[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
BEYOND GSES: EXAMPLES OF SUCCESSFUL
HOUSING FINANCE MODELS WITHOUT
EXPLICIT GOVERNMENT GUARANTEES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
JUNE 12, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-28
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20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma 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 STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota 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 JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
June 12, 2013................................................ 1
Appendix:
June 12, 2013................................................ 57
WITNESSES
Wednesday, June 12, 2013
Jaffee, Dwight M., Willis Booth Professor of Banking, Finance,
and Real Estate, Haas School of Business, University of
California, Berkeley........................................... 8
Lea, Michael J., Director, the Corky McMillin Center for Real
Estate, San Diego State University............................. 10
Min, David K., Assistant Professor of Law, University of
California Irvine School of Law................................ 15
Pollock, Alex J., Resident Fellow, American Enterprise Institute. 12
White, Lawrence J., Professor of Economics, Stern School of
Business, New York University.................................. 14
APPENDIX
Prepared statements:
Jaffee, Dwight M............................................. 58
Lea, Michael J............................................... 64
Min, David K................................................. 77
Pollock, Alex J.............................................. 98
White, Lawrence J............................................ 106
Additional Material Submitted for the Record
Lea, Michael J.:
Special Report entitled, ``International Comparison of
Mortgage Product Offerings''............................... 119
``Government Policy and the Fixed Rate Mortgage''............ 200
White, Lawrence J.:
``Reform of Housing Goals,'' by Jonathan Brown............... 213
BEYOND GSES: EXAMPLES OF SUCCESSFUL
HOUSING FINANCE MODELS WITHOUT
EXPLICIT GOVERNMENT GUARANTEES
----------
Wednesday, June 12, 2013
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Miller, Royce,
Capito, Garrett, Neugebauer, McHenry, Pearce, Posey,
Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt,
Stivers, Fincher, Stutzman, Mulvaney, Hultgren, Ross,
Pittenger, Wagner, Barr, Cotton, Rothfus; Waters, Maloney,
Velazquez, Watt, Sherman, Capuano, Hinojosa, Clay, Lynch,
Scott, Green, Ellison, Himes, Peters, Carney, Sewell, Foster,
Delaney, Sinema, Beatty, and Heck.
Chairman Hensarling. The committee will come to order.
Without objection, the Chair is authorized to declare a recess
of the committee at any time. The Chair now recognizes himself
for 5 minutes for an opening statement.
This is the 10th full or subcommittee hearing that we have
had on the topic of forging a new sustainable housing policy
for America.
Clearly, all Americans want a healthier economy and they
want a fair opportunity to buy a home that they can actually
afford to keep. It is clearly time to displace a system of
false hopes and broken dreams which have arisen from
misdirected government policies and subsidies that regrettably
have either incented, browbeat, or mandated financial
institutions to loan money to people to buy homes they all too
often could not afford.
We know all too well the legacy of these policies: the
shattered lives of millions of people who lost their meager
savings rolling the dice on a home purchase that Washington
encouraged them to make; almost $200 billion of taxpayer
bailouts; and a wrecked economy from which this Nation has yet
to recover.
Regardless of its relative merits, the Dodd-Frank Act was
silent on Fannie Mae and Freddie Mac: silent as to the
existence of a government-sanctioned duopoly that was at the
epicenter of the crisis; silent as to their cooked books;
silent as to a system where Wall Street investors offloaded
their risk onto Main Street taxpayers; and silent as to their
bullying tactics.
Thus, the task of reforming Fannie and Freddie falls upon
us. Notwithstanding the damage they have caused in their
checkered past, many cannot conceive of a housing finance
market without a government-guaranteed Fannie and Freddie.
Thus, our hearing today will examine alternative models and
will feature a panel of some of the most respected and
knowledgeable experts on the subject.
I believe this hearing will help establish a number of
propositions: First, the United States is practically alone in
the modern industrialized world in having GSEs directly
guarantee mortgage securities. We are practically alone in the
level of government subsidy and intervention into our housing
market.
We were also practically alone in the level of turmoil in
our housing markets as measured by foreclosures and
delinquencies. Clearly, there is a direct causal link. By
almost any measure, Fannie and Freddie have not propelled the
United States to housing finance nirvana. When compared to
other modern industrialized nations, whether we look at rates
of homeownership or spreads between mortgage interest rates and
sovereign debt, the United States can usually be found either
at the middle or the bottom of the pack.
However, there is one category where the United States has
clearly led. Regrettably, that category is foreclosure rates.
In other words, only in America can you find a government that
subsidizes housing more, so that we the people can get less.
Next, I believe this hearing will help remind us that we
don't have to look overseas to see a well-functioning housing
market without GSEs. Indeed, we don't have to look any further
than our own jumbo market that has operated without them. Prior
to the housing bust, the jumbo market was approximately 20
percent of the total housing market. There was capital,
liquidity, competition, the 30-year fixed mortgage, consumer
choice, and innovation all right here in America. And all of
this was delivered for about 25 basis points or a quarter of 1
percent interest differential from the GSEs, a modest amount to
avoid taxpayer bailouts, government control, and economic
catastrophe.
And I add parenthetically, as we have learned from previous
hearings, whatever modest interest rate benefit the GSEs
delivered to home buyers was offset by the cost of housing
principal they artificially inflated for those very same home
buyers.
Furthermore, I believe that it will be established that
although the 30-year fixed-rate with no pre-payment fees may be
the ``gold standard'' mortgage for some, it is clearly the
``rusty tin'' standard for others. We, again, are practically
alone in America having public policy assure its dominant role
in the mortgage market. For home buyers facing rising interest
rates or home buyers who keep their home for the market average
of 7 years, it is almost assuredly not the best mortgage
product. Successful alternative systems promote more consumer-
friendly choices.
Today, our government controls 90 percent of the housing
finance market. Today, Washington elites decide who can qualify
for a mortgage and who cannot. Today, taxpayers have bailed out
Fannie and Freddie to the tune of $189 billion. Today,
taxpayers are on the hook for $5 trillion in mortgage
guarantees.
As lawmakers, it is time to open up our eyes and open up
our minds to alternative models and a pathway forward. We
shouldn't preserve Fannie and Freddie's Federal guarantee just
because we have done so in the past. We shouldn't preserve
their Federal guarantee just because those who believe they
profit from the status quo urge us to continue doing so.
Americans deserve a better finance model, one that's built
to last and is sustainable--sustainable for homeowners,
sustainable for taxpayers, and sustainable for our economy.
At this time, I yield the ranking member 4 minutes for her
opening statement.
Ms. Waters. Mr. Chairman, I thank you for holding this
hearing this morning on international approaches to housing
finance. The hearing is entitled, ``Beyond GSEs: Examples of
Successful Housing Finance Models Without Explicit Government
Guarantees.'' However, if we are to be honest, it should be
more properly entitled, ``Examples of Other Housing Finance
Models with Other Forms of Government Guarantees,'' because
while the United States is among only a handful of countries
that explicitly guarantee their mortgage-backed securities, we
are not alone in terms of providing government support for
housing finance.
As our witnesses today will point out, covered bonds, which
are utilized more robustly in Europe, enjoy a preferential
status in terms of regulatory and capital treatment in ways
that, in fact, mirror the Federal Home Loan Bank System. And as
the actions of European governments and the European Central
Bank in the wake of the 2008 crisis demonstrate, the covered
bond market also enjoys implicit guarantees both in terms of
the general market and for the issuers of those bonds.
Of course, no one suggests that the United States model for
housing finance is perfect, or that it is not in need of
reform. Quite the contrary. That is why I continue to engage
stakeholders on the future of the secondary mortgage market and
why I call on the chairman to begin a discussion of the
specific bipartisan reform proposals, of which there are now
several.
I am focused on pursuing reform proposals that preserve the
beloved 30-year fixed-rate mortgage here in the United States.
I think the recent crisis has demonstrated that this is a
stable product which has actually outperformed the exotic
mortgages that proliferated in the lead-up to the financial
crisis. If we eliminated a government role in housing finance,
these exotic products would likely again predominate.
So while I think it is useful to consider international
approaches to housing finance, I also believe it is
disingenuous to suggest that foreign nations do not make
significant government investments in housing. And I think we
must acknowledge the important role that the 30-year fixed-rate
mortgage has played across the generations of American
homeownership and the need to preserve this unique product.
Finally, I think it is important to note that while other
countries may invest fewer resources in homeownership than the
United States, these foreign nations also make much more
significant investments in public and assisted rental housing.
This is something that the Majority on this committee is not
interested in pursuing. In fact, we already see that
sequestration is pushing renters out of Section 8 housing
operated by the Los Angeles City Housing Authority.
I thank you, Mr. Chairman. And again, as you engage us on
your interpretation of the role that Fannie and Freddie have
played in the housing market, and you blame the victims of a
system that literally exploited would-be homeowners, I think
this conversation needs to continue so that we can straighten
out and get to the bottom of what really happened here in the
subprime meltdown.
I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the vice
chairman of the committee, Mr. Miller, for 1 minute.
Mr. Miller. Thank you, Mr. Chairman. While a hybrid public-
private model for Freddie and Fannie was fundamentally flawed,
our focus should be a viable secondary mortgage market with
sound underwriting principles. No matter the path forward, we
must capture the important focus that the GSEs have performed
in the market, including the securitization process and
management of the to-be-determined futures market.
As the committee contemplates changes to the U.S. finance
system, it is useful to consider differences between the U.S.
mortgage market and the housing finance system in other
countries, which the witnesses are going to provide to us
today. As we look at reform ideas from other countries, it is
important to keep in mind that the size of the U.S. mortgage
market is far greater than other countries' mortgage markets
combined. It exceeds the entire European mortgage market, if
you added it all together.
In addition, while 70 percent of residential mortgages in
Europe are held by banks on their balance sheet, only about a
quarter are held by our banks. So there is a significant
difference between the two. We need to analyze the difference.
While reform is absolutely necessary, we should not eliminate
the extremely positive features that our system has had in the
past.
I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Michigan, Mr.
Peters, for 1 minute.
Mr. Peters. Good morning. And thank you to our witnesses
for being here today. While we are scheduled to examine housing
finance models used by countries across the globe, we cannot
lose sight of what makes America great: a strong middle class.
Affordable, responsible homeownership is a cornerstone of the
American middle class and vibrant communities across our great
Nation. We need to put an end to the taxpayer-funded bailouts,
but we must also ensure that responsible, hardworking families
can still achieve the dream of homeownership.
Eliminating the government backstop in the mortgage market
would likely undermine the housing recovery and risk
eliminating the 30-year fixed-rate mortgage which middle-class
families rely on to build equity and responsibly purchase their
piece of the American Dream.
I believe our committee has a real window of opportunity in
the coming months to meaningfully engage in GSE reform on a
bipartisan basis, and I look forward to working with my
colleagues on both sides of the aisle on this critical issue.
I yield back.
Chairman Hensarling. The gentleman yields back. The Chair
now recognizes the chairman of the Capital Markets
Subcommittee, the gentleman from New Jersey, Mr. Garrett, for 2
minutes.
Mr. Garrett. I thank the chairman for holding this hearing
today.
When I began preparing for this hearing, I remembered
reading an International Monetary Fund analysis on the U.S.
housing market that compared it to other foreign housing
markets. In comparing the level of subsidization of our housing
market to other countries, one of the authors, John Kiff,
notes, ``Compared to other developed countries, only a couple
come even close. Everything you could possibly name for
supporting homeownership for everybody regardless of whether
they can afford it is in place in the U.S.''
The IMF report goes on to state, ``Since the 1930s, the
U.S. authorities have provided a wide range of support to
facilities' access to credit. While this has provided access to
stable and affordable long-term mortgage financing, there is
limited evidence that it has boosted homeownership or has made
the system more efficient or provided buffers against economic
stress. Meanwhile, it has exacerbated the boom-bust cycle.''
The report went on to note, ``During the pre-crisis boom
period, government participation in housing finance tended to
amplify the relationship between rising house prices and
mortgage credit growth, particularly in advanced countries.''
Also, countries with more government participation
experienced deeper house price declines in the recent crisis.
These findings suggest that government participation
exacerbates house price swings for advanced economies. So while
it is clear that the extraordinary and unprecedented level of
subsidy that the United States provides its mortgage market
directly benefits the mortgage market industry participants,
there is much less evidence that all these subsidies actually
provide much benefit to the borrower. In fact, based on the
objective look of the IMF, no conservative think tank, mind
you, and the terrible impact our country's housing finance
policy has had, I believe a strong case can be made that at
least some of these policies, at the end of the day, have done
more harm than good. I believe we should learn from some of our
foreign counterparts who seem to have quite high levels of
homeownership without the dozens of levels of subsidy that this
country provides, which mostly benefit the wealthy and not the
people who actually need the help.
With that, I yield back.
Chairman Hensarling. The Chair now recognizes the ranking
member of the Capital Markets Subcommittee, the gentlelady from
New York, Mrs. Maloney, for 2\1/2\ minutes.
Mrs. Maloney. Thank you, Chairman Hensarling and Ranking
Member Waters, for holding this important hearing on
alternative models of housing finance. And welcome, to our
distinguished panel of witnesses today. One thing that we can
all agree on is that the government should not back 100
percent, or 90 percent, or even 80 percent of the mortgage
market. Some of my colleagues say that there should be no
government involvement, but the market and most economists
believe that that would be a disaster to our overall economy.
So the real question before us today is, how much of the
risk should the government bear and how much should private
investors bear? When we compare our housing finance system to
other countries, we need to look at the whole housing market,
not just the mortgage-backed securities market. Other countries
provide significantly more government support for rental
housing than the United States Government does. And many of the
largest European mortgage lenders have implicit government
guarantees. So let's remember, it was the GSEs that enabled the
widespread availability of the 30-year fixed-rate mortgage, one
of the great American innovations that my colleague, Mr.
Peters, just spoke about. Do we really want to lose this 30-
year mortgage that helps borrowers' monthly payments remain low
and predictable and provides a pathway, a road to
homeownership?
Housing represents 25 percent of our economy, according to
Mark Zandi and other economists. So when we talk about
reforming the GSEs, we need to remember that we are really
talking about reforming 25 percent of our entire economy. And
how do we reduce the government's footprint without harming the
overall mortgage market and homeownership availability? Would
completely removing the government from the mortgage markets
damage our economy as a whole?
These are the kinds of questions that we need to answer as
we move forward in deciding how to reform government GSEs.
Thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from Texas, the chairman of the Housing and Insurance
Subcommittee, Mr. Neugebauer, for 2 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman, for holding this
hearing. A lot of people are probably wondering why we are
having so many hearings on housing finance. The reason we are
is that housing finance is important to housing. We talk about
a lot of numbers that are the $200 billion that the taxpayers
had to pony up because bad decisions were made, bad lending
practices.
But I think one of the things that we have to do is to put
this in perspective of why it is important to have a
sustainable housing finance system in this country. The reason
is that it affects housing, not only the purchase of housing,
but the homeownership. And what happened to a lot of
hardworking Americans that we all are here trying to protect is
that some of those folks were doing the right thing. They were
making their payments. They had made a downpayment on their
house. And what happened was, many of them suffered tremendous
losses in the value of their house because of this poor market
performance where market discipline was not in place.
So, they got double-dipped. Their tax dollars had to bail
out these entities and they lost equity in their house. That is
a lose-lose situation for homeownership. If you want to have a
positive impact on homeownership, you have to have a stable
housing finance market. And there are those out there who think
the status quo is the way to do that. I would remind you it is
the status quo that got us here today. And when people quit
using proper underwriting standards and they were passing that
risk along and weren't paying attention, then we saw
carelessness happen and poor lending practices initiated.
What we have to do is to get--the government has
nationalized the housing finance market in this country. It is
not healthy for the government. Basically, that puts the
government in the position of telling you whether or not you
get to own a home. And that is not what America was founded on.
Mr. Chairman, I really appreciate you holding this hearing
today, and I look forward to hearing some of the other ideas
that some of these witnesses will discuss as to what other
countries are using to do their housing finance.
Chairman Hensarling. The Chair now recognizes the gentleman
from Georgia, Mr. Scott, for 2 minutes.
Mr. Scott. Thank you very much Mr. Chairman. First of all,
I think our ranking member, Ms. Waters, really put her hand on
the issue here. Yes, we have to make some moves. It is not as
healthy as it should be to have 90 percent of the market with
government-backed agencies. But what is important is that we
get an answer to the question of whether or not the private
market is willing to accept and fill this void and whether they
are capable of doing so.
We can look at nations all over the world, but there is no
nation like the United States. We have a history of demographic
issues. We have a history of exclusion. So, we look at this
change. There is a reason why we have the GSEs. We have to make
sure that the private market is capable and willing to fill the
void. That is the fundamental issue and the balance that this
committee has to deal with on this very, very important issue.
I yield back, Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the gentleman
from Illinois, Mr. Foster, for 30 seconds, and we all look
forward to finding out how much he can pack into 30 seconds.
Mr. Foster. Thank you. I would like to start by thanking
the chairman for having this hearing. I think it is past time
that we show some humility in this country after the failure of
our system and looking around the world at maybe other
countries that got it right. In reading the testimony last
night, I was struck by the generally positive comments about
specifically the Danish mortgage origination system. It is one
that provides a 30-year fixed-rate mortgage by pushing the
prepayments and the interest rate risk out to the private
markets, and it avoids the moral hazard and bad underwriting by
insisting that mortgage originators retain the credit risk. It
is also among the most efficient systems in the world. And I
think we should give it a long hard look, and I think there is
a bipartisan opportunity to really make an improvement by
heading in that direction. Thank you very much. I yield back.
Chairman Hensarling. We now welcome our panel of
distinguished witnesses.
Dr. Dwight Jaffee is the Willis Booth Professor of Banking,
Finance and Real Estate at the University of California,
Berkeley. Professor Jaffee teaches courses in asset-backed
securitization. He is the co-chair of the Fisher Center for
Real Estate and Urban Economics at UC Berkeley's Haas School of
Business. He earned his Ph.D. in economics at MIT, and his B.A.
in economics from Northwestern University.
Dr. Michael Lea is the director of the Corky McMillin
Center for Real Estate at San Diego State University. Dr. Lea
has published numerous articles on housing and mortgage
finance, including an influential 2009 World Bank publication
on emerging market housing finance. He received his Ph.D. in
economics from the University of North Carolina at Chapel Hill.
Mr. Alex Pollock is a resident fellow at the American
Enterprise Institute, and is widely regarded as an expert in
housing finance. He is a former president and CEO of the
Federal Home Loan Bank of Chicago. He holds master's degrees
from Princeton University and the University of Chicago, and a
bachelor's degree from Williams College.
Dr. Lawrence White is the Robert Kavesh Professor of
Economics at Stern School of Business in New York City. Dr.
White previously served on the board of the Federal Home Loan
Bank and was one of the three board members of Freddie Mac. He
has Ph.D. and bachelors degrees in economics from Harvard, and
a master's degree from the London School of Economics.
Last but not least, Dr. David Min is an assistant professor
of law at the University of California Irvine School of Law.
Dr. Min previously served as a staff attorney at the SEC and as
a staffer on the Senate Banking Committee. We welcome you back
to the Hill, Professor Min. He earned his law degree from
Harvard, and his bachelor's degree from Wharton.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. Please bring the
microphone very close to your mouth so all can hear the
testimony. Without objection, each of your written statements
will be made a part of the record. Again, the light is green.
And when it turns yellow, you will have a minute to sum up.
When it turns red, it is time for us to go to the next witness.
And each member of the committee will have 5 minutes in which
to ask our panelists questions. Again, thank you for agreeing
to testify. Welcome.
Dr. Jaffee, you are now recognized for 5 minutes.
STATEMENT OF DWIGHT M. JAFFEE, WILLIS BOOTH PROFESSOR OF
BANKING, FINANCE, AND REAL ESTATE, HAAS SCHOOL OF BUSINESS,
UNIVERSITY OF CALIFORNIA, BERKELEY
Mr. Jaffee. Chairman Hensarling, Ranking Member Waters, and
members of the committee, I very much welcome the opportunity
to discuss with you today the future role of our government in
the U.S. mortgage market. As the comments from the committee
members have already indicated, we really are at the point of
deciding how to reform the U.S. mortgage market and how to
replace the Government-Sponsored Enterprises.
There are basically two alternatives on the table. One is a
private market system in which we basically let the private
markets run the U.S. mortgage market. The alternative is to
create some new form of a government guarantee for most U.S.
mortgages that would replace the GSEs. In describing that
second alternative, I want to say, at least for myself, that
this is separable from the question of FHA and VA programs. In
other words, I do believe that the FHA and VA highly-directed
mortgage programs for specific groups are a separable issue. My
comments today are directed to government proposals, proposals
to have the government take over a large part of the U.S.
mortgage market.
My research has come to the conclusion that the private
markets are fully capable of carrying out all mortgage market
functions in the United States, and that it is, by far, the
best alternative. The issues with government guarantees, I will
come to at the end of my comments.
The reason for my confidence in the U.S. mortgage market as
a private market really comes in two forms. The first is that
the markets have already indicated a full capability to carry
out this activity. If you go back, for example, and look at the
period from 1950 to 1990 in which we had primarily a private
mortgage market, the homeownership rate in the United States
rose from about 55 percent in 1950 to about 64 percent in 1990,
a significant increase virtually all carried out by private
market lending. If you look at the period from 1990 to the
present, a period which has been clearly dominated by the GSEs,
the homeownership rate rose from 64 percent to 65 percent. In
other words, there is no evidence of the GSEs contributing
anything significant to an increase in homeownership rates in
the United States.
A related statistic is to look at the part of the U.S.
markets that is independent of the GSEs, the so-called jumbo
mortgage market in which, by definition, the GSEs cannot
operate. And the private markets, that market, the jumbo
market, has often exceeded 20 percent of the U.S. mortgage
market, has reached as much as 25 percent, and even today,
under the current conditions, is coming back. In other words,
the jumbo market is a really strong indicator that the private
markets are fully capable of making a large amount of mortgages
to most Americans.
The role that is sometimes attributed to the GSEs concerns
their role in the mortgage-backed security market where they
have guaranteed mortgages. I would like to point out that the
role that they have played there is predominantly due to the
implicit subsidy. One has to remember that they have
approximately a 50 basis-point benefit by convincing investors
in all of their debt securities that the government would bail
them out if worse came to worst, a fact that turned out to be
true. Of those 50 basis points, 25 basis points were passed on
to mortgage borrowers, and 25 basis points basically stayed in
the pockets of the GSE shareholders.
If you look at the jumbo market, at the same time, the
jumbo mortgages were typically priced at about 25 basis points
higher than conforming GSE mortgages. If you net out the 50
basis-point subsidy going to the GSEs, you actually come to the
recognition that the jumbo market in some sense was pricing
their mortgages 25 basis points less than the GSEs once you net
out the subsidy.
So this is my confidence in the ability of the U.S. private
markets to carry out the mortgage market activities. Comments
are sometimes also raised for the GSEs, that they are
responsible for the fixed-rate long-term mortgage. This is just
plain wrong. First of all, the fixed-rate long-term mortgage
was a creation actually of the Homeowners Loan Corporation in
the 1930s long before the GSEs existed. So, they certainly
can't claim credit for creating it.
Second, if you look at their activities in mortgage-backed
securities, all the GSEs did was pass all of the interest rate
risks on to the investors. So it was the investors that were
buying the fixed-rate mortgages. The GSEs played almost no role
in expediting that. So, there is just nothing to the fact that
they created it. Furthermore, many of the jumbo mortgages that
had nothing to do with the GSEs were also fixed-rate long-term
mortgages.
That is my basis on why the market works. The second point
is the European markets which are the focus of a lot of the
discussion here. My research on the--
Chairman Hensarling. Dr. Jaffee, if you could wrap it up,
so we could go to the next witness.
Mr. Jaffee. Sure. So on the European markets, my research
there has looked at a comparison of the databases with the
behavior of the U.S. mortgage markets versus the European
markets. And let me give one summary statistic which is that
the homeownership rate of the United States is only the average
of 16 European countries. So again, it reinforces the
conclusion that the GSE activity here has not realized any
benefits.
[The prepared statement of Dr. Jaffee can be found on page
58 of the appendix.]
Chairman Hensarling. Thank you, Dr. Jaffee.
Dr. Lea, you are now recognized for 5 minutes.
STATEMENT OF MICHAEL J. LEA, DIRECTOR, THE CORKY McMILLIN
CENTER FOR REAL ESTATE, SAN DIEGO STATE UNIVERSITY
Mr. Lea. Mr. Chairman, Ranking Member Waters, and members
of the committee, thank you for the opportunity to be here
today.
I have an extensive background in housing finance,
including senior executive positions at major mortgage lenders
and as Chief Economist at Freddie Mac. I have been actively
involved in the study of international housing finance systems
for more than 20 years, having done consulting, business
development, and research in 30 countries. I have recently
published two international comparative studies of developed
country mortgage markets and an article on the long-term fixed-
rate mortgage. I would request that these studies be entered
into the record, as they provide information supporting the
points I make today.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Lea. The points I would like to make in my opening
remarks are as follows: The U.S. housing finance system is
hardly the gold standard in the world. It has not performed
better, and in many respects has performed worse, than those in
other countries. The U.S. housing finance system is unusual in
its dominance of GSEs, housing-specific guarantees, and
securitization. These characteristics are, in large part, the
policy decision to make the long-term fixed-rate mortgage the
centerpiece of the system. No other developed country has a
government-sponsored enterprise. Among the 13 developed
countries surveyed in my research, only Canada and Japan have
government mortgage guarantee programs equivalent to Ginnie
Mae. Only Canada and the Netherlands have government-owned
insurance companies. And as mentioned before, only Denmark has
a long-term fixed-rate mortgage that can be prepaid without
penalty. And they finance it in a much safer and more
transparent way.
The extent of government support in other countries is less
than that in the United States. A successful housing finance
system is clearly not dependent on GSEs. It is important to
note that all countries support housing finance indirectly
through their banking systems. In most countries, commercial
banks are the dominant lenders. They are supported through
deposit insurance, liquidity backstops, and temporary
guarantees in crisis. It is to support, to sustain and maintain
a type of financial institution that is critical for the
functioning of modern economies and that conducts a wide
variety of business. Commercial banks pay for this support
through deposit insurance and meaningful capital requirements.
The GSEs have never paid user fees for their support and have
operated with inadequate capital for most of their existence.
To understand our housing finance system, one has to focus
on the role of the long-term fixed-rate mortgage. As Dwight
said, this is a creation of the government. It is not a
naturally occurring instrument in modern financial systems, as
it creates substantial financial and taxpayer risk. The
instrument was born in the Depression as a solution for the
refinancing problems of borrowers with nonamortizing mortgages.
FHA insured these instruments and private lenders refused to
make them. Due to concerns about their financial risks, Fannie
Mae was created to purchase their fund with Treasury debt. The
dominance of the instrument was entrenched when the savings and
loans were required to make only these kinds of mortgages in
the 1960s and 1970s. That dependence on fixed-rate mortgages
bankrupted the savings and loans industry in the 1980s.
The government continued to support the instrument through
the activities of the GSEs. And today, we are in the unenviable
position of having over 90 percent of our mortgage products be
one instrument and entirely backed by government guarantees.
Should this instrument be the bedrock of the housing finance
system? It has undeniable consumer benefit. However, there are
significant costs. The interest rate and prepayment risk of the
fixed-rate mortgage are costly and difficult for investors to
manage. A huge volume of derivative instruments is necessary
for investors to manage these risks. The premium for both the
long-term and prepayment option raise rates for all users of
the mortgage. The fixed-rate mortgage can create negative
equity in a falling house price environment, as we have seen.
And taxpayers have had billions of dollars in losses, backing
the credit risk guarantees provided by the GSEs in order to
support the fixed-rate mortgage.
If we move away from the housing finance system predicated
on fixed-rate mortgages and GSEs, what would emerge? Pre-crisis
experience shows that the private market can securitize fixed-
rate mortgages as the jumbo experience indicates. Borrowers
could lower mortgage rates by selecting shorter fixed-rate
terms consistent with their mobility patterns. Few fixed-rate
mortgages are held for the 15- to 30-year terms that exist in
our current instruments.
In a non-GSE world, instruments like the rollover or hybrid
adjustable rate mortgage provide rate and payment stability for
up to 10 years and protections through interest rate caps.
Lenders can safely finance these through term deposits, covered
bonds, or private label securitization. Taxpayer risk would be
substantially reduced through the elimination of the GSEs and
if lenders are holding meaningful capital.
In conclusion, the experience of other countries is that
affordable and stable housing finance can be provided without
GSEs and nearly universal government guarantees. Thank you for
the opportunity to address the committee, and I look forward to
your questions.
[The prepared statement of Dr. Lea can be found on page 64
of the appendix.]
Chairman Hensarling. Mr. Pollock, you are now recognized
for 5 minutes.
STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN
ENTERPRISE INSTITUTE
Mr. Pollock. Thank you. Chairman Hensarling, Ranking Member
Waters, Vice Chairman Miller, and members of the committee, the
American housing finance system has collapsed twice in the last
3 decades. We certainly do need to see what we can learn from
other countries. Viewing our housing finance sector in an
international perspective, as Mike Lea just said, the one thing
most unusual about it was and is the dominant and
disproportionate role played by Fannie Mae and Freddie Mac. The
GSEs themselves used to claim that this made U.S. housing
finance, as they said, ``the envy of the world.'' This was,
however, a view not shared by the world.
Let us ask and answer five essential questions from an
international perspective.
Are GSEs, like Fannie and Freddie, necessary for effective
housing finance? No.
Do the GSEs get for the United States an internationally
high homeownership rate? No.
Do the GSEs get for the United States an above average
homeownership rate? No.
Are GSEs necessary to have long-term fixed-rate mortgages?
No.
And even with their disastrous actual outcome, are GSEs the
best model in theory? No.
It was often claimed without supporting data that the
United States had the highest homeownership rate in the world.
This seemed plausible to Americans but it was wrong. For
example, England, with a different housing finance system and
no GSEs, has a slightly higher homeownership rate than we do.
In my written testimony there is a table of comparative
homeownership rates which displays homeownership in 28
economically advanced countries. On this list, the United
States ranks 20th, just behind England. The median
homeownership rate among these countries is 68 percent compared
with our 65 percent.
The GSEs, based on the free use of the U.S. Treasury's
credit, ran up the leverage of the housing finance sector,
inflated house prices, and escalated systemic risk. Foreign
investors helped pump up the housing bubble through the GSEs
while being fully protected from any risk. Of course, other
countries also made housing finance mistakes. But nobody else
made this particular giant mistake.
When Fannie and Freddie were still riding high and Fannie,
in particular, was a greatly feared bully boy both in
Washington and on Wall Street, I presented the GSE-centric U.S.
housing finance system to the Association of Danish Mortgage
Banks in Copenhagen.
One Danish CEO memorably summed things up at the end. He
said, ``In Denmark, we always say that we are the socialists
and America is the land of free enterprise. Now I see that when
it comes to mortgage finance, it is the opposite.'' He was so
right.
But now, with Fannie and Freddie continuing to be
guaranteed by the U.S. Treasury, being granted huge loopholes
by the Consumer Financial Protection Bureau, and being heavily
subsidized by the Federal Reserve's buying up of their MBS,
they have a bigger market share and more monopoly power than
before. The American housing finance sector is more socialized
than ever.
A senior British financial official said recently, ``We
don't want a government guaranteed housing finance market like
the United States has.'' They don't want what we have and we
don't want it either.
Every housing finance system in the world, as we look
around, must address two fundamental questions: The first is
how to match the nature of a mortgage loan with an appropriate
funding source. To this, there are multiple solutions.
The second fundamental question is, who will bear the
credit risk? In most countries, the lender retains the credit
risk, which is undoubtedly the superior alignment of
incentives. The GSE approach in America, and also that of
private MBS, systematically separates credit risk from the
lender. So you divest the credit risk of the loans you make to
your own customers. This was and is a distinct outlier amongst
countries and it has had disastrous results, needless to say.
One impressive solution to the two fundamental questions of
housing finance is the housing finance system of Denmark, as
discussed in my written testimony and pointed out by
Congressman Foster. My written testimony also discusses
Germany, England, Malaysia and Canada. Like most of the world,
Canada has no GSEs, although it does have excessive government
bearing of mortgage credit risk.
Overall, surveying the world emphasizes an essential
conclusion. Fannie and Freddie should cease to be GSEs.
Considering the international anomaly they represent and the
disastrous government experiment they represent, we should all
be able to agree on this.
Thank you very much for the opportunity to be here.
[The prepared statement of Mr. Pollock can be found on page
98 of the appendix.]
Chairman Hensarling. Professor White, you are now
recognized for 5 minutes.
STATEMENT OF LAWRENCE J. WHITE, PROFESSOR OF ECONOMICS, STERN
SCHOOL OF BUSINESS, NEW YORK UNIVERSITY
Mr. White. Thank you. Chairman Hensarling, Ranking Member
Waters, and members of the committee, my name is Lawrence
White. I am a professor of economics at the NYU Stern School of
Business. As the chairman indicated, from 1986 to 1989, I was
one of the board members of the Federal Home Loan Bank Board;
and in that capacity, I was also one of the three board members
of Freddie Mac. Now in the interest of full disclosure, I think
it is important that I add, in 1997, 1998, Freddie Mac asked me
to write an article for their publication, ``Secondary Mortgage
Markets on Bank Capital Requirements.'' I did so. It was
published. It is available. I am happy to send it to anyone.
You can find it on my resume. You can look on my Web site and
you can find the link. I was paid $5,000 for that article.
In 2004, Fannie Mae asked me to come in to one of their
advisory committee meetings and to talk about bank capital
requirements. I was paid $2,000 plus transportation expenses. I
flew both ways coach class on the shuttle. I used street-hailed
taxi cabs to and from the airport. Full disclosure, Mr.
Chairman.
The U.S. housing system provides substantial subsidies for
housing. Widespread. For homeowners, for home buyers, for home
builders, for renters. Now, there is a central tenet of
economics. I won't call it a law. Only you men and women of the
Congress deal with laws, and maybe Isaac Newton qualifies as a
creator of laws, but it is a central tenet of economics: If you
make something less expensive, if you make it lower in price,
people will buy more of it. For example, through subsidy. And
that has been true of housing. Housing has been reduced in
price through all those subsidies, and people have bought more
houses.
And as a consequence, the U.S. economy has suffered. The
housing stock is substantially larger than it otherwise would
be--which has meant that investments in other useful productive
capital, whether it is business capital plant and equipment,
whether it is social capital, schools, roads, bridges,
hospitals, whether it is human capital, education and
training--has been smaller because the housing stock has sucked
up otherwise usable investable funds.
Further, ironically, a lot of the subsidy has gone to
benefit high-income households. In essence, they have been
subsidized to do what they would do otherwise, which is buy
houses--only they bought more houses and they have engaged in
excessive leveraging because a lot of the subsidy encourages
borrowing. International comparisons, as you have just heard
from the three gentlemen on my right, and some of which I
reproduce in my testimony, shows that the U.S. housing system
doesn't look so good in international comparisons, despite the
extensive amounts of subsidy.
So what to do? First, let's cut back on the subsidy.
Second, let's especially cut back on subsidized lending,
whether through the income tax code or through special
institutions like the GSEs. Third, contrary to a lot of what
you are going to hear, maybe we ought to cut back on the
sanctity of homeownership and recognize that renting is a
perfectly good alternative for lots of households, especially
when one realizes that housing prices do not always go up.
Fourth, let's target subsidies where they really are needed: on
low- and moderate-income households, first-time home buyers. Do
it through FHA, VA. Do it on budget in a transparent way.
In a largely private financial housing finance system,
where will the financing come from? Partly through
depositories. It is important to remember that as recently as
2007, depositories held 30 percent of whole loan mortgages; and
without competition from subsidized GSEs, that percentage would
likely be higher. Probably also ``covered bonds'' might be able
to help out a little bit. Securitization, simplified, with more
information would take up the rest. Insurance companies,
pension funds are natural buyers of these long-lived assets,
since these institutions have long-lived liabilities. Having
sensible prepayment fees would be important there. And in that
context, the 30-year fixed-rate mortgage would continue to be
available to borrowers.
So in conclusion, a privately-oriented finance system for
housing is desirable. It is feasible. And sooner would be
better than later. Thank you, Mr. Chairman. I welcome any
questions from the committee.
[The prepared statement of Dr. White can be found on page
106 of the appendix.]
Chairman Hensarling. The Chair now recognizes Professor Min
for 5 minutes.
STATEMENT OF DAVID K. MIN, ASSISTANT PROFESSOR OF LAW,
UNIVERSITY OF CALIFORNIA IRVINE SCHOOL OF LAW
Mr. Min. Chairman Hensarling, Ranking Member Waters, and
members of the committee, thank you for the opportunity to
testify today on the topic of alternative housing finance
models. This is obviously a very complicated topic as we have
seen from the other witnesses' testimonies, but it is a
critically important one. Before I get into the substance of my
remarks, I want to emphasize a point that may seem obvious but
is not always well taken, which is that it is extraordinarily
difficult to try to compare different models of housing finance
as these are intrinsically and intricately intertwined with the
cultural political and economic systems with which they
coexist.
So for example, the low foreclosure rates in Europe can't
properly be understood in the absence of also understanding the
strong social safety nets and a large availability of public
rental housing there. With that important caveat in mind, there
are four points I would like to make today in my spoken
testimony.
The first point is that contrary to claims of some,
including all of my actual fellow witnesses, the United States
is not unique in the level of government guarantees that it
provides housing finance because such guarantees are universal
throughout the developed world. The claim that the United
States is unique in this respect is primarily based on
observation, as the United States is one of only a handful of
countries that provides government guarantees for mortgage-
backed securitization. The problem with this analysis is that
it focuses myopically on how the United States provides
government guarantees for mortgage finance, and ignores how
other countries might do so.
While securitization has dominated U.S. housing finance for
the past several decades, it is not a major factor in most
other countries. As such, in trying to determine whether other
countries support their mortgage systems, it makes little sense
to look at government guarantees for securitization. Rather, we
should be looking to how other countries actually do fund
mortgages and whether government guarantees exist on those
forms of funding.
Now, as Dr. Lea has noted, by far the largest source of
financing for residential mortgages outside the United States
is bank deposits, with covered bonds also providing a
significant amount of housing finance in Europe. Therefore, in
assessing how much government support exists in other mortgage
systems, the right question to ask is this: Do other countries
provide government guarantees on bank deposits and covered
bonds? And the answer is unequivocally yes. Bank deposits, of
course, enjoy explicit government guarantees across the world.
And in Europe, covered bonds enjoy a myriad of government
guarantees, which brings me to my second point. European
covered bonds are really not very different from our own agency
obligations in terms of the government support that they enjoy.
There are a number of ways in which covered bonds benefit from
such guarantees, which I describe in my written testimony, but
I will focus on what I think is the most important of these,
which is the implicit government guarantees that exist for
covered bond issuers. Both because of European aversion to
letting banks fail and because of the high prevalence of ``too-
big-to-fail,'' European banks are seeing us enjoying implicit
government guarantees behind all of their obligations.
As one European Central Bank official said, ``We don't let
banks fail. We don't even let dry cleaners fail.'' This
statement is actually also borne by history as the last failure
of a European covered bond issuer occurred in 1900. In addition
to government guarantees, European covered bonds also enjoy a
number of other governmental benefits, including preferential
capital treatment and eligibility as collateral for ECB repo
lending which are similar in many ways to the benefits that are
enjoyed by Fannie Mae and Freddie Mac.
In short, in a number of ways European covered bonds look
very similar to agency debt and may best be thought of as
government-sponsored obligations. This explains why sovereign
risk is a central factor in the credit ratings of European
covered bonds and why growing concerns about European sovereign
risks have negatively impacted covered bond spreads. It is also
why European governments and the European Central Bank
responded to the financial crisis with a tsunami of bailouts
targeted at protecting covered bonds, a partial list of which
is listed in my written testimony.
The third point I would like to make here today is that
there is no perfect housing finance system, as each of the
major housing finance housing models--bank deposits; mortgage-
backed securities; and covered bonds--have their strengths and
weaknesses. In the United States, we are well familiar with the
weaknesses of deposits in MBS due to our previous experiences
with the savings and loan debacle and the recent financial
crisis. Covered bonds carry their own problems as well, which I
will briefly describe to you.
First, because covered bonds require an overcollateralized
cover pool of issuer's best assets may necessarily increase
risk to other creditors, particularly government deposit
insurers who have worse and fewer assets to cover their claims
in the event of a bank resolution. This, of course, raises the
risk of a taxpayer loss.
Second, because investors and covered bonds look primarily
to the credit quality of the issuer, covered bonds tend to be a
more suitable funding instrument for large complex banks with
AAA ratings. And so any efforts to promote covered bonds in
this country would disproportionately benefit ``too-big-to-
fail'' banks and exacerbate that problem.
Moreover, covered bonds did not prove to be a panacea
against housing finance instability. Both of the countries that
primarily use covered bonds to fund their mortgage needs,
Denmark and Spain, experienced housing bubbles that were worse
than the one we experienced in the United States, and are
currently facing serious housing market problems as a result.
I make a number of other points in my written testimony,
but I will conclude with the fourth and final point I will make
here today, which is that given the political preferences of
Americans, I think it makes more sense to try to fix our
current system rather than implement radical changes or import
European models.
Deposit-backed lending is unlikely to provide broadly
available 30-year fixed-rate mortgages which are tremendously
popular with Americans following in the aftermath of the
savings and loans crisis. I uncovered bonds with the implicit
guarantees they carry and their tendency to promote ``too-big-
to-fail'' seem inconsistent with the long-standing American
populous diversion assertion that big banks, hidden subsidies,
and bailouts. Sometimes the devil you know is better than the
devil you don't. Thank you again for the opportunity to
testify. I look forward to your questions.
[The prepared statement of Professor Min can be found on
page 77 of the appendix.]
Chairman Hensarling. Thank you, Professor. And thank you to
all of the panelists. The Chair recognizes himself for 5
minutes to ask questions.
Clearly, there is a lot to unpack in this testimony.
Professor White, I was kind of intrigued by your use of the
phrase, I think it was, ``more home''--which I believe was
singular and not plural.
Mr. White. ``More house.''
Chairman Hensarling. ``More house.'' So I believe what I
have heard is that there are a number of countries that have
FHA-like systems and structures to target government policy
towards helping low- and moderate-income people; but otherwise,
we are somewhat unique in having the government involved in a
guarantee in the GSEs.
Are the GSE phenomena mainly helping upper-income people
get the granite countertops instead of the tile, get the fourth
bedroom instead of the third?
Professor White?
Mr. White. Certainly, that is the way I see the income tax
deduction for mortgage interest and local property tax
payments.
Even the GSEs, if you look at the experience of the 1990s--
I would urge you to take a look at a chapter written by
Jonathan Brown, look at the maps that Mr. Brown--I cite it in
my testimony--look at the maps that Mr. Brown reproduces from
the 1990s of where Fannie and Freddie were doing most of their
lending relative to the available possibilities on conforming
loans. And it was in the outer suburbs of the metropolitan
areas of Chicago, Cleveland, and Dayton, not the inner areas.
Chairman Hensarling. Mr. Pollock--
Mr. White. And the expansion of the conforming loan limit
in 2008 to $729,750 certainly expanded the opportunities again.
Chairman Hensarling. Mr. Pollock, you have done quite a bit
of research here. So I think it is somewhat well-established
that the GSEs may have helped buy down a consumer's interest
rate by 25 basis points and may have lost it on inflating their
principal.
But what did the taxpayer get for his almost $200 billion
of bailout? You say in your research we are only 20th in
homeownership of the modern, industrialized world. What did we
get? What did the taxpayer get for his money?
Mr. Pollock. We certainly didn't get a high level of
homeownership, relative to other countries. Obviously, we got a
lot of senior preferred stock in Fannie and Freddie. We got
higher house prices, Mr. Chairman. When you push credit at any
sector, especially in housing--but it also applies to colleges,
let's say--which is what Fannie and Freddie did, you cause
prices to rise. So not only, as Professor White says, do you
get more house, but you get higher house prices and you pump up
bubbles.
Chairman Hensarling. Many posit that what the GSEs did
deliver was a system that delivers the 30-year fixed with no
prepayment penalties and makes that really the center of our
housing finance system.
So, number one, Mr. Pollock, do you believe this would
exist? Would consumers, if they want a 30-year fixed with no
prepayment fees, would that exist in the absence of the GSEs,
in your opinion, and why?
Mr. Pollock. Mr. Chairman, as my fellow panelists have
said, we see the 30-year, fixed-rate alone existed in other
markets which were not guaranteed by the GSEs like the jumbo
market. As they have also said, the 30-year fixed-rate is
primarily a question of whether there are investors in long-
dated assets, which there are, not the question of the
guarantee of the security by Fannie and Freddie.
I think a robust housing finance system would have a lot of
different instruments in it. It would have long-term fixed-rate
mortgages. It would have--
Chairman Hensarling. Permit me to interrupt. My time is
just about to run out.
I am curious about the--and I don't want to put words in
your mouth, Professor Min, but I think you have shown a
preference for having a system that is fixed on the 30-year
fixed, but the data I see says that the average first-time home
buyer owns their home for 4 years. And if that is true, I have
done a little calculus here that if they would have gone with
the 15-year instead of the 30-year, or, actually, over a 7-year
time period, the difference in cumulative principal is the
difference between roughly $14,000 versus $53,000.
So the average American sells their home every 7 years. If
that is true, why is this necessarily pro-consumer?
Mr. Min. Sure. One thing I would note is that the span in
which homeowners are living in their house is obviously much
longer, given the crisis that we have experienced in the
financial system and the economy.
Basically, the safety and certainty of the 30-year fixed-
rate mortgage doesn't really benefit people during good
economies because they can resell their house during rising
markets, et cetera. It is only when we have bad economies and
difficulties in refinancing that the cost, certainly, of the
30-year fixed-rate mortgage really shows its value to
consumers.
Chairman Hensarling. Thank you.
I would note that the Chair is setting a poor example by
asking a question and not giving the witness the time to
answer. I hope the other Members don't follow my example.
Mr. Min. Hopefully, that was succinct enough.
Chairman Hensarling. I now yield 5 minutes to the ranking
member.
Ms. Waters. Thank you very much, Mr. Chairman.
I don't know where to start here. Let me start with Mr.
Lea, just quickly.
What did you say caused the failure of the S&Ls? And what
documentation do you have for that?
Mr. Lea. The failure of the S&Ls was based on the mismatch
that existed between their assets, 80 percent of which were
long-term fixed-rate mortgages, and their liabilities, which
were short-term deposits.
And when you look back in 1981, 1982, about 80 percent of
the entire industry was bankrupt and insolvent because of that
mismatch. They are paying out more in interest on their
liabilities than they are earning interest on those fixed-rate
mortgages.
Ms. Waters. May I ask, what role did the S&L involvement in
the commercial markets and all those shopping centers that they
invest in, what role did that play?
Mr. Lea. That played a role in making the losses worse.
Because what we allowed them to do is to try to grow out of
their problems that were created by the fixed-rate mortgage--
Ms. Waters. Some of us believe that is the major cause. So
I just wanted to make sure I understood what you were saying.
Mr. Lea. That is the major cause.
Ms. Waters. Let me talk about some homeownership rates
here.
Professor Min, homeownership rates in Germany are around 40
percent; in Denmark, around 51 percent during the 2000s, were
much lower than the United States, which had homeownership
rates between 65 and 70 percent.
Granted, from the peak of the housing bubble until today,
homeownership rates in the United States have fallen from a
high of 69.2 percent--that is, at the end of 2007--to 65
percent in the first quarter of 2013.
As a Nation, do you believe that we are prepared to slide
to the homeownership rates of 40 or 50 percent, similar to our
international counterparts?
Mr. Min. I think for that to happen without major
macroeconomic and social collapse, we would need to really
bring in a lot of the German and Danish social policies,
including the strong social welfare systems they have, the
large availability of publicly funded rental housing, among
other things.
There is just a lot less income volatility, a lot less
division of wealth. You can't really bring in the housing
finance system of those countries and expect it to work the
same way without bringing in all the other policies.
Ms. Waters. Thank you.
And, Mr. White, are you suggesting that we get rid of the
income tax deduction for mortgage interest?
Mr. White. I would do it in a heartbeat.
Ms. Waters. Would you speak up a little bit louder so all
of the middle-class constituents out there can hear you?
Mr. White. I would do it in a heartbeat because most of the
middle-class people don't get to take advantage of it because
they do not itemize on their tax return. And, further, high-
income households are going to buy more house, spend more
money, get much greater benefit from the deduction.
I would do it in a heartbeat. But if you are going to keep
it, at least convert it from a tax deduction and into a tax
credit so that lower-income households--
Ms. Waters. Okay, so I get it.
Mr. White. --could take advantage.
Ms. Waters. You are against the income tax deductions for
mortgage interest. I get that.
Let me just ask, if you know--I understand that the GSEs
have paid back $130 billion of the $180 billion bailout that we
afforded them. Are you aware of that?
Mr. Pollock, are you aware of that?
Mr. Pollock. Oh, I'm sorry, Ranking Member Waters. I didn't
realize--I didn't hear my name.
Yes. They haven't actually paid it back. They have paid it
in dividends. Of course, you don't get credit when you pay
interest or dividends on an investment for reducing the
principal. If we did the math right, we would have to account--
Ms. Waters. But the fact of the matter is they have paid
back $130 billion of the $180 billion; is that correct?
Mr. Pollock. They have sent in that money, and it reflects
their current monopoly--
Ms. Waters. And who has--
Mr. Pollock. --power and monopoly pricing.
Ms. Waters. Thank you.
Who has documentation, as it has been represented, that the
GSEs have more high-income owners than low-income owners? Who
said that?
Mr. White. It was me, Ranking Member Waters.
Ms. Waters. Give me the numbers. Give me the information.
What is the--
Mr. White. All right. I wish I had brought--I would love
to--you look at these maps and you want to weep.
Ms. Waters. No, no, no. I just--
Mr. White. That is the only--
Ms. Waters. --need the numbers.
Mr. White. I didn't bring them with me. I cite the article
in my testimony. I urge you and your staff to look at that
article, look at those maps.
Ms. Waters. What I would like you to do is submit for the
record your documentation---
Mr. White. I will be very happy--
Ms. Waters. --your data, as it is being identified by my
colleagues here, on what you represent.
Mr. White. I will be very happy to send it to you.
Ms. Waters. All right. Thank you, Mr. Chairman. I yield
back.
Chairman Hensarling. The Chair now recognizes the gentleman
from New Jersey, Mr. Garrett, for 5 minutes.
Mr. Garrett. I thank the Chair.
So I guess I will start with--in light of Professor Min's
comment, since we are comparing the U.S. housing finance policy
to many other countries in the world, I thought it would be
helpful if we look at the various ways that the United States
subsidizes the mortgage market and compare and contrast it with
the amount of subsidies other countries have actually had. And
other countries actually have a higher homeownership rate than
the United States.
And on the proverbial back-of-napkin count, the United
States has over 20 various ways that we subsidize our Nation's
mortgage finance market. This panel may come up with some other
ones for me.
These range from the institutional--the FHA as a government
mortgage insurer; Ginnie Mae as a government MBS guarantor;
Fannie and Freddie as GSEs, MBS guarantors; Fannie and Freddie
as GSEs, portfolio investors; the Federal Home Loan Bank as a
GSE lender through their Advance program; and then you have the
Federal Home Loan Bank as a GSE portfolio investor through
their MPF programs. All right.
Now, on top of that, you had the promotion of affordable
housing through the FHA; Fannie and Freddie affordable housing
goals; HUD's National Home Ownership Strategy; the CRA,
Community Reinvestment Act; HUD's Best Practices Initiative;
and the Federal Home Loan Affordable Housing Programs.
And in addition to that, you have FHA's Leadership in Low
Down Payment Lending; HUD's regulation of GSEs' affordable
housing mission; Fannie and Freddie's leverage and preferred
stock advantages; risk-based capital rules favorable to agency
obligations.
Then, you have favorable rules for second mortgage lending,
both as to the capital and the inability of the first mortgage
lender to prohibit it. And, of course, we all know the tax
deductibility of interest. And then, finally, the overreliance
by the Fed on lower rates as a weapon of choice.
And then, of course, on top of that, you have other
miscellaneous policies, such as limited use of prepayment
penalties, the de jour and de facto limits on recourse
deficiency judgments, liberal capital gains exemptions, and
procyclical loan losses, reserving and FDSE premium policies.
So that is what we have in this country. Does anyone else
have anything close to that whole litany of programs on top of
the GSEs?
Mr. Min. First, let me just say, I would be in favor of
streamlining some of the guarantees and other subsidies you
talk about.
Second, I guess I would just say it is difficult to tell
with European countries because so many of these are implicit
and opaque. So, for example, it was difficult to tell how
Europe would react to the failure of their housing markets and
their financial system in the 2008 crisis. What we saw was the
deluge of bailouts that--it was very difficult to predict in
advance.
And I think that is one of the reasons I argue that ex ante
sort of defined guarantees are better for the United States
than a European-style system of after-the-fact--
Mr. Garrett. Mr. Pollock?
Mr. Min. --bailouts.
Mr. Pollock. Congressman, I am not aware of anybody else
who has the panoply which you so well articulated of different
programs. It is, of course, difficult, when you do a whole lot
of different things, it becomes difficult to track the
aggregate impact of all of them. But we can say pretty clearly,
the aggregate impact is an increase in house prices.
As for the implicit versus explicit guarantees, of course,
one of the problems with Fannie and Freddie was the denial that
it really was a guarantee, when, of course, it really was. So
we engaged in a kind of make-believe about how much risk we
were taking, and that made the problem worse.
Mr. Garrett. Dr. Lea, do you have a comment before I go on
to my next question? It looks like you did.
Mr. Lea. Oh, I was just going to make a comment with regard
to two aspects of subsidy.
One is that, if you look on the lending side, no other
country that I am aware of has housing goals that specifically
require lenders to go down market and hit certain income
deciles. And even in terms of supporting first-time buyers, we
don't really have that kind of focus. The insurance programs in
Canada and the Netherlands, for example, are universal. They
are not targeted to any particular group.
Secondly, I think that we look at comparing or discussing
guarantees. Ours were specifically for the purpose of lowering
the cost of credit to the housing market, the kind of
backstops--
Mr. Garrett. Right.
Mr. Lea. --for issuers of covered bonds, which are
commercial banks, are a result of governments not wanting
failure of their large financial--
Mr. Garrett. Let me just cut you off. I only have 20
seconds here.
On the credit risk aspect of this, one of the other
arguments is that if you go to an explicit guarantee, one of
the benefits is that you are able to attract foreign investors
to our marketplace, whether it is implicit or explicit, but, as
you say, we go to explicit.
It was in a book back in the summer of last--a couple of
years ago, Hank Paulson wrote the book, ``On the Brink.'' And
he talks about in the summer of 2008 that the Russians--whoops.
You will have to comment back on how they were going to kill
our market, basically, by selling our credit risk here. And is
that still a risk to us going forward if we make this an
explicit guarantee?
But with the chairman's--
Chairman Hensarling. The witness can respond in writing.
Which witness were you directing that to, Mr. Garrett?
Mr. Garrett. Mr. Pollock.
Chairman Hensarling. Okay. Please respond in writing, Mr.
Pollock.
Mr. Pollock. Yes, it is. The bad thing about having
government guarantees--
Chairman Hensarling. That will do.
Mr. Pollock. --is that it produces bubbles.
[Mr. Pollock submitted the following response for the record:
``Yes, it is. Government guarantees, whether implicit or
explicit, create a group of creditors, such as bond or MBS
buyers, who do not care or need to care about the soundness of
the underlying assets being financed. They therefore promote
excessive debt and leverage in the sector which is given the
guarantee, and increase the chances of future bubbles and
crises in that sector. Such guarantees tend to distort prices
and cause misallocation of economic resources.'']
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, for 5 minutes.
Mrs. Maloney. Thank you.
I would like to thank all the panelists, and particularly
welcome Professor White, who is a professor in one of New
York's great educational institutions. Thank you for being
here.
I would like to ask Professor Min and Professor White,
isn't it true that the last time we had significant private
sector involvement in the mortgage-backed securities market,
the end result was a subprime mortgage bubble and a severe
financial crisis?
Professor Min?
Mr. Min. That is correct. In fact, the last time we had
such a large level of private sector, nonguaranteed involvement
was before the New Deal. Of course, the New Deal introduced
guarantees through the form of deposit insurance. The thrifts
became a major part of mortgage lending from the 1940s to the
1990s. What happened then was that the GSEs took over and
really had the lion's share of mortgage financing from the
1990s until about 2003, at which point private label
securitization took over.
And, of course, that is exactly contemporaneous with the
housing bubble we enjoyed, which is why most experts who have
looked closely at this issue blame the proliferation of private
label securitization, which went from a 10 percent market share
in 2002, rising to 40 percent of the market share in 2005 and
2006, as the proximate and most likely cause of the financial
crisis.
Mrs. Maloney. So you are saying the private label was the
cause of the financial crisis?
Mr. Min. I would agree with that statement, as I think most
experts who have looked at this do, including the Financial
Crisis Inquiry Commission and the three minority members who
acknowledged that this was a possible cause but argue that
there should be a multiplicity of causes looked at.
Mrs. Maloney. In light of the experiences that you just
described, do you think it is safe for the government to leave
the mortgage-backed securities market entirely in the hands of
the private sector, which, as you described, caused the
financial crisis?
Mr. Min. I think that every time we have had such a high
level of private, nonguaranteed involvement over 30, 40 percent
in the United States, we have experienced a proliferation of
crises, such as in the pre-New Deal era, where we had crises
every 5 to 10 years that really retarded economic growth and
really stunted capital formation during that period.
Mrs. Maloney. Professor White, your comments on the two
questions?
Mr. White. There is no question that the subprime expansion
was a very unfortunate event. Why people came to believe that
housing prices could only go up is something that is a mystery
to me. That is not something we teach at the Stern School of
Business at New York University. I doubt it is something that
gets taught at the University of California or the University
of San Diego or at the University of California-Irvine, but
somehow people came to believe that. I know it isn't taught at
the American Enterprise Institute. Somehow, people came to
believe it.
If you believe it, then mortgages can never be a problem,
because even if the mortgage borrower can't repay out of his or
her income, or gets hit by a truck or gets ill, he or she can
still sell the house at a profit and repay the mortgage that
way. And so, mortgage securities won't be a problem. That is
what happened.
I like to think that people learn from these experiences
and that going forward--
Mrs. Maloney. But do you agree with Professor Min that the
cause of the financial crisis was the private label mortgage-
backed securities, the private sector involvement?
Mr. White. Okay. It was a triggering event, but that alone
would have just meant a recession for the United States
economy. It was the spilling of those losses into a financial
sector that had five large investment banks, a large insurance
company holding company, a large bank holding company, and two
large mortgage--
Mrs. Maloney. But you say it is the trigger. So why do we
want to go--
Mr. White. --companies that were thinly capitalized and
could not bear the losses. That is what really caused the
crisis.
Mrs. Maloney. But, Professor--
Mr. White. Without those, we would have had a recession and
not a crisis.
Mrs. Maloney. But, Professor, if the private sector
involvement, as Professor Min pointed out, led to, he says, the
crisis and you say the trigger to the crisis, why in the world
do we want to go back to that particular model--
Mr. White. For sure--
Mrs. Maloney. --which led us to the worst depression,
recession, whatever you want to call it, in my lifetime, one
that we are still suffering from?
Mr. White. No, of course, we don't want to go back to those
particular circumstances. As I indicated, I think people
learn--
Mrs. Maloney. I only have a few seconds.
Mr. White. --and will be a lot more cautious this time
around.
Mrs. Maloney. My time has expired. The chairman has his
gavel ready. Thank you very much.
Mr. White. Thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from California, Mr. Miller, for 5 minutes.
Mr. Miller. Thank you, Mr. Chairman.
I enjoy these types of hearings because I think we need to
look and say, what did we do wrong, and what do we do now?
And I don't think anybody is going to defend the concept of
the structure of the GSEs to believe that the taxpayer should
be put at risk, yet the private sector should make the profits.
Now, they have historically been profitable; they are today.
And the money today is going into the Treasury, where I believe
it should always have gone. There should never have been a
reason for the GSEs to ever go public.
But the private label mortgage-backed securities were a
disaster. Most of them were basically predatory loans. And
there were trillions of dollars lost, and the investors were
absolutely hammered.
But GSEs don't originate loans. They are a purchaser of
loans as a conduit. And I believe they should have absolutely
held the groups that made these loans accountable. The lenders
who issued these loans and sold them off, they were not selling
loans that met the underwriting standards to be conforming.
They should have held them accountable.
But I don't want to, on the other side, tell somebody what
type of house they need to buy or how they need to buy it. And
I think, if we look at the Affordable Housing Initiative, the
problems that caused by making loans maybe we shouldn't have
made. But the mission was a 2008 expansion of the limits. The
reason they expanded the limits in 2008 is because everybody
else left the marketplace. There would have been no liquidity
in the marketplace in 2008 had they not raised the limits to
where they did. But the GSEs made huge, huge mistakes.
The thing we need to look at that I think is very important
is that the U.S. housing market is greater than any other
country's mortgage market. If we look at the European market,
we are larger than theirs combined.
And I look and say, how do we get government out? And if we
are involved in any way, who should make the profits? I think
the entire structure of the GSEs is wrong. They should never
have gone public, and the profits should have always gone back
to the Treasury. And had it done that, there would have been
ample money to handle any losses that might have occurred in
the future.
But if you look at the U.K., they are dominated by five
lenders, basically, and the government has already taken over
some of those. If you look at Germany, they rely on depository
institutions. The largest market share belongs to the savings
banks that are owned by the government. So you have to look at
all those and say, how do we make it work here today?
We had some hearings last year, and what came out of those
hearings was that U.S. markets have been predominantly through
securitization. How do we change that in the future, I guess
should be a debate. Are we going to argue that the private
sector is going to put out mortgage-backed securities? I don't
think anybody will buy them today or tomorrow because of the
disaster that has occurred in the past. And the other thing
that came out was a projection that we would lose $3 trillion
to $4 trillion in funding for domestic and foreign investors if
you didn't have an agency mortgage-backed security. I don't
know if that is true or not. That was just the debate that
occurred.
But are there examples of other countries that we could use
in our country to pattern ourselves after that can meet the
demands and the size of the U.S. housing market?
Anybody? I am willing to hear an answer from anybody.
Yes, sir?
Mr. Lea. You measure the depth of the housing finance
system by virtue of relative to the size of the economy. And if
you look at that for other developed countries, we are not
exceptional in terms of the size of our system versus the
economy. Many countries such as Denmark and the Netherlands,
for example, actually have a higher percentage of their economy
in the form of housing finance.
So yes, they meet the needs of their system. Yes, we are
larger. But if we had proper savings and we can tap that
savings in a variety of different methods, then I think there
is enough savings to go around. And, as Mr. Pollock said, it is
really matching the kind of instruments we have with the--
Mr. Miller. But there is going to be some--even if you
emulate what the U.K. does or Germany does, there is still a
government backing through their banks. They are going to tend
to be there. And we are looking at opportunities or options out
there where the taxpayers are not put at risk.
Professor, you had something you wanted to say, too?
Mr. Min. Yes. I think we can take some lessons from Canada
without necessarily taking their model. Canada requires
mortgage insurance on most mortgages, any mortgage that is over
a certain loan-to-value ratio, and that insurance is then
reinsured by their federal government. It is all paid for and
capitalized against, so they have two buffers of protection
against it.
I think a number of independent think tanks and groups,
such as the Bipartisan Policy Center, I think Senators Warner
and Corker, have come up with a solution that looks a little
like the Canadian model for mortgage-backed securities, which
allows us to have 30-year fixed-rate mortgages.
Mr. Miller. Representative McCarthy--who is out right now
with surgery--and I introduced the bill. And it basically says
that the profits from the GSEs are a conduit, whatever you want
to call it, go to the Treasury. And those funds build up as a
backstop against any future losses.
But if you are going to get the government out, you have to
get the profits out of the private sector for the risk the
government faces.
I yield back.
Chairman Hensarling. The Chair now recognizes the
gentlelady from New York, Ms. Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman.
Professor Min, many of today's panelists believe that the
lower foreclosure rates in Europe offer a justification to
eliminate government involvement in the U.S. mortgage market.
However, Western European governments provide a number of
recourse options to underwater homeowners that are not
available in the United States.
I would like to hear from you what type of programs or
mortgage provisions the European governments use to help
prevent foreclosure.
Mr. Min. I am not familiar with all of them, and I don't
want to get the details wrong.
I know that Spain is contemplating forbearance for many of
its underwater homeowners. Of course, Spain is facing a very
major housing crisis at the moment that, because of their heavy
reliance on implicit guarantees, is translating into a
sovereign debt crisis.
Of course, many of these European countries have upfront
social subsidies. Germany, for example, has a very, very large
public housing program that accounts for a significant
percentage of its GDP. This is publicly funded rental housing
that competes with private sources of housing finance. They
also have transfer payments.
And, of course, many of these European governments are
engaging in regulatory forbearance. Because many of the
European banks offer adjustable-rate mortgages or short-term
rollover mortgages, these are resetting, and the banks are
being heavily encouraged to refinance these mortgages, even
though they are actually heavily underwater.
So these are the types of sort of ex-post, ad-hoc relief
that European governments are providing, along with the ex-
ante, upfront, social-welfare-type programs that they have in
place.
Ms. Velazquez. Thank you.
Dr. Lea, would you be able to discuss with us some of the
consumer protections and underwriting standards that were in
place in Western Europe, Canada, and Australia, during the
economic collapse of 2008? And do you believe that contributed
to the lower number of foreclosures in those countries?
Mr. Lea. I think there are a number of factors that
contribute to lower foreclosures. One, of course, is recourse
that provides incentives for borrowers to pay because they are
subject to deficiencies. And that is pretty much widespread,
though, as Professor Min said, both Spain and Ireland have
moved back a bit from that by virtue of this distress.
I think the other things that go into that is that, with
our subprime debacle, if you will, it was characterized by what
we call risk layering. So it wasn't just that we made loans to
people who had bad credit scores; we made high loan-to-value-
ratio loans with limited documentation to people who had bad
credit scores.
Ms. Velazquez. Okay.
Mr. Lea. Yes, in the U.K, and to some extent the
Netherlands, there was some move towards more of a subprime,
but they never risk-layered. So if you had poor credit or if
you wanted limited documentation, you still had to put 20
percent or more down. That is another factor in why we haven't
seen the significant default rates.
The third is that, as mentioned earlier, you have
adjustable-rate-type markets in many countries in Europe, with
the extraordinary activities of central banks keeping short-
term rates down. That also has contributed to lower foreclosure
rates.
Ms. Velazquez. Thank you.
Mr. Pollock's written testimony included a chart listing
homeownership data from a variety of international sources that
ranked the United States 20th in homeownership rates. And, to
me, it is kind of intriguing because the U.S. data was from
2013 and the international data ranged from 2004 to 2012, which
was collected under very different economic circumstances.
So I just would like to ask Mr. Jaffee, Mr. Lea, and
Professor Min, as scholars, would you not agree that a single-
year snapshot provides a more accurate comparison of
international homeownership rates, rather than using data taken
from several different years and different economic
circumstances?
Mr. Pollock. Is that question for me, Congresswoman?
Ms. Velazquez. I just would like to hear from the scholars
who are here.
Mr. Lea. I would just point out two things. One is that
homeownership rates really, normally, don't change that much
over time.
Ms. Velazquez. And the economic circumstances?
Mr. Lea. We have had a big change in ours because of the
very high rates of foreclosure and people losing their homes.
That is internationally unusual; you don't see very high
foreclosure rates elsewhere.
In that sense, I think it is okay to use homeownership
rates over a period of time because, unless there is a shock of
some kind, I don't think they change that much.
Ms. Velazquez. Professor Min?
Mr. Min. Sorry, the question again was? Sorry about that.
Ms. Velazquez. They--
Mr. Min. Oh, the 1-year snapshot, yes. Of course,
circumstances were very different back then. I haven't looked
closely enough at the data to be able to judge whether that was
a fair comparison or not.
Chairman Hensarling. The time of the gentlelady has
expired, so the witnesses can answer in writing.
The Chair now recognizes the gentleman from Texas, Mr.
Neugebauer, for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman.
I want to go back to--someone was saying that the private
label was the cause of the housing crisis.
But, in fact--Mr. Pollock, you can answer this question--
Freddie and Fannie had these affordable housing goals, where
they were going out and making zero-down-payment loans and
housing policy. And, basically, they were encouraging the
marketplace to bring more people into the housing market with,
kind of looking the other direction. Is that correct?
Mr. Pollock. That is correct, Congressman. As we know, you
don't do somebody a favor by making them a loan they can't
repay. And Fannie and Freddie made a lot of bad loans, under
government direction. They were also major buyers of subprime
loans.
The crisis has a lot of culpable people. Certainly among
the culpable in a big way were Fannie and Freddie.
Mr. Neugebauer. In fact, I remember--I can't recall the
source of it since it has been a while--that Fannie and Freddie
said they were having trouble originating their own subprime
lending or affordable home lending and so they were, in fact,
buying private label.
In some cases, they were buying private label that they
couldn't actually legally themselves originate because of the
quality of some of that paper; is that correct?
Mr. Pollock. That is correct, Congressman.
Mr. Neugebauer. So, let's go back, then, to the private
sector. And the private sector has a small market share right
now, about 10 percent, and that is what we call the jumbo
space.
And in the jumbo space right now, Dr. Lea, they are making
30-year mortgages.
Mr. Lea. Yes, they do, 30-year, 15-year, and 10-year
mortgages. All of those are part of what you see in private.
Mr. Neugebauer. Fixed-rate, too?
Mr. Lea. They make fixed-rates primarily. We only have
about 3 or 4 percent of loans right now that are adjustable.
Mr. Neugebauer. So what we do know is the private sector
will make a 30-year fixed-rate loan without Freddie and Fannie
guaranteeing it?
Mr. Lea. I think they will, and, as we said before, they
do. Right now, they are crowded out, I would say. When you have
the very high loan limits that Fannie Mae and Freddie Mac have,
it is hard to get the volume and scale that is necessary to
efficiently fund the instrument today in the private sector.
Mr. Neugebauer. So if I am an investor and I am going to
buy a 30-year mortgage or a mortgage-backed security and it
goes through Freddie or Fannie, do I really care what the
quality of the borrower is?
Anybody?
Mr. Lea. Absolutely.
Mr. Neugebauer. With the guarantee.
Mr. Lea. Oh, with the guarantee?
Mr. Neugebauer. Yes, with the guarantee, do I really care
whether that person can--what their FICA score is? Is that of
any consequence to me?
Mr. Jaffee. Not at all. In that case, the government has
taken all the risk, and so the investor is not looking to the
credit quality whatsoever.
Mr. Neugebauer. So where is the market discipline in that
situation?
Mr. Jaffee. I would say there is none.
Mr. Neugebauer. Yes. And what happens when there is no
market discipline?
Mr. Jaffee. Bad loans get made.
Mr. Neugebauer. Did that happen recently?
Mr. Jaffee. I think so.
Mr. Neugebauer. So I think what we--it has been mentioned
that America is a great country, and it is a great country. I
have been in the housing business for over 30 years. And the
housing business has existed in America for hundreds of years,
and we built a lot of houses before the Federal Government
started guaranteeing a substantial portion of them.
And I think what my earlier comments were is that we have
seen the destruction when the Federal Government starts trying
to manipulate the housing market or control the housing market.
And when you let the government have 90 percent of the housing
market, they are, in fact--or the housing finance market, they
are, in fact, in control of the housing market in this country.
So I guess the question with the panel is that, if we begin
to create some space, more space here for the private market,
is there any reason not to believe that if they are playing in
the upper levels that they wouldn't come down with the loan
limits at Freddie and Fannie and fill that gap if the quality
and the underwriting of those mortgages is done with some
market discipline?
Mr. White. Congressman, let me just add, basically, you are
right, but it would help if we could get some final regulations
on the Qualified Residential Mortgage (QRM). Without the
certainty that the final regs on QRMs would bring, it is going
to be hard to see a lot of securitization, because the
securitizers, the investors don't really know what those
regulations look like.
Mr. Neugebauer. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman. I want to thank you
for having this important hearing today. It is something that
is very important to me and to my State of Texas.
My question is directed to Professor David Min.
Over the last two sessions of Congress, there have been
many suggestions by my colleagues on the other side of the
aisle that Fannie Mae and Freddie Mac need to be abolished, but
I have yet to see concrete suggestions for a replacement.
Housing is the backbone of the recovery, and, without
supporting it one way or another, the economy would never have
turned a corner.
My question to you is, the Financial Services Committee has
now held several hearings this year on the status of housing
finance but has failed to consider any legislation to reform
the U.S. market. Nevertheless, there are several proposals that
have recently been offered that aim at reforming the GSEs.
For example, the Bipartisan Policy Center published a plan
to created a public guarantor to approve issuers and provide a
catastrophic government guarantee on qualifying mortgage-backed
securities. There is also a plan to allow Fannie Mae and
Freddie Mac to use earnings to recapitalize and repay the
taxpayers. Additionally, the Center for American Progress
proposes Congress create new private-chartered institutions
that have the ability to guarantee payment of principal and
interest on qualifying mortgage-backed securities.
Professor Min, what are your views on each of these
proposals? And please address the level of government support
in each of these proposals.
Mr. Min. Sure, Congressman.
I should state as a disclosure that I was formerly at the
Center for American Progress, and I was deeply involved in the
drafting of their particular proposal, which was actually a
joint effort with a lot of other groups and individuals, which
we called the Mortgage Finance Working Group. So, of course, I
tend to favor that particular proposal, which in broad strokes
shares a lot in common with the Bipartisan Policy Center, their
proposal, as well as the proposal in the works or soon to be
released by Senators Warner and Corker over on the other side
of Congress.
So I agree that GSEs should be abolished. I think that they
have a lot of moral-hazard issues, as has been suggested by a
number of you today, as well as my fellow witnesses. That being
said, given historical precedent, I think it is important to
make sure that we don't engage in radical reforms that might
destroy some of the things we like about our housing finance
system, or used to like about our housing finance system.
And so that is why I support a limited guarantee at the
mortgage-backed-security level that mirrors in some ways what
Canada does at the mortgage level, which is have an insurance
of that, effectively, that is reinsured by the Federal
Government. You pay insurance premiums, and you require capital
be held against that, and that provides some protection to
taxpayers. Additionally, I think that adds an element of
stability that was missing in the past decade, when private
label securitization really took over.
I think that particular proposal would be less government
involvement than something where, like in 2008, we had the
government step in and bail out all sorts of different markets
that were tied to private label mortgage securitization. As I
think Professor White said, this wasn't just about private
label mortgage securitization. Those securities were used and
reused as collateral in different private banking arrangements,
and that is why the Federal Government had to step in so hard.
And so, I think we avoid that problem of ex-post, really
undefined guarantees. As I describe in my written testimony,
those guarantees tend to go too far. Because when you are in
the middle of a crisis, you want to stop the bleeding, and you
will do whatever it takes, even if that guarantees a bunch of
people who don't deserve that guarantee and are not necessary
to stop that contagion.
Mr. Hinojosa. So, tell me this: Would the model that
Germany is using, which does not have the GSEs, be practical
for us?
Mr. Min. Germany has, as I think was mentioned by
Congresswoman Waters, something like a 41 to 43 percent
homeownership rate. They utilize primarily bank deposits, with
a significant minority of covered bonds, which they call
``pfandbrief'' over there.
And I think that that model, again, as I said at the
outset, would be difficult to import without importing a lot of
their other social policies, as well. It is difficult to
imagine a 43 percent homeownership rate in this country. Given
the lack of affordable rental housing, what would people do for
housing, I think, is a real question.
Something that has not really been addressed in this
hearing is the need--rental housing also, like homes purchased
by their owners, requires a lot of finance, and often those
sources of finance come from the same entities. But we really
do have to account for that.
Mr. Hinojosa. My time has run out, and I yield back, Mr.
Chairman.
Chairman Hensarling. The Chair now recognizes the gentleman
from North Carolina, Mr. McHenry, for 5 minutes.
Mr. McHenry. Thank you, Mr. Chairman.
Mr. Pollock, in your testimony you mention that we have had
three cataclysmic housing events in the last 30 years. You had
the S&L crisis that originated with housing, you had--or real
estate. And then you had the government bailout at the end of
that crisis. Then, in 2008, you had Fannie and Freddie that
originated at the heart of this housing finance bubble that led
to bailouts of a whole array of institutions and
nationalization of the GSEs, right?
So what are the housing policies that led to that?
Mr. White. It is important, Congressman, I think, to have
that historical perspective. I would say--David Min said we
have crises every 10 years before the New Deal and we have
crises every 10 years after the New Deal. We just have crises
every 10 years.
Mr. McHenry. Are they just more expensive?
Mr. Pollock. In the S&L crisis, as Mike Lea points out in
his testimony, the mismatch of lending long and borrowing short
was directed by the government. This was a regulatory creation.
And the S&Ls were broke by 1979 on interest rate mismatch
directed by the Home Loan Bank Board, which was the cartel
manager set up by the government for the savings and loan
industry.
Mr. White. My predecessors.
Mr. McHenry. Right.
Mr. Pollock. This time, we have a different cartel, Fannie
and Freddie, who took over and dominated the broad middle part
of the mortgage market, the middle-class and upper-middle-class
mortgage market, where perfectly sound loans can be made with
no government guarantees. That is a market that would naturally
have been a thoroughly private market, except that it was
preempted by the government and by government direction through
Fannie and Freddie.
So you had a government market instead of a private market
through preemption, with the resultant pushing of credit
against the asset. This was a very important contributor to the
bubble, which then collapsed, as we know.
Mr. McHenry. So, Dr. Lea, one of the benefits--one of the
potential benefits, I think you might agree, of the GSE system
is standardization. Is that fairly accurate?
Mr. Lea. I think in the early days of their existence that
definitely was a benefit that they afforded the market, yes.
Mr. McHenry. Is that still important to think about, the
standardization, in order to access mortgages?
Mr. Lea. I don't believe it is important anymore, in that
we have developed a lot of these standards, and there is a
potential downside of excessive standardization, where you end
up compartmentalizing housing finance with too narrow of a
range of products and potentially too narrow of a range of
underwriting standards.
I do worry that some of the things being discussed in the
QM and QRM world will eliminate, virtually, things that can be
effectively used in certain circumstances.
Mr. McHenry. Okay. So overreliance on standardization could
limit options for my constituents?
Mr. Lea. Absolutely.
Mr. McHenry. The question here is, if you have the interest
rate risk and you have the credit risk--right? The interest
rate risk for a 30-year fixed, you can hedge out. An
institution, complex institutions can hedge out interest rate
risk, and that is done every day by moderate- and large-sized
businesses. And so that is resolvable.
The credit risk question, though, the benefit of
standardization for securitization is that you can have a wider
pool. And that can be effectively done without the government
then purchasing that standardized product and being the
securitizer, can it not?
Mr. Lea. Absolutely. You can diversify across geographic
areas, borrower types, and institutional originators. That
diversification is a significant value in terms of reducing
overall credit risk.
Mr. McHenry. So I want to know this: If we end Fannie and
Freddie, if we end GSEs, can my constituents still get a
mortgage?
Mr. Lea. Absolutely.
Mr. McHenry. Is it one that they could reasonably afford?
Mr. Lea. Absolutely.
Mr. McHenry. All right.
Thank you, Mr. Chairman. And I will happily yield back my
remaining 15 seconds.
Chairman Hensarling. The Chair recognizes the gentleman
from Massachusetts, Mr. Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman.
I want to thank the witnesses for being here today.
It is kind of interesting, today we are looking around the
world for different financial services issues that we can
follow, which I think is a great idea. We should be checking
every possibility we can. Yet, tomorrow, we are going to have a
hearing that basically says we shouldn't look around the world.
I just find it kind of an interesting juxtaposition. We
look when we want to find the right answer; we don't look when
we don't want to find--not an issue for the panel, but I guess
I will bring it up tomorrow, so you might want to be watching.
I also find it interesting that--for me, this is very
educational. I don't know a lot of these things around these
international matters, and I don't know some of the history of
it, and I am very interested in learning it.
And, honestly, it is kind of interesting when you look at
some of the covered bond things that the other bills do, that
if we are going to adopt any other country's system, we really
have to adopt the whole system, we shouldn't adopt it
piecemeal, which means we would have to pick up the covered
bonds, which, to me, sounds an awful like ``too-big-to-fail.''
And I don't like ``too-big-to-fail,'' which is why, by the
way, I just filed a bill yesterday, based on a paper written by
Peter Wallison at AEI and a friend of mine, Con Hurley at BU,
that kind of does an additional thing to suggest that ``too-
big-to-fail'' needs to be addressed again. Yet, today, I have
implications that we should adopt ``too-big-to-fail'' for
mortgage bonds by private companies. That is a different
hearing for a different day.
So when I get all of these confused things, I tend to go to
the simple matters, and for me, it is math. It is just numbers.
So I don't really know how to get a mortgage. I do the same
thing everybody else does. I go online, I visit my local
banker. So I did it again today. And in the United States right
now, approximately, you can get a 30-year mortgage with 20
percent down, for 4 percent. That is a pretty typical mortgage
today.
I have no idea what to do in other countries. So I picked
one. I picked England, because I figured I didn't have to
translate the Web site. Maybe I could figure out what they were
doing.
So I pulled up the 10 top mortgages in the U.K. today, and
I got one of these typical Web sites, money.co.uk, typical
thing, and do the same thing here. And I looked at them, and I
said, okay, that is all well and good. And I don't know most of
these companies, but I do know HSBC, one of the biggest banks
in the world. So I went to their Web site to figure out what
they actually do.
And here is what HSBC offers today, as of this morning, on
a typical mortgage. The rates are about the same, about 3.99
percent. Good stuff. But there is a minor little problem,
actually two, because I know everybody here knows, but some
people want to talk about rates as the only thing that matters.
The other thing that matters is the term, and the other thing
that matters is the downpayment.
The downpayment, in this case, at HSBC, is 40 percent. A 40
percent downpayment on a $300,000 house is $120,000 down. Now,
maybe a lot of people have $120,000 in cash sitting around that
they can put down on a $300,000 home. I don't.
But let's get past that. The next little issue is, the
longest term I could find was a 10-year mortgage. They have 2-
year mortgages, they have 7-year mortgages, they have 5-year
mortgages. And the truth is I didn't do the numbers on those,
because, just on that, I know that is obscene. But you do the
numbers on a 10-year mortgage versus the typical mortgage we
just talked about, you get the exact same loan under the HSBC's
Web site as of this morning.
And in the United States, the average person would have to
pay $60,000 down and would pay roughly $13,752 a year in
principal and interest. That same loan under these terms would
require $120,000 down and $21,852 a year, which is $8,100 more
than my average U.S. constituent, which means, for all intents
and purposes, out of their own pocket they would have to pay
for an extra 7 months a year. I pay 12 months a year; they
would have to pay 19.
Does anybody here think that is a good deal? Go right
ahead. Anybody?
Mr. Lea. That particular example would not be a good deal,
Congressman. But I would say that that is not a representative
loan in the U.K. today, looking at--
Mr. Capuano. HSBC is not representative?
Mr. Lea. Well--
Mr. Capuano. Actually, it was the best rate on this page.
This page shows me the highest rate is 5.79 percent, and that
is for a 2-year loan.
Mr. Lea. When they talk about 2-year loans, Congressman, in
the U.K., they are talking about the period of time the rate is
fixed. So these loans are longer-term, typically--
Mr. Capuano. I understand that.
Mr. Lea. But you--
Mr. Capuano. So there is no 30-year fixed-rate mortgage in
England?
Mr. Lea. That is correct, Congressman.
Mr. Capuano. Ah, bingo. Here we go.
Mr. Lea. But the LTV that you are suggesting, 40 percent
down, is not representative.
Mr. Capuano. Now, on the private market that happened
before the creation of GSEs--and, by the way, I want to be
really clear. I absolutely agree that we need to do something
with Fannie and Freddie, first of which is we should stop using
them as a piggybank and allow them to pay down their debt,
which is a different issue. But that is another argument for
another day.
But I absolutely agree. I actually particularly like the
consolidation of regulations. I want to do that as much as
anybody. I want to make it simple. All those issues are non-
issues to me.
The only question in the final analysis is whether the
taxpayers, through some degree, either directly or indirectly,
either explicitly or implicitly, are going to back mortgages
for this country. And I haven't heard anybody suggest anything
other than they have to, with the sole exception of people who
tell me the private market can do it alone.
Mortgages will be available under the private market, just
like they were in 1930, just like they were in 1920. There were
private mortgages. But guess what the rates were? Just like
England: 50 percent down, 5-year repayment, 5 percent. Same
problem.
Will there be private mortgages? Of course, there will.
Affordable? I don't know where you live; they are not
affordable in most of my district. It would be available to
some of my constituents on Beacon Hill and maybe in Brattle
Square in Cambridge. But my average constituent in Chelsea will
never own a home.
Do you think that is good for America?
Mr. Pollock. And yet England has a higher homeownership
rate than we do.
Mr. Capuano. I fully understand that. And it is a good
thing. I am going to be very interested to look at the historic
thing. And, by the way, I would love to increase the
homeownership rate.
I guess my turn is over. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from, New Mexico, Mr.
Pearce.
Mr. Pearce. Thank you, Mr. Chairman. And I would yield a
minute to the gentleman from New Jersey to complete a question
that he had.
Mr. Garrett. Only 30 seconds.
Can you just respond, Mr. Pollock, with regard to the
question I was asking before? That was the question on what
Hank Paulson was talking about, who we are actually selling our
guarantees to, and does that put us in a more dangerous
position going forward?
You can be brief on that.
Mr. Pollock. There is a wonderful couple of pages in Mr.
Paulson's memoirs of the crisis, which you cited, where he
talks about how they have to make good on the guarantee because
the Chinese and the Russians are calling them up and saying,
how about it, do you want us to sell all these mortgages? This
is a great example of the dangers of having a GSE.
I think as Congressman Miller said, the key mistake was
having a GSE. That is basically how you could summarize his
remarks. I think it is very important, that the worst of the
cases is the GSE status. We need to end that.
Mr. Garrett. I yield back.
Mr. Pearce. Mr. Min, the question about public- versus
private sector involvement in the meltdown was brought up by
one of my colleagues, and you, I think, discussed the role of
the private institutions in that meltdown of 2008.
Were there things that originated in public policy that
also contributed to that?
Mr. Min. Absolutely, of course.
Mr. Pearce. Could you highlight those? And could you pull
your microphone just a little bit closer to you?
Mr. Min. Sure. So I said, absolutely, yes.
I think some of the things that were problematic, going
back to the 1960s and 1970s, bank regulators started allowing
banks to do more activities. You started developing universal
banks in the United States. Our regulatory system was not well-
suited for that. We allowed a lot of ``shadow banking'' to
occur, financial intermediation or banking, as most people
think of it, the use of short-term--
Mr. Pearce. What about the Affordable Housing Act?
Mr. Min. Sure. And so I think that--
Mr. Pearce. What about the Affordable Housing--
Mr. Min. I would make a distinction between affordable
housing and subprime, because they were not always the same.
Many subprime mortgages, for example--
Mr. Pearce. If I could reclaim my time--
Mr. Min. Sure.
Mr. Pearce. --when I read in Gretchen Morgenson's book
here, ``Reckless Endangerment,'' before the affordable housing
law was passed, 1 in 230 lenders had a downpayment of less than
3 percent. So we came in with something above 3 percent of a
downpayment. And by 1992--the bill was passed in 1989--there
was only one in three who had--one in three had less than 3
percent. So from 230 lenders down to 3 lenders.
And then, also, at that time, James Johnson with Fannie was
fighting vicious warfare in this body, and he was paying off--
he was giving contributions to people to vote for things which
would push the affordable housing goals, which set into
policies then that the bankers were required to perform, which
then started all of these loans that were in the subprime
category.
Would you not consider that to be substantial in
contribution to the 2008 collapse?
Mr. Min. If I could, first, I would say I have never taken
any payments from Fannie Mae or Freddie Mac.
The second thing I would say is--
Mr. Pearce. No, I am talking about people in this body,
that they were putting--
Mr. Min. No, no, as a disclosure.
Mr. Pearce. Yes.
Mr. Min. And how I would answer your question--I know you
are running out of time--is that, in fact, there was zero
connection between the affordable housing goals and the
subprime crisis. There was almost no overlap, that most of
these loans did not qualify because of various reasons. In
fact, the Alt-A portfolio of Fannie Mae and Freddie Mac was a
much bigger cause of their losses. Hardly any of that qualified
for their affordable housing goals.
Similarly, CRA, which has been blamed for the crisis,
almost none of the subprime mortgages were originated by CRA-
regulated lenders--
Mr. Pearce. If I could reclaim my time, Mr. Chairman.
During that period of time, before 1996, Fannie had a portfolio
of $156 billion, and they doubled it. And then, it went up to
what it is today. The five executives were sporting $44 million
total in stock in Fannie and Freddie.
Mr. Min. Sure.
Mr. Pearce. During that time, Mr. Johnson was able to pay
himself $100 million from this government-guaranteed program.
His follower, Franklin Raines, took $29 million as his pay.
And yet, I am to believe from you that all of these changes
in the way that they were underwriting and the fact that they
had to keep these things going or they couldn't drive their
balance sheet higher and they could not drive their pay higher,
that had no effect downstream on the private market. Sir, that
just defies imagination.
I yield back, Mr. Chairman. My time has expired.
Chairman Hensarling. The Chair now recognizes the gentleman
from California, Mr. Sherman, for 5 minutes.
Mr. Sherman. Thank you.
Professor White, thanks for pointing out how important it
is that we get those QRM regulations published. Long-term
reform may take us a while here in Congress, but the agency has
had plenty of time to write those regulations. And that is one
step we all can agree on.
Mr. White. I agree, Congressman.
Mr. Sherman. And, Professor Min, I think you are right to
point out the important role private label subprime mortgage-
backed securities played in this debacle.
I just want to take a second to point out that the reason I
think that happened was the credit rating agencies. Once they
gave AAA to Alt-A, well, the lion's share of capital in our
system is in loans, bonds, publicly traded bonds, and any
portfolio manager who turned down the opportunity to get
somewhat higher yields with high-rated securities looked like a
fool in 2006 and was fired before 2007.
So, as long as we have a system in which the issuer hires
the bond rating agency, we are going to have bubbles here or
there, just as, if you let me hire the umpire, I would have a
bubble in my pitching record, 27 strikeouts per game.
Now, we have been comparing ourselves to other countries.
And one thing that is great in America still is that you can
get a 30-year fixed-rate mortgage, often with a 10 percent
downpayment if you have good credit. These other countries we
have been talking about, can you get a 30-year fixed-rate
mortgage, and can you get it with a 10 percent downpayment if
you have good credit?
Dr. Lea?
Mr. Lea. The 30-year fixed-rate mortgage is unusual. The
only other country which has that long of a term is Denmark,
and they have a 20 percent down requirement.
Mr. Sherman. So if we are going to let Americans buy homes
the way they are used to when they have good credit, we are not
going to be able to just adopt even the Danish system, let
alone the systems we see in some other countries.
Now, we are hearing about high homeownership levels in
other countries. Often, in Europe, you meet people whose great-
grandparents lived in the same house that they do. You can't
find that anywhere in California. We have the most adaptable
workers in the world, or at least in the high-income world. Our
people are willing to move across town or across the country
for a better job. And so, we have a lot of people moving from
here to there.
Do these other countries, if you adjust for longtime family
ownership, have the kind of homeownership rates we do? Or is
there a way for you to adjust it to try to give me a picture of
whether a young family who doesn't inherit a home from great-
grandparents can find a place to live and then find another
place to live when they move to another city?
Mr. Pollock. I will try that, Congressman, since that table
is mine. Those numbers, of course, are fairly hard to get and
have some estimates in them. The point of the table is it gives
you a pretty good sense overall that we don't have an
outstanding homeownership ratio.
We do have high labor mobility and lots of moving, as you
correctly say, Congressman, which is just why, as I think the
chairman said, you don't really need 30-year loans if you are
going to move every 4 or 5 years.
Mr. Sherman. We need 30-year loans to keep payments lower
than the 15-year loan, and--
Mr. Pollock. Yes. One important thing about 30-year loans
is, while they are good in an inflation, they are terrible in a
house-price deflation with falling interest rates.
So if we look at other countries, we see that the crisis
was helped by the fact that the house payments on a floating-
rate loan automatically fall. You don't have to refinance your
mortgage. You don't have to have a government program. Your
payment automatically falls with the rates.
One of the things, interestingly, and I think little
understood, is what made the crisis in this country much worse
was exactly the 30-year fixed-rate mortgage. In a house-price
deflation, it is a bad instrument.
Mr. Sherman. I have met too many people who have suffered
too much because their ARM adjusted upward.
And I yield back.
Chairman Hensarling. The Chair recognizes the gentleman
from Florida, Mr. Posey.
Mr. Posey. Thank you very much, Mr. Chairman.
Have any of you gentlemen ever purchased a home through
FHA? Just raise your hand if you have.
None of you have. Mostly everyone I know purchased their
first home through FHA or VA. I surmise maybe a lot of people
are just better off than the people that I know. And it is
unfortunate.
Have any of you ever processed a mortgage loan? Okay. Do
any of you think it makes--
Mr. Lea. I have managed people who process mortgage loans,
Congressman.
Mr. Posey. Okay. Do any of you think it makes any sense
that as of 2 years ago, we have spent $166 million defending
the top 3 executives at Fannie Mae and Freddie Mac? Do any of
you think that makes sense? Raise your hand if you think that
makes a bit of sense. Raise your hand if you think any of the
other countries in these charts that you gave us would ever
think of doing something that stupendous.
We had a crisis, and the crisis was caused by Congress; if
we had to start locking people up, you would probably start
with Congress. And then, you would go to the people who
actually did the dirty deeds. And because there has been no
accountability for that activity, that is why we have to fear
it happening again. They haven't pulled the same shams they did
in S&L, did they? They didn't have any S&Ls doing that stuff,
did you? A thousand people went to prison. Now what do we do?
Stipulated settlements and we buy off our prosecution with
stock corporate's money these days, it seems.
I looked at the information that you provided us. I know
you all don't think we read your written testimony, but we do.
And I compared the chart to Dr. Jaffee, Mr. Pollock, and
Professor White. And you are not all on the same page. You are
in the same neighborhood, but there are some differences in the
data, the hard data that you have given us. Not to say that
decisions to move in the direction Congress is going to move
need to be made based just on those charts or comparisons with
other countries.
We know there is an awful lot of difference there. And the
view we have of the international market that you provided us
is really relatively slim. It came close compared to debt, but
I would be interested in knowing the average cost of homes in
other countries or the average value to their GDP or the total
value to GDP. I am okay with moving away from GSEs. I am a
REALTOR by profession. I think it is just fine, just so long
as someone has a detailed plan, not just a vision like we have
passed on many national priorities recently, but a detailed
plan of how we would replace it without upsetting an already
very fragile--and I use that word as the nicest way of
describing the current real estate market--as being very
fragile. Without making that worse.
Do any of you claim to have a detailed plan of how we get
rid of the GSEs and replace the ability for funding and
financing for future generations with the same opportunities
that this generation had? And if you have a detailed plan of
that, raise your hand, because I am going to hold you
accountable for giving me a detailed plan. That is just
wonderful. Okay. We don't have time to hear your four detailed
plans now. But I would appreciate it if you would give me those
absolute four detailed plans and give us a chance to look them
over, and hopefully the chairman will be kind enough to bring
us back in here and we could discuss both sides of the
solution. I see my time is up, Mr. Chairman.
I yield back.
Chairman Hensarling. It wasn't quite up, but we will take
it nonetheless. The Chair now recognizes the gentleman from
Texas, Mr. Green. Apparently, the gentleman from Texas is going
to yield to the gentlelady from Ohio, Ms. Beatty, for 5
minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and Ranking Member
Waters. And I thank all of our witnesses who are here today.
As I have had a chance to listen briefly and read through
your testimony, I find it very interesting and educational for
me to be able to evaluate the international alternatives to our
models of housing finance. Hearing in the last part of the
testimony when we talk about eliminating some of the GSEs like
we can still have homeownership at an affordable level if there
is no FHA, Fannie Mae, Freddie Mac.
Now I am from Ohio, where we have had a collapse in our
housing market. We are trying to get through the recovery. I
have also spent 20 years of my life working with public housing
authorities to get people to be more self-reliant. So first-
time homeowners who don't have that 40 or 20 percent
downpayment that we have talked about, who might have some
challenges with their credit scores.
So when I hear we can still have an affordable market, it
puts me on pause because in Ohio, I have not had that
experience. Let's just assume that I have a different answer
than your answer. My question then would be, if we don't take
steps to preserve access to housing for the working-class
families, what risks do you foresee in the housing markets?
Mr. White. Congresswoman, I think most of us would agree
that targeted programs through FHA are worthwhile--in fact,
Professor Jaffee explicitly mentioned FHA. I mentioned FHA in
my testimony as well. Target low- and moderate-income
households, first-time home buyers, absolutely. That is a
worthwhile place to be focusing and targeting subsidies. On
budget, transparent, and as far as I am concerned, we should
expect this program to be a net cost in the budget. Because it
is a subsidy program, we should expect it to be a subsidy. It
is absolutely worthwhile. Absolutely worthwhile.
Mr. Pollock. Congresswoman, in my testimony it says
something like this--you can be a private company or you can be
part of the government but you can't ever be both at the same
time, which is what the GSEs pretended and claimed to be with
disastrous results. I think in a resulting real-world scenario,
we will have some mix of private and government, but you will
be one or the other. That which is government will be clearly
government, on budget, approved and appropriated by the
Congress.
Then you can ask, what is the mix? Some of us think the
right mix is 80 percent private, 20 percent government, which
is a long way from where we are now in a much healthier way. We
can debate about exactly what the mix should be. But we need to
go in the more private less government direction. I think
virtually everyone agrees with that.
Mr. Lea. And Congresswoman, I would like to make two other
quick observations. One is that if we put weak households--weak
from a standpoint of income capacity, lack of savings, or past
credit problems into a house--a house is a large financial
obligation and it isn't necessarily the best thing for all
people.
So I would agree, for example, with what Professor Min was
talking about earlier in that we need to have a balance of
policies for affordable rental as well as homeownership. We
want to have a balance in that regard.
And the other thing to keep in mind is that while we have
people we want to help from the standpoint of their
homeownership and housing, other people provide savings and are
bearing those risks.
Mrs. Beatty. You mentioned rental. Let me ask this very
quickly: Do you think that the U.S. rental markets are
significantly equipped to handle a larger rental population if
we get into that? If people want a home, they can't buy, they
go to rent and all--
Mr. Lea. We have seen a decline of almost 4 percentage
points in the homeownership market. And the rental markets have
been able to absorb a lot of that, yes.
Mrs. Beatty. Thank you. I yield back.
Mr. Luetkemeyer [presiding]. Thank you. The chairman had to
step out for a little while, so I am in the chair. And it just
so happens that I am up to ask questions, so you get a double
dose of me here.
I will be brief so that we can get to some other folks here
before the time runs out.
Dr. Jaffee, in your testimony, you talked about the period
between 1950 and 1990 when homeownership rose to 64 percent.
What was the percentage during that timeframe of GSE
involvement in the housing market?
Mr. Jaffee. The GSE growth was steady over that period. If
you start in 1950, it was minimal. It was maybe 1 or 2 or 5
percent of the mortgage market. Even by 1980, it was only maybe
10 percent of the market. So I would describe the period from
1950 to 1990 to be a U.S. mortgage market that was dominated by
private market bank participants.
Mr. Luetkemeyer. Okay. So by 1990, it was what, roughly?
Mr. Jaffee. All in, maybe 35 percent.
Mr. Luetkemeyer. 35 percent by then. And we had 64 percent
homeownership numbers, is that right?
Mr. Jaffee. Exactly right.
Mr. Luetkemeyer. And now today, we have 90 percent GSE
guarantee, according to your written testimony.
Mr. Jaffee. Yes.
Mr. Luetkemeyer. On page 3, I guess it is. And we have 65
percent homeownership, is that correct?
Mr. Jaffee. That is correct.
Mr. Luetkemeyer. So basically, we have almost tripled the
amount of GSE involvement with basically no change in the
amount of homeownership; is that basically correct?
Mr. Jaffee. That is correct.
Mr. Luetkemeyer. Okay. Mr. Pollock, you made, a minute ago,
a comment with regards to 80/20 with regards to the ideal mix.
Can you go back and explain just a little bit why you think
that is a good number and why it would be not 50/50 or
something like that?
Mr. Pollock. We can remember how we used to think about the
mortgage market. It was 15 or 20 percent what we call
government loans, which is FHA/VA. I think realistically,
politically, while the FHA has plenty of problems and lots of
bad credit on its books, it will be reformed but not taken
away. What is not government, in my view, should be private.
That is how we get to 80/20. So it is 20 percent formally
government, on budget, appropriated; 80 percent private; and
zero percent GSEs, Congressman.
Mr. Luetkemeyer. Part of the discussion earlier was with
regards to 30-year fixed loans. As a former banker, I have made
a lot of loans to individuals on homes before. And when you sit
there and you look at their budgets and you look at the house
they are trying to buy, and if it is something they can afford,
and they have a proper downpayment, and you look at how they
want to stretch it out to 30 years versus 20 years, if they
just make an extra $50 or $150 a month, they can go from 30
down to 20 and save literally thousands and thousands of
dollars. And I don't think we are doing them a favor by
stretching it out to 30 years. I think we are doing them an
injustice by putting them in a 30-year loan.
Mr. Pollock, you made the comment a minute ago how this can
be a detriment. I would like for you to expound on that just a
little bit if you wouldn't mind.
Mr. Pollock. I am also a former banker, Mr. Chairman, and I
fully agree with your point.
Mr. Luetkemeyer. You are recovering from that, are you?
Mr. Pollock. I remember talking long ago to a guy who ran
an old mutual. He still called it a ``building and loan,'' in
downstate Illinois. His mortgage loans were for a maximum of 15
years. If you didn't like the payments, you bought a less
expensive house because, he said, ``Look at the difference in
the equity build-up between a 15-year and a 30-year loan.'' And
it is really quite remarkable. So there is a strong argument
that the shorter loans, because of the much faster equity build
for the borrower, can be more advantageous.
Mr. Luetkemeyer. This is one of the ways that individuals
save, is it not, to get equity in their homes as they make
payments into it? That is one of the best ways that the
individual can save. It is also, as we go through this process,
we have found that 7 years is the average length of a loan. And
why do we need a 30-year mortgage whenever it endangers them,
sometimes whenever the markets fluctuate? So I will stop right
there and move on. I believe the gentleman from Texas, Mr.
Green, is next in the queue.
Mr. Green. Thank you, Mr. Chairman. You look quite well in
the chair. I thank the ranking member.
Mr. Luetkemeyer. You will get more time for that, sir.
Mr. Green. I thank the ranking member for hosting this
hearing as well.
I thank all of the witnesses for appearing. Many of you
indicated that you have detailed plans. I am not going to ask
for your plans. But I do ask, do you have a statement from the
builders who are in support of your detailed plan? If so, would
you kindly extend a hand into the air from the builders, home
builders who are in support, if you have a statement from them.
Do you have a statement from the REALTORS who are in support
of your detailed plan? If you do, would you kindly extend a
hand into the air?
Let the record reflect that thus far, we have had no hands
which connotes, as I understand it, with this en banc process,
that we don't have any statements from anyone.
Do we have a statement from the bankers who are in support
of the detailed plan? I take it from the absence of hands that
the plans, though they may be great plans, they haven't been
either vetted by the bankers, the REALTORS and the builders,
or that they are not in support of the plans. And I said that
to give you a little bit of latitude so as not to imply that
they have had an opportunity to see them and they are opposed
to it. But let's just say they haven't been vetted.
I do see Mr. Min. Mr. Min, do you have something that you
would like to share with us?
Mr. Min. The National Association of REALTORS (NAR), the
Mortgage Bankers Association (MBA), and the National
Association of Home Builders (NAHB) have all looked at the plan
that I was formerly associated with, which was released by the
Mortgage Finance Working Group, and organized by the Center for
American Progress. They indicated they were in broad support of
it generally, but of course we didn't have written statements
from them for a number of different reasons.
Mr. Green. Your plan has a 30-year rate associated with it?
Mr. Min. Yes, it does.
Mr. Green. A 30-year fixed-rate?
Mr. Pollock. And Congressman, the plan that my colleagues
and I at AEI put together has also been given to all of those
people.
Mr. Green. Been given to, but not received a response from?
Mr. Pollock. Home builders and REALTORS in particular
never saw a GSE they didn't like, Congressman.
Mr. Green. I understand. That may or may not be the case. I
won't speak for them in terms of your report.
Let me go on. The 30-year fixed-rate does allow lower
monthly payments, generally speaking. I think that is a fair
statement. And I appreciate what you are saying about the
ability to save money by having a 15-year mortgage or a 20-year
mortgage. But let me ask this: Is there anything that precludes
a 15-, 20-, or 25-year mortgage right now, notwithstanding the
30-year fixed-rate being offered? Nothing precludes that. A
person can still get a 25-year, or a 15-year. You just have to
either ask for that and negotiate that product, or you can
simply make your payments such that you pay down your house in
15, 20, or 30 years. It is your option. And once you get the
30-year fixed-rate--let me do this, Mr. Min. And I will try to
get back to you.
Let's talk about something else quickly. People not only
need houses and homes, they also need transportation. If you
get a 30-year fixed-rate mortgage, that $150 can go toward a
vehicle for transportation. I have a good many constituents, my
dear friends, who find $150 extra per month to be a rather
handsome sum of money. And that can help them do other things.
So if you change the 30-year fixed-rate such that this becomes
a part of the culture--and it is a change in the culture that
you are talking about--you will also impact other aspects of
the economy. Perhaps the auto industry might have a little bit
of concern with only 15- or 10-year rates because they may be
impacted in terms of the products they produce and sell. There
is an impact that goes beyond simply having that one mortgage.
Finally this, with my last 29 seconds--and I apologize to
you, Mr. Min. But we do have to ask ourselves, Mr. White--and I
like your animation, by the way--why people thought that we
would have housing prices that go up forever. But let's ask,
why did they go up? You don't have to know why people thought
they would. But why did they, is the question? And when you
have IRS regulations that cause flipping to be profitable, when
you have other aspects of buying a home, not to own it, but to
sell it, that is a part of it. Thank you. I yield back, Mr.
Chairman.
Mr. Luetkemeyer. Thank you. The gentleman from Wisconsin,
Mr. Duffy.
Mr. Duffy. Thank you, Mr. Chairman. I think this is an
important conversation we are having today. If you look at
Americans, the largest investment they usually make in their
lifetime is their home. And we are having a conversation about
potentially changing the market in which Americans engage to
make that largest purchase of their lifetime. We are also
dealing with an issue where American taxpayers are forced to
bail out the GSEs. And America hates that as well. So I think
it is a great conversation. It is an important conversation to
have.
Mr. Jaffee, to you, I want to get you engaged here. I think
you were commenting about the basis point difference in the GSE
market as opposed to a non-GSE market. Is that correct? You
would see a 25-point basis differential?
Mr. Jaffee. That was prior to the crisis, not in the
current conditions. But over a long history, the jumbo
mortgages would be priced at about 25 basis points above what
was virtually an identical mortgage that was just under the
conforming loan limits.
Mr. Duffy. I want to drill into that a little bit. If you
look at the jumbo market, is it fair to say that those who were
given a jumbo loan, a jumbo mortgage, are wealthier? They put
more money down. In essence, they are probably a little better
risk than the mid- to low-income individuals who may be getting
mortgages as well. And to maybe use that as an example of the
differential in basis points may not be an accurate
representation of what we would see with middle-income
Americans.
Mr. Jaffee. The 25 basis points difference that I was
referring to was a computation which did try to control for the
different borrower attributes on either side of the line.
Mr. Duffy. Including downpayment? Because on average, jumbo
borrowers are putting 20 percent down, is that right?
Mr. Jaffee. Sure.
Mr. Duffy. And on average, we are seeing Americans put 5 or
10 percent down.
Mr. Jaffee. For sure. So I am agreeing, the average jumbo
borrower was different from the average conforming mortgage
borrower which, in computing the 25 basis points, we just tried
to control for that.
Mr. Duffy. Okay. So you think you have an accurate
representation?
Mr. Jaffee. As good as can be. I think it is generally
agreed that is a reasonable number.
Mr. Duffy. So looking at a world without our GSEs--which,
listen, I am on this pathway, so don't take my questions the
wrong way. But what does the market look like? Do we have
mortgages that are amortized for 30 years that will have a
fixed rate for 10 or 20 years? How does this look? How much are
we putting down? What can Americans expect? I know the four of
you have plans. You have probably done this analysis. But Mr.
Jaffee, if you want to go first, what does the market look like
in a non-GSE world?
Mr. Jaffee. The way I look at it is, we once had, not 100
years ago, but 20 and 30 years ago, such a market. The U.S.
mortgage market in the 1970s certainly, and I would say into
the 1980s, was predominantly a private market-driven system.
And what we had were mortgages. The standard U.S. mortgage was
a 30-year, fixed-rate, 20 percent downpayment mortgage. And I
know of no reason to think that would not recur if we were not
crowding out the private market today.
Mr. Duffy. But we have to agree that there is going to be a
significant difference in Americans' ability to purchase a home
if you are saving 20 percent to put down as opposed to 5 or 10
percent. It is going to take far longer. It is going to have a
significant impact on how the market works. And maybe that is a
good thing. We are going to have less risk in the mortgage
market. Is it fair to say a little longer in saving?
Mr. Jaffee. Except again, that I would say, remember now
that the homeownership rate over this period from 1950 to 1990,
when we did have this 20 percent downpayment mortgages, the
standard did go up from 55 to 64 percent. So it is not clear to
me, at least, that a 20 percent downpayment mortgage is not a
feasible solution.
Mr. Duffy. So it is not a correlation is what you are
saying in regard to downpayment and homeownership?
I only have a limited amount of time left.
Quickly. I come from rural Wisconsin. We have a lot of
small community banks. They expressed concern about what kind
of market would exist for them to still engage with
homeownership. Are they going to see the big banks take over
the mortgage business and leave them out? Because they are
concerned about the market they will be able to sell into.
Do you guys see a pathway for small community banks and
credit unions to still engage in a mortgage market without our
GSEs, Mr. Pollock?
Mr. Pollock. Yes. It is a very important part of the
system. Almost all of the 7,000 banks are small banks and we
should make sure they have a vibrant, competitive role. There
are various ways you can work on that. I would be happy to take
it up with you in more detail, if you would like.
Mr. Lea. One quick comment on that is that the GSE
activities during the 1990s actually encouraged a lot of
consolidation in the markets because the GSEs gave the big
banks, the aggregators preferential pricing, and that led to
the situation where the smaller community institutions were
increasingly dependent on the ability to sell to a Wells Fargo
or a Bank of America. And that was all due to GSE pricing
policy.
Mr. Duffy. I yield back.
Mr. Luetkemeyer. Thank you. Mr. Delaney?
Mr. Delaney. Thank you, Mr. Chairman. And I thank the
witnesses for your testimony here today.
Let's assume for a second that the 30-year fixed-rate
mortgage, as it is structured, is a good deal for the borrower
and not a good deal for the lender, which seems to me to be a
reasonable assumption because no lender would ever make a 30-
year fixed-rate prepayable mortgage unless they knew rates
would stay high, or unless they had a way of hedging the
interest rate risk and the prepayment risk, which they can do
better now than they probably ever could. But still, it is a
better economic proposition for the borrower and the lender.
And let's assume for a second the GSEs were poorly crafted
and poorly designed institutions. I think Mr. Pollock, you said
it quite well. You can be government, or you can be private,
but you can't be both. Because you get--from their perspective,
it was a ``heads they win, tails we lose'' kind of business.
And let's assume for a second that the government is
crowding out the private market, which I think to some extent
they are. So let's assume all these things for a second.
I am curious. And first, Mr. Pollock and then Dr. Lea. Two
questions. First, Mr. Pollock, have you done any analysis in
your evaluation of the housing market to indicate the cost of
the various subsidies and operating model that we have deployed
across the last, call it 30 or 40 years, to the taxpayer, and
compared that or contrasted that to the economic benefit that
was created in the country broadly for this kind of housing
finance system? Because it seems to me, we can't look at what
is wrong with our housing finance system in isolation without
doing deep serious research into the economic benefits that
were transferred to the economy to the tax base and to
consumers broadly.
And my second question for Dr. Lea is, as we think about
new housing finance models, which we clearly have to do, and
deciding what the role of government should be--I think there
should be some role of government, but it needs to be very
different than what it has been in the past. And we contrast it
to international markets which have idiosyncratic aspects, as
Professor Min indicated. But have you analyzed how those
markets, which are materially smaller than the U.S. housing
market, because I think the mortgage market in the United
States is the second smallest fixed income market in the world
and at different times, it was the largest fixed income market
in the world.
Have you thought about how those scale? Do they scale
successfully into a much larger model? And have you done
detailed research around that notion? So the first question for
Mr. Pollock, which is contrasting the benefits, really, has
this been a good investment for us economically?
Mr. Pollock. Congressman, that is a great question. It
would make a good project for an economist, of which I am not
one. I am a banker.
I would say this: We know that if you want to get efficient
allocation of resources you have to have markets and market
pricing. That is the way to do it. That is what we haven't had.
And that is what we need to move toward so that the prices of
these instruments and the prices of the houses are not to be
distorted. It is my view--and I think it is right--that all our
subsidy efforts have had the effect of pushing up the price of
houses, which is great if you happen to own one and your price
is going up. It is very bad if you are trying to buy one as an
entry level home buyer.
Mr. Delaney. I am not an economist either; I am actually a
banker by trade. But don't you think it is somewhat
intellectually dishonest to propose that the housing finance
system we have deployed, which in my introductory comments I
acknowledged, had deep structural flaws in it. But isn't it
somewhat intellectually dishonest to say that is not an
appropriate system absent an analysis of what benefits it has
created in the economy? So maybe we should have another time to
talk about that. Maybe we will go to Dr. Lea.
My question was, how do these other markets scale into the
first or second largest fixed income market in the world?
Mr. Lea. There are a couple of different ways of doing
that. You obviously have a demand for credit on one side
through the housing loan demand; and then you have a supply of
savings that is going to meet that demand. That savings comes
in a variety of forms. So as you mentioned before, commercial
banks are the dominant lenders and the dominant funders not
only in other countries, but if you look at what commercial
banks buy, Fannie and Freddie securities, in fact, they are the
dominant funding source here in the United States as well. And
what they are doing is engaging in regulatory arbitrage where
they are basically taking a 4 percent capitalized asset and
turning it into a 1.6 percent capitalized asset because it
could be guaranteed.
Mr. Delaney. So with 20 seconds left, do you think these
other markets can scale their models, could scale into our
sized market?
Mr. Lea. Yes, because it has been a variety of instruments
that are going to tap different sources of savings. So covered
bonds as well as mortgage securities can tap longer term
savings. And you want to have a mix of that. I think it is a
savings and investment question.
Mr. Luetkemeyer. Thank you. The gentleman from South
Carolina, Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman.
Gentlemen, thank you for doing this. I want to chat for a
little bit about a couple of different pieces of a credit
facility you have heard discussed a little bit today, which is
a 30-year fixed facility. I am a former home builder, so I am a
little familiar with it. I also did mortgage closings for a
long time, so I have been on all sides of these transactions.
And one of the things that I have heard discussed back and
forth a couple of times today is whether or not this particular
facility would continue to exist. Dr. Pollock thinks that it
would, that you don't need a GSE to have a 30-year. And Mr.
White probably agrees with him. And I agree with you, Doctor.
You had mentioned that you thought that insurance companies
were the proper funding source for those future loans because
that would match up.
Mr. White. And pension funds, Congressman.
Mr. Mulvaney. There you go. They are long-term.
Mr. White. They have long-term liabilities. They are
natural buyers.
Mr. Mulvaney. I recognize that Professor Min may disagree.
But tell me, Mr. Pollock, we will start with you, why you think
we would we still have a 30-year facility if we got rid of the
GSEs?
Mr. Pollock. For starters, we have 30-year loans where
there aren't GSEs. So, they clearly happen already. We had 30-
year loans when the GSEs were tiny and before one of them--
namely Freddie Mac--existed. We will have whatever the market
likes between demand and supply, just like always in markets.
At some price we will have the balancing point between what the
buyers demand and the suppliers will supply.
Mr. Mulvaney. And I think that is important. We had 30-year
fixed facilities before we had this dramatic participation in
the market by these GSEs, correct? In fact, I think--
Mr. Pollock. That is correct.
Mr. Mulvaney. --Dr. Jaffee correctly pointed out, you go
back to the 1960s and 1970s and my family was building houses.
Yes, we had a 30-year facility. No, we didn't really have the
same type of GSE participation. But we did have 20 percent
downpayment requirements. But we also had homeownership rates
well above 60 percent. So what we have seen over the course of
the last generation is that the downpayment requirements have
gone down, but homeownership has not gone up that dramatically.
All that has gone down dramatically is the equity in homes,
which I think exposes us to dramatic risk.
I want to ask one last question dealing with a 30-year fix,
which is that I can't help but wonder--each of you I think has
mentioned, I think accurately so, one of the root causes of the
S&L crisis, a previous financial crisis that we faced in this
particular industry which was caused by a mismatch of terms. We
had short-term money funding, long-term types of durations on
debt. Aren't we encouraging the same type of risk now? Isn't
this GSE proclivity, isn't the GSE the default preference for a
30-year fixed facility leading us down the exact same risk
today? Are we simply encouraging short-term money to invest in
long-term debt?
Mr. Pollock. It is certainly true that the banking
regulators are worried about the build-up of interest rate risk
under the current low interest rate environment. And I think
you and they are right.
Mr. Mulvaney. Dr. Lea?
Mr. Lea. Yes. I was just going to mention that it still
exists. We haven't gotten rid of that risk in our financial
system. I mentioned before that banks buy mortgage securities
and are funding them with a lot of short-term debt.
Mr. Mulvaney. And to the extent there is a bias in favor of
the 30-year mortgage, the market by itself might not issue as
much 30-year fixed debt as it is right now. I think that is
fair to say. It would offer more options. You would have more
10-year; you would have more 5-year balloons; you would have
more 20-year debt. Then, we have a 30-year fixed. That is the
market because our rules push us toward this 30-year fixed.
Professor Min, I am going to ask you the same question. Are
we going down the same type of road today with this bias
towards this 30-year fixed facility through the GSE subsidy
that you saw as being one of the root causes of the S&L crisis?
Mr. Min. I think it is important to recognize that asset
mismatch still continues to be the case in every country in the
world. I don't think personally there is enough long-term
demand for long-term elongated maturity securities. Even
insurance companies and pension funds want a lot of stuff that
they can roll over. I think the fact that so many countries
have that type of intermediation is important. So I think that
it is important to recognize also that in the 1960s and 1970s,
the real issue was that we encouraged risk to lend to 30-year
fixed. We gave them a benefit. It wasn't a private system, as
Dr. Jaffee has said. And it collapsed.
So I think today the problem is that banks have shied away
from interest rate risk. When you talk to bankers, they
typically will tell you that they want more than 10 percent of
their balance sheet being of these 30-year type--
Mr. Mulvaney. Do you think that one of the reasons they are
shying away from interest term risk is because we have had this
zero interest rate policy in place for the last 4 years?
Mr. Min. This was pre-crisis as well when you talked to
bankers. They didn't want the interest rate--it was post S&L
crisis that they shied away from that risk. So I think going
back to the depository system doesn't work as far as supplying
the 30-year fixed mortgage. I think covered bonds would do it.
But that comes with its own issues.
Mr. Mulvaney. Dr. Jaffee, you look like you had something
to add.
Mr. Jaffee. Yes. No one has commented that--we had some
prior discussion suggesting a 15-year mortgage might be more
reasonable, actually, given the high mobility of U.S. citizens.
What no one has commented on is the 15-year mortgage has a
lower interest rate than the 30-year. We have been deceived
into thinking the 30-year is so wonderful because it is
subsidized through the GSEs. If you take away those subsidies,
actually the desirable mortgage for most U.S. homeowners would
be the 15-year mortgage and they would actually get a rate
benefit because the interest rate would be lower.
Mr. Mulvaney. Thank you, Doctor. Thank you, Mr. Chairman.
Chairman Hensarling. The gentleman from Illinois, Mr.
Foster.
Mr. Foster. Thank you. One of the things that makes it hard
to compare mortgage systems across national boundaries is the
very different loan-to-value limits that happen in different
countries. And under normal market conditions, a 90 or even
more than 90 percent loan to value is actually a fairly safe
thing. But when there is a bubble market going on, like in Las
Vegas where the prices doubled in 2 years, even a 20 percent
loan-to-value is a very unsafe mortgage. And I was wondering if
any of you have comments on proposals to procyclically adjust
the loan-to-value limits on mortgages and how that might be
used to strengthen the system? We will start with Mr. Pollock.
Mr. Pollock. Thank you very much, Congressman, for that
question. Yes. Along with my colleagues, I do have such
proposals and I think it would be a very positive thing in the
American mortgage system if loan-to-value limits were
countercyclically geared to the behavior of prices. I like to
tell my banking friends, you think the collateral is the house
but it is not the house. It is the price of the house. And as
the price rises very high in a bubble, you need to be adjusting
the loan-to-value ratio down. I think it is very realistic to
think we could design such a system. Interestingly, our
neighbors in Canada did make some countercyclical loan-to-value
adjustments like that. They did it by regulation. I think a
systematic rule would be much better. Thank you.
Mr. Foster. Are there any other comments?
Mr. Lea. One very quick comment is that in Germany, they do
the adjustments through the appraisal process. So instead of
having an LTV regulation, they impose what is called a
mortgageable value valuation which tries to take a more cycled
view of what the true value of a house is.
Mr. Foster. So in other words, they look at the long-term
trend value of the house and treat rather skeptically the
recently expanded value of a house--
Mr. Lea. Absolutely yes.
Mr. Foster. --in terms of underwriting the mortgage.
Secondly, I was really, as I mentioned in my opening
comments, surprised about the positive things said about the
Danish system. And I was wondering if we could just go--anyone
who wants to comment or maybe all of you about what would be
the downside if we simply adopted the Danish system for both
the covered bond and noncovered bond part of their market?
Mr. Min. I addressed this in my testimony. I think that the
covered bond model could work in the United States. That being
said, I don't think it is a panacea against housing bubbles.
Denmark actually had a worse housing bubble than we did, partly
because of the proliferation of interest-only mortgages, which
currently have a market share of about 56 percent there. They
are facing a big fallout. It is a big policy problem right now.
But covered bonds could work. And particularly, they have been
providing the 30-year fixed-rate mortgage as they do in
Denmark. The downsides from the U.S. perspective, I think, are
that they tend to promote ``too-big-to-fail,'' because they are
best suited to be issued by large issuers.
In Europe, at least, where they have been successful, they
really do benefit from these government guarantees I describe
at length. So I am not sure they will achieve liquidity without
all sorts of these types of regulatory and other mechanisms
that really create guarantees for them if we transfer that to
the United States. So that is sort of the cost we would have to
deal with is implicit guarantees, ``too-big-to-fail,'' and all
the stuff that comes with that.
Mr. Lea. To point out one benefit of the system is that you
have a match between the loan and the bond. And it becomes a
very transparent system, a very efficient, much simpler than
what we have today. Of course, it also achieves high credit
quality by virtue of a maximum 80 percent loan-to-value ratio.
The downside is that it does require a higher borrower
downpayment.
Mr. Min. If I could respond to the maturity mismatch point,
the fact is that covered bonds--much like many long-term
obligations here where--collateralized and in the shadow
banking system, it actually became short-term liquid
liabilities, covered bonds serve the same purpose in Europe.
They really are a core part of the shadow banking system, as I
described in my written testimony.
So in fact, a lot of what seems to be long-term demand for
covered bonds is actually short-term demand for short-term
liabilities, which is one of the reasons they bailed out
covered bonds so heavily.
Mr. Pollock. Nothing, Congressman, saves financial systems
from cycles. It is a part of human nature, and therefore part
of financial systems. We could do very good things to moderate
the cycles like the countercyclical loan-to-value ratios we
were discussing. I think also the Danish-style covered bond
would be a very good addition to the United States, as one
instrument among others. The great advantage, as I see it, is
that while the interest rate risk doesn't go away, it is all
taken by the bond buyer, while keeping all the credit risk with
the maker of the loan, which aligns the incentives correctly.
Mr. Foster. The interest rate risk and the prepayment risk,
as I understand it. So you just simply could not have had, for
example, a savings and loan crisis with the Danish system
because it would have been agony in the bond market, which that
is what the bond market is for, is dealing with that. All
right. Thanks so much. I guess my time has expired.
Mr. Luetkemeyer. Thank you. The next questioner is the
gentleman from Kentucky, Mr. Barr.
Mr. Barr. Professor Min, a question for you specifically
pertaining to your testimony, assigning principal blame to
private label securitization as the proximate cause for the
financial crisis. Why would the private secondary mortgage
market not securitize subprime when the GSEs, in order to
promote their affordable housing goals, were the largest
purchaser of subprime and Alt-A mortgages during the exact time
period that your testimony referred to, the 2004-2007 time
period? If the government is churning that, why would the
private secondary mortgage market not be securitizing subprime?
Mr. Min. I believe that the GSEs actually started--became
the majority purchaser, I think, starting in 2005 or so, when
they convinced the regulator to do that. They also were the
largest purchaser of Alt-A. That being said, the demand for
AAA-rated private label securities has been described by a lot
of sources--universally, as almost infinite, that the AAA
demand, because it offered a higher coupon yield than agency
debt or treasuries, and had that AAA rating that was seen as
safe and because it was then recollateralized in different
markets, like repos and derivatives and over-the-counter sort
of transactions, there was almost infinite demand for it. So I
don't think the GSEs contributed materially to that. A lot of
people have written about that particular issue.
Mr. Barr. You acknowledge, though, Professor, that there
was a massive growth in the GSE subprime portfolio during the
time period that ran up to the financial crisis, correct?
Mr. Min. Sure. And I think a number of studies have looked
at that purchase amount. First of all, it was all AAA, and
determined that was not necessarily the driving cause of the
demand. Really the limiting factor on private label
securitization was the equity and mezzanine tranches. You had
to sell those to somebody. So that was the limit basically. You
could sell as much of the AAA stuff as you wanted. Somebody was
going to buy it. Central banks, insurance companies, banks, et
cetera.
Mr. Barr. You talk about the devil you know versus the
devil you don't know. We know--a little editorial comment
here--devil that we do know is a system with GSEs that operated
at a leverage ratio of over 200 to one--well over 200 to 1,
primarily because of the hybrid models that allowed politics to
drive it instead of market-based underwriting decisions. Where
profits were privatized, losses were socialized, and where as a
result, the taxpayers were exposed to up to $200 billion. So
that is the devil we know.
A question for Professor Lea. Alex Pollock has pointed out
that the long-term fixed-rate mortgage, while it has been
described as consumer friendly for obvious reasons, may not be
so consumer friendly in practice. As he puts it, consumers do
not benefit if rates go down, if they find that the values of
their homes have fallen and they can't refinance because the
long-term mortgages have effectively trapped them in their
homes. Isn't there another problem though that comes about
because the 30-year fixed-rate mortgage forces some borrowers
to subsidize others because lenders can't charge prepayment
fees? I think you mentioned that the absence of prepayment fees
raises the price of mortgages by 50 basis points. If this is
true, doesn't this force those who have no intention of
refinancing or moving from their homes to subsidize those who
want that option?
Mr. Lea. Yes. In fact, the cost is socialized and spread
through the mortgage interest rate to all buyers. And in fact,
you do find that there are certain groups who are more likely
to refinance and not surprisingly, it is better-off people who
have equity and are going to refinance more often. So the
contrast is to have a system where you pay for the option only
when you exercise it. That is the European model, which applies
prepayment penalties not for the 30-year time period, but
generally for the time the rate is fixed, which is oftentimes
just 5 to 10 years.
Mr. White. Can we expunge from the discussion the phrase
``penalty?'' It is a fee for exercising a valuable option.
Don't think of it as a penalty. Think of it as a fee for
exercising a valuable option. Please.
Mr. Barr. Let me just conclude. I have a little bit of time
left. Let me just conclude by asking kind of a more general
question for anyone who would like to chime in. I would like to
inquire about the Federal Home Loan Bank model. We have been
talking about, okay, beyond GSEs, what do we go to next? How do
we have a vibrant private sector-driven secondary mortgage
marketplace that gives us a range of products for consumers,
including the 30-year fixed-rate mortgage? What are your views
on the Federal Home Loan Bank model in terms of driving, I
guess, that secondary mortgage marketplace as a substitute to
the GSE model? Professor Min, I would like your thoughts on
this too.
Mr. Min. I think it would create lots of liquidity. It has
been a proven model. I am not sure it would lead to 30-year
fixed-rate broad origination because of that interest rate risk
that would be held by the depository institutions that receive
the advances.
Mr. Pollock. I am an interested party, Congressman, as you
know, having run a Home Loan Bank and invented their mortgage
business. I think we do need to consider how the Home Loan
Bank, which is a GSE, but a much better kind of a GSE than
Fannie and Freddie, could fit into this bigger picture. I would
be glad to come talk to you about that if you would like.
Mr. Barr. Okay. I yield back.
Mr. Luetkemeyer. Thank you. Just as a housekeeping matter,
we do have to clear the room here by 1:00, so we will have one
more Member on each side speaking. First, Mr. Ellison, and then
Mr. Royce will finish it up. And with that, Mr. Ellison from
Minnesota.
Mr. Ellison. Thank you, Mr. Chairman. And let me thank
everyone on the panel. This is a very important discussion. Let
me just lay a little groundwork for my question. The U.S.
housing market is subsidized by tax incentives. And one of
those tax incentives is mortgage interest deduction. I know
Professor White, you and Representative Waters talked about
that a little bit before. But it is also true that the Simpson-
Bowles Deficit Commission and other bipartisan commissions have
recommended converting the deduction into a tax credit. Others
have recommended eliminating the deduction entirely to lower
rates or to reduce the deficit. The benefits of the mortgage
interest deduction are primarily to the top quintile of the
income scale. And that is families with incomes above about
$100,000 a year. Could you all talk about whether other
countries use these kinds of tax incentives? To what extent do
other countries provide generous tax benefits to homeowners or
do they subsidize the interest on a mortgage property tax and
capital gains while also exempting imputed rent? Go right
ahead, Mr. Pollock?
Mr. Pollock. Congressman, many other countries do not have
the home interest deduction, such as Canada, for example, our
neighbor. And yet, they have homeownership equal to or greater
than ours.
Mr. White. The U.K., the United Kingdom, England used to
have it. I think they changed from a mortgage interest
deduction to none, I believe it was in the 1970s. And grass
didn't start growing in the streets. It is possible to make a
transition to a less subsidized system.
Mr. Ellison. Professor Min?
Mr. Min. One additional comment. Germany has an interesting
model where I believe they give tax subsidies to landlords and
renters. So that might be something we are considering as well.
Mr. Ellison. Do you all think that we could reform the
mortgage interest deduction so that it reaches more future
homeowners and isn't so highly concentrated in the top
quintile?
Mr. White. If you want to keep it, Congressman, turn it
into a refundable tax credit so that not just high-income
households that are more likely to take deductions rather than
use the standardized deduction. Sorry. Itemized versus the
standard deduction. If you want to keep it, turn it into--
Mr. Min. You could cap it. That would be an easier fix but
maybe not as effective.
Mr. Ellison. Dr. Lea?
Mr. Lea. I will make a more general comment. If you look
particularly at the housing market, but more broadly at trends
in the U.S. economy, we have become addicted to debt generally.
Not just mortgage--student, auto, everything else. And if you
are going to talk about providing subsidies for particular
activities such as home purchase, then doing it through the
savings side makes sense because we need to have more savings
generally in this country and less emphasis on debt.
Mr. Ellison. Thank you for that. I will try to move
quickly, because they only give us 5 minutes.
Professor Min, you have mentioned I think in your testimony
that other nations make a more significant investment in rental
housing than the United States does. I would like to give you a
chance to elaborate on that. One of the little factoids out
there that I picked up on which is important to me is that in
the United States, more than half of renters pay more than 30
percent of their income for housing; for the lowest-income
families, more than 80 percent pay more than half of their
income for housing. And we already have a shortage of about 7
million homes affordable to families at the 30 percent area
median income. In my own district, I can tell you, we have
10,000 people on the waiting list for public housing. Could you
elaborate a little bit?
Mr. Min. I have not done an exhaustive analysis, but in
looking at a few countries, I think generally what you see is
two ways in which rental housing is subsidized: one is direct
subsidies; and the other is sort of tax credits. And I guess
there is a third which is transfer of payments so that people
have a higher minimum level of income. I think all of those
help support rental housing, particularly in European
countries.
Mr. Ellison. With my very short time, does anybody care to
comment on how other countries help people who are renters or
particularly at the low-income level?
Mr. Lea. Again, mainly through rental subsidies to help
people afford rents beyond a certain percent of their income
but to a much larger portion of the population than we do.
Mr. Ellison. Do other countries have this problem with low-
income housing on the same scale we do? Is this a worldwide
problem among industrialized economies?
Mr. Min. What do you mean by a problem?
Mr. Ellison. We need 7 million more homes which are
affordable to families at the 30 percent.
Mr. Min. Affordability--I think that the United States is
probably pretty unique among the advanced economies in that
regard.
Mr. Pollock. I know that in international discussions of
housing finance, the problem of affordability and low income is
often discussed by many countries.
Mr. Ellison. Thank you all.
Mr. Luetkemeyer. With that, the gentleman from California,
Mr. Royce, will wind it up.
Mr. Royce. Thank you, Mr. Chairman.
I think at the end of the day, the question here with 90
percent of the market currently, the housing market, in the
hands of the GSEs, is what are we going to do to reform the
system to have private capital come back into the market, so as
to return the stability to our housing finance system? And the
element of this that concerns me is that the more distance
there is from the last housing implosion, the memory loss that
we are going to have over the factors that played into it, and
the euphoria that we are going to feel over maybe the rise of
Fannie and Freddie stock, or what have you, will take
precedence over the actual impact this had on the average
homeowner, the type of individual who lost their home, the
consequences of political interference in the market--and I
know not everybody agrees with this. But I have always thought
that replacing political poll by putting that in charge instead
of market forces, that would always be the crux of a moral
hazard problem, because good intentions have no limits in terms
of Congressional interaction or from the Executive Branch.
So if we go back to the good intentions with respect to
zero downpayment loans, or the good intentions with respect to
allowing the GSEs to overleverage 200 to 1, I understand what
drove that, the idea to put everybody into a home. But I
understand how injurious it was because at the end of the day,
we had a lower homeownership rate.
Traditionally, when private capital dominates, the
ownership rate is pretty constant, and you do something to
mitigate the boom-bust cycle. But here we had three factors of
government intervention in play at one time. We had, from 2003
on, the decision by the Federal Reserve to run negative real
interest rates for 4 years in a row--and I remember the
economist opining on this, the London economist foresaw the
asset bubble that this would create. But when I went back
through the minutes, it was Mr. Bernanke who suggested this
approach at the time. And I understand what they were trying to
do. But central banks always overcompensate during growth
periods and set those interest rates--traditionally, set them
too low. And here we had the consequence of an asset bubble.
But on top of that bubble, we were able to further leverage it
because of some of the actions that Congress took. And in one
case, action the SEC took.
By allowing the investment banks the SEC decision on that,
allowing the investment banks to leverage it 30 to 1, that was
a profound error. But combining that with the GSEs, which by
then were 60 percent of the market, who had imposed upon them
this added mission with the housing goals of purchasing
subprime and thus putting their--on those documents and holding
those subprime in their portfolio up to 200-to-1 leverage, as I
mentioned, that was $1.7 trillion.
I had legislation in 2003 to try to allow the regulatory
community to do what they wanted to do, which was to regulate
this for systemic risk. And I remember how difficult it was
during a housing boom to get anybody to focus on what the
downside risk would be if the implosion came. But we had at the
Fed at that time those who understood this problem and who told
me this will start in housing and it will spread. And sure
enough, when the GSEs collapsed and went down like dominos, the
investment banks came out after them. By the way, AIG was
overleveraged 170 to1.
Your comments, Dr. Lea or Dr. Jaffee, on how we get action
now before we lose the institutional memory of--there were
other factors of course. But I am giving you some of the ones
that were most immediately observable to me. Dr. Lea?
Mr. Lea. I think we have to continue and accelerate the
course we have started on with regard to reducing the footprint
of the GSEs. One way is through reducing the loan limits. I
don't see a rationale for the high loan limits we have today.
Also in terms of raising their guarantee fees because right
now, they are crowding out the private sector. We don't have
the option to see what the private sector can do because the
GSEs are taking the bulk of the market.
Mr. Royce. Dr. Jaffee?
Mr. Jaffee. Yes, sir. I would agree. The two vehicles are
to reduce the conforming loan limits, perhaps raise the
guarantee fees that the GSEs are charging, and do that step by
step. And it is actually a very safe way because you will see
the results. You will see the jumbo markets coming back. If you
don't see them, of course, you will go more slowly. If it is
working great, you go more quickly. I think it is a very
feasible path.
Mr. Royce. Thank you, Mr. Chairman.
Mr. Luetkemeyer. Thank you, Mr. Royce. And I would like to
thank all the witnesses again for their testimony today. You
guys have done a great job and we appreciate the opportunity to
pick your brains and be able to get certain information for our
further discussion and deliberation.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
The Chair would also announce that we have another hearing
in here starting at 1:00, so please take any conversations you
have with your staff or anybody else to the back room or
outside. And with that, the hearing is adjourned. Thank you.
[Whereupon, at 1:00 p.m., the hearing was adjourned.]
A P P E N D I X
June 12, 2013
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