there will be a need to
address the goal of nondiscriminatory access to housing
finance. In the academic literature, there is substantial
evidence that the affordable housing goals were not the major
factor responsible for the housing bubble and crash.
Second, the Portfolio Risk Reduction Act caps the GSEs'
portfolios at $250 billion in 5 years. While it is ultimately
both desirable and necessary to reduce the portfolio,
constraining the path of reduction in this way is not, in fact,
the way to optimize taxpayer returns.
Policymakers and the Nation as a whole must make
fundamental decisions about the shape of our Nation's finance
system going forward. The issues being considered today are of
critical importance to the Nation's future.
I thank you for the opportunity to testify, and I welcome
your questions.
[The prepared statement of Professor Wachter can be found
on page 213 of the appendix.]
Chairman Garrett. I thank the panel.
So I will begin by yielding myself 5 minutes. And I guess I
will just start with Mr. Dalton.
One of your opening comments was to make a comparison to
the first day of baseball, which is cute, but, of course, the
Secretary--the Federal Government doesn't subsidize the first
day of baseball, at least I hope they are not. Maybe it will be
something we will discover during the C.R. discussion.
So can you run down and take a look at some of the things
that we are doing right now? I am getting a little bit of a
mixed message here. Some people on the panel are saying that we
are moving too quickly, that we shouldn't be acting now, that
despite, of course, the fact that it has been 2 years and we
have been asking for hearings on this, and we haven't had
anything. Now we are having hearings, and we are having the
experts come up before us.
So do you believe that the legislation that you are seeing
before, as far as the IG, additional powers there, and the
rest, as far as the G-fees and the rest, will those things be
moving too quickly if we begin to consider them and debate them
and discuss them and move those along?
Mr. Dalton. Mr. Chairman, I think that there are positive
aspects to a number of these bills, but I think it is very
important that we have a comprehensive program in place before
we--for example, one of the bills has the GSEs going out of
business in 5 years. And I think to have that without having a
new system in place--
Chairman Garrett. Actually, let me just correct you there.
I think you are talking about the portfolio language, which
winds that down. Is that what you are talking about?
Mr. Dalton. That is right.
Chairman Garrett. Yes, that just deals with the portfolio,
shrinking the portfolio over 5 years, right? So--yes.
Mr. Dalton. I was referring to the Hensarling bill, that I
believe does, in fact, within--at the end of a 5-year period,
the GSEs--
Chairman Garrett. So you are not opposed to the idea of
having an acceleration, for example, of the portfolio so that
we can try to wind down that $1.5 trillion deficit hanging
around our head?
Mr. Dalton. No, sir. I think the winding down of the
portfolio has merit.
Chairman Garrett. Okay. Since we only have so much time,
Mr. Pinto, in your testimony, you describe the advantages that
the big banks somehow have over the small banks, in terms of
one of the other bills with regard to the issue of G-fees. Can
you just elaborate on that and explain that to us?
Mr. Pinto. Yes. Actually, in my testimony, I believe I
quote Jay Brinkmann, the chief economist for the Mortgage
Bankers Association, who about 2 weeks ago said that the
history of the GSEs was to promote ever-larger consolidation
among large financial institutions, controlling the housing
finance market through their offering of discounts to the large
financial institutions, Countrywide and the large banks.
The community banks and the other community financial
institutions were charged what you would consider in hotels
being called a rack rate, 20, 25 basis points. Countrywide and
the other larger originators were charged 10 basis points, 12
basis points.
As I pointed out in my testimony, what you lose on each
one, you cannot make up in volume. And I think Director DeMarco
covered that when he said the G-fees were woefully inadequate.
It was because they were discounting them for the big banks and
trying to make it up with the little banks.
Chairman Garrett. Let me just jump over to Mr. Phipps. You
were the one who suggested that we may be moving too quickly,
we don't want to move on a piecemeal approach. So let me just
ask you, on some of the bills that are before us, for example,
Mrs. Biggert's bill, with regards to giving more authority in
creation of the IG, how would that be bad if we did that today?
Wouldn't that have been good if we actually had that in place
several years ago?
Mr. Phipps. The short answer is, we really believe that the
principles that we spent the last 2 years working on articulate
a comprehensive plan. And we believe that the replacement, the
successor for this, is critical and needs to be put in that
context.
Chairman Garrett. And I am right with you on that. We have
to figure out what the replacement is. But until we get there--
and you have to admit, it is going to be pretty hard to get
consensus on what that replacement is--until we get there,
aren't there some other things we can do, as we lay out here
today, that would be good? So you are supportive of the idea,
right, that they should have--on the--
Mr. Phipps. --should be reformed.
Chairman Garrett. And you are supportive of the idea with
regard to Mrs. Biggert's bill, as far as additional authority
with regard to the IG. You can't be opposed to the idea of--are
you? Is anybody opposed to that idea, that they should have
authority in that area? No? Is anybody opposed to the idea
that--
Ms. Wachter. Yes, in my written testimony, I did oppose
that.
Chairman Garrett. Okay. And if we had that--okay.
Ms. Wachter. The reason I opposed it is that reporting to
Congress with 7 days advance notice may simply not be
practical.
Chairman Garrett. Okay, just for the practicality. And just
one last question, then. With regard to some of the other
ideas, with regard to the Secretary signing off on the new debt
issuance, is anyone opposed to that idea?
Mr. Phipps. We are not taking--
Chairman Garrett. Besides this one. I know, besides Ms.
Wachter, because you highlighted that. Okay. So there are
some--and I suppose, Mr. Nielson, you want to--
Mr. Nielsen. No. I think that Treasury already has that
ability to sign off on that debt.
Chairman Garrett. But this is a requirement that he would
have to.
Mr. Nielsen. But they have the ability to do it now,
correct? Don't they have to sign off on--
Chairman Garrett. They do.
Mr. Nielsen. Okay.
Chairman Garrett. They are not doing it, and we would say
that they--and so I will just close on this and yield to the
ranking member that I guess there is a little bit of unanimity
that there are at least some things that we can do now, even
though we don't have the final plan, which is going to take a
little bit more time to accomplish.
With that, I yield to the gentlelady from California.
Ms. Waters. Thank you very much, Mr. Chairman.
Let me thank all of our panelists who have come today to
help us delve into this very, very difficult and complex
problem of what to do about the GSEs. I think that it was said
by one of you that this should not be a partisan issue, that
this should be a bipartisan issue. And I agree with that.
There are several things that have been said today that I
absolutely agree with. Starting with you, Mr. Dalton, and your
love for the 30-year mortgage, I love it, too. And I think we
should do everything possible to ensure that is a product that
is available.
But let me delve a little bit into who you are and what you
do. I see, Mr. Dalton, that you are the president of the
Housing Policy Council of the Financial Services Roundtable.
You are made up of individuals who are in this business of
initiating loans, financing, extending mortgages, however you
want to describe it. These are people who know what is going on
in this mortgage industry. Is that correct?
Mr. Dalton. Yes, ma'am. That is accurate.
Ms. Waters. And having said that, some researchers--
particularly those from the American Enterprise Institute, whom
Mr. Pinto represents on the panel today, contend that the 30-
year fixed mortgage either isn't going for homeowners or could
survive and could continue to be an affordable product for
medium-income families without any government involvement in
the housing finance system, but you were definite about 30-year
mortgage. Do you want to say it again in a short sentence for
us why you feel so strongly about the 30-year fixed mortgage?
Mr. Dalton. Yes, ma'am. I think it has been the bedrock of
the Nation's housing finance system for more than a half a
century. It is sustainable. It is safe. It delivers
affordability, certainty, stability, and predictability.
The fact is that for those Americans who live on a budget,
they know every month, year--month in and month out, year in
and year out, that mortgage payment is going to be the same.
And I think that predictability is very important for those
Americans who are living on a budget and--
Ms. Waters. You don't have to go any further. I think you
have really said it. But what is interesting for me is, I think
your background is Republican and you are willing to stand up
for this 30-year mortgage. Is that right?
Mr. Dalton. My background happens to be Democrat, Madam
Chairwoman.
Ms. Waters. Oh, is that right? Oh, that is better.
[laughter]
Mr. Dalton. But I have served in both Democrat and
Republican Administrations.
Ms. Waters. Okay, thank you.
Now, if our housing finance system were completely
privatized, as the plan under Representative Hensarling's
comprehensive GSE reform bill, what would the implications be
for small and community banks? Would they be able to compete
with the large financial players? Would they easily be able to
sell their homes on the secondary market? Would you tell me
what you think about that plan? He wants to completely
privatize.
Mr. Dalton. I am sorry?
Ms. Waters. Under the Hensarling comprehensive GSE reform
bill, he would like to completely privatize. And I want to
know, if the system was completely privatized, what would the
implications be for small and community banks? Would they be
able to compete with the large financial players? Would they
easily be able to sell their loans on the secondary market?
What would this mean for the small banks?
Mr. Dalton. I have reservations about a completely
privatized system, Congresswoman Waters. I think that the--our
proposal is one that includes the private sector. And we
welcome that.
But I think to go completely to the private sector, you
wouldn't have the government guarantee of the 30-year fixed-
rate mortgage. I think the mortgage market would shrink. I
think long-term fixed-rate loans would be less available. And
generally, I think it would be difficult for the institutions
that you mentioned to be able to finance mortgages.
Ms. Waters. Thank you very much.
I want to move quickly to Ms. Susan Wachter, professor, the
Wharton School, University of Pennsylvania. One of the bills
offered today by Representative Royce would eliminate the GSEs'
affordable housing goals. While I don't believe that data
suggests that those were major contributors to either the
failure of Fannie and Freddie or the greater housing and
economic crisis, I am open to perhaps restructuring how we
support affordable housing in a future housing finance system.
Would you reiterate what you know about this accusation
that these affordable housing goals somehow caused the crisis?
And do you have any ideas about how we could provide support
for moderate- and low-income folks--how could we restructure
this?
Ms. Wachter. Congresswoman Waters, may I take that question
in reverse order? Support for working Americans is extremely
important for the mortgage system. And for that, we do need a
30-year fixed-rate mortgage as a base because of its
affordability through amortization.
So for working Americans overall, the starting point is
that we need comprehensive reform that will allow
sustainability of the 30-year fixed-rate mortgage.
Secondly, on the role of affordability, and housing goals
in particular, it has been alleged that the Community
Reinvestment Act and the GSEs' housing goals were somehow the
cause of the crisis. The timing is simply wrong, number one.
The Community Reinvestment Act and the housing goals were in
place far earlier.
In addition, we had a commercial real estate bubble, as
well. We had a boom and bust of equal dimensions. And when I
say commercial, I am not simply talking about multi-family
only. I am talking about office, industrial. That commercial
real estate bubble certainly could not have been caused by the
affordable housing goals or the CRE.
Chairman Garrett. I thank the ranking member.
To the vice chair of the subcommittee, the gentleman from
Arizona?
Mr. Schweikert. Thank you, Mr. Chairman. The joys of trying
to do this in 5 minutes when you have dozens of different kinds
of questions.
And forgive me. This is going to be a little bit shotgun. I
think it might have been Mr. Nielsen, who spoke to sort of the
housing policy or housing goals for the country. In, like, 25
seconds, what is that?
Mr. Nielsen. In my mind, I think the housing goals should
be that people who want to have a home should be able to find a
mortgage, if they are creditworthy, to be able to buy a home.
That seems to be the American dream, and we believe in that.
And so we think that is extremely important.
And all of these discussions have to do with costs. We can
create a system that is so expensive that only a very few
people can access themselves to single-family homes. That, we
think, would be wrong.
Mr. Schweikert. Mr. Chairman, Mr. Nielsen, and this is one
of the concerns, because you are my brothers and sisters. I
come from your industry. But I am being told that as much as 13
percent of our housing stock in this country is now empty. And
much of the pricing structure out there right now may be half
replacement costs. So those on the homebuilding side have a
devastating type of structural competition.
You see the solution as what?
Mr. Nielsen. I can tell you that in some of the most
devastated markets, number one being Las Vegas, which I just
visited, there are still homes being built and sold. This
hangover is not of newly built unoccupied homes, of older
foreclosed homes. There are going to be 5,000 homes built and
sold in the worst market, the white hot center of foreclosure
in this country. And those homes being sold, each one of them
will employ 3.5 people.
Mr. Schweikert. Mr. Nielsen--having a little familiarity
with some of the Vegas market, isn't that because, also those
lots, the land, the infrastructure, those things basically were
almost given away for--
Mr. Nielsen. But, Congressman, still, those homes are being
sold at way above the foreclosure prices. So people are willing
to pay more for a home, a new home. It clearly is only 10
percent of where they were at one time, but the point is, there
is still a market for new homes. And that exists across the
country.
Whether you are in Florida or anyplace else, there are
niches where people are desirous of homes.
Mr. Schweikert. But my great fear--and I am going to bounce
along--is we are still sitting there with a massive number of
vacant properties in many of my neighborhoods. And I know there
is a hunger over here to build new products, but I still have
this concern about what happens to my housing stock when I have
10 percent, 13 percent vacancies, up and down the country? And
what does that mean?
For Mr. Phillips, let's--some of the financing side. What
would make the REALTORS happy? How about a system where much
of the guarantee was actually coming through private mortgage
insurance? Would that be helping us meet some of our mechanics
and our goals?
Mr. Phipps. Certainly any pieces that can be brought to the
table to minimize the exposure would be great. But when you are
looking at the raw scale, at the end of the day, we need the
government guarantee. We just do. And the secondary market is
critical for the whole market, because you are talking about
the impact of all 75 million--
Mr. Schweikert. You are saying--okay, Mr. Phillips--
Mr. Phipps. It is ``Phipps.''
Mr. Schweikert. Oh, excuse me, sir.
Mr. Phipps. ``Phipps.''
Mr. Schweikert. Okay. Glad I was paying attention. Sorry
about that. Mr. Phipps, you need the government guarantee
because you are concerned about bondholders' willingness to buy
the bonds?
Mr. Phipps. No, actually--
Mr. Schweikert. The guarantee does what? In your eyes, it
does what?
Mr. Phipps. The guarantee provides us with access to
capital in a market where there are so few--
Mr. Schweikert. I need you to get more technical with me,
Mr. Phipps. Is it because people are willing to buy the bonds
because there is a guarantee and that creates liquidity?
Mr. Phipps. Essentially, yes. There is no confidence right
now without the guarantee.
Mr. Schweikert. So ultimately our solution is, what makes
it so people are willing to buy the bonds?
Mr. Phipps. The guarantee makes it possible that they are
willing to invest. The certainty of the guarantee and the
certainty of this government is what is facilitating it. It is
a huge scale. Clearly, insurance will complement it.
Mr. Schweikert. But ultimately, if we sold that liquidity
issue, of saying, look, I have the MBS, I need someone willing
to buy the bonds, right now we do it through a GSE or a full
faith and credit right now guarantee, but if it was a
combination of that or something else, as long as someone is
buying these bonds and it pushes down the liquidity outside the
securitization into my home mortgages, we are accomplishing the
goal?
Mr. Phipps. Provided the average consumer has access to
competitive cost mortgage money, we get there. We don't see any
alternative right now. And the principles outlined in my
written testimony, really tell you how we have to transition to
it.
The conversation is really problematic because the winding
down causes uncertainty in the market, which causes the
consumer to pause. That is a huge problem where the consumer
doesn't understand--
Mr. Schweikert. That is at this end. I am trying to
actually solve the problem on--if it is a liquidity issue.
Mr. Phipps. Thank you.
Mr. Schweikert. Sorry. I am now over my time. I look
forward to another round.
Chairman Garrett. The gentleman from Massachusetts?
Mr. Frank. Thank you, Mr. Chairman.
Let me begin with Mr. Phipps. I want to echo what my
colleague, Mr. Sherman, said. Others may have, as well. I think
it is very important when we are trying to keep confidence in
the housing industry to make it very clear that the mortgage
interest deduction is going nowhere. The sun will disappear
before it goes away.
Now, I will say this. If I were starting a new country, I
would not have it. I don't think it is ideal tax policy. But
given the extent to which people's legitimate vested interest,
in the best sense, include that, trying to abolish it now, even
if we were in a wonderful economy, would be unfair. You cannot
do it without being disruptive to people. Houses are still a
large part of the wealth for many people.
And I have to say, I don't think there are 50 votes to get
rid of it. I understand people are afraid of it, but I think it
would help us all if we could just make this clear that is
staying around and then we can build on that.
And, having that said, I do note that there is a dilemma, I
think--and I sense this from Mr. Dalton's testimony, whom I
have enjoyed working with over the years. The specific bills
that are proposed, in my judgment, are almost all reasonable. I
do notice--frankly, if you don't mind my phraseology--even Mr.
Pinto balked at the compensation one. I say, ``even Mr.
Pinto,'' because he has been most critical of the operations.
And since everybody agrees they are not going anywhere and
we have a whole lot of complex tasks to talk about, I don't
think a drastic reduction in everybody's salary is a realistic
proposal. We did, I would note, in 2009 put a bill through the
House that would have covered them under the TARP executive
restrictions. My colleagues at that point opposed it. Now
they--I think they went from being too relaxed to too rigid.
But it did seem to me--and I noticed one of my Republican
colleagues had concerns about that. Others--I think Mr. DeMarco
made a good point on the portfolio. I think we should make
clear that securitization, risk retention applies to them, but
I think you have to account for that in the portfolio. And
making a distinction in the portfolio between bad assets and
good ones, giving you the flexibility--we could work on those.
But I think there would be a lot of agreement. I have some
questions about some of the goals, but here is--what I am
struck by is that three very responsible organizations
representing major economic interests concerned with housing--
the Financial Services Roundtable, which is itself an amalgam
of a number of different financial entities, the REALTORS and
the homebuilders.
And we have people who represent the financers, the people
who build the house and people who sell them, all say the same
thing. Yes, taken individually, these bills are reasonable, but
to act on them now, in the absence of a broader approach, would
be a problem.
Would you elaborate on what you think the negative would
be? And I know Mr. Dalton mentioned the Hensarling bill, which
is in limbo somewhere, and I think you are not supposed to
mention it in polite company. It was filed to satisfy some
obligation.
But what is the problem you see? I did sense agreement that
the bills that were before us are mostly bills that--let's put
it this way--they are bills everybody would want to see
included in an overall proposal. What do you think is the
reason not to go forward with some of them now, given that
there is still no agreement on what happens at the end?
Let me start with you, Mr. Phipps.
Mr. Phipps. I think the short answer, Congressman, is that
we want to go through with a comprehensive approach, because
consumers need to know that there is a reliable source of
financing. And, frankly, when I started in the business 30
years ago, there were--the top 5 lenders represented 25 percent
of the market. The top 5 lenders now represent almost 75
percent of the market. So there is a concentration that really
makes it hard for competition that is pro-consumer, and we need
a successor to this--
Mr. Frank. Can I say then--let me see if I can rephrase
it--since confidence we all understand is an important part of
this. We are asking people to make a huge decision. That is why
I wanted to say that the MID isn't going anywhere.
Is it your concern that if we appear to be doing this in a
piecemeal way that people will be reinforced in the sense that
this is an uncertain future for the whole operation?
Mr. Phipps. Exactly. When you--
Mr. Frank. Okay, if I got it right, then I am going to go
on to Mr. Nielsen.
Mr. Nielsen. I think you are exactly right. I think it is a
comprehensive approach that needs to be taken so that there is
consistency and people can see where we are going. I was
listening to Mr. DeMarco very closely when he talked about the
number of folks who worked for Fannie and Freddie and what they
must be feeling today as they go forward.
And we still have an ongoing company there that has a whole
lot of--
Mr. Frank. I don't want to go over, and I know Mr. Dalton
has essentially said the same thing. And I just want to say,
here is the dilemma that my colleagues have. I want to take
``yes'' for an answer. I think the problem is this: My
colleagues got themselves, frankly, into a corner by insisting
last year that they knew what the ultimate solution was, by
bringing forward a bill that had a longer-range thing, the
Hensarling bill, that is, as I said, now in limbo. They offered
it. They said it was our fault we didn't give a chance to have
hearings to make it better.
But I have never known them to have to wait for me to do
what they thought was best. They could talk to other people.
They don't need my permission. And here is the problem. They
are a little bit embarrassed, I think, that they were committed
to something and haven't got the final thing, so they are
putting forward these proposals to show they are at least doing
something. And while they are in themselves, I think,
reasonable, taken together, trying to do it that way instead of
going forward with the overall approach may do more harm than
good, and I am struck that it appears to be the view of those
industry organizations that have this responsibility.
Thanks for the indulgence, Mr. Chairman.
Chairman Garrett. Thank you. I didn't hear all of that; I
just heard the part that they are reasonable.
[laughter]
I yield now to the gentleman from Ohio.
Mr. Stivers. Thank you, Mr. Chairman.
And I would like to start with a question for Mr. Dalton. I
think you and the ranking member of the subcommittee had a
conversation about the 30-year fixed mortgage. I, too, like
probably all the committee, support the 30-year fixed mortgage,
and I am just curious if you can tell the committee whether the
jumbo market that didn't have GSEs involved had a 30-year fixed
mortgage involved in it for the past 20 or 30 years.
Mr. Dalton. Mr. Chairman--or, excuse me, Congressman--the
concern I have about the--
Mr. Stivers. No, I am asking a question. Did they have--did
the jumbo market have a 30-year fixed mortgage? This is a yes-
or-no question.
Mr. Dalton. Yes.
Mr. Stivers. Thank you. The second question I have for Mr.
Dalton is about the Federal Home Loan Banks. We have kind of
not talked about them. And I think you and the ranking member
of the subcommittee also had a conversation about community
banks. Can you, in about 10 seconds, talk about the role of the
Home Loan Banks with regard to community banks? Don't they give
community banks liquidity on mortgages and provide a similar
role to what the GSE does?
Mr. Dalton. The Federal Home Loan Banks did provide that
role. Yes, sir--
Mr. Stivers. And don't they help keep community banks
competitive in the mortgage market, at least to the extent they
can, without some huge--they don't have the volume of a lot of
your members.
Mr. Dalton. Congressman, I would like to answer that for
the record. I am not sure specifically--
Mr. Stivers. No, we can back off of that one. But, I just
wanted to make sure that we put all this in context, because it
is a puzzle. And the Home Loan Banks have an important piece of
it.
I do want to go to something Mr. Phipps said and talk
quickly about the mortgage interest deduction and agree with
the ranking member of the full committee that I think we all
support mortgage interest deduction. I am for a flatter tax
system, but I still believe that the mortgage interest
deduction plays an important role here. And it is one way that
we can support housing going forward.
I do want to go through and ask a question sort of all the
members. Is there anyone on the panel who believes that risk-
based pricing of the guarantee fees, the G-fees, is a bad idea?
Mr. Nielsen. Let me respond to that. As I said before, you
can create any kind of a cost structure that you want. All it
does is take more and more people out of the mortgage market.
So anytime you increase costs--
Mr. Stivers. Okay, I understand that. So what you are
saying is, it is fair for my neighbor, if I am a bad credit
risk, to pay the same amount I pay--
Mr. Nielsen. No, no.
Mr. Stivers. --but take some of my risk, because that is
what happens when you don't have a risk-based pricing system.
Is that what you are for?
Mr. Nielsen. No, no. That is not what I am for.
Mr. Stivers. Okay. Then how do you reconcile that with the
fact--
Mr. Nielsen. No, no--
Mr. Stivers. --increasing G-fees to a risk-based system?
Mr. Nielsen. I am going back to my original analogy. The
concept is, if anyone can create risk-based fees to a point
where you have no risk almost--there is always some risk--but
at what cost? What--
Mr. Stivers. Okay--
Mr. Nielsen. To what portion of the American public are you
going to say, ``You don't get to have a home?'' ``You don't get
to have a mortgage.''
Mr. Stivers. The point is, people need to do as good a job
of pricing risk. And if we can identify risk, it needs to be
priced. Is there anybody on the panel who disagrees with that?
You disagree with that?
Ms. Wachter. In a nuanced way, yes.
Mr. Stivers. Okay.
Ms. Wachter. The fact of the matter is, what is even more
important is that the system itself delivers what the credit
risk of the system will be. So your actions going forward will
determine how risky the system is.
Mr. Stivers. That is fair. I think that is fair. And I
don't disagree with folks that we need to figure out where we
are going, but I think the point of these proposals is you can
create a foundation that you can move forward with. And while I
don't agree with all these, I agree with almost all of them. I
think they create a foundation that allows us to move forward.
Is there anybody who disagrees with an Inspector General
for Fannie and Freddie, which is one of the other proposals? I
didn't think there would be.
Ms. Wachter. That is not my understanding. I thought--they
do have an Inspector General. I thought you were talking about
specific roles of an Inspector General.
Mr. Stivers. It is powers. It is powers for the Inspector
General, but yes.
Ms. Wachter. --very narrow, specific proposals, including
that are--the problem--
Mr. Stivers. So do you disagree with--
Ms. Wachter. Yes, I do, in the following way.
Mr. Stivers. Tell me. Okay.
Ms. Wachter. I think the problem is, these are--when you
say Inspector General, that is, of course, extremely
reasonable, sir. But all of these are very narrow, and the
problem is that the American people could say, ``Is this all
Congress can do in setting up a new system?'' I think it
undermines confidence.
Mr. Stivers. I think what we are--the purpose is to set a
foundation that everybody can agree on while we continue to
move forward. And you will see more proposals coming forward,
but I think most of these proposals are very reasonable. I
support most of them, and I appreciate everybody's time. It
looks like my time has expired, but I appreciate the
opportunity to have a conversation with all of you today. And
we want you included in the discussions going forward.
Thank you.
Chairman Garrett. Thank you.
The gentleman from Colorado for 5 minutes.
Mr. Perlmutter. I thank the chairman, and I thank the panel
for their testimony today. What I am getting from most
everybody's testimony is that we have a fragile real estate
market. It hasn't begun to move in the way that any of us want
it to move. We know that so many millions of people are
employed in housing and in real estate, in finance. And, we
have to get people back to work.
And all of a sudden, we are starting to tinker with
something that has been central to the real estate market since
the 1930s, as if that is going to help stabilize and underscore
strength in this market.
So I think my friends on the Republican side are just wrong
on this. And I feel like I have to be the historian in this
committee, because--
Chairman Garrett. Please do.
Mr. Perlmutter. --I thought--I know the chairman always
loves to hear me, because he and I really get going on this
subject. But Fannie Mae and Freddie Mac in particular--Federal
Home Loan Banks, I hope are not part of any of this GSE
conversation. I don't think they are.
But as to Fannie Mae and Freddie Mac, we have had two
trouble spots for Fannie Mae and Freddie Mac, once under Ronald
Reagan and once under George Bush II. And I know, Mr. Phipps,
you would like this to be a very bipartisan--and I appreciate
that--but I see a pattern, quite frankly, where particularly
2003 to 2007, the Fannie Mae and Freddie Mac were used in a
way--it was like just a cash register.
Now that stronger and tougher underwriting standards are
back in place, we don't see the troubled loans. We didn't see
the troubled loans before that. So in working with these
particular agencies, companies, and that is something we have
to look at, whether it is the Federal Government or private or
both, and that is a legitimate concern. But none of that is
really addressed here.
So, Mr. Nielsen, what I would like to--I did have one other
historical nugget for you, Mr. Chairman, that I know you always
like to hear.
Chairman Garrett. About the President or--
Mr. Perlmutter. That is--no, this is about the former
chairman, one of the former chairmen of this committee, Mr.
Oxley, when in 2005, there was an effort to put some
limitations on Fannie Mae and Freddie Mac and exactly what was
going on there. And he pointed the criticism at the White
House. He said all the hand-wringing and bed-wetting is going
on without remembering how the House stepped up on this to
modify it.
What did we get from the White House? We got a one-finger
salute from the Bush--
Mr. Sherman. Will the gentleman yield? Did the former
chairman indicate with which finger he was saluted?
Mr. Perlmutter. He did not, but I can picture it. And when
the Democrats came in, in 2007, the very first thing we took on
was Fannie Mae and Freddie Mac and the excesses--
Chairman Garrett. Would the gentleman--will the gentleman
just yield on that?
Mr. Perlmutter. I would yield to my friend from New Jersey.
Chairman Garrett. So were you here when all that was
happening?
Mr. Perlmutter. I was not.
Chairman Garrett. Oh, okay.
Mr. Perlmutter. I am just reading what Mr. Oxley had to
say.
Chairman Garrett. Do you remember--that bill moved along in
the House, right?
Mr. Perlmutter. It did move in the House. And it stalled in
the Senate, apparently at the request of the White House, who I
think was--
Chairman Garrett. It came out of Senate Banking, right?
Mr. Perlmutter. --provided--
Chairman Garrett. It came out of the Senate Banking
Committee?
Mr. Perlmutter. No, it did not, did not come out of the
Senate. But taking back my time, Mr. Chairman--
Chairman Garrett. You may want to check your record on
that. It came out of the Senate Banking Committee, and then it
was stalled in the full Senate.
Mr. Perlmutter. All I am doing is reading from Mr. Oxley,
the former chairman of this committee. So--
Mr. Sherman. If the gentleman would yield--
Mr. Perlmutter. I yield to my friend from California.
Mr. Sherman. I understand the chairman's position is that
blame lies before the full Senate and not the Senate Banking
Committee, that the Senate Banking Committee was wise up to
take up the legislation in the full Senate?
Chairman Garrett. Right. And it was the full Senate where
we needed 60 votes in order to move the bill, and I guess we
didn't get support--I guess from your side of the aisle,
actually, in order to move that.
Mr. Perlmutter. I will take back my time, because I am just
reading what Mr. Oxley had to say.
Now, the point being that here we have a fragile recovery,
and I would turn to you, Mr. Nielsen, for just this question.
If we were to take up all of these different efforts right now,
what would we do to the housing business, to those 5,000 homes
that you are talking about being built in Nevada?
Mr. Nielsen. I guarantee it would be a miss. And to your
earlier point, the secondary mortgage market that we have had
in place since the 1930s is the envy of the world.
Mr. Perlmutter. You bet it is.
Mr. Nielsen. Envy of the world. For us to look at two blips
and say we should dump the whole thing, in my mind, seems
inappropriate. And to that end, if you want to change the name
or change little bits around the edge, that is fine. But please
maintain that secondary mortgage market that has created a
homeowner nation out of this country.
Mr. Perlmutter. Thank you. And I yield back to the Chair.
Chairman Garrett. The gentleman from New York?
Mr. Grimm. Thank you, Mr. Chairman, I appreciate it.
And I thank my colleague for the history lesson, I think.
[laughter]
It is amazing how so many different individuals can
remember history differently. But I think what I am getting out
of this--and, Ranking Member Frank, you mentioned how we could
have had these hearings. I think the point is, we are having
them now.
I am proud to be a part of a committee that is having this
dialogue. I come from Staten Island, Brooklyn, where the real
estate market is imperative. It is crucial and vital for our
job sector and for our economy overall.
I am--I do have to admit--and maybe because it is his
birthday--I agree with Ranking Member Frank, and that will be
his birthday present, that the interest deduction should not go
away. I also believe in the 30-year fixed, something my parents
relied on when they bought their first and only house, the same
house my mother still lives in.
That being said, this discussion is important, because I
think we are all agreeing that we do need reforms. It is a
matter of getting it right, though, and not--if I am
understanding this panel--going so fast that we cut off our
nose to spite our face and we make things worse, rather than
better.
Professor Wachter, you mentioned that we have to recognize
the fragility of the market. And just if you could expand a
little bit on bringing back private capital and how you would
propose on bringing back the private capital.
Ms. Wachter. Thank you, Congressman. The market is at an
extremely fragile point. And if we were to have a double dip,
not down a few percentage but a serious double dip, a
recurrence of what we had before, it would not only put people
out of jobs, it has the potential to bankrupt our banking
system again. So we are at a serious crossroads.
And the confidence in the housing market depends on
confidence in there being financing for the housing market.
That said, private capital is not where it could be. Private
capital has not come to the fore in the jumbo market where
Fannie and Freddie are not operating. And the suppliers there
are asking for rules of the game so that they can bring in more
capital.
In the short run, there is no alternative to a government
guarantee, a catastrophic guarantee. Even if--
Mr. Grimm. Professor, could I just--on that, would you
agree, though, that the first step has to be, at a minimum, to
start to unwind where Fannie and Freddie never should have
been--
Ms. Wachter. Absolutely, from the sense of--
Mr. Grimm. --out competing in the marketplace--
Ms. Wachter. Absolutely--
Mr. Grimm. --putting them back to a secondary market, which
is their original mission?
Ms. Wachter. Absolutely. They should be--they should not
have been part of the unwinding of credit standards, the
reckless lending. They should not have been part of that. They
didn't start it. They were late to the game. But they certainly
were part of it. And--
Mr. Grimm. So would you agree that in and of itself--
Ms. Wachter. And it has been stopped.
Mr. Grimm. --will be the beginning of starting to bring the
private capital back?
Ms. Wachter. No. One solution is to have private capital
which has a government-guaranteed backstop. And in fact, that
is what we have with the banking system. It is not correct to
say that we don't have a government backstop. We have it
implicitly in the banking system.
The question is, a backstop that will, in fact, allow a
flourishing market for 30-year fixed-rate mortgages. And that
is why we need a system, a secondary market system. It doesn't
have to be exactly like Fannie and Freddie, and it certainly
should not replicate the errors of Fannie and Freddie, but
there is no secondary market system in the world--and we are
the envy of the world--that doesn't have some government role.
Mr. Grimm. I am almost out of time. Thank you.
Mr. Phipps, you mentioned the value of homeownership. And I
don't think anyone in this room would disagree with you. What
are you proposing, though? In general broad terms, I am hearing
just an overall plan. Is it that you want to make sure that we
don't move too quickly, that there is no secondary market at
all and the bottom falls out because the private sector and the
private money have not come to bear yet?
Mr. Phipps. Essentially, yes. And the reason homeownership
matters is that even after all the market corrections, the
average family who owns their house is worth $188,000. The
average family who rents a house is worth about $4,600. If we
want self-reliant people, homeownership is the perfect
opportunity for that. It has been a benefit and a priority of
this country for almost 100 years. We would like to see that
for our children and grandchildren.
Mr. Grimm. Thank you.
Mr. Dalton, we have met before. I am out of time, so I will
just ask you yes/no. Are you really a Democrat, Mr. Dalton?
Mr. Dalton. I am a Democrat.
Mr. Grimm. Okay, that is fine.
[laughter]
My time has expired.
Chairman Garrett. And did you want to go down the rest of
the row, too, with--
[laughter]
Just to be curious. And--anyway. And, of course, the
professor's comment--of course, Dodd-Frank was to make sure
that we are taking away all those explicit and implicit
guarantees to the banking system, because they are no longer
too-big-to-fail, and that is what the whole benefit of Dodd-
Frank is, that we don't have that anymore.
But to the gentleman from California, for 5 minutes.
Mr. Sherman. I wish the gentleman from New Jersey was right
and Dodd-Frank completely eliminated too-big-to-fail. As you
know, we had a number of amendments to Dodd-Frank that might
have allowed it to achieve that objective.
Chairman Garrett. Achieve that, yes.
Mr. Sherman. I think Mr. Dalton is to be commended on his
most recent answer--
[laughter]
And the wisdom that lies behind it.
Professor Wachter, I think, is right in that the worst
thing we could do to our economy is to see a slide or
precipitous drop in home prices. And the biggest thing we can
do to protect Fannie Mae and Freddie Mac is to make sure that
they are not buying subprime loans and Alt-A loans and liar's
loans. And that we have already done.
The barn is much better now that we have closed the door. I
don't know what changes we would have to make short term that
exceed the importance of that.
Mr. Phillips, I just want to re-emphasize what you just
said. The average non-homeowning family in this country has an
average net worth, value of everything they own in the world,
of under $5,000.
Mr. Phipps. Correct.
Mr. Sherman. That is a strong argument for promoting
homeownership. I commend the gentleman from Staten Island on
the importance--on his statement that we should keep the home
mortgage deduction.
What is most likely to happen in Congress is we will have a
lot of talk about eliminating the home mortgage deduction, and
then we won't actually do anything. So whatever Federal
revenues are available from not doing anything will be
available. That is to say, zero.
But what effect does it have on today's home prices that
people are reading that Congress might eliminate the home
mortgage deduction, which means when you live in the home, you
don't get the home mortgage deduction, and when you sell the
home, you sell it for an awful lot less? I would think from
your position, as president of the National Association of
REALTORS, you could give me some insight as to what this talk
is doing to home prices.
Mr. Phipps. What all the conversations--and particularly
the conversations on mortgage interest deduction and its
elimination do--is cause people to pause. So when we have an
overhang and an oversupply in the market, to discourage
qualified, ready, willing, and able buyers from stepping into
the market means that you have a further eroding of average
price.
It is particularly challenging--and the conversation I
personally find frustrating, because it is something that my
grandparents, my parents, and I benefited from, to pay down and
pay off the 30-year mortgages. It feels like generation theft
that my kids and grandkids cannot enjoy the benefits that we
have had in place since 1913.
Mr. Sherman. Fannie and Freddie hold portfolios of well
over $1 trillion collectively. Their plan is to sell those off
to reduce that holding of mortgages by about 10 percent. Is
that too precipitous, too fast, both to keep the housing market
in good shape and keep the funds flowing in the housing market
and to make sure that Fannie and Freddie get full value for the
assets that they are selling? Is 10 percent a year faster than
it ought to be? Or should I prefer to--
Mr. Phipps. Actually, I would prefer you ask--I think the
goal, frankly, is--
Mr. Sherman. Let me ask the professor.
Ms. Wachter. I think that Director Ed DeMarco did actually
respond to that in a way. He was asked whether 5 years is too
precipitous, and he said there is no way that he can answer
that question.
Mr. Sherman. But you are smarter.
Ms. Wachter. --no, by no means--10 percent at this moment
in time does not appear to be threatening the recovery.
Mr. Sherman. So we should encourage the 10 percent, but
maybe not mandate it in a way--
Ms. Wachter. Exactly, mandatory--
Mr. Sherman. --that would lock it in.
Ms. Wachter. --is exactly where you do not want to be on
this.
Mr. Sherman. Mr. Phillips, I come from a high-cost area,
Los Angeles. If the conforming loan limit drops, what does that
do to home prices in the 10 largest cities? And then I will ask
the professor whether that likely drop in home prices would
adversely affect the economy, but first--
Mr. Phipps. The answer is that it will actually force down
prices. What is really interesting is it is portrayed as a
coastal issue, when, in fact, we are looking at 29 States
having high-cost areas, 206 counties, and it impacts 51 million
Americans. So it is a significant portion of this country that
has broad demographics.
Mr. Sherman. And if all of a sudden every home that used to
be worth $800,000 in the L.A. area dropped to a value of
$500,000, Professor, what would that mean for the national
economy?
Ms. Wachter. That would certainly create regional
recessions and beyond that, of course, if we have a price--
Mr. Sherman. But only in our 10 biggest metropolitan
markets.
Ms. Wachter. --if we have a price fall of that magnitude.
Mr. Sherman. I yield back.
Chairman Garrett. Great. Thank you.
The gentleman from Texas?
Mr. Sherman. The record should show that when I say only
the 10 largest markets, that was facetious.
Mr. Hensarling. Thank you, Mr. Chairman.
Mr. Pinto, I evoked your name in the earlier panel for some
work that you did. Just to put it in the proper context, I
believe you said that, under the normal rate at which Fannie
and Freddie are dealing with their portfolio holdings, that is
roughly 20 percent per year.
I had authored some legislation that would have essentially
shrinked their portfolios on a stair step basis 700, all the
way down to 250, over a 5-year timeframe. So did I understand
correctly--and I didn't hear Mr. DeMarco necessarily disagree--
that your data is accurate?
I know that you have spent quite a part of your
professional career studying the GSEs, and I certainly have
spent some time poring over the paper that you did along with
Mr. Wallison.
So, can you give us a little bit more detail about your
observation on reducing the portfolio of holdings? And is 5
years a reasonable time period?
Mr. Pinto. Yes, thank you, Congressman.
Fannie and Freddie report monthly. They have a monthly
report. And in that, there is a section on their portfolio, and
it shows what it consists of, what the additions are, what the
subtractions are, and it has a liquidation rate.
And the liquidation rate over the last year, 2010, it is
known as an annualized liquidation rate. It varies a little bit
month by month, so you annualize it. And so you are getting 21
percent is what it was last year. And if you look in January of
this year, the first month that is reported, it has an
annualize rate of 21 percent.
So it is running in January the same. It could drop a bit.
It could go up a bit. But that is roughly what it has been
running.
And when I put that against your stair step, as you
described it, you started off a little more slowly and then
accelerated, and so over time, over 5 years, it came out to
be--I don't remember the exact number--it was about a 15
percent reduction per year, annualized 15 percent. So it seemed
that if the liquidations are 21 percent today, if you assume it
slows up a bit, that 15 percent seemed to be in the ballpark
and, therefore, shouldn't be troublesome.
I would add that I believe the reduction over the last
year-and-a-half has been slower than the liquidation. So in
effect, they have been adding to the portfolio, not--if they
were just sticking to the liquidation rate, it would be lower
than where it is today.
Mr. Hensarling. Mr. Pinto, in the paper, the AEI paper that
you presented back in January along with Mr. Pollock and Mr.
Wallison, you stated that the alternative plans in Washington
that still retained a government guarantee in the secondary
mortgage market were flawed. I quote from the paper, ``These
plans are based on a fundamental error that the government can
act like an insurance company and set a correct price for the
risk it is taking.''
So we know on the menu of options that the Administration
has presented to us, certainly, option two and option three
would still have the government setting a price for risk-
taking. Can you tell me why you and the other AEI scholars have
concluded that the government cannot correctly price for risk?
Mr. Pinto. Yes, thank you. Basically--and it echoes what
Director DeMarco said last September before the full
committee--the government doesn't have a means for figuring out
how to price for risk. It doesn't have a profit motive. It
doesn't have the ability to do that.
And time and time again, it has been proven--and I think
there were some comments by various members earlier, the number
of cases that the government has had where it hasn't properly
figured out the pricing of risk. And so that is your first
problem.
The way the government doesn't provide capital backing that
for the most part, whereas the private sector does. So if the
private sector actually has a thick cushion of capital at risk,
it has to do a very good job of pricing for risk. And if it
doesn't, it loses that capital.
In fact, we issued a final White Paper last week that
outlined a completely private system, save for FHA, which we
talked about earlier, that would rely totally on private
capital, and it would put that capital at risk if it were not
properly priced.
And we priced that with experts in the industry, and we
came up with pricing that is not that much higher than where we
are today, and certainly within the confines of both what
Secretary Geithner said on March 1st, a moderate increase in
interest rates, and, secondly, the Center for American Progress
proposal, which relies on a government guarantee, calls for a
40 basis point increase per year, and ours is less than that.
Mr. Hensarling. I see my time has expired. Thank you.
Chairman Garrett. And I thank the gentleman from Texas.
The gentleman from Indiana is recognized for 5 minutes.
Mr. Donnelly. Thank you, Mr. Chairman.
It seems to me that one of the key ingredients here, more
than almost anything else, is common sense, that we have to
have a glide path into a product that doesn't disrupt and tear
apart the housing market as we move forward, that we can't one
day be here and the next day be completely here and pray that
everything turns out right in the process, because in the
process of doing that, Mr. Nielsen, for instance, how many
people are involved in the home-building industry today?
Mr. Nielsen. We have 160,000 members that are involved in
the home-building industry. They represent about 6 million
total employees. And that is down dramatically from just a year
or two ago.
Mr. Donnelly. And, Mr. Phipps, just a little background,
the first house I bought was a 30-year fixed mortgage, 30-year
fixed-rate mortgage. And what we were able to do, it enabled us
to get into the house. And then after some years, we were able
to refinance into a 15-year mortgage, when we were able to
handle a little bit more payment.
But what it did was enable us to raise our family there, to
be our greatest wealth instrument, and at the same time, the
30-year fixed got us into the opportunity to be part of this.
What happens to the real estate market if what we do is not
a smooth transition as we move away from the way Fannie and
Freddie is? If we do not handle this properly, what will happen
to the real estate market?
Mr. Phipps. An unpredictable market and a market with
uncertainty is a challenge, because prices go down. It is
interesting. Our number-one priority as an organization is a
reliable flow of capital, of mortgage capital, because at the
end of the day, we live on the river on which capital creates,
and it impacts all 75 million American families.
If you take that away and it is not reliable, and it is not
understood to be available, then it causes people to pause,
prices go down, unemployment will increase. It is a challenge.
And I would add one other interesting nuance. The pendulum
has swung so far in terms of tight credit now that the average
credit score that Fannie and Freddie are buying is 750, rather
than 700 to 720. So we need to get back toward medium, because
there is about 15 percent of the market that should have access
to credit, that if you look at their whole profile, certainly
have the ability to pay it back. And they are being
disenfranchised, and, frankly, that 750,000 additional
transactions this year could generate 350,000 to 375,000
additional private-sector jobs. We are very much a jobs
business.
Mr. Donnelly. Thank you.
Mr. Secretary, first, thank you for your service, sir. And
then I just have one question for you, and that is, what would
happen to the real estate market if there wasn't a 30-year
fixed-rate product available?
Mr. Dalton. Thank you for your nice compliment, Congressman
Donnelly. With respect to what happens, I think you can see
that the American people want 30-year fixed-rate mortgages, in
that in the last quarter of 2010, 95 percent of the refinances
went into a long-term fixed-rate mortgage. Whatever people had
before, this is what they want. And so I think clearly we need
to do that.
In terms of what would happen without it, I think you would
see homeownership less available to many Americans. I think
they want predictability, and that is what the long-term fixed-
rate mortgage gives them. I think without it, you would have
uncertainty. And one of the things that we have learned is that
nothing spooks the marketplace more than uncertainty.
Mr. Donnelly. Thank you, Mr. Secretary.
Mr. Chairman, I yield back my time.
Chairman Garrett. Thank you.
Mr. Donnelly. Thank you, sir.
Chairman Garrett. Thank you very much.
The gentleman from Ohio?
Oh, he is already gone. The gentleman from--unless the
gentleman from California would like to yield to the gentleman
from Ohio?
Mr. Miller of California. No, no, I didn't. I was waiting
for my time. You are wishing I would yield, but I won't.
Chairman Garrett. Would you like to yield to anyone?
Mr. Miller of California. No, I would love to take my time.
I am a history buff. I love history. If we go back to 490 B.C.
and discuss Athenian democracy or we look at the issue of the
GSEs--I enjoyed Mr. Dalton's comments that everybody supports
the fixed 30-year loan. I do, too. I attended a major seminar
by all the major lenders in 1982 when they said there would
never be a fixed 30-year loan again. Remember that? Because of
the bad times. And the GSEs got that moving, where the jumbo
market came back in and participated in the fixed 30-year loan,
so I totally agree with that.
Now, Mr. Pinto, did you say that the GSEs or the government
is not capable of pricing risk? Was that your comment?
Mr. Pinto. The government is not capable of pricing risk.
Mr. Miller of California. The GSEs are not capable of--
Mr. Pinto. I said the government is not--
Mr. Miller of California. Okay, good. I hope you said that,
because if that were true, the private sector is doing
horribly, because the GSEs are outperforming the non-agency
market by far. Have they made mistakes? Yes. The default rates
are lower. We can't argue that.
So they have made mistakes, without a doubt. And we tried
in 2005--and I would like to correct history--we sent a very
good bill to the Senate. It required a strong regulator, good
underwriting standards, a fair standard as applies to all
lenders. It got out of committee, but the Senate Democrats
filibustered it, but everything else was correct in the
statement, except that last part.
So perhaps if we had done that, we wouldn't be where we are
today. In 2001, I started introducing amendments that probably
got the Senate 4 or 5 times defining subprime versus predatory.
And if we had done that, we would not have seen a Countrywide
and the predatory loans they made, and perhaps we wouldn't have
seen the debacle we have today.
But if you look at the GSEs in history, if you go back from
1970 to 2000, 1985, when Fannie lost some money that one year--
they have always made money--in fact, they have always paid
money into the Treasury. They have actually made money for the
government.
So instead of looking at the history of where they went
wrong, what they did wrong, and what years they did it wrong
in, and correcting that, we are looking at other things.
And I think we need to say that, if they are outperforming
the private sector--and this economic downturn in housing was
global, and yet not one of the other countries that suffered
the downturn had the same form of lending practice that we have
here, yet they suffered the same identical type of a downturn
percentage-wise, we should say, what did they do wrong? How can
we fix this? And how can we make the lending market solvent and
strong for future generations?
Now, what I have seen, based on the history of being a
builder, is--and I think many REALTORS and builders
acknowledge that--when--lenders, if you couldn't meet
conforming standards, they didn't want to deal with you,
because they realize there wasn't the liquidity in the private
sector to make those fixed 30-year loans and hold those fixed
30-year loans because it ate up all their liquidity, in most
cases.
If we had an alternative to the GSEs, I would like to see
it, because it wasn't there at the height of the market, 2005,
2006, and 2007, when you would have seen it. All you saw was
Countrywide and the like issuing junk bonds out there to people
and telling them they equaled mortgage-backed securities by the
GSEs, which they didn't.
So if we didn't have a GSE, I would like to hear from the
builders and REALTORS, what impact on the housing market do
you think that would have today?
Mr. Nielsen. Probably the major problem would be, who is
going to be there in another downturn? There is no question
that private capital is private. And as a private capital, they
get to go in or get out of any market they want to.
So when the market is tough, they are not going to be
there. What we have been able to count on in the past, is for
the GSEs and FHA to take up that mantle when we had a problem.
It concerns me greatly to think that the only folks we would
have out there to help us out in a crisis is private capital.
Mr. Miller of California. And I am extremely pleased to
hear that the GSEs are using risk-based loan standards and
principles and strong underwriting standards. Had they done
that in recent years, instead of acting like a company that is
owned by stockholders trying to get a larger market share
regardless of the cost or the risk, they wouldn't be where they
are at today.
But today, the government owns them. Now, the government
has an opportunity to make them solvent, to get paid back every
dime we lent them, but charging them 10 percent interest
doesn't do that. So we have an opportunity to reform the GSEs,
to put them back to their original intent, to provide liquidity
to the marketplace, in times like today when we need them, and
not put taxpayers at risk, as a matter of fact, make money for
the taxpayers like they have done in all the years they have
been in business until recent years.
So if we are looking at what they have done, there is not a
lender in the private sector historically that has performed as
well as the GSEs, when they only lost money in one year. Find
me one lender that has done that in history. There are none.
So should we be fixing them? Yes. Should we be correcting
the mistakes they made? Yes. But first, let's find out what
they did wrong and let's fix it. I yield back the balance of my
time.
Chairman Garrett. Thank you.
To the gentleman who is standing up from Texas, for 5
minutes.
Mr. Green. Thank you, Mr. Chairman. I want to stand up for
homeownership.
Chairman Garrett. There you go.
Mr. Green. I want to stand up for builders who are trying
to help us recover.
Chairman Garrett. And the taxpayers, too.
Mr. Green. I want to stand up for all taxpayers, including
you, Mr. Chairman. I stand for making sure that we have a 30-
year affordable homeownership opportunity. And I am
appreciative of what was said. Someone said that housing is not
partisan. I made a note of it, and I had to step away. I
believe it was the REALTOR who said it. I concur. And I want
to work across lines to make sure that we get this right.
Ultimately, however, after--let me do this--I thank all of
you for coming. I want to especially thank, however, the
REALTORS, the builders, and the Roundtable, simply because you
are there where the rubber meets the road. And a lot of what
you have presented is based upon your experiences, and your
talking to people, and your actual knowledge of what is going
on from the user's perspective.
And I don't mean to in any way demean the academicians. I
thank you for what you have done, as well.
Ultimately, what we have to decide is, what will the role
of the Federal Government be? That really is where the rubber
meets the road right now. And until we do that, it is difficult
to do all of these other things, because we could find
ourselves moving in one direction, when, in fact, we have gone
too far or we have done something that we will regret and we
will have to try to unwind something that we placed in place.
So I want to say to you--I believe it was Mr. Nielsen with
the builders--you said that you think that there should be a
Federal backstop. And, Mr. Pinto, I believe you are of the
opinion--and if I am incorrect, I would like for you to correct
me--there should be no Federal involvement at all, no Federal
capital should be at risk in any way.
Mr. Pinto. That is not correct.
Mr. Green. Okay, thank you. Please correct me. And do it as
quickly as you can, because I have a question.
Mr. Pinto. FHA, VA, and the Department of Agriculture
programs we believe are appropriate.
Mr. Green. But as it relates to the GSEs, absolutely not?
Mr. Pinto. We don't--
Mr. Green. Or anything similar?
Mr. Pinto. We don't believe there should be any GSEs.
Mr. Green. Anything similar to that? Okay. So, now, the
question becomes, in this new paradigm, however, I am sure you
are aware that there is--we are thinking about a paradigm that
will include FHA, VA, and some other things that may be unnamed
at this time or some other paradigm, some system by which we
will continue to have mortgages promulgated.
And, of course, your answer would be, ``Just let the
private market take care of it.'' Is that correct?
Mr. Pinto. Our answer is, we laid out a very comprehensive
approach of how the private market--
Mr. Green. Okay. But is it--in essence, when we get to the
bottom line, it is the private market, is this correct?
Mr. Pinto. A private market, yes.
Mr. Green. And that would be it. Okay. Now, there are some
other people who are similar to Mr. Nielsen, and they think
that the Federal Government, while not the primary, maybe not
the secondary, maybe not the tertiary, but possibly the
quaternary, somewhere in there, there is a role for the Federal
Government. And without saying where it is right now, those who
think that there is a role for the Federal Government, we need
to know who you are so that we can know what we are supposed to
do, at least based upon your perspective.
So let me just start with the lady. And it is interesting
to note that one lady can counterbalance one, two, three, four,
five men.
[laughter]
Ms. Wachter. I don't know--
Mr. Green. And you have done well. So where do you stand on
it? And I regret that I must ask that you say yes, some Federal
role, or no, no Federal role--
Ms. Wachter. Yes, on the Federal role.
Mr. Green. Yes. All right, that is a yes.
Mr. Phipps. An enthusiastic yes.
Mr. Green. That is another yes. That is two. Yes, sir?
Mr. Nielsen. Yes, sir.
Mr. Green. That is three.
Mr. Pinto. No for--
Mr. Green. No, all right.
Mr. Papagianis. Some Federal role.
Mr. Green. All right. That is four, and--
Mr. Dalton. Yes. Yes, sir, we do.
Mr. Green. All right. So now we have--let the record
reflect, please, let the record reflect that all persons,
saving one, believe that there is some role for the Federal
Government. And the record might also reflect that two of the
academicians are having a gentle conversation about that. My
suspicion is that there is--
Mr. Papagianis. I think we agree. It is FHA.
Mr. Green. Okay. Then let's--extracting FHA, so we will get
it right. I don't want to trap you. I want to know what your
thoughts are. Extracting FHA, removing VA, is there a role for
the Federal Government? Now let's do this again. Ma'am?
Ms. Wachter. Yes.
Mr. Green. Sir?
Mr. Nielsen. Yes.
Mr. Green. Sir?
Mr. Pinto. No.
Mr. Green. No.
Mr. Papagianis. I say no, but we have a ton of subsidies in
the--
Mr. Green. Okay, you are a no. Okay. All right.
Mr. Dalton. Yes.
Mr. Green. Yes. So we have two of our academicians who
think not, and those who, where the rubber meets the road, seem
to think yes. Now, if we have this opportunity to have some
role for the Federal Government, isn't it reasonable and
prudent--my time is up, so I have to be quick here--isn't it
reasonable and prudent to have some idea as to where we are
going with this, so that we can have a comprehensive approach
to this, as opposed to deciding that maybe we ought to do a few
things here and a few things there?
I think what people are saying to us is, let's get some
certainty, and the way to get the certainty is to take this
comprehensive approach and deal with it to make sure that we
don't make another big mistake. If I could just get people to
say yes or no, I will be honored.
Ms. Wachter. Yes.
Mr. Phipps. Yes.
Mr. Nielsen. Yes.
Mr. Green. All right. You didn't understand the question.
That is all right. We will leave you out. You didn't understand
the question. Yes, sir?
Mr. Dalton. Nor did I, sir.
Mr. Green. Okay.
Chairman Garrett. Thank you for your questions.
Mr. Green. Okay.
Chairman Garrett. Votes are going to be called shortly, but
before the panel leaves, as they did with another hearing, we
have a little bit of time left, so what we are going to do now
is to go into what we call a lightning round, because votes are
going to come very quickly, so we will just go for 2 minutes or
so for each person, and then we will conclude.
So, very quickly, following up on your last question, which
members who had indicated yes to a government role or
government guarantee or taxpayer-supported backstop have a
financial interest in it if they were to have the taxpayers
bail it out? Ms. Wachter?
Ms. Wachter. I do not.
Chairman Garrett. Would you--
Mr. Phipps. Not personally, but--
Chairman Garrett. Not you, personally. I am asking on
behalf of those you represent.
Mr. Phipps. We certainly would benefit.
Mr. Nielsen. Yes.
Chairman Garrett. Yes?
Mr. Pinto. No.
Chairman Garrett. You didn't vote yes, so--
Mr. Dalton. No, just the investor would have--
Chairman Garrett. Thank you. Excuse me?
Mr. Dalton. I said just the investor, because of the
government guarantee on the mortgage-backed securities.
Chairman Garrett. So a partial yes. Mr. Papagianis? There
we go. Can you tell us, some of the proposals that were laid
out before, some before us right now, would do what to the cost
of mortgages? And then, secondly, depending upon your answer to
what it will do to the cost of mortgages, what will it actually
do at the end of the day with regard to the homeowner,
prospective homeowner, as far as his ability to buy a house?
Mr. Papagianis. Which proposal? You are talking about the
bills before the committee?
Chairman Garrett. Bills before the committee, yes.
Mr. Papagianis. The bills before the committee are, in my
opinion, as a package. And we can go through individual bills.
But it would be a--it would send an important signal to the
market to--so private capital could come back in.
I think the most important one is actually on the G-fees.
And I would go back to comments that Mr. DeMarco made, that
even on the 2010 book of business--and, obviously, they are
pulling forward losses from the past--but that the G-fee is
still not appropriately calibrated.
Chairman Garrett. Right. And so that you may see costs go
up, as far as the credit costs?
Mr. Papagianis. I think so. I think that, I am sort of
where the Treasury Department is, where--that any reasonable
plan, pathway forward is going to include marginal price
increases--
Chairman Garrett. What does that do to the price of the
house?
Mr. Papagianis. Price of the house?
Chairman Garrett. Yes.
Mr. Papagianis. The price of the house would go down.
Chairman Garrett. What does that do to the homeowner, as
far as buying a new house?
Mr. Papagianis. It makes it more affordable.
Chairman Garrett. It makes it more affordable, so more--
actually that--more sales and actually more construction and
more building potential.
Mr. Papagianis. That is right.
Chairman Garrett. Okay. And the last question is dealing
with the 30-year fixed. Secretary, you said that people want a
30-year fixed mortgage. Isn't it true that people actually want
the cheapest mortgage that they can possibly get? For a long
period of time, they actually wanted 1-year and 2-year and 3-
year and 5-year and 7-year ARMs, because those were the
cheapest things out there? Doesn't the public really want
whatever is most affordable to them, whether it is 30-year or
anything else?
Mr. Dalton. I think they want predictability, Mr. Chairman.
And that is what the 30-year fixed-rate mortgage gives them.
Chairman Garrett. And even if it is more expensive, they
will go with the 30-year fixed, if it is predictable, even if
there are cheaper things on the market?
Mr. Dalton. I think that is what they showed in the last
quarter of 2010, yes, sir.
Chairman Garrett. Thank you. In the last quarter of 2010,
because that is really all that was available? But prior to
that, when there are other things available in the marketplace,
won't people go for what is cheapest available? Does anybody
else have a comment as to whether people go for the higher-
priced 30-year mortgage or the cheaper?
Mr. Nielsen. I think it is still predictability. I think if
you go back and look at ARMs and what was happening, I think
the 30-year fixed has always been the mortgage of choice.
Mr. Phipps. And it was part of the problem that we had in
the predatory lending period. People did exactly what you are
saying. They went for the least expensive without realizing
they were going to reset in 2 years. So there is a lesson that
we learned as a country that predictability and knowing what
the payments are of a long term, it is something we really need
to do for sustainable homeownership and literacy.
Chairman Garrett. Mr. Green?
Mr. Green. Thank you, Mr. Chairman.
I wanted to make that very comment, so I will continue with
what you were saying. Also, if we examine the empirical
evidence, we will find that many of the people who went for the
teaser rate didn't qualify for the adjusted rate. And I think
we have to factor that into this equation.
But people do seem to want to have certainty. Certainty
means something not only to investors, but also to consumers.
Everybody is looking for certainty. And I think that what we
need to do, as has been indicated, is to move towards this
comprehensive approach.
Now, let's talk about persons who have a vested interest.
Is it not true that everybody has a vested interest in this?
Because if we don't--
Mr. Phipps. Congressman, all 75 million American families
who own homes have a vested interest in it.
Mr. Green. Thank you.
Mr. Phipps. It is their livelihood.
Mr. Green. Exactly, because when they buy that home, they
want to be able to pay for it, so it has to be affordable. And
builders have an interest not only in what they sell, but also
they have people who are employed by them. They have people who
are going to--who are taxpayers and who benefit from this, as
well.
So the notion that because you happen to provide something
that the American people need somehow skews your judgment, if
we take that attitude, then we will never hear from anybody but
academicians. And I would also point out that we get a lot of
anecdotal evidence that we put a lot of credence in, and I
don't think that we ought to stop allowing anecdotal evidence
to be presented.
But also I think this evidence from people who are actually
there on the ground makes a real difference. And I appreciate
the testimony that you have presented.
Let's go back now to Mr. Dalton. Mr. Dalton, let me just
ask you one final question before my time is up. You said you
had 32 members?
Mr. Dalton. Yes, sir.
Mr. Green. And your 32 members, you have had an opportunity
to poll them. And when you speak today, you are speaking for
the 32 members. Is this correct?
Mr. Dalton. I am. Yes, sir.
Mr. Green. Okay. And I assume that you are speaking for
REALTORS when you say that you are here today as a
representative of REALTORS --
Mr. Phipps. The 1.1 million, but also on behalf of the 310
million Americans who need shelter and the 75 million Americans
who own homes.
Mr. Green. And let me just go to Mr. Nielsen. Are you
speaking for builders across a--you can't speak for every one
of them, but across the length and breadth of the country, you
are in communication with them?
Mr. Nielsen. Correct.
Mr. Green. And you are speaking for them, in terms of what
we need to do as we move forward?
Mr. Nielsen. That is right.
Mr. Green. Thank you.
Chairman Garrett. Thank you.
The gentleman from Ohio?
Mr. Stivers. Thank you, Mr. Chairman.
First, I would like to address Professor Wachter and let
her--say I am glad to hear from the gentleman from Texas that
the University of Pennsylvania is where the rubber meets the
road, but I am sorry. I do find you an academician. He said you
weren't an academician, and I do think the University of
Pennsylvania is a fine academic institution. And, I am just
joking around there.
But I do want to know how many of the folks at the table
represent an organization that has a plan on GSEs? A lot of you
do. Raise your hand if you do. Four--five of you have plans.
Have any of you been involved in working together with the
other groups to come together with one plan, for example?
Because, for example, I know that the Financial Services
Roundtable plan and the REALTORS' plan and the homebuilders'
plan have been different components. The two that are closest
probably are the REALTORS and the homebuilders. But have you
guys worked together on a plan that you would--or talked at
least about a plan?
Mr. Phipps. We talk.
Mr. Stivers. Do you have one plan at this point? I know you
have--I know there are five plans, but is there one plan that
you have come together on?
Mr. Nielsen. No, I don't think there is one plan. But,
frankly, we haven't been asked to coalesce in that way. We have
gone out and developed these on our own--
Mr. Stivers. I will ask you to do it.
Mr. Nielsen. Okay.
Mr. Stivers. So, please, I would like--I would be curious
to hear how you could come around on one plan. The other thing
I want to address just quickly is, I do feel like that, on the
30-year mortgage, I support it, but it has to be an option in
the marketplace. To Mr. Dalton, to me, it is about what is
appropriate for each individual borrower. And that may include
affordability. It may include predictability. It would probably
include a range of factors for each individual borrower.
This is not the Soviet Union, and I do not want to force
any product down borrowers' throats. So while I stand for the
30-year fixed mortgage, I stand for it as an option, and I
believe that is the position of everybody at the table,
although from hearing some of you, it sounded like that is not
the case.
Mr. Dalton. Congressman, my point is that we want to keep
the 30-year fixed-rate mortgage available.
Mr. Stivers. I agree. And that is exactly where I am. I
just wanted to make sure we weren't talking about having that
as the only option, because, frankly, there are--and I will
quickly ask the REALTORS, because I think I am out of time--
the average length somebody stays in their home is about--
Mr. Phipps. Seven to 8 years.
Mr. Stivers. That is what I thought. Okay. Thank you. And I
support the 30-year fixed mortgage, but I want to recognize
that it is not always the right option for each individual
borrower. Thank you for your time, and thank you, Mr. Chairman,
for including me.
Mr. Green. Mr. Chairman, may I be recognized to ask a
question, please? Would the Chair entertain a super-lightning
round?
[laughter]
Chairman Garrett. Sure. I yield to the--the gentleman is
yielded 10 seconds. No, just kidding.
Mr. Green. That would be faster than lightning, Mr.
Chairman.
Chairman Garrett. Go ahead.
Mr. Green. How much time?
Chairman Garrett. Do you have just a couple of questions?
Another minute.
Mr. Green. Okay, thank you. I want to follow up, because I
concur with what my friend has said, that we are talking about
options. And what we don't want to do is rule out what appears
to be a significant option. And if we are not careful in terms
of how we structure this, we may find ourselves with a 30-year
fixed-rate that is not affordable. It has to be affordable. It
is just not enough to have a 30-year fixed-rate. It has to be
affordable.
That is what we have been trying to get to, affordability.
And what do we have to do to make sure that we have
affordability in this marketplace? Because builders can
construct when they know how these are going to be sold.
REALTORS can sell houses when they know that the interest rate
is going to be one that Americans can afford. And bankers can
lend. And that is what affordability addresses. We have to make
sure that all of these things are in this equation.
And if we are not careful, we are going to find ourselves
privatizing our way back to the way it was in the 1920s, when
we had the private market and you had to put down 20 percent,
30 percent, 40 percent, 50 percent, when you had balloons at
the end of a very short period of time. Yes, there was a
private market, but it was not an affordable market that gave
every American the opportunity to fulfill the dream of
homeownership. Not everybody can afford one, but those who can
ought to be able to buy one.
I yield back.
Chairman Garrett. All right. And I will yield myself a
minute and then the gentleman from Ohio.
For those of you who have looked and advocated for the 30-
year mortgage, saying that we need to keep that, can you tell
me in detail what you have looked at as opposed to the
traditional government backing for this in order to guarantee
that, as opposed to investor interest in this area as far as
drilling down into the structures and making sure that there
are some other mechanisms in place in order to provide the
guarantee to them, whether you have a vertical--yes, Mr. Pinto?
Mr. Pinto. Yes, we actually--in developing our approach, we
went to the securitization market and had a 30-year fixed-
rate--in this case, freely prepayable, because we wanted to
compare it to today's Fannie Mae loan. We had them run those
numbers, and we found that there was a very modest increase in
interest rate. And if one takes into account what has been
discussed here by both Director DeMarco and the committee
members, increasing the G-fees some, the difference is quite
modest.
We do believe--and the important point is, you have to do
this over time. It takes time to develop that transition, and
we have proposed that, as I think most of the committee members
do. And if you do that, you will have a robust market,
including 30-year fixed-rate loans.
Chairman Garrett. My time is up. But who else did a
comparable drilling down, as far as other approaches on this?
Ms. Wachter. I have.
Chairman Garrett. Okay. How about the other gentleman?
Mr. Phipps. We have.
Chairman Garrett. And what is your analysis, that it will
not work?
Mr. Phipps. That it is not--it doesn't have the capacity to
absorb what we need to absorb right now, that is, the market--
Chairman Garrett. It doesn't have the capacity? It has the
capacity or the structure that you would analyze--
Mr. Phipps. Both.
Chairman Garrett. Can you provide--since we don't have much
time--can you provide the analytical breakdown of the--and down
to whether vertical, horizontal tranches that you would have on
this to show us that this would not work, with regard to
capacity or just as percentage of the marketplace?
Mr. Nielsen, do you have--
Mr. Nielsen. I was just going to say, it is a cost issue,
again. We could certainly provide you with those numbers.
Chairman Garrett. Okay. Anybody else?
Mr. Stivers. Thank you, Mr. Chairman.
What we are talking about today is a way forward, and there
are several legislative proposals in front of us which several
of you opposed, but I guess I would ask you to work together
and come to some consensus about what then you think the way
forward is, because I think these are modest first steps that
get us down the road to where we need to be.
I guess something Mr. Pinto said just brought up a
question. You talked about how we need to be thoughtful and it
is going to take time for a robust marketplace to develop. What
does that mean, in number of years or how long?
Mr. Pinto. We have suggested 5 years, and we outlined a
plan that would wind down Fannie and Freddie over 5 years, and
then we demonstrate how the private sector will definitely fill
in behind that and absorb that retreat by Fannie and Freddie
and do it in a way that is cost-effective.
Mr. Stivers. Great. And I think we all agree with the
gentleman from Texas that we want an affordable option in the
30-year fixed mortgage. It is not enough just to say we want a
30-year fixed-rate mortgage. Clearly, if it is not affordable,
it is not a real option.
So thank you for your time. I again would challenge you to
work together to come to some kind of consensus that we can all
work with you on, because we are committed on the way forward
to making sure that we limit taxpayer exposure and find a
robust marketplace so that we do have options. Thank you so
much.
Thank you, Mr. Chairman.
Chairman Garrett. And for the last word on this, 1 minute?
Mr. Schweikert. Thank you, Mr. Chairman, as we do the
lightning round.
Mr. Pinto, earlier, I think, in some of the discussions, we
were bouncing back and forth. The point I was trying to get to
is, our great concern is liquidity, the ability to have money,
the ability to finance these mortgages. I have a fixation of
the number of vacant homes out there so we can start getting
the velocity.
Give me a vision that you have worked on that produces that
liquidity so there is money out there for these deeds of trust
and these home mortgages without a full faith and credit?
Mr. Pinto. Great question. Thank you, Representative.
The proposal that we have made, which relies on a
combination of portfolio investment roughly at the levels they
are at today, but expands the private mortgage-backed
securities market substantially, and that market relies on
mortgage insurance, a traditional approach, but with much more
robust capital, which we outline, and securitization through
the traditional tranches, but, again, only for prime loans.
When you do that--and just take $10 billion, everyone talks
about a $10 billion market. Let's take today's dollars, so we
are not worrying about inflation or anything. So in 10 years,
we want to handle a $10 trillion market. Let's assume 20
percent of it is the Federal Government, FHA, VA, some non-
prime loans. Let's assume that is 20 percent. I think that is
consistent with the Administration's statements on the size of
FHA, etc.
You are now down to $8 trillion. Let's assume that half of
that is covered by mortgage-backed securities. Let's assume a
different half that also overlaps is also covered by mortgage
insurance. So what you are looking for is two things. At the
end of that 10 years, you want to have enough bond investors
who will buy $5 trillion of mortgage bonds, private mortgage
bonds, to support that market.
When we talk to bond investors and we talk to, for example,
one of the largest insurance companies in this country, with a
$130 billion portfolio, they say we need private mortgage-
backed securities for two reasons. There is only a $30 trillion
investable private market in this country. That may sound like
a lot, but they have investments to make of $30 trillion, and
so there is a rough match. So there is $30 trillion in
investable assets.
The government has, in effect, taken $10 trillion off the
table by nationalizing the housing finance system. And so you
are left with $20 trillion. What that does is two things. One
is, it doesn't allow you to invest in the private securities,
because there virtually aren't any, but more importantly--or as
important--it also concentrates your risk in the $20 trillion,
so you now don't have the diversification that you need, which
is becoming a concern. So that is number one.
Number two, on the private mortgage--excuse me, private
mortgage guarantee side, let's assume you had, again--you had
$4 trillion of mortgage guarantee that you needed. They would
cover a 25 percent exposure, which is what we suggested. That
is $1 trillion. They would have, at the end of 10 years, about
a 10 percent or 12 percent capital. You would end up needing
$80 billion to $100 billion of capital. That is very doable. We
outline how that is done.
By definition, that would probably involve 10 companies.
None of them are too-big-to-fail. And each one has so much
capital at risk that they have to be careful, but if they do
fail, they fail on their own because of their own capital.
Mr. Schweikert. Okay, Mr. Chairman--Mr. Pinto, so you think
there is--sorry, I was going to tease you a bit about the
ability--
Mr. Pinto. It was a little bit--
Mr. Schweikert. --very short answer on--last thing. Mr.
Chairman, this one is sort of an open-ended and a little bit on
the ethereal side. How important is it to having a healthy
housing market if we had products that someone could buy a home
with less than 20 percent down, assuming we can make it quality
paper, so, whether it be through a private PMI or some other
mechanic? For those of us who have been--and I first became a
member of--as a REALTOR when I was 18 years old. I got my
license when I was in high school, so it has been my whole
life.
And I will tell you, probably the majority of properties
that I have sold over those years were 10 percent, 15 percent
down. Do we need that to have--do we need to have something
less than a 20 percent down option out there?
Ms. Wachter. I believe we do.
Mr. Phipps. Yes--
Mr. Pinto. Absolutely.
Mr. Nielsen. Yes, particularly for home purchase.
Mr. Dalton. Yes, sir, absolutely.
Mr. Papagianis. Same, yes.
Mr. Schweikert. So our mandate here is to find out if there
is a way to make that quality enough paper that the bond
markets are willing to securitize and the bond markets are
willing to buy it?
Okay. Thank you, Mr. Chairman.
Chairman Garrett. I thank you for that. And I thank the
panel. As always, there may be more questions. And for that
reason, without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
Also without objection, I will be entering into the record
the statement of the National Association of Credit Unions,
dated March 30th, with regard to today.
And with that, I thank the panel once again. And this
hearing is adjourned.
[Whereupon, at 2:30 p.m., the hearing was adjourned.]

A P P E N D I X

March 31, 2011

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