[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
SUSTAINABLE HOUSING FINANCE:
PRIVATE SECTOR PERSPECTIVES
ON HOUSING FINANCE REFORM
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
OCTOBER 25, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-49
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
30-338 PDF WASHINGTON : 2018
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
Subcommittee on Housing and Insurance
SEAN P. DUFFY, Wisconsin, Chairman
DENNIS A. ROSS, Florida, Vice EMANUEL CLEAVER, Missouri, Ranking
Chairman Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
STEVAN PEARCE, New Mexico MICHAEL E. CAPUANO, Massachusetts
BILL POSEY, Florida WM. LACY CLAY, Missouri
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
STEVE STIVERS, Ohio STEPHEN F. LYNCH, Massachusetts
RANDY HULTGREN, Illinois JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DANIEL T. KILDEE, Michigan
LEE M. ZELDIN, New York JOHN K. DELANEY, Maryland
DAVID A. TROTT, Michigan RUBEN KIHUEN, Nevada
THOMAS MacARTHUR, New Jersey
TED BUDD, North Carolina
C O N T E N T S
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Page
Hearing held on:
October 25, 2017............................................. 1
Appendix:
October 25, 2017............................................. 42
WITNESSES
Wednesday, October 25, 2017
Bailey, Nikitra, Executive Vice President, Center for Responsible
Lending........................................................ 8
Chavers, Kevin, Managing Director, BlackRock, on behalf of the
Securities Industry and Financial Markets Association.......... 10
Hughes, Brenda, Senior Vice President and Director, Mortgage and
Retail Lending, First Federal Savings Bank, on behalf of the
American Bankers Association................................... 5
Stafford, Richard, President and Chief Executive Officer, Tower
Federal Credit Union, on behalf of the National Association of
Federally-Insured Credit Unions................................ 12
Vallandingham, Samuel, President and Chief Executive Officer, The
First State Bank, on behalf of the Independent Community
Bankers of America............................................. 7
APPENDIX
Prepared statements:
Bailey, Nikitra.............................................. 42
Chavers, Kevin............................................... 68
Hughes, Brenda............................................... 75
Stafford, Richard............................................ 86
Vallandingham, Samuel........................................ 106
Additional Material Submitted for the Record
Stafford, Richard:
Written responses to questions for the record submitted by
Representative Sherman..................................... 114
Vallandingham, Samuel:
Written responses to questions for the record submitted by
Representative Sherman..................................... 115
SUSTAINABLE HOUSING FINANCE:
PRIVATE SECTOR PERSPECTIVES ON
HOUSING FINANCE REFORM
----------
Wednesday, October 25, 2017
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Sean Duffy
[chairman of the subcommittee] presiding.
Present: Representatives Duffy, Ross, Royce, Pearce, Posey,
Luetkemeyer, Stivers, Hultgren, Rothfus, Zeldin, Trott,
MacArthur, Budd, Hensarling, Cleaver, Capuano, Sherman, Beatty,
and Waters.
Also present: Representative Hill.
Chairman Duffy. The Subcommittee on Housing and Insurance
will come to order. Today's hearing is entitled, ``Sustainable
Housing Finance: Private Sector Perspectives on Housing Finance
Reform.''
Without objection, the chair is authorized to declare a
recess of the subcommittee at any time. And without objection,
all members will have 5 legislative days within which to submit
extraneous materials to the chair for inclusion in the record.
Without objection, members of the full committee who are
not members of the subcommittee may participate in today's
hearing for the purpose of making an opening statement and
asking our great panel of witnesses questions.
The chair now recognizes himself for 3 minutes for an
opening statement. I first want to thank the panel for taking
the time out of your busy lives to come in and testify for us
today, to dispense great wisdom and insight for us as we look
at housing finance reform. This is one of many hearings that we
are going to hold on this very topic.
If you look at the panel today, you will notice that there
is a common theme, and that is finance. Well, the most
important person reforming housing finance system are home
buyers, it is vitally important that the way we reform the
housing finance system allows for a transition that provides
certainty to those that are involved in making the dream of
home ownership come true, the dream of a family of finally
being able to own a home.
We have seen a number of principles and proposals in the
last decade on reforming the housing finance system and they
have come from academics and think tanks and the private
sector. Even Members of Congress have put out ideas and
principles on how this reform should look.
What I hope for today is to hear from all of you on which
of those principles and proposals you believe would be best for
us to focus on. I want to hear from the panel about what we can
preserve in the current system.
But more importantly, what isn't working? And how do we
incentivize more of the private sector development? Many of you
have called for an explicit government guarantee on mortgage-
backed securities. And we should explore your proposals.
But can we also structure a system in which private capital
comes in and bears that frontal risk where we also have that
catastrophic government backstop? How do we deal with the
duopoly of Fannie and Freddie to limit taxpayers' exposure on
losses?
How do we expand the pool of eligible investors for credit
risk transfers? Is it appropriate for the GSEs to continue to
own the common securitization platform, or can we utilize that
structure for all housing finance reform stakeholders?
We need a system that will allow for consumers to have a
variety of options in mortgage products. One of our top goals
should be a system that promotes affordability, choice, and
innovation.
While incentivizing the development of options, we must
also ensure that people are not entering into mortgages they
cannot afford. They can't maintain because we see how
disastrous this is for our economy, but also for the very
families who have mortgages and they go in default and then
foreclosure. So I look forward to our panel's testimony today.
And with that, I yield to the ranking member, the gentleman
from Missouri, Mr. Cleaver, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. Thank you for the
hearing today on private sector perspectives on housing finance
reform. And thank you to the witnesses for joining us today.
Today's hearing will focus on the private sector's
perspective regarding housing finance reform. And earlier this
month, we had the opportunity to hear from Director Mel Watt on
his assessment on the current state of FHFA.
I welcome Dr. Watt's update on FHFA's effort in developing
the common securitization platform, as well as his opinion on
the significance of the housing trust Fund and capital magnet
fund. It is important to remember that we are in the midst of
an affordable housing crisis, and this funding plays an
important role in developing and creating affordable housing in
our country.
The national low income housing coalition released a report
recently, and in that report I pulled out something that I
probably will not forget while I am here in Congress. And they
wrote, and I quote, ``There is no State, city or county where a
minimum wage worker can afford to rent a modest two-bedroom
apartment.'' And that is tragic.
There is some work to be done. And many of my constituents
are still recovering from the financial crash of 2008 and to be
sure, our entire economy is still trying to recover.
The recession greatly exacerbated the wealth gap,
especially for vulnerable communities, including African
Americans, Hispanics and low income individuals. Home ownership
has historically been an important piece of the puzzle in
building wealth in this country, a critical component of the
American Dream I would add.
The recession devastated decades of accrued wealth, leaving
many in dire situations with foreclosed homes as rampant
unemployment plagued the communities. As we move forward in
discussing GSE reform, it is important to ensure that the
housing finance system is inclusive.
Though congressional efforts on housing finance reform
stalled in the 113th Congress, I am hopeful that the committee
will be able to work together on a bipartisan basis this
Congress.
I believe that any attempt to reform the GSEs must preserve
the 30-year fixed rate mortgage. And I look forward to hearing
our witnesses' perspective on this.
Additionally, reform to our housing finance system must
focus on preserving affordability in the housing market,
protecting taxpayers, providing stability and liquidity in the
market, and ensuring access to smaller lenders. I look forward
to hearing from our witnesses.
And thank you, Mr. Chairman.
Chairman Duffy. The gentleman yields back. And I do look
forward to working with him.
The chair now recognizes the vice chair of this
subcommittee, the gentleman from Florida, Mr. Ross, for 2
minutes.
Mr. Ross. Thank you, Chairman Duffy, and thank you for
calling this hearing. As this subcommittee prepares to address
one of the most intractable, complex and, indeed, divisive
policy matters facing Congress, it is important that we talk to
those who work in this field day in and day out. So I thank you
all for being here and joining us for this hearing.
Notwithstanding the many questions that obstruct our path
forward on housing finance reform, one thing is absolutely
certain: the status quo is unsustainable. Congress needs to
allow Americans to have a better housing finance system rather
than continue to support the endless boom and bust cycles in
real estate.
Americans deserve a competitive marketplace that provides
choice and opportunity to the hardworking men and women of this
country. The financial crisis of 2008 was not that long ago. We
should not forget that at its core, the Federal Government had
created a system that was unsustainable.
According to Peter Wallison of the American Enterprise
Institution, ``By 2008, 19.2 million of the total 27 million
sub-prime and other weak loans in the U.S. financial system
could be traced directly or indirectly to U.S. Government
housing policies.'' We saw what came of that.
The two biggest players in the housing finance world,
Fannie Mae and Freddie Mac, required a taxpayer bailout in the
amount of $200 billion. And yet in the flurry of new laws that
followed the crisis, nothing, next to nothing was done to
address the underlying structural failings that played such a
large role in the financial crisis.
When Dodd-Frank was passed, legislators argued it would
prevent another crisis. But much of what it did only seemed to
add greater layers of bureaucracy, incentivize greater
consolidation, and further obscure the weaknesses of our
housing finance system.
The fact is we are doomed to repeat history unless we take
the time and hearings like this one to dig into those difficult
issues that our constituents sent us here to address.
I think we all know why the Federal Government is involved
in housing finance. It is because we recognize that home
ownership is a fundamental part of the American Dream. But
today I am looking forward to hearing about ways people can
achieve that American Dream without fear of another economic
collapse that turns the dream of home ownership into a
nightmare.
Thank you, and I yield back the balance of my time.
Chairman Duffy. The gentleman yields back.
The chair now recognizes the gentleman from California, Mr.
Sherman, for 2 minutes.
Mr. Sherman. One problem is the availability of affordable
housing. We need to build more apartments, condos, and homes.
That is in significant degree a local decision because you
cannot build if they don't let you build.
The 2008 crisis came because we allowed the bond rating
agencies to give AAA to Alt-A. They get paid by the issuer and
if they give a good grade they get another contract. I think
the market has been spooked, correctly, so much that this is
unlikely to happen again until we forget that it happened.
But to blame this on Fannie Mae and Freddie Mac is absurd.
The problem was the tendency to invest in bad mortgages just
because they yield an extra quarter percent.
The current system works spectacularly well. Ordinary
working families are able to borrow. Now, there are some
problems, but compared historically, when in history have
ordinary working families been able to borrow $300,000,
$400,000, $500,000 at fixed rate, low rate, from people they
have never met?
This is a system that ought to be preserved. The failure
was when we tried to have Fannie and Freddie be both government
agencies in terms of their downside and private corporations in
terms of their upside. That is called crony capitalism,
socialism for the wealthy, whatever term you use. It is a bad
system.
So we now have a system that generates a substantial profit
for the Federal Government and no one on this committee has
offered the tax increase legislation to replace that profit. So
we have a system that creates profit for the Federal
Government, allows ordinary families to borrow huge amounts at
low interest rates, and I don't know why we are talking about
throwing the whole thing away.
Thank you.
Chairman Duffy. The gentleman yields back.
We now welcome our panel and our witnesses. Our first
witness is Mrs. Brenda Hughes--welcome--senior vice president
of First Federal Savings on behalf of the ABA.
Our next witness is Mr. Samuel Vallandingham--I hope I got
that right--president and CEO of First State Bank on behalf of
Independent Community Bankers of America.
Next we have Ms. Nikitra Bailey, executive vice president
at the Center for Responsible Lending. Welcome.
Next we have Mr. Kevin Chavers, managing director of
BlackRock on behalf of the Securities Industry and Financial
Markets Association or SIFMA. Welcome.
And finally, last but not least, we have Mr. Rick Stafford,
president and CEO of Tower Federal Credit Union on behalf of
the National Assessment of federally Insured Credit Unions. To
all, welcome.
The witnesses will in a moment be recognized for 5 minutes
to give an oral presentation of their testimony. Without
objection, the witnesses' written statements will be made part
of the record following your oral remarks.
Once the witnesses have finished presenting their
testimony, each member of the subcommittee will have 5 minutes
which they can ask all of you questions.
You will note on the table in front of you there are three
lights. The green light means go, the yellow light means you
have 1 minute left, and the red light means your time is up.
Your microphones are sensitive so please make sure that you are
speaking directly into them.
And so with that, Ms. Hughes, you are now recognized for 5
minutes for your presentation.
STATEMENT OF BRENDA K. HUGHES
Ms. Hughes. Good morning. Chairman Duffy, Ranking Member
Cleaver, my name is Brenda Hughes.
Chairman Duffy. And Ms. Hughes, if you would just pull your
microphone up so we can all--
Ms. Hughes. OK.
Chairman Duffy. Or pull it directly--yes.
Ms. Hughes. OK. Thank you.
Chairman Duffy. We want to hear your testimony. Thank you.
Ms. Hughes. I serve as senior vice president and director
of Mortgage and Retail Lending for First Federal Savings of
Twin Falls, Idaho. We are a $622 million asset savings
association founded in 1915. I appreciate the opportunity to be
here to present APA's views on GSE reform and community bank
access.
This issue is a critical one for our country. Americans
have relied on access to long-term fixed rate mortgages for 70
years.
Fannie Mae and Freddie Mac have facilitated access to this
product by providing access to the capital markets for primary
market lenders. These GSEs have been a conservatorship for
nearly 9 years. We should not delay reform any longer.
Absent aggregation and securitization, access to long-term
lower rate funding would be far more difficult to come by for
most primary lenders. The government backstop provided to
mortgage-backed securities, guaranteed by the GSEs make them
attractive to the capital markets, ensuring liquidity.
As we consider reform, these elements must be preserved and
remain available to support all primary market participants,
regardless of size or location. First Federal relies on this
access and actively delivers loans directly to Freddie Mac,
retaining servicing on these loans. We currently service
approximately 5,100 loans.
Like so many banks, both large and small, access to the
secondary markets or federally guaranteed secondary market is
essential to our ability to meet the mortgage needs of our
customers.
ABA has worked with bankers from institutions of all sizes
and from all parts of the country to develop shared principles
which should guide reform of the GSEs.
For my testimony today, I would like to highlight a few key
principles. More detail on these principles can be found in my
written testimony.
We believe that the following principles should form the
basis for legislative reform efforts. First, the GSEs must be
strictly confined to a secondary market role, providing
stability and liquidity to primary mortgage market for low to
moderate income borrowers.
They must be strongly regulated, thoroughly examined and
subject to immediate corrective action for regulatory
violations. In return for their GSE status, and the associated
benefits, entities must agree to support all segments of the
primary market in all economic environments and provide
equitable access to all primary market lenders.
This includes the preservation of the to-be-announced
market and both servicing and retained and sold options.
Mortgage-backed securities issued by the GSEs should carry an
explicit guarantee from the Federal Government. These
guarantees should be fully paid for through the guarantee fees
equitably assessed.
The GSEs must be capitalized appropriately. Capital
requrements must be tied to sound underwriting practices to
ensure that it reflects the risk borne by these institutions.
Expanding affordable housing is also an important component
of the GSEs' mission. The FHLB Affordable Housing Program is a
strong model that has delivered over $5.4 billion in funds to
expand affordable housing, and we believe it should be used as
a model in a reformed GSE system.
Credit risk transfers required by FHFA should be continued
and expanded. The vital role played by the Federal Home Loan
Banks, not to be confused with the roles played by Fannie Mae
and Freddie Mac, is working today, and must not be impaired.
Congress has an essential role in providing the certainty
necessary to ensure long-term stability of the housing finance
system. Without legislative reform, past abuses may be
repeated.
Some will argue that this can be accomplished via
regulation, and FHFA has done an admirable job in recent years
ensuring equitable treatment and addressing other past abuses.
However, regulators and other regulatory approaches can change
over time. While a strong regulator must be part of reform, so
too, must be clear statutory guidance.
Reform not need be radical or extreme, but comprehensive.
Legislation need not create an entirely new secondary market
structure. In fact, guided by these key principles we believe
that relatively tailored legislation that takes a surgical
approach to making necessary alterations to the current system
is desirable and can achieve the needed comprehensive reform.
These legislative reforms are critical. Just as the Federal
debt market provides a bellwether that makes all private debt
markets more efficient and liquid, an explicit, fully priced,
fully paid for Federal guarantee for a targeted portion of the
mortgage market will be a catalyst for broader market growth
and development.
Congress should not defer action any longer. 9 years of
conservatorship is more than enough. Thank you for the
opportunity to share our views with the subcommittee, and I am
happy to answer any questions you have.
[The prepared Statement of Ms. Hughes can be found on page
75 of the appendix.]
Chairman Duffy. Thank you.
Mr. Vallandingham, you are now recognized for 5 minutes.
STATEMENT OF SAMUEL A. VALLANDINGHAM
Mr. Vallandingham. Thank you, sir. Chairman Duffy, Ranking
Member Cleaver, members of the subcommittee, I am Samuel
Vallandingham, president and CEO of the First State Bank, a
$200 million asset bank in Barboursville, West Virginia.
As a fourth generation community banker, I am pleased to be
here today on behalf of ICBA and more than 5,700 community
banks. ICBA strongly sports GSE reform, but it is critical to
borrowers in the broader economy that the details of reform are
done right.
Community bank mortgage lending is vital to the strength
and breadth of America's housing market. Community banks
represent approximately 20 percent of the mortgage market, but
more importantly, our mortgage lending is often concentrated in
rural areas and small towns, which are not effectively served
by large banks.
For many rural and small town borrowers, a community bank
loan is the only option for buying a home. Through a
correspondent network of 60 community banks, First State Bank
serves over 60 rural and suburban communities in the eastern
United States.
Our bank survived the Great Depression and numerous
recessions, as have many ICBA member banks by practicing
conservative, commonsense lending and serving our community
through good times and bad.
Today I would like to talk to you about my bank's mortgage
lending and the importance of secondary market access. The
First State Bank has been selling mortgages in the secondary
market since 1980 to access additional funding.
Today we have a nearly $600 million servicing portfolio,
consisting of approximately 5,500 loans, many of which are
purchased from other community banks. Most of these loans are
held by Freddie Mac and a smaller number are held by Fannie
Mae. First State Bank and our customers depend on secondary
market access.
The secondary market allows me to meet customer demand for
fixed rate mortgages without retaining the interest rate risk
these loans carry. As a small bank, it is not feasible for me
to use derivatives to manage interest rate risk.
Selling in the secondary market frees up my balance sheet
to serve customers who would prefer adjustable rate mortgage
loans, as well as small business loans, which play a vital role
in our community.
ICBA's approach to GSE reform is simple. Use what is in
place today and is working well and focus reform on aspects of
the current system that are not working or that put taxpayers
at risk.
ICBA has developed a comprehensive set of secondary market
reform principles. First, community banks must have equal and
direct access. They must have the ability to sell loans
individually for cash under the same terms and pricing
available to larger lenders.
Second, there can be no appropriation of customer data for
cross-selling of financial products. We must be able to
preserve our customer relationships after transferring loans.
Third, originators must have the option to retain servicing
at reasonable cost. Servicing is a critical aspect of the
relationship's lending business model vital to community banks.
Finally, an explicit government guarantee on GSE mortgage-
backed securities is needed. For the market to remain deep and
liquid, government catastrophic loss protection must be
explicit and paid for through GSE guarantee fees at market
rates.
This guarantee is needed to provide credit assurance to
investors, sustaining robust liquidity even during periods of
market stress.
Without these principles, we could see further
consolidation of the mortgage market, which would limit
borrower choice and disadvantage communities. Any version of
reform that effectively transfers the asset's infrastructure or
functions of the GSEs to a small number of megafirms could
devastate the housing market in thousands of small communities
and put our financial system at risk of another financial
collapse.
Finally, ICBA believes that the GSEs must be allowed to
rebuild their capital buffers. Though Fannie Mae and Freddie
Mac have returned to profitability, the quarterly sweep of
their earnings to the Treasury has seriously depleted their
capital buffers.
Absent a change in policy, they are on track to fully
deplete their capital by year-end. A draw from the Treasury
could trigger a market disruption. This self-inflicted crisis
can and must be avoided.
While Congress debates the reform the FHFA should protect
taxpayers from another bailout. ICBA urges FHFA to follow the
Housing and Economic Recovery Act of 2008 and require both GSEs
to develop and implement a capital restoration plan.
ICBA is pleased to see a robust debate emerging on housing
finance reform and hopes to have a seat at the table on behalf
of the communities we serve as these discussions continue.
Thank you again for holding this hearing and for the
opportunity to testify.
[The prepared Statement of Mr. Vallandingham can be found
on page 106 of the appendix.]
Chairman Duffy. Thank you.
Ms. Bailey, you are recognized for 5 minutes.
STATEMENT OF NIKITRA BAILEY
Ms. Bailey. Good morning, Chairman Duffy, Ranking Member
Cleaver and members of the House Committee on Financial
Services Subcommittee on Housing and Insurance. Thank you for
the opportunity to testify regarding our Nation's housing
finance system, an issue that profoundly affects American
families and is critical to the overall housing industry, which
is nearly 20 percent of the United States' economy.
I am executive vice president of the Center for Responsible
Lending, a nonpartisan, nonprofit research and policy
organization dedicated to protecting home ownership and the
family wealth that it creates.
We are an affiliate of Self-Help Credit Union, local
community economic development lender that is based in Durham,
North Carolina, that has provided over $7 billion of financing
to borrowers, homeowners, small community organizations such as
health facilities and nonprofits and charter schools across the
Nation.
We also have a credit union network that serves over
130,000 people in the States of North Carolina, California,
Chicago, Florida and Wisconsin.
Reforming the housing finance system presents Congress with
the chance to make America as good as its promise. For most
families, the secondary market's purpose is simple. It is about
providing opportunity to pursue homeownership and the security
that homeownership offers.
Homeownership is the engine that drives the economy by
creating jobs that stabilize communities all across our Nation.
The jobs created by homeownership are HVAC installers, tile
layers, plumbers and clerks at local home improvement stores.
Homeownership has been the primary vehicle that most families
use to build wealth and remain in a stable middle class.
Sadly, our housing finance system is rooted in lending
discrimination. Several policies created as a response to the
1930's' Great Depression were designed to help spur economic
growth and appear to treat everyone the same.
However, these policies provided affirmative benefits to
white families of European ancestry, while denying mortgage
credit to African Americans and people of color.
The Federal action prevented families of color from
building wealth through homeownership. And I want to give you
two examples of the impact of this.
In the first 35 years of the FHA's administration, 98
percent of loans went to white families, with only 2 percent of
loans going to families of color.
In the State of Mississippi in the V.A. program two out of
3,229 loans went to black servicemembers who served our country
in the first 3 years of the program's implementation. As a
result, white families had a leg up and an ability to build
wealth faster.
Borrowers of color entered into a market that was
redlining, subject to predatory lending, and they were often
pushed into loans that made foreclosure more probable. These
families lost $1 trillion of wealth as a result of abusive
lending practices.
The African American homeownership rate today is the exact
rate that it was in 1968 when this Congress passed the Fair
Housing Act in response to the death and assassination of one
of our country's great leaders, Dr. Martin Luther King, Jr.
The Federal Government's role in perpetuating housing
discrimination in the housing finance system must be addressed
because the families stymied by the millstone of racism deserve
a chance to succeed.
Future reforms must build on HERA and the new great
protections offered by Dodd-Frank and the Consumer Financial
Protection Bureau that has stabilized the mortgage market as it
is on a path to receiving steady returns.
The duty to serve provisions that began in the GSEs'
charters and remain in HERA, require that credit is available
all across the Nation in all communities.
This directive creates liquidity for loans in every
community, and especially in rural communities, and helps small
lenders gain access to credit because oftentimes they are the
ones serving the mortgage needs of those communities that are
left behind.
We must make sure that small lenders are on equal footing
with large lenders, and we must preserve the affordable housing
goals.
I will end today by thanking you for your great work that
you have already done. Please build on this existing reform.
And contrary to varies that Dodd-Frank stifled the market,
in 2006, financial institutions had total annual profits of
$171 billion, the highest level since 2013. Community bank
profitability rebounded as well, and by the end of 2015, over
95 percent of community banks were profitable.
Thank you for the opportunity. I look forward to answering
your questions.
[The prepared Statement of Ms. Bailey can be found on page
42 of the appendix.]
Chairman Duffy. Thank you, Ms. Bailey.
Mr. Chavers, you are recognized for 5 minutes.
STATEMENT OF KEVIN CHAVERS
Mr. Chavers. Good morning. Chairman Duffy, Ranking Member
Cleaver and members of the subcommittee, thank you for the
opportunity to testify today on the important topic of housing
finance reform.
My name is Kevin G. Chavers, and I am the managing director
at BlackRock focusing on public policy issues, testifying today
both on behalf of BlackRock and the Securities Industry and
Financial Markets Association, better known as SIFMA.
BlackRock manages assets on behalf of individual and
institutional clients across equity, fixed income, real estate,
and a host of other strategies. Our clients include pension
plans, charities, foundations, endowments, financial
institutions, as well as individual savers around the world.
The assets we manage represents our clients' futures and
the investment outcomes they seek, and it is our responsibility
to help them better prepare themselves and their families for
their financial goals.
SIFMA and its member firms appreciate the attention being
paid to housing finance reform and believe it is timely for
Congress to move forward with meaningful reforms that protect
taxpayers, ensure access to affordable housing and maintain
deep and liquid markets, including the preservation of a highly
TBA market.
Since the financial crisis, policymakers have contemplated
an array of proposals for what the next iteration of the
housing finance system could look like. While SIFMA believes
that some of these proposals are certainly worthy of
consideration in whole or in part, we would like to take this
opportunity to discuss a few key principles that SIFMA believes
Congress should consider when developing any housing finance
reform legislation.
At a high level, our guiding principles for reforming
housing finance are the need for clearly defined and limited
government role to facilitate liquidity yet protect taxpayers,
transparency at all levels, and a framework to attract private
capital.
The primary focus of SIFMA has been and will continue to be
the preservation of a highly liquid TBA market which provides a
number of important benefits to consumers, lenders and the
economy. The TBA market is roughly a $5 trillion market that
helps borrowers by facilitating the advance sale of conforming
loans.
The forward nature of this market allows originators to
offer borrowers interest rate locks well in advance of the
closing, and the TBA market also offers benefits to end
investors, including 401(k) plans, pensions and mutual funds,
by allowing them to buy MBS with clear, predictable terms on a
regular basis and to meet their own portfolio diversification
needs.
Because the TBA market is so liquid over $200 billion of
securities trade on an average day. And end investors do not
demand steep liquidity premiums which further drives down the
cost to borrowers.
Homogeneity is what makes the TBA market succeed. Because
securities are sold in advance, buyers and sellers agree on
terms of a trade, but buyers do not know, and nor do they need
to know all the characteristics of the securities they have
purchased.
These standards mean that investors can purchase MBS in the
TBA market with confidence that these securities will meet a
certain minimum standard of quality regardless of who
originates these mortgages.
SIFMA and its members believe that to retain high levels of
liquidity in today's market and protect and preserve the TBA
market, any housing finance reform legislation should establish
an explicit and appropriately priced government guarantee for
qualifying MBS.
The guarantee promotes homogeneity by allowing investors to
look beyond idiosyncratic credit risk and instead focus on the
risk that loans will pre-pay at a faster or slower rate than
expected, behavior which is in large part driven by changes in
the interest rate environment.
These investors that are so-called rate investors may not
have an interest in nor appetite for credit risk that is
required for investments in, for example, the non-agency MBS
market. Without a guarantee, large swaps of investors, both
U.S.-based and indeed globally, would look to other products
for investment opportunities.
In addition, Congress should encourage the return of
additional private capital to the mortgage market through the
establishment of policy certainty. Today the private label
securities market is but a small corner of the market and we
believe that any long-term, holistic solution must address
this.
Housing finance legislation should also aim to involve new
sources of private capital while being careful not to repel
private actors or generate uncertainty for investors.
Regulatory policies that recognize and respect the rights of
investors are critical to attracting private capital to the
housing markets.
Finally, any legislative reforms to the housing finance
system should be undertaken in an orderly and thoughtful way,
including an orderly transition from the current system to the
new system and fungibility between existing GSE MBS and any
future MBS.
There is tremendous downside risk of a disorderly
transition and in our view, policymakers focused on creating a
new system should be just as mindful of how we transition to
the new system and what that will look like.
In conclusion, the circumstances that we find ourselves in
today are very different than 2008 when the GSEs were first
placed into conservatorship. The housing markets have largely
recovered. Financial conditions of the GSEs have stabilized and
the GSEs have undertaken a number of important reforms.
That said, the importance of reform is paramount. Thank
you, Mr. Chairman, and I would be happy to answer any
questions.
[The prepared Statement of Mr. Chavers can be found on page
68 of the appendix.]
Chairman Duffy. Thank you.
Mr. Stafford, you are recognized for 5 minutes.
STATEMENT OF RICHARD STAFFORD
Mr. Stafford. Good morning, Chairman Duffy, Ranking Member
Cleaver and members of the subcommittee. My name is Rick
Stafford, and I am testifying today on behalf of NAFCU. I am
president and CEO of Tower Federal Credit Union in Laurel,
Maryland. Thank you for the opportunity to appear before you
today and talk about the important issue of housing finance
reform.
As you consider reform, we urge you to narrowly tailor
changes. At Tower, our relationship with Fannie Mae is working
fine. With technologies deployed by Fannie Mae in recent years,
it is easier today in some ways for credit unions to sell a
loan than it was 5 years ago. The current system is working for
credit unions.
However, we recognize the challenge to the current model
that exists and appreciate the opportunity to offer our
thoughts on reform.
Without the GSEs, our capacity to lend in our communities
would be outstripped by demand. Our ability to sell loans
ensures liquidity, mitigates long-term interest rate risk,
reduces concentration risk, and keeps rates competitive.
Without access to GSEs, our capacity to meet local demand
would be greatly diminished. Consumers would suffer from higher
rates and fees, more stringent credit requirements and fewer
overall options. A viable secondary market is vital to our
success.
NAFCU has been active in the housing finance reform debate
and does not believe any previous proposals adequately protect
the needs of community-based lenders. There are certain housing
finance reform principles that are important to credit unions
and should be considered in any reform effort.
I outline these in detail in my written testimony, and I
would like to highlight a few key points here today. It is of
the utmost importance that a healthy, sustainable and viable
secondary mortgage market for credit unions is maintained. To
achieve this, credit unions must have guaranteed access to the
secondary mortgage market.
Efforts to fund any system must be done in a way that
limits the cost to small lenders and is not a barrier to
access. NAFCU wants to stress that it is critical that large
institutions not be given control of the market.
Their market dominance would have negative consequences for
small lenders. Congress must ensure this does not happen in a
reformed system.
Any new system must recognize the high quality of credit
unions' loans through a fair pricing structure. Credit unions
originate comparatively fewer loans than others in the
marketplace.
Thus, we do not support a pricing structure based upon loan
volume, institutional asset size or any other issue that will
put our member-owners at a disadvantage. Credit unions must
have access to pricing that is focused on quality, not
quantity.
NAFCU believes that there should be a continued role for
the U.S. Government to issue an explicit guarantee on the
payment of principal and interest on mortgage-backed
securities. The explicit guarantee will provide certainty and
stability to the market and investors and facilitate the flow
of liquidity.
One of the first steps in housing finance reform should be
to ensure that the GSEs are in a safe and sound condition. We
do not think the GSEs should be fully privatized at this time.
NAFCU supports allowing the GSEs to rebuild capital slowly over
time as part of a broader reform discussion.
The transition to a new system should also be as seamless
as possible. Credit unions should have uninterrupted access to
the GSEs and the secondary mortgage market, in particular
through the cash window and small pool options.
Our partnership with Fannie Mae is critical to Tower's
mortgage lending function. Our use of Fannie Mae's desktop
underwriter on all mortgage loans that we originate ensures
conformity and consistency across our portfolio, whether we
sell the loan or not. Access to such technology must be
preserved in any reforms.
Additionally, any new housing finance system must ensure
credit unions can retain servicing rights to the loans that
they make to their members. At Tower, we retain servicing
rights on all of our loans. Our members turn to us because they
want to work with an organization that they trust. And they
know that we will provide exceptional member service.
Finally, we appreciate the committee's ongoing focus on
regulatory relief and encourage you to continue to look for
ways to reduce regulatory burdens that hamper access to
mortgage credit. I have outlined a number of ideas for relief
in my written testimony.
In conclusion, credit unions exist to provide provident
credit to their members. It is vital that credit unions
continue to have legislatively guaranteed access to the
secondary market and fair pricing based upon quality of the
loans.
Thank you for the opportunity to provide our input on this
important issue. I welcome any questions.
[The prepared Statement of Mr. Stafford can be found on
page 86 of the appendix.]
Chairman Duffy. I thank you, Mr. Stafford, and thank you
for the panel's testimony.
The chair now recognizes himself for 5 minutes.
Homeownership is oftentimes the single largest investment a
family makes in their lives. Homeownership is part of the
American Dream, being able to have your own house.
And making sure that we get this right is incredibly
important because when we get it wrong, we saw what happened in
the 2008 crisis, not just to homeowners but to a whole economy
that was taken down when this system doesn't work.
And making sure we have a thoughtful conversation on how
reform can make the system work better and safer and still well
for the American family is what I think our focus should be.
So many of you know we are talking about how do we offload
credit risk? How do we have a catastrophic government backstop?
And so I want to focus my first questions on those issues. In
regard to catastrophic government backstop, how do you price
the backstop?
Ms. Hughes, do you know how do we look at a government
backstop and price it? Or anyone from the panel if you want to
take that?
Ms. Hughes. Sorry. They are through the guarantee fees that
we currently pay through our rate system.
Chairman Duffy. No. Right, but how do we know that that is
the correct price?
Ms. Hughes. I think if you look at what is the market
sustainability of those and under the current system and the
losses and you balance that against the guarantee fees, I think
they are appropriate.
Chairman Duffy. Anybody else want to? You don't have to if
you don't want to jump in.
Mr. Vallandingham. I would also support the use of
guarantee fees to support the government backstop. The reality
is that we have historical information to support that. We have
monitoring.
The GSEs have improved their monitoring of collateral
values and the reassessment of those values as the market
dynamics change. And so they are better able to understand the
changes of values through booms, busts and the period which is,
I think, giving us a better insight into the risk associated
with holding those MBS'.
And so I think that as we move forward, the technology that
we have and the information that we are providing as lenders,
is going to better enable the GSEs to assess the risk inherent
in those portfolios.
Chairman Duffy. And I bring it up because I don't think
there is a good answer to it. It is challenging. Without a
market to price the backstop we are trying to do our best
analysis to pull the right number out of a hat. And again,
markets are the only one that efficiently price.
To the panel, what percent of the credit risk can we
offload do you think? What will the market bear?
Mr. Chavers, any idea?
Mr. Chavers. Mr. Chairman, I think the question of what
percent the market will bear should be preceded by what
outcomes would you like to see on the front end? At its height,
extrapolating from the jumbo private label market, it was $213
billion of issuance I believe in 2003, which was the height of
the size of the prime jumbo market.
But I believe the question is more one of what do you want
the downstream implications to be? And that is, what is the
cost ultimately to the borrower of the credit protections that
you put in place before the taxpayer and what the implications
are downstream.
As policymakers, you are in the position to make that
determination of what market you ultimately hope to serve,
balancing it against how much the appetite is in the
marketplace. But the current GSE marketplace is supported in
the rates market, right, and that market dwarfs the size of the
private mortgage credit market ultimately.
Chairman Duffy. Anyone else? I want to get all up in the
record quickly. So there is the Mortgage Bankers Association
that has a proposal creating a mortgage insurance fund to
provide the government backstop. There is also the DeMarco
Bright proposal, taking Ginnie Mae out of HUD and using Ginnie
to provide the government backstop.
Any thoughts on either of those plans? Do you favor one or
the other or some other plan that has been put out or principle
that is put out?
Mr. Stafford?
Mr. Stafford. Thank you. My position and NAFCU's position
is that the current system is working today. It is not perfect.
It needs reform. It needs to be removed from conservatorship.
But the current system I think is appropriate for what
credit unions need today both in the rural market and for us in
more of an urban market.
Chairman Duffy. I would just note that before 2008 there
was great testimony that said, ``It works. This system works.
We don't need to change it. There is nothing wrong with it.''
We had a great history, and it works until it doesn't work.
And I would make the point that private capital at the front
end reforming the way this system works, they brought us one of
the greatest crisis of our time, is important for this
committee to look at how we reform it and make it work better.
And my time is expired.
And now I recognize the Ranking Member Mr. Cleaver for 5
minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
Ms. Bailey, I am going to tell you what bothers me at night
when I wake up--well, a lot of things--but among them the
homeownership rate is falling.
There are about 1.2 million mortgages that are turned down
annually and builders are moving toward more and more luxury
home building and so we are ending up just kind of pushing
aside the issue of affordability and so that troubles me.
And when you consider the rental market, it is in crisis.
And are any of those or other things related to this
troublesome to you?
Ms. Bailey. Indeed, sir. Access and affordability need to
be central tenants of the house and finance system and we
really need to pay attention to how mortgage loans are priced.
The pricing of the mortgages will determine who actually
gets a mortgage and that is a fundamental question. Right now
what we are experiencing in the market is market
overcorrections that are pushing out creditworthy borrowers who
have a history of being successful in homeownership.
Urban Institute estimates that 5.2 million loans since 2010
have not been made in the market so that means people in
communities all over the country who would do well with home
ownership and the opportunity to build wealth that home
ownership presents, aren't given that chance and the time where
our market is relatively affordable, interest rates are at
historic lows, the actual cost of housing in some communities--
I won't go to some of our outliers like places in California,
are still relatively low.
So when we have things that are excessive risk instruments
come in the market they stop borrowers from getting credit. One
example of these are loan level price adjustments that the FHA
allows. These are additional fees that borrowers pay based on
credit scoring and ability for down payment.
These fees have a disproportionate impact on borrowers of
color and they are drying up credit opportunities all over the
Nation. They must be abolished, and we need to think about
every proposal that is going to come before you during this
discussion on housing and finance reform in how it relates to
pricing. Pricing, ultimately, determines who gets the loan.
Mr. Cleaver. Thank you. My follow up question I think Mr.
V.--because I am not going to struggle with it--Mr. V and Mr.
Chavers, I would like the both of you to deal with the issue
and tell me if I am right or wrong.
I don't believe that we have a housing market. I believe
that we have two, one for the rich, and then one for the rest
of us. Do you disagree or agree and why?
Mr. Vallandingham. My community bank serves low to moderate
income people. I mean, we are in West and West Virginia and
very much serve that market and we serve it through the
secondary market. And even with loan level pricing adjustments,
we are able to price those in and make those loans work.
Typically, where we see barriers to home ownership it comes
to either financial education or down payment. Those seem to be
the biggest challenges in our marketplace and so when you say
that there isn't a market for the low to moderate income buyer,
I would say the 60 plus markets that I serve every day are low
to moderate income environments that we make secondary market
loans in and we are serving those constituents that you are
concerned about.
Mr. Cleaver. OK. I wanted to respond, but Mr. Chavers, my
time is going to run out.
Mr. Chavers. Congressman, I think your point is well-taken,
though I would submit that as you think about housing finance
reform it is important to think about it on a holistic basis
and that is it is important to not only think about the
implications for what loans that have traditionally funneled
through the GSE channel, but to also include the FHA, V.A.,
Ginnie Mae component of the system as part of how you think
about the solution.
I had the honor and the pleasure of serving at an earlier
time in my career as the president of Ginnie Mae and I know for
a fact that the FHA market, for example, tends to
disproportionately serve the low to moderate income markets and
first-time homebuyers.
I think it is a mistake. However, to look at them in sort
of disparate tracks and instead to look at housing finance
reform, indeed, on a holistic basis.
I would also submit that both of those markets are
supported, ultimately, in the capital markets by the presence
of a government guarantee on the securities so that the funding
from the global capital markets is somewhat indifferent as to
which channel it comes in through the front end.
Mr. Cleaver. Thank you.
Chairman Duffy. The gentleman yields back.
The chair now recognizes the vice chair of the
subcommittee, the gentleman from Florida, Mr. Ross, for 5
minutes.
Mr. Ross. Thank you, Chairman. And as I talked about in my
opening, since 2008 we have seen a recovery from the housing
market and we made changes, but yet what we have done in regard
to the GSEs is essentially put a veneer over a chasm that
exists that is going to probably implode again if we don't do
something about it.
And as I pointed out in Mr. Vallandingham's testimony, that
Fannie and Freddie have less capital today than were placed in
conservatorship 8 years ago in absent of the change in policy
are on track to fully deplete their capital by year-end so my
questioning goes to capital retention.
Several groups, including the Housing Policy Council,
American Bankers Association, Habitat for Humanity, National
Association of Homebuilders also a letter on September 21 to
Director Watt and Secretary Mnuchin stating, ``Key structural
reforms must be implemented by Congress before a decision is
made regarding the GSEs and capital retention and that Congress
should decide the final resolution of the conservatorship.''
So my question to each of you is what is your take on
capital retention for the GSEs?
Ms. Hughes?
Ms. Hughes. I believe that the legislative reform should be
completed and the capital restrictions or the requirements set
and allow the GSEs to work toward those capital requirements.
Mr. Ross. Mr. Vallandingham?
Mr. Vallandingham. We too support the recapitalization of
the GSEs. When you look at the broader markets and you--
Mr. Ross. And if they are able to recapitalize, then we can
reduce their line of credit, too--
Mr. Vallandingham. We should.
Mr. Ross. --Couldn't we?
Mr. Vallandingham. Absolutely.
Mr. Ross. OK.
Mr. Vallandingham. Even as a financial institution, we are
required to have capital so it is no different for the GSEs.
Mr. Ross. Absolutely.
Mr. Vallandingham. And when you look at the overall
function of the market and the international investors, they
want to see recapitalization of those GSEs so that we maintain
the liquidity and the viability of that market internationally
as well.
Mr. Ross. Ms. Bailey?
Ms. Bailey. We believe that they need to continually be
reformed and then recapitalized specifically highlighting the
reforms that we discuss today.
Mr. Ross. Gotchya.
Mr. Chavers?
Mr. Chavers. I think the concern about recapitalization is
that it somehow sends a message to the market that it is an
adoption of the recapitalization and release proposal which
would be problematic in terms of supporting the guarantee,
explicit government guarantee at the MBS level.
Whether you recapitalize them in the short term for
operating purposes so they don't have to take a draw or whether
they take a draw, it is actually sort of left pocket, right
pocket.
There is not a material difference. In both instances,
right, it is funding to support them on the short-term basis by
the taxpayer.
Mr. Ross. Gotchya.
Mr. Stafford?
Mr. Stafford. We fully support and NAFCU fully supports the
capitalization of the program modestly, maybe one-quarter
worth, but again we truly--
Mr. Ross. Prudent.
Mr. Stafford. Excuse me?
Mr. Ross. It is just prudent.
Mr. Stafford. I think it is prudent. I think it allows them
to not have to go to the Treasury as there are changes in their
financial condition.
Mr. Ross. OK, and thank you. And let me follow up on the
chairman's earlier question regarding the Mortgage Bankers
Association's proposal to create a mortgage insurance fund to
provide the government backstop.
Specifically, the DeMarco Bright proposal last year
proposed taking Ginnie Mae out of HUD and using Ginnie to
provide that government backstop.
Between the two, do any of you have a position between the
MBA's proposal for a backstop and the DeMarco Bright?
And Ms. Hughes, I will start with you.
Ms. Hughes. I have not reviewed either of those plans you
just mentioned, so I don't have a real opinion on either of
those.
Mr. Ross. Mr. Vallandingham?
Mr. Vallandingham. The form of which we take that create
the backstop I don't think is as important as doing it and that
really points back to the previous question of adding capital
back to the GSEs.
Mr. Ross. Right.
Mr. Vallandingham. Essentially, that is the same thing so
we can talk about doing it in multiple ways. But the reality is
we have to form some type of backstop to help deal with credit
losses and down in stress markets.
Mr. Ross. Ms. Bailey?
Ms. Bailey. I believe a backstop is important.
Mr. Ross. Mr. Chavers?
Mr. Chavers. There is no official statement of position and
I don't believe there is actually a difference between the
substance of the two approaches. In one instance--
Mr. Ross. They accomplish the same.
Mr. Chavers. They accomplish the same thing and they are,
in effect, the same thing just with a different name. They have
more in common than they don't.
Mr. Ross. OK.
Mr. Stafford?
Mr. Stafford. NAFCU does not have a formal position.
Mr. Ross. Mr. Chairman, you talked earlier in your opening
about a framework to provide private capital. Could you kind of
further expand on what that framework would look like?
I mean, are we looking at front end risk being by the
private sector or back end or how would you consider that to be
structured?
Mr. Chavers. So I think the way to think about the private
capital stack that stands in front of the taxpayer is
multifaceted. I think it is important to acknowledge that the
primary housing markets have largely recovered--
Mr. Ross. Yes.
Mr. Chavers. --So literally the first lost piece of capital
is the equity in an individual borrower's home.
You then move to at the instance where that particular
borrower has mortgage insurance, you then move to the mortgage
insurance, you then transition to whatever the guarantee fee
for that particular security.
And then you look to, in the case of backend credit risk
transfer, whatever the intermediary is, aggregating and laying
off some of that in the capital markets through credit risk
transfer, pool insurance, senior subordinated securitization
structures or alternatively that aggregator doing sort of front
end credit risk transfers. We support both.
Mr. Ross. I appreciate that analysis. Thank you very much.
My time is expired.
Chairman Duffy. The gentleman's time has expired.
The chair now recognizes the gentleman from California, Mr.
Sherman, for 5 minutes.
Mr. Sherman. Mr. Chairman, every Republican speaker in this
committee has always had the debt chart up there and suddenly
it disappeared in the same week in which the Republican budget
offers us an opportunity to blow another $1.5 trillion, maybe
$2 trillion, hole in our deficit so I have taken the liberty of
putting up the Republican debt chart in the upper half of that
graphic behind our witnesses.
And then I have added the fact that the Republican tax cut
adds another $150 billion to $200 billion a year and the
abandonment of quantitative easing adds another $80 billion to
$100 billion a year to that deficit.
And I might add that getting rid of Fannie and Freddie and
spreading them off would also add to that deficit as well. I am
told that the regular Republican graphic is somehow technically
not available this week, but I invite speakers on both sides of
the aisle to choose to have this graphic up during their time
as is consistent with the history of this committee
particularly this year.
I praise the present system in my opening remarks. It is
not a great system compared to what we aspire too. It is a
great system when compared to other lending systems that have
existed through history.
One of the bad systems that existed in history was the one
we had in 2008. It was working well until it didn't. It didn't
because we had Fannie and Freddie as government guaranteed
private corporations. We need to never go back to that.
And I agree with the chairman that that system failed in
2008. It is the system we adopted since then where Fannie and
Freddie are basically government entities that is working very
well especially on a historical basis.
The ranking member points out the need for affordable
housing and we need to build it both rental and for purchase,
but I might also add that proposals to eliminate the property
tax deduction and/or the home mortgage deduction raise the cost
of homeownership and makes some perspective borrowers,
therefore, ineligible for loans.
Mr. Chavers, the homebuyer once I think needs a 30-year
fixed rate pre-payable mortgage. Could that possibly be
achieved without a government guarantee? I won't say--I
overstated it. Is it likely to be achieved in the absence of a
government guarantee?
Mr. Chavers. I do not believe so, Congressman, not in the
scale we currently enjoy.
Mr. Sherman. Thank you. Is there anyone on the panel that
thinks that we can have 30-year fixed rate pre-payable
mortgages in the absence of a guarantee?
Mr. Stafford. NAFCU's position to ensure that there is an
explicit guarantee.
Mr. Sherman. OK. Is there anyone on the panel that wants to
argue the other way? The record should report that no one came
forward.
On recapitalization, we have this situation where we want
to transfer money out of Fannie and Freddie to the Treasury to
avoid the capitalize and release that you, Mr. Chavers, brought
up, but at the same time we don't want the political
embarrassment of Fannie and Freddie ever having to draw on its
Treasury line.
What can we do to take away any stigma that and any of it
is transferred money to the Treasury year after year for the
last several years may occasional draw and then go back?
One way to eliminate that stigma would be to have the money
paid in dividends to the Treasury earmarked in the Treasury as
a special money received from Fannie and Freddie account and
then it would be more obvious if money was drawn from the
Treasury that it was coming from money that had previously been
deposited in the Treasury.
Mr. Chavers or anyone else, can you think of another way in
which we on the one hand make sure that Fannie and Freddie can
in a bad year get some of the money that they previously
generated, but at the same time prevent the capitalize and
release?
Mr. Chavers. Congressman, I can't opine on the level of
potential political concerns about the draw one way or another.
As a practical matter, I think it is very important if there
were to be a limited funding of a capital buffer on a limited
basis that that is communicated very clearly to the markets
that it is not intended to signal the end of the
conservatorship.
Mr. Sherman. I think you bring that up and that is instead
of dealing with the politics of having to draw, deal with the
politics of some capitalization and make it plain that
capitalization is there to prevent a draw, not to really--
Mr. Chavers. And I would suggest the concern there is not,
at least not from the markets standpoint, not so much a
political one, but one of transparency, such that investors are
able to understand in the global capital markets that this does
not signal some other type of activity and that, in fact, it is
a very limited intended for this purpose recognizing that this
market is supported on a global basis and so that will have to
be understandable to investors around the world.
Chairman Duffy. The gentleman's time has expired.
The chair now recognizes the chair of the Subcommittee on
Financial Institutions, the gentleman from Missouri, Mr.
Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
I thank all of you for being here this morning. An
interesting discussion. One of my first questions or concerns
is, what are the biggest impediments to getting private capital
back in the mortgage market?
We seem to have transitioned to a system where more and
more government involvement, more and more government
backstops, more and more government rules and regulation, what
does it take to get more private capital involved? Anybody?
Ms. Bailey?
Ms. Bailey. I will answer that. The only time where the
market was purely private was at the time leading us up to the
housing crash so any private capital that returns to the market
has to really be responsible and it can't be toxic private
capital that leads us on a chase or excessive profits that puts
American taxpayers and homeowners at risk so I will answer in
that form.
And I will also remind the committee that FHA and the GSEs
played a very important role following the housing crash. They
actually sustained the market when private capital withdrew so
we have to be very careful as we are making these decisions
about house and finance reform to do it in a way that doesn't
jeopardize the modest recovery we have experienced.
Mr. Luetkemeyer. Mr. Chavers, you made a comment long ago
about a new system and you have talked and served general
terms, but can you get specific of what you would see with a
new system what it would look like? What you would see it--how
it would transition to what our view would have an idea that it
can be down the road?
Mr. Chavers. So I think in any new system I think I have
indicated it is important if we are going to serve a market
with the features and size that is currently served, that is
important that there is an explicit government guarantee at the
MBS level, at the security level.
I think it is also important that in that transition from
current system to any new system that the outstanding existing
MBS are, in fact, fungible with the new MBS.
Mr. Luetkemeyer. OK. Many of you have talked about
maintaining government guarantee. What do you mean when you say
the government guarantee? Are you going to guarantee the entire
loan, 95 percent, 50 percent?
Mr. Chavers. Well, actually, Congressman, in fact--
Mr. Luetkemeyer. Or just the GSE security?
Mr. Chavers. It is just the security.
Mr. Luetkemeyer. What are you--you are talking about the
GSE security as a whole.
Mr. Chavers. That is correct.
Mr. Luetkemeyer. Not individual loans.
Mr. Chavers. That is correct.
Mr. Luetkemeyer. OK. So the individual loans would be
independent loans that would not be guaranteed individually?
Mr. Chavers. I believe that is correct.
Mr. Luetkemeyer. So security would be guaranteed--
Mr. Chavers. The security, the timely payment of principal
and interest at the security level would be explicitly
guaranteed.
Mr. Luetkemeyer. OK. I know a number of you talked about
the servicing of the assets being important to you. Can you
explain why that is important? I know the banking guys and the
credit union guys both made a comment on that.
Both of you, if you can give me a response both of you, Mr.
Stafford and Mr. Vallandingham?
Mr. Stafford. It is absolutely critical in a credit union.
Being able to retain the servicing is allowing us to build that
relationship and when our members down the road are stressed
financially and they need options they come to us. We work with
them one-on-one because we have the relationship.
If we didn't retain the servicing, we wouldn't be able to
help them. So servicing to us is an absolutely critical
component of any future reform.
Mr. Luetkemeyer. Mr. Vallandingham?
Mr. Vallandingham. I would echo his comments as well. The
relationship is critical and maintaining that relationship with
a customer is catamount to our franchise. Ultimately we do a
better job, I mean, just flat-out. As a small servicer we have
closer relationships with our borrowers.
We better understand the markets in which we serve. And
when there is something that happens whether it be a hailstorm
or a flood, we have a better understanding how to make that
customer correct the situation and make it right, and we serve
them better. So at the end of the day it is a win-win for both
sides.
Mr. Luetkemeyer. One of the comments that has been in some
discussions that have already been had with regards to
capitalization of the GSEs, you know we had Director Watt in
here the other day and he is concerned about that. And I think
the decision has to be made at some point.
Do the GSEs recapitalize so they can absorb losses or do we
continue to just take the profits, funnel it to the Treasury?
And whatever a loss occurs just have the Treasury write a check
back. I mean can you guys give me some thoughts on that, see
where we need to go?
Mr. Vallandingham. I would say that if we recapitalize and
reform then it will build a robust mortgage market that private
investors will want to invest in. And you will see the
inclusion of private capital at that point, but right now there
is a little bit of limbo and that is why you are not seeing the
re-entry of private capital.
Mr. Luetkemeyer. Do you believe that if we had a capital
account there that had to be touched, that had to be gone to in
order to absorb losses that the GSEs would be more responsible
with where they lend money?
Mr. Vallandingham. Well, obviously having capital is going
to help. And maintaining a capital level is going to help them
maintain responsibility, and it also directly impacts the size
of the balance sheet in which they hold. I mean, you have to
have enough capital to support the risk in which they bear. And
that is one of the things--
Mr. Luetkemeyer. That would be the key right there.
Mr. Vallandingham. --That is one of the things that we
didn't do in 2008.
Mr. Luetkemeyer. I hope everybody listened to that last
comment that is key to what is going on here. Holding capital
to be able to curtail or to be able to really settle what is
going on with a number and an amount of loans that are made.
Thank you.
Chairman Duffy. Gentleman's time has expired.
The chair now recognizes the ranking member of the full
committee, the gentlelady from California, Ms. Waters, for 5
minutes.
Ms. Waters. Thank you very much. I appreciate that and I
would like to thank our witnesses for being here today.
As I have sat here listening it appears that everyone on
this panel agrees that an explicit government guarantee is a
necessary component of housing finance reform. Is that right?
Ms. Hughes. Correct.
Ms. Waters. OK. And I would ask you about the PATH Act, but
Mr. Chavers has already told us he wishes not to opine in the
political aspects of this discussion. So what I will ask you is
from each of your perspectives what harms would result if we
eliminated the government guarantee? Yes, we can start.
Mr. Vallandingham. I will be glad to answer first. If you
take away the explicit government guarantee the cost to the
consumer is going to go up point blank. And so less borrowers
are going to be able to afford homes and our housing market is
going to decline. I mean it is direct correlation.
Ms. Waters. All right, everyone agree with that?
Ms. Hughes?
Ms. Hughes. For us, if that path were to go away we would
not be able to serve the number of borrowers that we serve.
So we are a small community bank. We did just under 1,300
loans to mortgages last year. That is a huge amount in our
market and without the path that we have we would not be able
to deliver that.
Ms. Waters. Ms. Bailey?
Ms. Bailey. Yes, the cost of credit would go up, and
regions around the country that actually rely on credit like
rural communities would definitely not have access to credit.
Ms. Waters. Thank you.
Mr. Chavers?
Mr. Chavers. Congresswoman, yes. I also agree that the cost
of credit would go up. You would not be able to support a TBA
market which means the size of the 30-year fixed rate freely
repayable market would likely be diminished.
Ms. Waters. Mr. Stafford?
Mr. Stafford. I also concur with that. There would be a
loss of confidence. Fees would go up and it would detrimentally
hurt the rural market that credit unions serve.
Ms. Waters. Ms. Bailey, I would like to ask you if you have
any thoughts on the reform proposal that was put forward by Mr.
Gene Sperling, are you familiar with that one?
Ms. Bailey. I am.
Ms. Waters. I think Mr. Sperling, Mr. Parrott, Mr. Zandi
and Mr. Ranieri and Barry Zigas, and it is also similar to a
proposal that I put forward. Could you tell me what is it that
you feel is attractive in those proposals? What is it you like
about them?
Ms. Bailey. So we are evaluating every proposal by how it
impacts the cost of credit. So we are being very careful to
figure out how much additional fees would result from how
mortgages are going to be priced. We disagree with that
proposal as it is currently written and we have tried to
negotiate with them and share some of our perspectives around
some of those core concerns.
We have to be very careful not to allow fees that are going
to drive up the cost of mortgages that have a disproportionate
impact on borrowers of color and that don't firmly speak to our
country's affordable housing goals.
We need to be very careful as we are moving the levers of
the market not to dry up credit access in important communities
all across the Nation and we don't think that proposal, as it
is written, will help the borrowers that I mentioned earlier in
my testimony access the mortgage market in a more equitable
manner.
Ms. Waters. You are referring to--
Ms. Bailey. The proposal by Zandi and Mr. Parrott, not your
proposal ma'am.
Ms. Waters. I see. Anyone else familiar with that proposal?
Mr. Chavers?
Mr. Chavers. I am, Congresswoman, and actually I would
submit that SIFMA and myself evaluates those proposals based on
the implications that each have and its ability to be supported
by the capital markets. And I would submit that the Zandi
proposal as well as your earlier bill from the prior Congress
and the mortgage bankers and frankly the Milken Institute
proposal have more in common than they do in distinction.
That is they all support an explicit government guarantee,
they all support an orderly transition from the current state
to the future state, and they all look to the capital markets
to provide some support in front of the taxpayer.
And so rather than say opine on one proposal versus the
other, the position is to look at their ability to achieve the
principal such that the capital markets can support ultimately
the primary market.
Ms. Waters. Do you have any thoughts about fees?
Mr. Chavers. I think the fees are more actually dials, if
you will. And both policymakers and the implementers have the
opportunity to make the adjustments when those fees relative to
the amount of risk and where that risk should fall in the
system, so how much ultimately falls on the front end in terms
of what the borrowers pay, how much gets laid off into the
capital markets either through risk sharing or how much gets
laid off through mortgage insurance or other forms of credit
enhancement.
So I don't have an opinion on a fee specifically, just
being sure that the apparatus is in place to appropriately
allocate those.
Ms. Waters. But you do agree that if the fees are
disproportionate it could have a negative impact on low income
borrowers, right?
Mr. Chavers. Yes. So as you adjust the fees up the, now
this is me speaking in my individual capacity, I don't think
SIFMA has a view, but obviously if you adjust the fees across
the ecosystem is has an impact on the eligible universe of
borrowers.
Chairman Duffy. The gentlelady's time has expired.
Ms. Waters. Thank you.
Chairman Duffy. The chair recognizes the gentleman from
Illinois, Mr. Hultgren, for 5 minutes.
Mr. Hultgren. Thank you, Chairman. Thank you all for being
here. I appreciate your input into these important issues.
I wanted to address my first question to Mr. Vallandingham
if I could?
One of the primary tenets I know of your testimony is that
any changes to the housing finance system should, and I quote,
``preserve equal and direct access to the secondary market to
safeguard the role of community banks providing mortgage credit
in the communities we serve,'' end quote. I absolutely agree
with that.
Small financial institutions are integral to providing
access to mortgage credit across my district and every district
in the country, especially the more rural areas where larger
lenders do not have a presence.
What do you see as some of the risks for diminishing the
role of community banks in the housing finance system and do
you have any specific examples or concerns you can sight with
any of the proposals that have been discussed here in
Washington?
Mr. Vallandingham. What I see is community banks if they
were to become less involved in the housing finance system than
those segments of the population, the low to moderate income
and the rural communities, would be less served.
And one of the things that we are able to do in our
underwriting is really customize the loan and make sure that we
understand the property and the marketability and make sure
that while it does meet the GSE requirements that it does match
the communities in which the property exists.
And a lot of times what you see or what we have experienced
as we have dealt with other investors is that larger financial
institutions that don't participate in those communities don't
really understand the markets and so it is easier to turn that
loan down than it is to make that loan work. And what we would
see is less availability of credit in those markets and that
would be a negative consequence nationwide.
Mr. Hultgren. Thank you.
Mr. Stafford, I know credit unions play a similar role in
rural communities. Do you have any thoughts to add about how
credit unions might not be able to as easily participate in the
housing finance system if certain changes are made.
Mr. Stafford. I would echo many of those comments. Again,
many of the rural areas are not served appropriately by the
larger financial institutions and so those credit unions need
access to the secondary market or liquidity to support those
communities. It is at the foundation of what credit unions do.
Mr. Hultgren. Thanks.
Mr. Chavers if I could address a couple questions to you?
In its June 2017 report on the banks and credit unions the
Treasury Department found that the exemption that the GSEs have
been granted from the CFPB's qualified mortgage rule has
resulted in a concentration of the mortgage market and
government supported mortgage programs because the exemption
allows the GSEs to securitize loans that private institutions
cannot.
As the Treasury Department put it, the exemption creates an
asymmetry and regulatory burden for privately originated loans.
Do you agree with this assessment and is the exemption an
impediment to bringing private capital back to the market?
Mr. Chavers. I don't fully agree with that assessment. I
think it is part of a larger challenge for return to the
private market. That includes concerns about confidence in the
infrastructure that supports the private market. That also
frankly includes the prevailing economics of the execution of
private label securitization. Does the definition contribute to
that? Perhaps but it is certainly not the entirety.
Mr. Hultgren. OK. Also Mr. Chavers, if I could I am
supportive of the concept of making significant reforms to our
housing finance system that will protect taxpayers without
diminishing access to credit.
However given the large role currently being played by
Fannie and Freddie, how would you imagine such a transition
taking place and what steps should Congress working with FHFA
and the administration, what would or should we take to avoid
any significant market disruptions?
Mr. Chavers. I think a couple of things come to mind. One,
assuming that the future system is very clear about maintaining
an explicit government guarantee at the MBS level, it is also
important that it is communicated that the existing outstanding
GSE MBS will be freely fungible with whatever the future state
of MBS. That is important.
Number 2, that it be done in a very deliberate fashion and
that it be adequately and accurately communicated with full
transparency to the marketplace in the transition period and
effective date and be very clear about that communication.
Mr. Hultgren. Thank you. Just have a few seconds left here
but Ms. Hughes if I can address quickly page 90 of your
testimony points out that the so-called treasury sweep has
actually cost taxpayers money because it does not account for
the interest obligations of the investments made on behalf of
the taxpayers. Isn't this fact on its own enough to justify
significant reform?
Ms. Hughes. Yes. I mean we do need to have significant
reform, but loans that are underwritten appropriately and if
the capitalization is there the system should work as it needs
to.
Mr. Hultgren. Thank you again.
My time is expired I yield back. Thanks, Chairman.
Chairman Duffy. The gentleman's time has expired.
The chair now recognizes the gentlelady from Ohio, Mrs.
Beatty, for 5 minutes.
Ms. Beatty. Thank you, Mr. Chairman, and thank you to our
ranking member and certainly to the panelists. Thank you.
In response to a question posed by my colleague and Ranking
Member Cleaver, Mr. Vallandingham you stated that two of the
biggest barriers to homeownership are financial education, and
down payment. Well, let me just say thank you, and I agree with
that statement.
And that is why I introduced a bill entitled The Housing
Financial Literacy Act which is co-sponsored by more than 20
Members of Congress and even from this committee, Congressman
Stivers who sits on the the other side of the aisle.
And what this bill does, it will provide a 25 basis point
reduction on the annual mortgage insurance premium paid by FHA
borrowers who take a HUD certified home buying financial
literacy class. And so I want to urge my other colleagues here
on this committee to take a look at that bill.
That is a plug, Mr. Chairman, that I am giving to you. Or
maybe I should use a challenge. So thank you for your comment
on that, Mr. Vallandingham.
Now, the question I have, first I would like to start with
you, Ms. Bailey, and maybe you, Mr. Stafford, in responding to
this. The Federal Housing Administration is critically
important to first-time homebuyers in minority populations.
In Fiscal Year 2016, first-time homebuyers represented 82
percent of all FHA purchase originations. More importantly, in
2015, while FHA loans were used for 25 percent of all home
purchases, it was used for 47 percent of purchases by African
American households and 49 percent of home purchases by
Hispanic households.
So can either one of you, and we will probably have enough
time for others to be on deck, can you describe how the reforms
of the past act would transform the FHA and its potential
impact on minority homeownership?
Ms. Bailey. The act actually designs to take away and
abolish the FHFA housing mortgages, and that would just be a
wrong choice for consumers all over the country. As you stated,
it is the way most working families enter into the housing
finance system. And it is the way that many families have built
home equity and wealth over time.
So it would be a very poor choice to take away that option
for families. And we need to be mindful that FHA actually
rescued the market. It was part of the support to the market
when private capital retreated and withdrew from the market. So
the FHA and the GSE-insured mortgages actually sustained the
market at a time when we actually needed it.
So we have to make sure it is modernized and it has the
resources that it needs to fully function and to function well,
but we have to be very careful to have a whole total approach
and not move in a way that will create real lack of opportunity
in the housing sector.
Ms. Beatty. Thank you.
Mr. Stafford?
Mr. Stafford. Tower doesn't officially do FHA mortgages. We
actually have another customized program that we use, and they
are non-Q.M. loans so we have the option to customize those
products specifically for the members.
However with that, as far as the PATH Act, NAFCU doesn't
have an official position. I would be more than happy to follow
up with one after this hearing.
Ms. Beatty. OK. Anyone else like to comment?
Thank you, Mr. Chairman, and I yield back.
Chairman Duffy. The gentlelady yields back.
The chair now recognizes the gentleman from Pennsylvania,
Mr. Rothfus, for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
Ms. Hughes, in your testimony you discussed the importance
of the Federal Home Loan Banks and the role that they can play
in providing liquidity in times of crisis. I am certainly
familiar with these institutions, especially the Federal Home
Loan Bank of Pittsburgh, which is based in my part of the
commonwealth.
You expressed concerns that changes to Fannie and Freddie
as part of our overall housing finance reform effort may
inadvertently impact negatively the FHLB system. You also
suggested that the FHLBs may have the potential to play an
expanded role in a revised secondary market system.
In your opinion, what is the most appropriate or ideal role
for the Federal Home Loan Banks going forward?
Ms. Hughes. The Federal Home Loan Banks function very well
as they are. They are in partnership with their member banks,
and we actively utilize them for acquisition of affordable
housing programs through their Home Start Grants. We utilize
them for delivery of mortgage loans that we service on behalf
of the Federal Home Loan Bank. And we obviously use them for
advances as needed.
Again, the process that we have with the Federal Home Loan
Banks works as it is today.
Mr. Rothfus. Let us see, Mr. Stafford, in your testimony
you wrote that, quote, ``to date we do not believe that any
housing finance reform solution suggested in previous
Congresses fully accounted for the needs of small lender
access.'' What are some of the major issues that impede
participation by smaller institutions?
Mr. Stafford. Price and access to the market. Small credit
unions in rural areas need unfettered access to the GSEs in the
secondary market. That will provide them the appropriate
liquidity. They can't hold that type of volume of loans on
their balance sheet because of interest rate risk and
concentration risk.
So if we can provide in a reformed environment dedicated
access, guaranteed access, those are the markets that need it
the most.
Mr. Rothfus. Mr. Vallandingham, can you comment on that?
Mr. Vallandingham. Yes. I would also point out that the
onslaught of compliance and regulatory burden that came on
after the mortgage crisis has eliminated many participants in
this market space. The reality is that many financial
institutions elected to step away from mortgage lending because
they couldn't deal with the compliance costs or the
complexities of the compliance that came on after that crisis.
In addition to that, when you look at Q.M. and non-Q.M.
loans, the additional litigation risk that hasn't really fully
been understood at this point keeps many of those players out
of the market and they have decided that it is just much easier
to do something else.
Mr. Rothfus. Let us talk about Q.M. for a minute, and I
want to follow up with Mr. Stafford on the same questions. I
know Mr. Stafford expressed concern about Q.M. being the
standard for loans eligible for the government guarantee.
Do you have thoughts, Mr. Vallandingham on why that is
problematic and can you recommend a more appropriate
underwriting standard?
And I am going to get the same answer from Mr. Stafford, or
same question.
Mr. Vallandingham. I will say that community banks, we did
it right. We did it right the entire time, and now we are
burdened with an additional layer of regulatory oversight and
testing and cost, so the actual cost of producing a loan has
gone up. The cost of servicing the loan has gone up.
And so when you look at things like Q.M. and ATR, we now
have these multiple tests that we go through in the origination
process that it takes us longer to produce the loan. And at the
end of the day, we weren't the ones that did it.
In fact, if you want to go back, Freddie and Fannie weren't
really the cause of this crisis. It was the option ARMs and the
interest-onlys and they were all the products, the exotics,
that we aren't talking about that really created that.
Now, it snowballed later. I get that.
Mr. Rothfus. So Fannie and Freddie didn't buy any Alt-As?
Mr. Vallandingham. They did buy Alt-As, but those were a
part of the affordable housing initiative, and I am not sure
that they were necessarily bad credits absent if you had that
other portion of the market not occurring. If those didn't
occur--
Mr. Rothfus. They weren't bad credits. We didn't have to go
bail out for Fannie and Freddie?
Mr. Vallandingham. I am just saying that when it started it
started with a lot of the exotics. And had absent those losses,
I am not sure the rest of the market would have rolled into
that.
Ms. Bailey. Could I interject?
Mr. Rothfus. No. I want to get Mr. Stafford's response on--
Ms. Bailey. All right.
Mr. Rothfus. --On can you recommend a more appropriate
underwriting standard than Q.M.?
Mr. Stafford. Yes. I can obviously tell you that the
regulatory burden is significant. And I will give you one
perfect example is we saw that our members were being taken
advantage of by title companies. They did not have our members'
best interests in mind, so we formed our own title company.
Now, with Q.M. rules, the expense associated with us
creating our own title company has to be added to the 3 percent
Q.M. rule. It immediately makes that mortgage a non-Q.M. We can
no longer sell it. We have to keep it and hold it on our
balance sheet.
So even though we had to do what is in our members' best
interests, we were actually penalized by the regulation because
of the way that you have to calculate the expenses.
Same thing with TRID. This is a pain point for our members
of why do they have to wait 3 business days to sign a closing
disclosure and then wait for their funds? And if they don't do
e-sign it is another 6 days.
So our members are asking why is the government telling me
I have to wait 3 or 6 days before I can close a mortgage? Why
won't they empower me, the consumer, to waive some disclosures
saying I know and understand the rights, and I wish to move
forward immediately and not wait 3 or 6 days.
Mr. Rothfus. Yield back.
Chairman Duffy. The gentleman's time has expired.
The chair now recognizes the clapping member from
Massachusetts, Mr. Capuano for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman.
Mr. Vallandingham, thank you. That is what we have been
saying from day one. I don't think anybody has ever said Fannie
and Freddie didn't play where they shouldn't have played, but
they didn't create it. They simply went in where others went
before them, for the reasons, in my opinion, it is human
nature.
Fannie and Freddie worked fine when they were government
entities, and they worked fine for a long time as non or quasi
government agencies, until all of a sudden the greed factor
took over with nobody there to regulate them.
They had no choice but to provide good returns for their
stockholders and they loved having their pay scales tied to
profit. Normal, human nature, should have been foreseen. It
wasn't. They participated, played hard and hurt all of us. And
I am glad.
I am actually wondering, it seems to me and again correct
me if I am wrong, everybody here agrees that we need to do
something with the GSEs, specifically preferably explicitly
state the government backing of the GSEs. So I think everybody
seems to agree on that.
And I think everybody seems to agree that the GSEs,
whatever is left after any reform we do, have sufficient
capitalization. So if we all agree on that, could somebody tell
me what the heck we are doing here?
I mean, you are all very smart and capable people and you
have been very good, but all the issues that were brought up
today require a lot of details, exactly where the limits are
and all that kind of stuff. Those are details. That is not for
a public hearing. Those are for discussions to have and push
back and forth.
We are having, I don't know, the 400th hearing on housing
market, and yet we all agree it has to be done, but we can't
get it done. The only bill that this committee has passed out
is the PATH Act, and no one here likes it. No one here on this
side would have voted for it, and I daresay very few on the
other side would have voted for it.
In the 20 years I have been here, I have never seen a
committee put out a major piece of legislation that then never
made it to the floor, except for the PATH Act, because nobody
thought it could work and would destroy the housing market.
Thank you for all coming to basically the same exact agreement.
I would also want to ask if any of your banks would have
given me a loan and then after I repaid the loan, plus any
reasonable amount of interest, you kept taking all my wages? Do
you think any of your bankers would not be put in jail? And yet
that is exactly what the Federal Government is doing to Fannie
and Freddie.
In 2016 $15 billion was taken from homeowners who didn't
know it, and taken and put into the general fund every quarter,
a total of $15 billion. By the way, I would just like--curious
since I don't have too many questions in here, because I am not
sure what we are doing here, especially those of you who
represent banks.
One of the things I have always been interested in is
getting banks back into local mortgages, preferably by
incentivizing you to hold the mortgages. My personal opinion is
that a held mortgage should be counted toward your
capitalization requirements, and maybe a few other incentives.
I like the idea of keeping local banks tied to their
communities that they serve having a vested interest in not
taking my house because you know me. And because the truth is
no small bank, no medium size bank, really is equipped to get
rid of a whole bunch of houses. It is not what you want.
So how would you like us to be able to provide you some
incentive to hold your mortgages? Would that incentivize your
banks to start making their own home mortgage loans in their
own communities?
Ms. Hughes?
Ms. Hughes. We currently service about 5,100 loans, and
part of those, about 2,800 of those are on behalf of Freddie
Mac, and then we have a small pool for Federal Home Loan Bank.
Servicing our own loans is paramount for our ability to serve
our consumers' needs.
We actually in our partnership with Freddie Mac on those
servicing, because of the constraints under the regulation on
how we have to manage those loans if those borrowers go into
default, we have actually purchased loans back from the agency
because we could work with our borrowers at a deeper level than
the regulations allowed.
And back to Sam's point of the regulatory oversight, is
pushing community banks out of the market. It is continuing to
push the community banks out of the servicing platform. And as
we add those additional layers we are adding additional reasons
for banks to get out of mortgage lending because it costs--
Mr. Capuano. I appreciate that. My time has run out and I
would love to hear from all of you, but my chairman is going to
knock me out. But at the same time I want to tell you that I
don't hate regulation. These are regulations in my opinion that
are wrong-ended. And I would love to work with you to
straighten those out if we could ever be allowed to do so.
Thank you, Mr. Chairman.
Ms. Bailey. Community bank profitability is at 95 percent,
so it is very important that as we have this discussion that it
is rooted in the facts. We had 7.8 million foreclosures in this
Nation, and we responded. This Congress responded with sensible
rules that provide abilities for lenders and community members
to have safety in the market.
So it is very important that as we have this discussion,
that it is rooted in the fact that we have actually returned to
the levels of lending that we did for our community banks
across the country.
Chairman Duffy. The gentleman's time has expired.
The chair now recognizes the gentleman from Michigan, Mr.
Trott, for 5 minutes.
Mr. Trott. Thank you, Chairman. I want to thank the panel
for their time this morning. I want to also echo some of the
comments that have been made regarding the ability to retain
servicing. That has got to be part of any solution for the
credit unions, the community banks.
And really people don't talk about it much, but the crisis
in 2008 was really exacerbated by the inability of large
servicers to deal with their borrowers in an appropriate
manner.
Communication oftentimes was very poor and really made loss
mitigation nearly impossible for a lot of borrowers, which led
to quite a bit of frustration and some bad results. So I just
want to echo that.
Ms. Hughes and Mr. Chavers, I want to talk about an idea I
have because my friend in Massachusetts says this is our 400th
hearing on housing finance reform.
I haven't been here that long, so this is probably only my
20th, but one of the reasons why we keep struggling with this
is it is hard to get an agreement, not only among Republicans,
but in certainly any kind of bipartisan solution on GSE reform.
And one of the issues I have found is, two-thirds of the
book of the business for Fannie and Freddie are refis and
second home mortgages. Why are they in that business? I agree
with Ms. Bailey's comments. The dream of home ownership is an
important part of our American values.
Why should Fannie and Freddie be involved in helping
someone buy a second home? Why should Fannie and Freddie be
involved in helping someone realize a lower interest rate?
I understand one of the concerns would be for low and
moderate income folks, but Ms. Hughes, what do you think about
simplifying our approach on GSE reform by just getting Fannie
and Freddie out of refis and second home mortgages?
Ms. Hughes. I have really not thought about the second home
mortgages.
Mr. Trott. How simple would that be, right?
Ms. Hughes. It would be simple, yes. On the investment
property space, that is another space that they are actually
very active in, and we are limited in what we can deliver to
that market. But there are opportunities in the past for loans
that are not investors that we could look for other options to
make that happen.
Mr. Trott. Mr. Chavers, what do you think it would do to
the rate on a refi if we took them out of that part of the
market?
Mr. Chavers. Well, Congressman, I am pretty sure that SIFMA
has not taken a position on excluding the refi or second home
market. and so I would submit that that is a policy
determination, obviously best left to the Congress.
I would submit, though, that it is important to recognize
any of the downstream implications of the changes that you
make. One of the other reasons that I believe as a policy
matter we support an orderly housing finance system is its
implications for the broader economy.
And typically one of the mechanisms by which we have
historically sought to spur economic activity has been through
monetary policy and the adjustment of interest rates
nationally. And one of the industries that communicates that
most directly to the marketplace has historically been the
housing market, so just recognizing the implications
downstream.
Mr. Trott. But there would be a way to phase it in over
time. And in your earlier comments you said any kind of reform
has to have transparency and certainty and adequate notice.
So there would be a way for us to adopt a policy, wouldn't
there, such that if Fannie and Freddie were going to get out of
the refi market, we could do it and phase it in over time such
that the private sector would fill that need and not create any
kind of turmoil.
That would be the goal, and we are not great at executing
on some of that sometimes, but that would be the goal.
Mr. Chavers. Congressman, I was just referring to sort the
macroeconomic implications and the implementation of monetary
policy and--
Mr. Trott. Right. I understand.
Mr. Chavers. --the housing markets. So in its current
configuration with estimates being somewhere between 12 and 15
percent of GDP being impacted by the housing market, taking
away the refi or the second home market would have some
downstream implications for that impact is all I was
suggesting.
Mr. Trott. Well, a different question for you, sir. What
issues would you consider if you were to enhance Ginnie Mae's
role in providing a guarantee in the conventional loan space,
as proposed in the DeMarco Bright solution?
Mr. Chavers. I think a couple of things come to mind, and
again, am speaking for myself in this instance because I don't
believe that SIFMA has opined on this. As the DeMarco Bright
proposal contemplates, there is the need for some
administrative reforms at Ginnie Mae.
It has been simplified as being characterized by removing
it from the Department of Housing and Urban Development, which
I understand placing it on sort of independent footing. But it
is important to recognize the strengths of Ginnie Mae is that
it is a globally recognized brand in the capital markets. And
so the ease of execution is appealing.
The challenges of Ginnie Mae is Ginnie Mae has, at least,
probably has less than 200 employees with managing a
significant amount of counterparty risk in the marketplace. And
it historically has not had the tools to bring in the kind of
capacity internally.
What it has been able to do is to leverage it through
outside vendors in order to perform its functions. If you were
to expand its role, it seems to me that it needs some
operational enhancements in order to do so.
Mr. Trott. Thank you.
I yield back.
Chairman Duffy. The gentleman's time has expired.
The chair now recognizes the gentleman from North Carolina,
Mr. Budd, for 5 minutes.
Mr. Budd. Thank you, Mr. Chairman, and thank the panel.
Mr. Chavers, the common securitization platform was
originally intended to broaden participation in the
securitization market by allowing new entrants to come into the
market and compete with the GSEs. However, it seems that the
platform's development in recent years has focused on being
solely used for Fannie and Freddie.
How important is it that the platform's role in bringing
private capital back to the mortgage market?
Mr. Chavers. So I believe that the common securitization
platform could be expanded to be an option for private market
participants to provide standardization and to provide more
confidence in that infrastructure.
One of the challenges in the private label market coming
out of the crisis is that investors have lost a lot of
confidence in the infrastructure having the proper alignment
and incentives of the intermediaries between the end investor.
And so the ability to leverage the platform to bring that
standardization to provide the sort of marketplace utility
merits exploration. Now, I am also mindful, I have heard the
comment that the common securitization platform is a bit of a
Rorschach test in that everyone sees in it what they hope to
see.
And so I don't have any transparency into its current
functional application and to appreciate how accessible it
would be to sort of migrating to make it a utility for the
private market, but it certainly bears exploration.
Mr. Budd. Thank you. So are you concerned that a platform
as it is currently being developed will be used exclusively by
the GSEs?
Mr. Chavers. I don't know that it gives rise to concern. My
understanding is that the way it is currently configured that
is the intention. It is also facilitating the transition to the
single TBA, which is something that potentially offers
additional liquidity, which I think is a desirable objective.
So--
Mr. Budd. So how realistic do you think it is that a
platform will be open to other industry participants, aside
from Fannie and Freddie, if it continues to be a joint venture
of Fannie and Freddie?
Mr. Chavers. I don't know that answer. I haven't heard any
indication of the intention for it to migrate as we sit today.
The focus, as I understand it, has been on it coming fully to
market and providing the underpinnings to deliver the single
security.
Mr. Budd. Sure. So a slight variant of that same question,
how critical is it for the platform to be spun off from Fannie
and Freddie?
Mr. Chavers. Excuse me. Congressman, I would like to give
that some more thought and--
Mr. Budd. Certainly.
Mr. Chavers. --Get back to you.
Mr. Budd. Certainly. Thank you.
Mr. Vallandingham, thank you again for being here. Is it
your view that the GSE expansion into the single family rental
market is consistent with their charter as entities in a
conservatorship?
Mr. Vallandingham. To answer your question, I think that
their participation in the investment property and rental
market makes homeownership affordable, whether it be through
actual ownership or through rental. And so that makes the
market--I mean, we had one of the previous commented that the
rental market was a disaster and that there wasn't affordable
housing in that segment.
Without that investment property avenue, it would be even
worse because the cost of financing for those particular
properties would go up, which means the cost of rental payments
would have to go up in order for that to be a profitable
investment.
Same thing with the refinance. So many times I see my
borrowers come in and we are shoring up their balance sheet. We
are taking equity out of their home and paying off higher cost
debt and moving it to lower cost so that their balance sheet is
better-positioned and they can withstand problems in their own
financial environment.
And if we take that away, I think it would be disastrous,
both for the housing market and to the consumer.
Mr. Budd. OK.
Ms. Bailey. We think that their increasing involvement
there is something to really be critically examined. They have
a robust multi-family portfolio that is really designed to
impact the rental market space.
And we have to be very careful that as they consider moving
into that space that they are not ignoring their obligations to
ensure that more homeowners are entering into the single family
space so that we can actually expand homeownership, which is
part of what those obligations actually speak to.
Mr. Budd. Thank you, Miss Bailey.
Chairman, I yield back my time.
Chairman Duffy. The gentleman yields back.
The chair now recognizes the gentleman from New Jersey, Mr.
MacArthur for 5 minutes.
Mr. Macarthur. I thank you, Chairman. I would like to step
back a little bit. You each expressed in your opening remarks
some concerns about reforms going too far and maybe disrupting
the marketplace, at least that is how I heard it, each from a
different perspective.
And I would just like to ask one or two of you to take a
stab at what do you see as the primary benefits of the current
system? And what do you see as the one or two primary drawbacks
of the current system?
Mr. Stafford. I can start. The benefits of the current
system are numerous; one, its competitive with pricing. There
is confidence in the system.
It is an easy flow of liquidity. The technology used by
Fannie and Freddie, for example, is significant. And we use it
to even hold the loans internally.
So there is a great sense of confidence that the system is
working well, at least for credit unions, and we feel
comfortable with that.
The things that obviously we are concerned about is
conservatorship is temporary. It--by definition. And so we do
and are in favor of reforms to remove it from conservatorship.
Mr. Macarthur. And one other?
Ms. Hughes?
Ms. Hughes. For us without the opportunities in the path
that exists currently, we would not be able to deliver the
number of loans that we deliver to the secondary market. We
cannot afford to hold loans on our books at market rate
interest rates for our consumers long term.
So that is the definite need that we have for us to
continue to be able to service our marketplace.
Mr. Macarthur. Yes, and that kind of leads me to my second
question.
Mr. Stafford, you mentioned easy flow of liquidity and you
are talking about the limitation of holding loans if you can't
offload them to a secondary market.
This balance of catastrophic risk and how to deal with
that, that is one model, versus I guess what I would call a
smoothly flowing market aside from catastrophic risk, just a
normal ebb and flow, smooth market that facilitates housing
starts and facilitates an orderly real estate market. How would
you balance those two issues?
Mr. Vallandingham?
Mr. Vallandingham. Well, I think that we got away from
prudent underwriting standards. And if you do a good job on the
front end you are not going to have a repeat of what happened
in 2008. And therein lies the basis.
And I think community banks proved that time and time
again. I mean, our portfolio has outperformed national averages
across the board. And so in reality it is an ounce of
prevention is worth a pound of cure.
So in reality I think that we have to be prudent up front
and make sure that we do a good job and that we don't allow the
non-bank participants, who really, I think in my opinion,
created a lot of the problem.
Access to the market and the way that they had it where
they were just doing anything they wanted in any way they
wanted, and ultimately created the risk that we weren't
comfortable with today.
Ms. Bailey. And I would echo that point, and I would also
go back to your original questions about some of the real
benefits of the market. One of the things that the market does
really well is pool loan risk so that there isn't a
specialization where we are only serving borrowers with
pristine credit profiles in certain regions of the market.
We actually have a system that allows us to have credit
availability because of the duty to serve requirement across
the country, specifically in rural areas. And this is really
something that the market does well that must be preserved
going forward. And the affordable housing goals along with the
duty to serve are very critical.
Mr. Macarthur. So just balancing those two, and I am going
to end, Mr. Chavers, with you because I would like you to sort
of look at this from the perspective of those who invest in
these securities ultimately.
This balancing of--I agree with you. We need to consider
those without pristine credit and making sure that a broad
group of Americans can have some hope at the American Dream.
But when that goes too far, which it did in the period in
the run up to 2008 where the Federal Government is encouraging
people to borrow money that they don't reasonably have a hope
of repaying, and I think that was a big part of the run up to
the housing crash. How do we reform that?
How do we make sure, Mr. Chavers, that the Federal policy
is encouraging lending that is responsible, that there is every
hope of it being repaid, that the private market will
ultimately want to invest in those loans as they are
securitized? What reforms would you see that would allow us to
achieve that?
And again, I am out of time, so answer briefly.
Mr. Chavers. OK. So Congressman, I think your question runs
at the beginning of the continuum, prudent underwriting. And I
don't think there is any substitute for prudent underwriting
for the product that ultimately goes through the system and
ends up in the securitized space.
Now, relative to what we think of as the traditional GSE or
TBA market, the benefit of the government guarantee is it opens
up the global capital markets, who have no interest, frankly,
in taking on credit risk, and bring that capital to support the
primary housing market.
As it relates to the private label market, it begins with
prudent underwriting and appropriate transparency and
intermediaries who act in the ultimate interest of the investor
and the borrower and transparency and appropriate disclosure
throughout the process.
Mr. Macarthur. I thank you. My time has expired. I
appreciate all of you being here.
I yield back.
Chairman Duffy. The gentleman's time has expired.
The chair now recognizes the gentleman from New Mexico, Mr.
Pearce, for 5 minutes.
Mr. Pearce. Thank you all very much for your testimony.
Thank you, Mr. Chairman.
Ms. Bailey, I appreciate the testimony and the work of your
group in going in the areas that are very underserved. Second
District of New Mexico is 60 percent minority and also one of
the poorest districts in the country. 50 percent of the houses
are manufactured housing, so I am a little bit familiar with
the circumstances they talk about.
Do you hold almost everything or almost nothing in the
portfolio on your loans? Or do you sell them to the secondary
market?
Ms. Bailey. We actually have a robust secondary market
program that allows us to actually buy loans from banks. So how
it is designed is--
Mr. Pearce. So you are a little bit of a secondary market
yourself then?
Ms. Bailey. Yes. We actually buy certain loans from banks
to actually help them make more Community Reinvestment Act
loans.
Mr. Pearce. Do you all have different rates for different
borrowers based on credit worthiness?
Ms. Bailey. I would have to check with our team over at
Self-Help to make sure I answer that correctly, so I would--
Mr. Pearce. OK.
Ms. Bailey. --Like to get back to you on that.
Mr. Pearce. Yes, if you wouldn't mind I would appreciate
that.
Mr. Vallandingham, do you have any rules of thumb when
people are coming in and they are wondering about the 15 or 30-
year mortgage that if you have 15 years you pay this much, 30
years? What kind of is that rule of thumb?
Mr. Vallandingham. In clarification, are you asking about
debt-to-income ratio or how we counsel them about the products?
Mr. Pearce. No. No, I am just talking about if somebody is
wanting to know what am I paying over the 15-year for--if I do
a 15-year loan versus 30-year loan? Do you have a rule of
thumb?
Mr. Vallandingham. Well, in terms of what their total cost
would be?
Mr. Pearce. Yes, the total cost, that is--
Mr. Vallandingham. No. I really don't. We provide them with
a truth-in-lending statement that shows in that. Generally--
Mr. Pearce. Just generally I would look at it and I think
it is fairly accurate, 15 years you are going to double the
price of the house, so a $150,000 house you will pay about
$300,000. 30 years you will pay $450,000, about three times.
And so--
Mr. Vallandingham. Well, and I am going to argue that it
depends on what rate environment we are in. And one of the
things that--
Mr. Pearce. Yes. I mean, yes, it will.
Mr. Vallandingham. At the current market and when we ask
what it does well, is it brings very low cost financing to the
borrowers. I mean, 4 percent over 30 years, that is an
incredibly low rate and something that consumers are benefiting
from. When I started, and I know I--
Mr. Pearce. Yes. If I could take my time back here I would
appreciate it. So we have heard the statement today many times
that the 30-year mortgage will be dead if we don't have the
secondary market. What percent--you say in your testimony that
many of our banks, community banks, choose to hold their loans
in the portfolio.
So by what percent is that? Because we really do want to
get a sense of how much we are going to penalize the market if
we change this GSE structure?
Mr. Vallandingham. Well, currently my community bank is
$200 million and we service over $600 million in mortgages. We
have about a $30 million internal portfolio of loans. We
generally use those loans to--
Mr. Pearce. How much do you put out? In other words, I am
more interested in percents than sizes, so what percent do you?
Mr. Vallandingham. When you say ``put out,'' sir?
Mr. Pearce. Yes. Yes, so that you put to the secondary
market?
Mr. Vallandingham. Well, not only--
Mr. Pearce. Thirty of 600? That is what you are telling me?
That is all of it?
Mr. Vallandingham. We portfolio about 30 and we have 600
that we service. Now, in a given year we might have originated
a couple hundred million and I would say probably--
Mr. Pearce. So it is a very small percent is actually held
in portfolio?
Mr. Vallandingham. Yes, sir.
Mr. Pearce. OK.
So Miss Bailey, the ability to repay rule that CFPB puts
out, have you all taken a position on that?
Ms. Bailey. Yes. We strongly support the ability to pay
rule.
Mr. Pearce. You strongly support the 43 percent, even
though that is going to be very punitive on the lower income.
You support the 43 percent because I know in our district it is
going to be very punitive, but you support it?
Ms. Bailey. We support it because we think that it gives
guidelines for lenders and consumers to have safety in the
marketplace. We think Dodd-Frank, like any other piece of
legislation or any other regulation, can be fixed, but we think
that they present us with a really good starting place for it.
Mr. Pearce. OK.
Ms. Bailey. And they return credit to the market.
Mr. Pearce. I just wanted to know if you support the 43
percent.
So Ms. Hughes, do you all track the--
Ms. Hughes. We--
Mr. Pearce. --Underwriting standards of--do you track the
underwriting standards of the GSE pretty closely?
Ms. Hughes. Yes.
Mr. Pearce. Yes. So when Mr. Johnson began to diminish the
underwriting standards, again, I am addressing the fact that
the GSEs had no responsibility in 2008. And when I look at it
they began to change the underwriting standards dramatically
and it began to get loans into the system that probably never
were going to be repaid.
If they had never changed the underwriting standards then
that great downward pressure in the system probably would not
have occurred. And so I accept the fact that there were greedy
people out there working in the finance market, but to simply
say that underwriting standard in the GSEs have no part in it,
is something I just, at the end of the day, won't buy.
I see my time has expired, Mr. Chairman, and thank you very
much.
Chairman Duffy. The gentleman yields back.
Did you want to respond to that?
Ms. Hughes. I can.
Chairman Duffy. Sure.
Ms. Hughes. On the underwriting standards we do follow them
very closely. I personally, and I am not speaking on behalf of
the ABA, I am personally speaking to you at--the ACR was a non-
issue for our institution. We underwrote loans on the
borrowers' individual ability to repay from the onset.
So through the housing crisis we had very limited issues
against our peers against national averages. We were very low
in our defaults because we tried to underwrite them to begin.
Mr. Pearce. Yes. I was just trying to say that you, even
though the underwriting standards deteriorated, you all chose
not to internally.
Ms. Hughes. Right.
Mr. Pearce. A lot of institutions did not make that choice.
If they could go ahead and make the bonuses based on getting
rid of the loans, somebody else got the problem, they jumped
into that. But if they could not have gotten rid of the loans
because they didn't meet the underwriting standards, then much
of the downward pressure in the system wouldn't have occurred.
So I appreciate the fact that you all chose to implement it
differently, but my point was actually to the national
pressures on those institutions that chose just to walk
straight with the underwriting standards, creating an
instability in the system.
And that, I think, is a great concept that is a piece of
the equation that must be brought into play as we are looking
at the entire GSE question.
And again, I yield back Mr. Chairman. Thank you.
Chairman Duffy. For the second time the gentleman yields
back.
I want to thank our witnesses for their testimony and time
today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
Without objection, this hearing is now adjourned.
[Whereupon, at 11:58 a.m., the subcommittee was adjourned.]
A P P E N D I X
October 25, 2017
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