[House Hearing, 115 Congress] [From the U.S. Government Publishing Office] SUSTAINABLE HOUSING FINANCE: PRIVATE SECTOR PERSPECTIVES ON HOUSING FINANCE REFORM, PART II ======================================================================= 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 __________ NOVEMBER 2, 2017 __________ Printed for the use of the Committee on Financial Services Serial No. 115-53 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] __________ U.S. GOVERNMENT PUBLISHING OFFICE 30-772 PDF WASHINGTON : 2018 ----------------------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Publishing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-mail, [email protected]. 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 ---------- Page Hearing held on: November 2, 2017............................................. 1 Appendix: November 2, 2017............................................. 41 WITNESSES Thursday, November 2, 2017 Stevens, Hon. David H., President and Chief Executive Officer, Mortgage Bankers Association................................... 6 Howard, Jerry, Chief Executive Officer, National Association of Home Builders.................................................. 8 Goodwin, Dan, Director of Mortgage Policy, Structured Finance Industry Group................................................. 10 Edelman, Sarah, Director of Housing Policy, Center for American Progress....................................................... 12 Brown, Kevin, Chair, Conventional Financing and Policy Committee, National Association of Realtors............................... 13 DeWitt, Robert, Chairman, National Multifamily Housing Council on behalf of the National Multifamily Housing Council and the National Apartment Association................................. 15 APPENDIX Prepared statements: Brown, Kevin................................................. 42 DeWitt, Robert............................................... 52 Edelman, Sarah............................................... 93 Howard, Jerry................................................ 105 Goodwin, Dan................................................. 117 Stevens, Hon. David H........................................ 136 Additional Material Submitted for the Record Duffy, Hon. Sean: Community Associations Institute: Private Sector Perspectives on Housing Finance Reform.................................. 204 Hultgren, Hon. Randy: Written responses to questions for the record submitted by Mr. DeWitt................................................. 216 Written responses to questions for the record submitted by Mr. Stevens................................................ 218 Written responses to questions for the record submitted by Mr. Goodwin................................................ 221 SUSTAINABLE HOUSING FINANCE: PRIVATE SECTOR PERSPECTIVES ON HOUSING FINANCE REFORM, PART II ---------- Thursday, November 2, 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 2:03 p.m., in room 2129, Rayburn House Office Building, Hon. Sean P. Duffy [Chairman of the subcommittee] presiding. Present: Representatives Duffy, Ross, Royce, Luetkemeyer, Stivers, Hultgren, Rothfus, Zeldin, Trott, MacArthur, Budd, Hensarling, Cleaver, Capuano, Sherman, Beatty, Kildee, Kihuen, and Green. Chairman Duffy. The Subcommittee on Housing and Insurance will come to order. Today's hearing is entitled Sustainable Housing Finance, Private Sector Perspective on Housing Finance Reform 2.0. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. 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 this subcommittee may participate in today's hearing for the purpose of making an opening statement and questioning the witnesses. Now, the Chair now recognizes himself for 3 minutes for an opening statement. I first want to thank our panel for their participation in today's subcommittee hearing. This is our second in our series on housing finance reform. For those of you who may have watched the hearing last week, I think you might have noticed a common theme and that theme was expected from many of us. I suspect that you will hear similar themes today and probably similar questions from the panel today for all of you. But we are looking for your feedback and what is most important to your organizations as we craft our vision for housing finance reform. I want to be clear that I believe that if we are going to be successful not just in the House but in the Senate, we have to address this on a bipartisan level. And that is why Mr. Cleaver and I have been working on scheduling meetings and seeing if we can start painting off the same canvas as we look at housing finance reform. Obviously, we are better off being nonpartisan and actually having a housing finance reform that works for the American people. In reforming housing finance, we have to figure out how to get private capital back into the system. That means we have to provide certainty to investors that will track private capital by making the rules of housing finance system transparent and enforceable. I believe the government can help in providing that certainty to the marketplace at the catastrophic level. While I expect to hear from some of our panelists that the government should give an explicit guarantee on mortgage-backed securities, we must also ensure that our taxpayers are protected. I want to know that your vision of--I want to know what your vision of a guarantee is and at what level should that guarantee actually kick in. What does it look like? I hope that you will all agree with me that any housing finance reform should be based on market discipline. We have learned from the lessons of the past and need to ensure that private shareholders are not able to profit in good times, but when times go bad, they leave taxpayers holding the bag. The concept that we have capitalism on the way up and socialism on the way down, I would argue doesn't work well for anybody. We absolutely have to deal with Fannie and Freddie. This is consistent with what you have heard, rom both sides of the aisle. We can't have these entities exist as they are today and continue to grow. Their risk is ultimately borne by the taxpayer in the form of a bailout should we see another 2008- esque crisis. And finally, we have to address the FHA (Federal Housing Administration). Since the crisis, the FHA has grown from a program for helping first-time home buyers and has expanded into availability for higher income individuals. Ultimately, this is crowding out the private sector. So I am looking forward to a vigorous, frank, lively, honest discussion today with all of you. This is your opportunity to give us your feedback on what you think housing finance reform should look like. So we can hit some 30,000-foot points. But also, it is nice to get into the weeds on the finer points of the housing finance. So I thank you all for coming. My time has expired. I now recognize the Ranking Member, the gentleman from Missouri, Mr. Cleaver, for 4 minutes. Mr. Cleaver. Thank you, Mr. Chairman. Thank those of you who come to provide us with testimony that will help us eventually deal seriously with some of the problems that all of us are familiar with. And I think the Chair is absolutely right that, if we can continue to work together, I think the two of us can for sure, but if we can get partners who are willing to work, we can come up with something that would be good for the country. And it also gives us the time to hear stakeholders' input on housing finance reform. It has been 9 years since Fannie Mae and Freddie Mac were put in conservatorship. Though a number of reforms have been put in place during that time, this arrangement, I can assure you, was never intend to be permanent. This hearing will give us a chance to assess many of the GSE (government-sponsored enterprise) reform proposals that have been offered by you, our witnesses. And as I mentioned last week, I remain hopeful that this committee will be able to work together in a bipartisan manner to reform the housing finance system. At the forefront of this conversation should be the need for this subcommittee, and Congress, as a whole, to preserve the 30-year fixed mortgage. This has played a crucial role in helping families purchase homes and in financially muscling up the middle class. Any attempt to dismantle it I believe could have a devastating impact on our communities and in the housing market. The rates for homeownership have already been in decline, and we need to take steps to improve access to mortgage credit, not just for the wealthy but all. Communities of color struggle to gain access to housing market, and our efforts need to improve on this. As this conversation continues, Mr. Chairman, I look forward to working with you, and I would yield the remaining time to Mr. Sherman from California. Mr. Sherman. Thank you. We are focused on sustainable housing finance, the old system. Chairman Duffy. Mr. Chairman, could I just interrupt? I know you are going to get a minute as well. Maybe we just yield all 3 minutes to you at this time so we don't break up your opening. Mr. Sherman. Oh, thank you. Chairman Duffy. So yield the gentleman from California for 3 minutes. Mr. Sherman. Thank you. What was not sustainable is the old system where Fannie and Freddie had private shareholders and private management, and the upside went to the private sector and the downside went to the public sector. What is sustainable is what we have now: Basically government entities ensuring loans. This will sustain our current system of a 30-year fixed-rate pre-payable mortgage which is what our constituents expect. It not only is sustainable, but it provides a role for the private sector. There are trillions of dollars of private sector money invested in home mortgages today, most of it where Fannie and Freddie are guaranteeing the bond. But keep in mind, it is the private sector taking the interest rate risk. And it is this allocation where a government agency ensures the debt risk, the private sector assumes the risk that interest rates will go up but the mortgage will be paid over 30 years. That is working and working well. What is not, there are two risks to sustainability. The first is the tax bill that was released limiting the home mortgage deduction to $500,000 unindexed, which means that is 10 years from now, 12 years from now, a quarter million dollars. Also, it is deceptive in that it says if you have a mortgage now that is over $500,000, you are fine except when you go to sell your house. And no one can buy it at today's prices, and so the value of that house goes down. And that poses a risk not only to home buyers and home sellers in communities. But if I can think of any risk to Fannie and Freddie, it is the decline in home values that will occur if a tax bill takes away the home mortgage deduction from a big part of the market, including homes in LA County that are below average in price where our median home income is way above $600,000. Second, we have a system dealing with subprime mortgages where we still have the issuer selecting and paying the bond rating agency. The last time we tried that, we got bond rating agencies giving Aaa to Alt-A, and they will do it again once memory fades. We need a system where, if you need a bond rating agency to rate mortgage-backed securities that are difficult to value, that are not prime, that are not guaranteed, that the bond rating agency is not beholden to the issuer, it is not selected by the issuer, and does not generate more profits by getting more issuers to select them. So I look forward to these hearings, and I thank the Chair and Ranking Member for the time. Chairman Duffy. The gentleman yields back. The Chair now recognizes the Vice Chair of the subcommittee, the gentleman from Florida, Mr. Ross, for 2 minutes. Mr. Ross. Thank you, Chairman, and thank the witnesses for being here today. We spend a great deal of time discussing things which we are divided. But I feel that obscures where we are really all in agreement. First, people should be able to afford a place to live. Second, homeownership is important not only for home buyers but also for communities and businesses that rely on a flourishing housing market. Third, losing a home, whether it be through a natural disaster or through a financial crisis, is a tragedy, the root causes of which should never be the consequences of misguided Federal policy. I think we all agree on that. I think there is even consensus that our current housing finance system is unsustainable. The question is how do we proceed? We have enjoyed a lot of benefits from the GSEs since they were first formed. But the financial crisis revealed a massive downside. I believe we can find a path to a more sustainable, more robust housing financing policy by steadily moving the government away from its historical role in rewarding the GSE's risk taking. I say it all the time: America should be the home of risk takers, but those risks shouldn't be suicidal. Ultimately, I would like to see a system which Fannie and Freddie and their shareholders are responsible for their own risks and not taking those risks with a nudge and a wink at the U.S. taxpayers. According to AEI's Edward Pinto and Peter Wallison, in June 2008, before the crisis, 56 percent of all U.S. mortgages were subprime or otherwise low quality. Of these, 76 percent were on the books of government agencies or institutions that were controlled by government policies with the GSE's holding or guaranteeing about two-thirds. The common denominator is government policy which means that it is our responsibility as legislators to think critically about what needs to change. When I ask why we are encouraging these loans, I am not denying the need for affordable housing. Rather, I want to make sure that we are not committing the moral hazard of putting people in a bad situation, one where they have no choice but to default. In that circumstance, no one succeeds. We all want America to be able to own that slice of the American dream. We all want to empower the housing market to thrive, and we all want to make sure that no one loses their home. But time and again, Americans have seen their Federal Government engage or incentivize risky and reckless lending. We need to find a better way that doesn't lead people into trouble. We need to find a better way to protect taxpayers. I believe we can work together toward that solution, and I yield back. Chairman Duffy. The gentleman yields back. Mr. Royce. Mr. Chairman, could I ask unanimous consent for 1 minute to address the committee? Chairman Duffy. Without objection. Hearing none, the gentleman from California is recognized for 1 minute. Mr. Royce. Well, thank you, Mr. Chairman. And thanks for this hearing. Housing finance reform remains the great undone work of the financial crisis. And a nationalized mortgage market, frankly, is an unsustainable status quo. Sadly, the situation we find ourselves in today was a predictable one. In 2003, I introduced legislation and again in 2005 which would have reined in the GSEs allowing them to be regulated for systemic risk. Alan Greenspan backed my amendment, but it was not enough to overcome the outsized political pressure brought by the GSEs themselves. While claiming that Fannie and Freddie posed no threat to the financial markets and the systemic risk was a theoretical term, the opponents of my amendment won the day. But they do not have to win today. We have a chance to learn from the past and to put to rest the model of private gains and public losses once and for all. Increasing private sector involvement in the secondary housing market through increased credit risk transfer and a truly common securitization platform is the first step in presenting another bailout paid for by the American taxpayers. Thank you, Mr. Chairman. Chairman Duffy. The gentleman yields back. Mr. Kildee. Mr. Chairman, I also ask unanimous consent to speak for 1 minute. Chairman Duffy. The Chair now recognizes the Vice Ranking Member of the committee for 1 minute. Mr. Kildee. Is that right? You can say Assistant to the Regional Manager, if you would like. Chairman Duffy. Duly noted. Mr. Kildee. Thank you, Mr. Chairman. I appreciate it. And I just want to raise an issue, and I know this is obviously a really important topic. It is the topic that attracted me to this committee in the first place, and it is a subject that obviously I think we should spend significantly more time on. The particular point that I want to make is that, when it comes to questions around housing finance, I want to caution us to keep in mind that even in periods where data might suggest that there is a return of functionality to the marketplace, and I think we have seen some resettling of the market post crisis, that there are particular regions and within communities particular--or within regions, particular communities that have really yet to recover from not only the crisis, the acute crisis that we faced starting in 2007, 2008, but from the long slide that those communities had experienced even leading up to that crisis. The chronic housing crisis in older cities, distressed communities, was made worse and, in fact, exacerbated in ways that they haven't yet recovered from in--as a result of the acute crisis. So if you can address in your comments the particular needs in weak markets, I think it would be really helpful. And I appreciate the indulgence of the Chairman. I yield back. Chairman Duffy. The gentleman from Michigan's time has expired. We now welcome our panel today, which is a large panel for this subcommittee. We welcome our first witness, Mr. David Stevens President and CEO of the Mortgage Bankers Association. Our next witness, Mr. Jerry Howard, CEO of the National Association of Home Builders. Our third witness, Mr. Daniel Goodwin, is the Director of Mortgage Policy for the Structured Finance Industry Group. We next have Sarah Edelman, the Director of Housing Policy at the Center for American Progress. Then we have Mr. Kevin Brown, Chairman of the National Association of Realtors, Conventional Financing and Policy Committee. And finally last but not least, Mr. Robert DeWitt, President and CEO of the GID Investment Advisors on behalf of the National Multifamily Housing Council and the National Apartment Association. To all of you, welcome. In a moment, the witnesses will 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 their oral remarks. Once the witnesses have finished presenting their testimony, each member of the subcommittee will have 5 minutes within which to ask all of you questions. I would just note that, on your table, 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. So I will try to pay attention to the lights up here. But if you would help and pay attention from your position, that would be helpful. Your microphones are sensitive. So you want to make sure that you are speaking directly into them. And if I could just make one note to our panel, I believe that votes are going to be called in roughly 10 minutes. So we are not trying to be rude, but we will have a couple votes on the floor. I think we have a House picture that is also going to be taken, which can take a lot of time, or it can take not much time. But we will get back as quickly as possible. So we should be able to get through most of the panel, but we may not get through all of it, just for your information. With that, Mr. Stevens, you are recognized for 5 minutes. STATEMENT OF THE HONORABLE DAVID H. STEVENS Mr. Stevens. Thank you. Thank you, Chairman Duffy. Thank you, Ranking Member Cleaver, members of the subcommittee. Thank you for the opportunity to testify here today. Nine years have passed since the GSEs were placed in conservatorship, and yet their long-term status remains unresolved. Extending conservatorship is economically and politically unsustainable, and it is an unacceptable long-term outcome. Without comprehensive reform, borrowers, taxpayers, and lenders will all face increased risk and uncertainty about the future. I will cut right to the chase: The time to act on comprehensive legislative reform is now. Despite the positive steps FHFA (Federal Housing Finance Agency) has taken as conservator, only Congress can provide the legitimacy and public confidence needed for long-term stability in both the primary and secondary mortgage markets. That is why, to build on prior work surrounding GSE reform, and in the hopes of spurring legislative action, MBA (Mortgage Bankers Association) convened a task force reflecting the full composition of MBA's membership: Residential and multifamily, bank and nonbank, small, medium, and large. Our task force truly represented the full depth and breadth of the entire real estate finance industry rather than the narrow interest of any one specific market segment. We tasked this group with developing a proposal that would address the future of the secondary mortgage market and, in particular, an end-state model that can also fulfill an affordable housing mission. Our proposal, which I have included as part of my written testimony, ensures equitable access for all lenders to the secondary market, prohibiting special pricing or underwriting deals based on loan volume as occurred prior to the conservatorship, preserving the cash window, small pool execution options, and eliminating the opportunity for vertical integration by the largest market participants. Our proposal recognizes the need for any comprehensive GSE reform plan to balance three major priorities: Consumer cost and access to credit, taxpayer protection, and investor confidence. To achieve these policy objectives, MBA's plan recommends recasting the GSE's current charters and allowing a multiple guarantor model that features at least two entities and preferably more. Guarantors would be monoline, regulated utilities owned by private shareholders operating in the single-family and multifamily markets. The core justification for a utility style regulation is that privately owned utilities attract patient capital and derive certain benefits by virtue of their Federal charters. The guarantors would be subject to rigorous capital requirements that would provide financial stability without unduly raising the cost of credit for borrowers. These requirements would be satisfied through multiple layers of private capital including proven means of credit risk transfer. The implicit government guarantee that existed before the conservatorship of Fannie Mae and Freddie Mac would be replaced with the legislated explicit guarantee only on the mortgage-backed securities. The guarantee would be supported by a Federal insurance fund with appropriately priced premiums paid by the guarantors, much like banks pay for FDIC insurance. Our plan explicitly calls for deeper first loss risk sharing that is transparent, scaleable to all lenders, and capable of limiting taxpayer exposure to only catastrophic risk. The task force also developed recommendations in two areas that have vexed past reform efforts. One, the appropriate transition to a new system, and, two, the role of the secondary market in advancing national affordable housing strategies. Our proposal specifically notes the importance of leveraging the assets, infrastructure, regulatory framework, and more of the current system. We also believe that any workable transition must utilize a clear roadmap and be multiyear in nature. We developed an affordable housing framework that covers both renters and homeowners of various income levels. Our plan suggests other improvements to better serve the full continuum of households including updating credit scoring models and better capturing nontraditional income. Our framework has outcomes that are transparent, well- defined, measurable, and enforceable. Mr. Chairman, as I noted, FHFA has put in place a number of policies and procedures to improve access to the secondary market and reduce risk to taxpayers. Now is the time for Congress to act and lock in these improvements. Only Congress can alter the existing charters, establish an explicit Federal Government guarantee, and create a regulatory mandate to maintain a level playing field amongst all lenders. We cannot go back to a housing finance system that provides private gains when markets are strong yet relies on taxpayers when losses occur. Calls to simply recapitalize the GSEs and allow them to operate without further structural changes are misguided. Under such plans, the post-crisis administrative reforms already achieved could be reversed by regulation. The American people rely on a mortgage finance system that enables them to access quality, affordable rental housing, buy their first home, or build a nest egg for their children. We owe it to them to proceed with the hard work of reform without delay. Thank you again for the opportunity to testify, and we are committed to work with you and the committee as you further this endeavor. [The prepared statement of Mr. Stevens can be found on page 136 of the Appendix] Chairman Duffy. Thank you. Mr. Howard, you are recognized for 5 minutes. STATEMENT OF JERRY HOWARD Mr. Howard. Mr. Chairman, Ranking Member Cleaver, members of the subcommittee, NAHB (National Association of Home Builders) is proud to have the opportunity to appear here before you today. We applaud you, Mr. Chairman, Mr. Hensarling, and the others for the work you have already done in helping to advance the debate on housing finance reform. NAHB also believes that 9 years in conservatorship is too much. And we believe that it is time now to move forward, and we are eager to be a constructive partner. While some have called on the FHFA director to allow Fannie and Freddie to recapitalize in order to avert a need for further draw from Treasury, NAHB believes that this would be counterproductive to achieving comprehensive housing finance reform. Allowing the enterprises to recapitalize would encourage their release from conservatorship prior to meeting full reform, and would reestablish the failed GSE model. To ensure a stable housing finance system that will support home ownership and affordable multifamily housing in America, Congress must fix the structural flaws inherent in Fannie and Freddie's charters, though they contributed so significantly to the housing finance crisis. Regulatory solutions or piecemeal legislative steps are simply not adequate. NAHB believes strongly that a bipartisan legislative solution would not only protect the American taxpayer who, absent reform, is on the hook for any losses stemming from the $6.29 trillion in federally guaranteed mortgages, but the legislative fix would also ensure that the housing finance market has a reliable and adequate flow of affordable housing credit that would not face uncertain availability from one administration to another. As an organization representing members who construct approximately 80 percent of all new housing, single and multifamily, NAHB's priority in the system is to ensure liquidity for the housing sector in all markets throughout every economic cycle. This is only possible if the market participants know that there is a Federal Government backstop that will maintain stability in catastrophic circumstances. While NAHB agrees that the current degree of government intervention is unsustainable, an ongoing though more limited government role must be maintained to avoid future interruptions in the flow of credit to mortgage borrowers. Since 2008, numerous lawmakers, housing and consumer advocates, academic and industry stakeholders have proposed plans for a reformed housing finance system. NAHB members themselves have spent countless hours debating reform proposals, crafting our own proposal, and generally seeking a bipartisan road forward. Many of the early reform proposals called for a complete restructuring of the secondary market, and several proposed a full dismantling of both enterprises. These plans were untested, often complex, and would have required a transition that could have been considerably disruptive to the housing finance market. Thankfully, over the past 9 years in the light of regulatory and policy changes throughout the industry, the continued functioning of the mortgage market, there has been a gradual moderating of the approach to reform. And consensus is forming around broad principles. Importantly, recent proposals call for legislation that preserves areas of the market that are working, including the significant infrastructure and resources of Fannie and Freddie themselves. Of specific note, many plans include the following key elements that are consistent within NAHB's vision. One, an insurance fund capitalized by market participants that would stand in front of the Federal Government explicit backstop. The Federal Government and taxpayers would be at risk only in the case of catastrophic loss. Two, the system will rely primarily on private capital. Three, the Federal Government backstop would apply to mortgage-backed securities but not to the private companies themselves. Four, there would be a level playing field for lenders of all sizes. Five, the enterprises or their successors must have appropriate capital requirements. And, six, government-supported securities would be backed by single-family loans that meet qualified mortgage requirements as well as prudently underwritten multifamily mortgages. Finally, number seven, there should be careful transition to avoid market disruptions. Mr. Chairman, given the significant role that housing finance plays in the economy and that housing itself plays, we urge this committee and Congress to take a long-term holistic approach to housing finance system reform. We thank the committee for its leadership on this issue and stand ready to work with you to achieve such reforms and provide certainty and stability to this critical sector of the economy. Thank you. [The prepared statement of Mr. Howard can be found on page 105 of the Appendix] Chairman Duffy. Thank you, Mr. Howard. Mr. Goodwin, you are recognized for 5 minutes. STATEMENT OF DAN GOODWIN Mr. Goodwin. Chairman Duffy, Ranking Member Cleaver, and members of the subcommittee, thank you for the opportunity to testify today. My name is Daniel Goodwin, and I am the director of the Mortgage Policy, Structured Finance Group. SFIG is a trade association that represents over 350 corporate members from all sectors of the structured finance and securitization market. A key element of SFIG's mission is to educate and advocate on behalf of the structured finance and securitization industry with respect to policy, legal, regulatory, and other matters affecting the securitization markets. I thank you for the opportunity to address the committee regarding housing finance reform, including finding an appropriate balance of private and public funding for the housing finance system. The disproportionately large role of the government in today's housing finance system is the outcome of many factors, but it is inarguably in an unhealthy condition. SFIG believes this condition can be remedied but must be done in a manner which minimizes market volatility and keeps credit flowing. In considering reforms inherently critical to the U.S. housing market and the economy as a whole, we suggest there is a guiding principle that should be considered. In order to provide consumers access to credit at competitive rates, there must be a stable, liquid, and efficient market. This market must allow responsible lenders to compare funding costs easily across competing sources and readily access those same funding sources on a level playing field. Historically, these funding sources have fallen under two broad categories: Publicly supported funding and privately supported funding. Any considerations of housing reform should encourage a healthy and sustainable mix of both, eliminate hidden or implied guarantees or subsidies which may distort costs and minimize the risk to taxpayers and the economy. We strongly encourage steps to restore the private-label securitization market in order to remove risk from the taxpayers, diversify economic risk, encourage economic innovation, and ultimately reduce borrowing costs. We also believe that the continued presence of publicly supported funding is essential to act as a source of 30-year fixed-rate mortgage credit, support affordable housing goals, provide countercyclical stability, and support the TBA (to be announced) market. As detailed in my written testimony, this smooth functioning of the TBA market is critical in that it is the cheapest and most efficient way for mortgage borrowers and lenders to lock in an interest rate when a mortgage loan is approved thereby minimizing the cost of borrowing passed on to the consumer. The TBA market is dependent on a government guarantee making it imperative that any reform legislation include provisions that preserve such a guarantee. Also, without the backing of the Federal Government, it is unlikely that the 30- year fixed-rate mortgage would exist in its current state. The 30-year fixed-rate mortgage is an essential financing tool for home buyers. The fixed interest rate provides certainty allowing a family to budget their housing costs and make long- term financial plans without the fear of future interest rate swings. While the government guarantee provides significant benefits that should be maintained, in some ways, private capital has been crowded out. SFIG believes we should strive to encourage an appropriate and healthy balance between public and private funding to protect the taxpayer, promote competition, and drive innovation. The GSE's credit risk transfer programs are examples of notable success in the reintroduction of private capital into the mortgage market. Those programs have clearly demonstrated that there is private capital eager to invest in newly originated mortgaged credit risk so long as investors feel their interests are protected and there is a reasonable amount of regulatory and legal certainty. We believe that the GSE should build on their success and expand their programs to include an even greater percentage of their portfolios, perhaps even explore selling more of the existing risk they retain on the CRTs (credit risk transfers) to further reduce risk to the taxpayer. It is important to note that CRT, although reliant on private capital, is not a replacement for private label securitization. The PLS market once represented a far greater share of the mortgage funding ecosystem. Market excesses and bad actors across the mortgage market led to the collapse in housing that fed the Great Recession. In response to that crisis, legislation and regulation were put into place with the goal of preventing the kinds of excesses we witnessed a decade ago. Despite the imposition of significant regulation, this market has not recovered. However, it has begun to show green shoots, and we should seek ways to encourage responsible growth. Areas for consideration are capital relief for non-GSE issuers of credit, paring back certain onerous capital and liquidity standards, and reducing conforming loan limits. As this committee is considering housing finance reform and ways to attract private capital, lawmakers should review policies which may have created an uneven playing field or inadvertent biases. Thank you again for the opportunity to testify, and I look forward to answering your questions. [The prepared statement of Mr. Goodwin can be found on page 117 of the Appendix] Chairman Duffy. Thank you, Mr. Goodwin. Ms. Edelman, you are recognized for 5 minutes. STATEMENT OF SARAH EDELMAN Ms. Edelman. Thank you, Chairman Duffy, Ranking Member Cleaver, and members of the House Subcommittee on Housing and Insurance. My name is Sarah Edelman, and I am the director of Housing Policy at the Center for American Progress. I am here today to remind you that what matters most in a discussion about the housing finance system is whether the families you represent can get a sustainable mortgage regardless of where they live or whether they are wealthy and, until they are qualified to buy, that they can find an affordable rental. The housing finance system determines who can borrow money, what they will pay, and whether financing is available for affordable rental housing. As Congress considers how to strengthen the housing finance market for decades to come, we offer the following three recommendations. First, policymakers should build on what has worked. Prior to the 1930s, home ownership was only an option to those who could make a 40 percent down payment. And even then they had to repay or refinance within just a few years. Starting in the 1930s, the Federal Government began supporting affordable home ownership through Federal mortgage insurance programs and through the government-chartered enterprises Fannie Mae and Freddie Mac. These interventions helped to grow the middle class significantly. Going forward, the enterprises or their successors should retain their strong mission as well as the tools to deliver on a mission that has served America well. Second, Congress should support reforms already underway to fix what hasn't worked and consider new reforms where appropriate. The housing crisis was not caused by Fannie Mae or Freddie Mac. As detailed in my written testimony, the problems that caused the crisis arose from the private label securitization system and predatory lending practices. While Fannie Mae and Freddie Mac didn't cause the crisis, though, they did stray from their mission in the years leading up to it. And as the private securitization market grew, their income declined and they made bad business decisions to generate quick profits and to please shareholders. These decisions eventually landed them in conservatorship. Since the crisis, Congress has taken important steps to reform the housing finance system. Congress established protections for consumers and reined in Wall Street through the Dodd-Frank Wall Street Reform and Consumer Protection Act. Congress also passed the Housing and Economic Recovery Act which established a strong regulator, the FHFA, to oversee the enterprises. Left for Congress to address are the shareholder incentives that could drive bad decisions at the enterprises or their successors. And Congress also needs to decide how to ensure that the government guarantee, which was implicit for decades, is paid for. Finally, as Congress considers reforms, policymakers need to make sure that they don't make changes to the system that could actually make matters worse for consumers, taxpayers, and the housing market. For instance, several of the proposals under consideration make the mistake of setting competition as a goal of housing finance reform. It was not the lack of competition in the secondary market that caused a crisis, and a larger number of firms guaranteeing or issuing government- backed securities will not necessarily make taxpayers safer. As finance expert and former SFIG executive committee member Andrew Davidson explains in a new paper, even if there are multiple guarantor entities, it is likely that if one is failing that the others are likely to be under pressure. Government might still have to intervene. Further, the risk isn't just that they fail but the damage that is done as they race toward bottom. Our concern is that these proposed structures may create conditions for the irresponsible behavior we saw in the private-label securitization market in the lead up to the crisis, except this time, the securities will be guaranteed by the Federal Government. Congress should also help ensure that mortgage pricing is relatively stable and homogenous across the market. This is important for a healthy mortgage market and for ensuring that working families continue to have access to fairly priced mortgage credit. In recent years, the GSEs have shifted toward pricing risk at the loan level which has raised costs significantly for borrowers with average credit scores. Instead, the cost of ensuring risk should be spread more evenly across all borrowers. Any reforms considered by Congress should encourage fair pricing and should not solidify the current practices or move further toward a market where only the wealthiest among us can get a mortgage at a fair price. Thank you for the opportunity to be here and for your efforts to strengthen the housing market. How you decide to proceed will have consequences for America's home buyers and renters alike, and we look forward to working together. [The prepared statement of Ms. Edelman can be found on page 93 of the Appendix] Chairman Duffy. Mr. Brown, you are recognized for 5 minutes. STATEMENT OF KEVIN BROWN Mr. Brown. Chairman Duffy, Ranking Member Cleaver, and members of the subcommittee, my name is Kevin Brown. I am currently the Chairman of the National Association of Realtors (NAR) Conventional Finance and Policy Committee, and I served as a president of the California Association of Realtors in 2014. I am the broker of Better Homes Realty, Rockridge, in Oakland, California, and I have over 39 years of experience servicing the cities of Oakland, Berkeley, Albany, El Cerrito, and Sacramento in California, and the city of Portland in Oregon. NAR is America's largest trade association. Realtors are involved in all aspects of both the residential and commercial real estate industries. I would like to start by thanking Chairman Duffy and Committee Chairman Hensarling for your leadership on flood insurance. It was a pleasure collaborating with both of you and your staff on this important issue. NAR looks forward to working closely together on housing finance reform as well. As part of the comprehensive housing finance reform, Realtors believe that it is crucial for Congress to ensure that affordable mortgage capital will always remain available in all markets for creditworthy Americans. In order to ensure a steady flow of affordable mortgage capital in both good times and bad, NAR believes that Congress must include an explicit government guarantee for the future housing finance system. Moreover, Realtors believe the enterprise that should be converted into government charted, nonshareholder-owned authorities that are subject to tighter regulation on products, profitability in minimal retained portfolio practices in a way that ensure the protection of taxpayers' moneys. Realtors believe that any entity with private profits that are implicitly backed by public losses, as enterprises were structured before the conservatorship, is flawed and problematic. This model allows enterprises to take excessive risk, focus on revenue and profit generation based on assumptions that taxpayers would step in when the losses begin to mount. Additionally, realtors desire a smooth transition that will pose the least amount of market disruption. As mentioned earlier, realtors strongly support a secondary mortgage market model that maintains an explicit government guarantee. That guarantee will protect taxpayers by ensuring that all creditworthy consumers have reasonable access to affordable mortgage capital so that they too can attain the American dream of home ownership. Furthermore, NAR urges Congress to address the enterprise's declining capital. Under the terms of their agreements with U.S. Treasury, the enterprise's capital reserves will decline to 0 on January 1, 2018. It is important to have a buffer between any losses and the taxpayer. This is especially the case if comprehensive housing finance reform legislation has not yet been adopted. It makes sense to build that buffer now while the enterprises have positive cash-flows. To address this concern, a prudent intermediate step would be to establish a mortgage market liquidity fund, or MMLF, through legislation or under existing regulatory authority. A portion of the enterprise's profits could be deposited into the fund controlled by FHFA director which could cover future losses due to market fluctuations as I have described. The FHFA director could release funds from this account to buffer against further U.S. Treasury involvement. As a result, some capital will be in place to avoid significant market disruption and provides Congress with the necessary time to enact comprehensive housing finance reform. Realtors recognize that this is an extensive and important conversation regarding how we mend and improve a housing finance system that can serve us well into the future. Realtors believe that recommendations provided today will help commerce and our industry partners design a secondary mortgage model that will be in our Nation's best interest today and in the future. Thank you for the opportunity to testify, and I look forward to answering any questions. [The prepared statement of Mr. Brown can be found on page 42 of the Appendix] Chairman Duffy. Thank you, Mr. Brown. Mr. DeWitt, you are recognized for 5 minutes. STATEMENT OF ROBERT DEWITT Mr. DeWitt. Thank you, Chairman Duffy, Ranking Member Cleaver, and Ranking Member Waters, and members of the subcommittee. It is my privilege to appear before you on behalf of the National Multifamily Housing Council and the National Apartment Association to provide the multifamily industry's perspective on housing finance reform. My name is Bob DeWitt, and I am the President and CEO of GID, a Boston-based owner/operator/developer of multifamily properties. I serve currently as the Chairman of the National Multifamily Housing Council. The apartment sector is a competitive and robust industry that helps nearly 39 million people live in homes that are right for them. We help build vibrant communities by offering housing choice, supporting local small businesses, creating millions of jobs, and contributing to the fabric of communities across the country. Today we are experiencing fundamental shifts in our housing dynamics as more people are moving away from buying houses and choosing to rent apartments. More than one in three Americans rent, and 19 million of those households are building their lives in apartments. In the past 5 years, an average of 600,000 new renter households were formed every year. This increased demand will generate a need for 4.6 million new apartments at all price points by 2030. To meet that demand, we will need to build an average of at least 325,000 new apartment units every year. Yet, on average, just 244,000 apartments have been built from 2012 through 2016. The apartment industry is extremely capital-intensive; therefore, it is critical that housing finance reform provide consistent access to debt capital across geographies, markets, and product types if we are going to meet the current and future demand for rental housing in America. Today, private capital dominates multifamily markets. Banks, insurance companies, commercial mortgage-backed securities, and, to a lesser extent, pension funds and private mortgage companies are all key sources of capital for the multifamily industry. Unfortunately, private capital alone is insufficient. Even during healthy times, the private market has been unwilling or unable to meet the totality of the multifamily industry's capital needs. For example, banks are limited by capital requirements and have rarely been the source of long-term fixed rate financing. Life insurance companies typically comprise less than 10 percent of the market and finance only higher-end properties. And CMBS (commercial mortgage-backed securities) has also not fully returned to pre-crisis levels. As this committee considers housing finance reform, it is critical to remember the enterprises have ensured capital availability regardless of prevailing economic conditions. They have operated with great distinction even during the financial crisis, and the committee should build on the success to ensure liquidity, stability, and affordability in a growing multifamily housing market. In this regard, we urge you to consider the following key six principles. First and foremost, it is essential that a reformed housing finance system maintain an explicit paid-for Federal guarantee for multifamily backed mortgage securities available in all markets at all times. Second, recognizing the inherent differences between the single family and the multifamily sectors both in how we operate and how they have performed will require different solutions to avoid putting at risk the nearly 39 million Americans who rely on the apartment industry for their housing. The positive performance of the GSE's multifamily programs are a direct result of their adherence to prudent underwriting standards, sound credit policy, and, most importantly, placing private capital at risk in front of the taxpayer. Third, we share the view that private capital should dominate the multifamily sector wherever and whenever possible. Reform should ensure continued private sector participation. Fourth, Congress should protect taxpayers by continuing risk sharing and private capital participation. Each GSE utilizes its own risk sharing multifamily model that protects it from losses by placing private capital in the first loss position. These models worked effectively through the great financial crisis in shielding taxpayers from the bill for credit losses. Fifth, Congress must maintain the successful components of the existing multifamily programs in whatever succeeds them. Establishing a new business model for multifamily businesses would only serve to disrupt capital flows to the industry. The enterprise's technology, processes, and personnel must be preserved as the committee evaluates a new housing finance system. Six, Congress should avoid market disruptions during the transition to a new system by clearly defining the government's role in a reform system in the timeline for transition. Finally, it is critical that the Federal Housing Administration continue to be a reliable source of construction and mortgage debt. FHA ensures mortgages and is a source of construction and long-term debt for affordable and work force housing. Thank you for the opportunity to testify today, and I look forward to answering your questions. [The prepared statement of Mr. DeWitt can be found on page 52 of the Appendix] Chairman Duffy. Thank you, Mr. DeWitt. And it looks like votes have been pushed back, thankfully. So the Chair now recognizes himself for 5 minutes. To the mortgage bankers, home builders, and realtors, how did your members fare during the 2008 crisis? Not well, did they? Mr. Stevens. No. Chairman Duffy. They lost a ton of people because they went under. Mr. Stevens. That is right. Chairman Duffy. I know a lot of home builders went out of business, and a lot of realtors lost their jobs as well. And it impacted a lot of my constituents, people all over America. So this is an issue that affects, I think, everybody equally. And making sure we get reform right is critically important, because when we get it wrong you see your membership roles drop considerably because it has a huge impact. Mr. Brown, would you just take a moment. You have discussed a government charter versus government sponsored. Can you explain what you mean by that and how you envision that working? Mr. Brown. The government charter--what we want to do is we want to have a government-chartered entity with an explicit guarantee. The most important thing is the explicit guarantee to preserve the 30-year fixed-rate mortgage. I think out in the private market, if the government guarantee wasn't there, the 30-year fixed-rate mortgage would not exist. Chairman Duffy. Does it exist in the jumbo market? Mr. Brown. Does what exist? Chairman Duffy. Thirty year. Mr. Brown. In the jumbo market, does the government guarantee-- Chairman Duffy. Can you get a 30-year mortgage in the jumbo market? Mr. Brown. Yes. Yes, you can. Chairman Duffy. So when you look at having a government charter, are you guaranteeing the entity or the security? Mr. Brown. The security. Chairman Duffy. OK. So it is different in what we have right now, where we are guaranteeing the entity, right? Mr. Brown. Yes, explicit guarantee. Chairman Duffy. Right. Mr. Stevens, in regard to your proposal where we are going to have an insurance fund to help with losses, what skin in the game does the lender have should one of their mortgages go bad? Mr. Stevens. If they are selling to a government agency, they are on the hook for representations and warranties that they met the standards that would be required to be able to sell a mortgage backed ultimately by the explicit guarantee. Chairman Duffy. So you can come back to the lender? Mr. Stevens. Correct. Chairman Duffy. And recoup some of those losses? Mr. Stevens. Absolutely. Chairman Duffy. Have you taken a look at Bright DeMarco by chance? Mr. Stevens. Yes Chairman Duffy. And why is your proposal better than a Bright DeMarco-esque proposal where we are looking at--they are looking at a Ginnie Mae model as opposed to the insurance fund model. Mr. Stevens. Honestly, they are very close, and there is a lot of similarities between the two proposals, because they are both a multiple guarantor model with several consistencies around capital requirements and more. Ours does use the CSP (common securitization platform) versus Ginnie Mae. And I think the critical difference between a Ginnie Mae execution and having that be the platform is the lenders act as their own issuer. There is, for example, no cash window at Ginnie Mae for small lenders. And in our view, going forward, if you are going to have the customer base that the GSEs have today, which is a couple thousand lenders, the regulation and the safety and security net is better managed if you have a few guarantors versus a couple thousand lenders all issuing through a government platform. There are many other complexities to that topic which I would love to follow up with you on. But, in essence, there is a lot of agreement between Bright DeMarco in terms of structure, the plumbing differences we talked about, whether it is a CSP or Ginnie Mae comes down to a lot of nuance that I would love to explore with you beyond the time that is allowed here today. Chairman Duffy. I welcome that future meeting. I asked this in the last hearing, and I don't think that I had a really good answer. But does everyone on the panel agree there needs to be a government guarantee or a catastrophic government guarantee in this space? Anyone disagree with that? And so if we are going to offload credit risk, how much credit risk can we offload? What does that number look like? We can debate how we do it, but-- Mr. Stevens. Yes. From our view, you are going to offload all credit risk except for the pure catastrophic level of credit risk. Chairman Duffy. And what is that? Mr. Stevens. We would have to get in a discussion of what-- in basis points. But let's just assume that you would essentially load off the first 50 percent or so of the loan to value that is being guaranteed by the government. That would break you through all measures of risk modeling, that would take into account every recession we have been through, including the most recent Great Recession. So there would be private capital--multiple layers of private capital ahead of that risk so that the government would only be on the hook once you burn through all layers, down to a very low loan to value that would have withstood the worst recessions. We have laid it out in detail in our paper. It is another one that--of course, it is a bit complicated. But through the multiple risk transfer structure that we put in place, you ultimately truly put the government in a catastrophic risk level, and I would assume that most economists would agree with that as well. Chairman Duffy. My time is up, but I look forward to having a more vigorous conversation with all of you on these topics as we move forward. I would just hope that there is going to be agreement, one, on a government backstop but also that we want market principles at play, because what might feel good today, we are all doing well with being this close to the crisis, we know that time heals all those memories, and we start to behave poorly. And market discipline is a great way to make sure that 2008 doesn't happen again. So my time has expired. I now recognize the gentleman from Missouri, the Ranking Member, Mr. Cleaver, for 5 minutes. OK. I do not recognize the Ranking Member. I now recognize the gentleman from Massachusetts, Mr. Capuano, for 5 minutes. And I would just note that he has his jacket on which means he is going to be well-behaved. Mr. Capuano. Thank you, Mr. Chairman. It is because we have had this hearing half a dozen times yet and thus far haven't heard anybody change your opinions. You like the system the way it was before they met their excesses. You like the idea of a government backstop to mortgages. And we all agree we ought to keep the 30-year fixed mortgages. Did I say anything that anybody disagrees with? So anybody have any idea why we just can't do this? Why hasn't it been done? Anybody know? I can't figure it out. Everybody in the world agrees with the real basic premise of what we have to do except one or two extreme, out of the mainstream whack job think tanks. All of us think it is pretty easy. I don't have a clue why we keep doing these hearings, except, of course, I love seeing you all. But this is something we could just do. And why don't we just do it and stop talking about it? So I am not going to talk about it, because we all agree. I do want to take a second and thank Ms. Edelman for mentioning something I thought I was the only one that has ever mentioned it, but you did it. What mortgages were like before Fannie and Freddie. Now, my numbers are just slightly different but not much. It was a 50 percent down payment. Fifty percent down payment. The rates were about the same rates as we have today except there was a 5-year pay back. Five year. Not 30, not 15, 5. Which meant your monthly mortgage was about two to three times what it is today for the same house. And home ownership was close to 0. So it is something we need--we have done the private thing already. It didn't work out too well. And I don't hear anybody who thinks we should change it. But I do want to ask my real estate guys here today. Today, many of us have been trying to rip through this 400-page tax bill trying to figure out what is in it and what it all does. And I can't pretend. I haven't digested the whole thing yet, and I might be wrong in some of the things I see. But I am just curious. All the people in the business, do you think that it is a good idea to exclude--to repeal the current exclusion for the sale of a principal residence, therefore, make it taxable income? Would that help the business? Anybody think that helps the business? Mr. Brown. I think it is terrible. And I also think doubling the standard deductions neutralizes home ownership, and I think that is terrible as well. You know, we are a Nation of homeowners. Nobody aspires to rent a house. But we are afraid. Especially in California, renters are, in another 10 years, 12 years, there are going to be more renters than homeowners. And I think that maybe tax reform might even accelerate that in its current form if they take the incentives out of homeownership. Mr. Capuano. I really appreciate that comment, there are going to be more renters than homeowners. Again, we are always going to have some renters. I own a two-family home. I live in a two-family home. To my knowledge, I am the only Member of Congress who does. Why do I do that? Because when I could afford to buy a home, I needed the rent to pay the mortgage, and I have stayed. And I know that nobody here knows what a triple decker is or what a two decker is. In Boston, they are pretty common, and they are usually occupied by people trying to get into the housing market. It is usually the first house you own, because you use the rent to pay it off. And I will tell you that in Boston and New York and LA, and Chicago--I guess another question, it appears as though they are trying to reduce the cap on mortgage interest deduction to homes only up to $500,000. Does anybody here think that is going to help your business? It may not change your business in big chunks of the country, because $500,000 homes are kind of big homes in most of the country. But $500,000 in Washington, D.C. might get you a parking space, maybe, maybe two, but that is about it. So does anybody here think that that cap, that reduction of that cap would help increase home ownership or help business? Mr. Howard. We don't think so, sir. We are very concerned about the impact of the tax bill on housing. While we differ from the realtors in that we are in favor of the doubling of the standard deduction, we think that there are ways--revenue neutral ways that the tax bill could solve the problem that it creates with housing. We have presented some of them to the Republican leadership and to Chairman Brady, and we are hopeful that ultimately a bill will put something in there, more specifically a home ownership tax credit that would be geared toward the middle class. Mr. Capuano. I appreciate it. There are other provisions of this bill too. My time is running out, and they are going to call votes. But I will tell you that we need your voices here with this tax bill, because even if we finally get around to doing the right thing on GSEs, which I think we might some day in my lifetime, even if we do that, if we then kill it on the other end by making homeownership unaffordable to the entry- level people because of various tax provisions, not going to help you, not going to help us, it might help some people on Wall Street. It will not help the people building homes. It will not help the people selling homes. It will not help the people trying to finance those people who want to buy homes. So we may help one segment of the economy, but we will hurt another big segment of the economy that matters to my constituents. Thank you, Mr. Chairman, for your indulgence. Chairman Duffy. The gentleman yields back. I wish I had more time to address the tax issue, but I don't. I now recognize the Vice Chairman of the subcommittee, the gentleman from Florida, Mr. Ross, for 5 minutes. Mr. Ross. Thank you, Chairman. I, again, thank the panelists for being here. You know, it is interesting, because I agree with Mr. Capuano. I think we all believe that there should be a solution here with a backstop. As was pointed out earlier, I think everybody agrees that a government backstop should be there. The problem we have is to what extent the government is responsible for that backstop. And I think the details are what we are talking about here. Mr. Goodwin, I think, believes that there should be a balance between private and government. Ms. Edelman, I believe, thinks that on the front end we should have the government there. And Mr. Stevens, I think, that you believe in a private sector one, which I, of course, support. And my first question is, is there anybody here that believes that without a government backstop we cannot have a sustainable 30-year mortgage, despite the jumbo market? Is it necessary to have a government backstop in order to maintain a sustainable 30-year mortgage? Mr. Stevens. Yes. Mr. Howard. Yes. Mr. Ross. Would anyone disagree with that? OK. Good. Mr. Goodwin, do you agree? Mr. Goodwin. Yes. Mr. Ross. OK. My concern is where we are crossing lines here between the primary and the secondary mortgage. There has been an issue about that bright line. And, Mr. Stevens, to what degree have there been examples of the GSEs kind of crossing that bright line into the primary mortgage market? Mr. Stevens. Well, thank you for the question. It is a great concern to our industry. Freddie Mac and Fannie Mae should play a role purely in the secondary market, and in a general sense, they do. But they have had scenarios that we need to be concerned about. Contacting the owners of apartment buildings versus the lender lending to the owner of the apartment building, or creating pilot programs where the vendors are selected without an open and public and transparent process, or giving terms of business to select institutions and pilots that ultimately last far longer and give advantages to certain lenders in the marketplace, or building web capabilities that are focused on consumers versus institutions. Our view is that they should stay behind the bright line, remain as a secondary market participant only, and not compete with the private sector. Mr. Ross. And you have discussed your utility rate-like program. That, in essence, just engages the private market and would provide for a stable long-term rate. Is that correct? Mr. Stevens. Absolutely. The advantage of the utility model versus the predecessor to the conservatorship of the GSEs where there was unending pursuit for shareholder gains is utility investors tend to be more patient investors, long-term investors not expecting the grandiose returns, and therefore they put less pressure on the guarantors that are involved in the system. Mr. Ross. And there is enough capacity out there in the private sector to make this happen. Would you agree? Mr. Stevens. Absolutely. Yes. Mr. Ross. Mr. Brown, how do you feel about that, about that particular type of backstop, with the utility rate-type-- Mr. Brown. You are talking about the bright line? Mr. Ross. Yes. Mr. Brown. We believe in the bright line and-- Mr. Ross. Oh, I am sorry. Not the bright line. I apologize. But go ahead. Go ahead. Mr. Brown. And we think that large financial institutions should not be working both sides. Mr. Ross. And I appreciate that. But with regard to specifically Mr. Stevens' proposal for a government backstop that is private shareholders with a rate regulation-type environment that is used in utilities, how do you feel about that? I mean, do you think that is going to-- Mr. Brown. What we are calling for is a mortgage market liquidity fund. That is the rainy day fund. There is actually a lot of private capital in the market now. And they would have to, say, if there were losses, for instance, there is the downpayment and the equity that a homeowner has in the house. There are the G fees, PMI, and-- Mr. Ross. It would provide the liquidity up front. Mr. Brown. Yes, yes. But losses would have to eat through all that. And what we are proposing, that this fund, that profits can be put into now to establish this fund for catastrophic losses. Mr. Ross. Ms. Edelman, how do you feel? To what degree should the backstop be structured in terms of the homeowner, the lender, the government? At what level do each of these parties participate? Ms. Edelman. So, yes, the home buyer puts up a down payment which acts as a buffer. And then we do want a situation where the government is really just the backstop. Mr. Ross. Market of last resort. Ms. Edelman. Yes. Mr. Ross. Absolutely. Ms. Edelman. But to your question on the private utility, we think utility structure is really interesting. The idea of capping the returns to get at some of the incentives that get messed up with shareholders. One of the problems is how do you make sure that the regulator stands strong. You look at private utility models all over the country and it is a constant battle between the utility commission and the regulated entity. Mr. Ross. But that is the beauty of the system. It is a constant ebb and flow, because of market demands, because of consumer demands, because of natural disasters. I mean, utility rates are never static. And I don't think that mortgage rates would ever be static either. Ms. Edelman. I think the greater concern is how much are the investors getting paid and how much are the entities incentivized to try and create businesses that are going to create more returns for the investors. I think that is the sticking point. Mr. Ross. Thank you. My time has expired. I yield back. Chairman Duffy. The gentleman yields back. As the panel can see, votes have been called. I would just note for your timing, I believe we have three votes and then a House function, which is a picture. So I would just guess, it is probably going to be 45 minutes to an hour before we resume. So you can deal with your time in that fashion. So with that, the committee now stands in recess. We will reconvene after the beautiful House photo. With that, the committee stands in recess. [Recess.] Chairman Duffy. The committee is recalled to order. The Chair now recognizes the gentleman from California, Mr. Sherman, for 5 minutes. Mr. Sherman. Thank you. I believe I usually have a graphic here showing the debt. I don't know if staff can put that up. I don't know if staff is listening. OK. Mr. Brown, in your testimony you support a two-guarantor system, a Fannie and a Freddie. You haven't asked for a Mark or a Tom. You seem to focus on having two. Why are two guarantors optional? And should we only have one? Should we have three or four? Mr. Brown. We think that having one would not be good. If something happened to that entity, there is nobody else in the space. Having two we think is a perfect balance. We think that that has led to competition and innovation. So that has worked out well so far with the GSEs. Having more than two, having multiple guarantors, we just think it would be a race to the bottom in terms of pricing and then we would have liquidity problems in the market. Mr. Sherman. Now, we need to have enough capital or reserve funds for the GSEs. Sometimes they are going to do better, sometimes they are going to do worse. And if they have too much capital, that may tempt some to say, well, capitalize--catch and release or capitalize and release. And if they have too little, they are going to need to draw against the Treasury. And that will be a political firestorm, or could be, depending upon how it is characterized. You have raised concerns about the enterprises drawing on their line of credit with the U.S. Treasury. Wouldn't it be prudent to, perhaps, when they remit funds to the Treasury, to put that in a separate part of the Treasury line item in the Treasury so that if it was needed by the enterprises on a rainy day, it would be clear that they were just drawing down money they had previously transferred to the Treasury? Mr. Brown. Mr. Sherman, that is exactly what we want to see happen, is that rainy day fund created, a mortgage market liquidity fund. When the GSEs have that, then they can really focus on home ownership. And they can also engage in countercyclical activities in weaker markets. It would be a fund for catastrophic losses. After the system went through private capital, then that would be the fund of last resort, and so it would cover the taxpayer from that respect. And that is kind of our mantra: What can we do to protect the taxpayer? Mr. Sherman. Thank you. And I agree with you. Mr. DeWitt, Fannie and Freddie are major sources of mortgage capital for the multifamily market. There is a growing shortage and increased demand for multifamily rental housing. Do you think private capital alone will meet the need to build the apartment buildings that people need to rent? Mr. DeWitt. Congressman Sherman, no, I don't think that that is possible, to have the private market provide all of the capital that is required. And just as evidence of that, we haven't ever seen the private market be able to provide 100 percent of the capital that the multifamily industry consumes. Certainly during the 2008 to 2010 great financial crisis private capital disappeared entirely. And without Fannie and Freddie, we would have had a severe liquidity crisis that would have put a lot of properties in maturity foreclosures when their loans became due and we had no other source of funding to refinance those. So we don't believe that it is possible. And the rationale for that, if you look at the commercial banks who provide most of the construction financing, and they provide some short-term variable rate financing or floating rate financing, they are constrained by the regulations imposed by Dodd-Frank and Basel III and others. Mr. Sherman. We have certainly heard about those in this room. I am going to try and sneak in one more question for Mr. Stevens. Are there risks associated with a rollback or reversal of the Federal Housing Finance Agency's policies? Mel Watt will not be there forever. I enjoyed sitting next to him on this committee for many years. What legislation could mitigate the risk of being whipsawed between one set of policies and another set of policies? Mr. Stevens. With what little seconds are left, yes. Unless we lock in some of the reforms that the director has put in place, they can always be subject to change. And legislating an explicit guarantee, legislating real capital standards, legislating the level playing field for all lenders, large and small, so that they compete evenly, these are just three of several things that Congress can do. Mr. Sherman. Mr. Stevens, I am going to give you a homework assignment, and that is, can you produce a proposed piece of legislation designed to lock in the best of Mel Watt's work? Mr. Stevens. Absolutely. Mr. Sherman. Thank you. Chairman Duffy. The gentleman yields back. The Chair now recognizes the gentleman from California, the Chairman of the Foreign Affairs Committee, but also a great member of this committee, Mr. Royce, for 5 minutes. Mr. Royce. Mr. Chairman, thank you very much. Let me start with Mr. Stevens. And, Mr. Stevens, as you know, I and Gwen Moore have put forward a bipartisan bill that would direct Fannie and Freddie to increase the amount and the types of credit risk transfer transactions. And we would do it to the maximum level that is economically viable, that is commercially viable. And when we had FHFA Director Watt here before the committee, it was October, he was here in October, and he told me that when they are looking to encourage--that in terms of the timing, they are looking at encouraging more front-end credit risk transfers at Fannie and Freddie. And I am not sure when they are going to do that, but I was going to ask you, how do you think they intend to accomplish that goal, and do you think deeper mortgage insurance is part of the equation? Mr. Stevens. Well, thank you, Congressman. And I appreciate your leadership on this subject. Credit risk transfer is critical to almost every model that is being presented going forward. And to date, the credit risk transfer model has been mostly in the form of structured finance through CRT executions that have taken place. We believe to have a truly functioning, deep first loss credit enhancement market, you need to utilize both institutional risk transfers via mortgage insurance and the reinsurance markets, as well as structured, and that FHFA should be directed to do this sooner rather than later. Because we believe ultimately proving that point will bring more capital into the markets through good markets and bad, regardless of whether credit spreads are wide or narrow. So it is something we encourage FHFA to pursue, and we appreciate your efforts to try to do the same. Mr. Royce. Well, thank you, thank you. And let me ask Mr. Goodwin, in your testimony you highlighted the work SFIG has done around the revitalization of the private label securities market. Outside of lowering conforming loan limits, which you have already spoken to, can you highlight some of the recommendations you have that we, as legislators, can undertake to help on that front? Mr. Goodwin. Sure. Thank you. There are three broad areas that I think would need focus. One is an industry-focused area of providing alignment of interests, clear roles and responsibilities, and that is part of the undertaking that SFIG is doing under its RMBS 3.0 umbrella. So that is an industry self-regulating piece. I think we should continue the work that we have been doing over the last several years with prudential regulators and the CFPB (Consumer Financial Protection Bureau) to clarify liability around investors and to tailor regulatory and capital rules to better suit the products that we are working with. And then finally, we should continue to work to reduce the GSE footprint. Mr. Royce. Yes. And let me go back to Mr. Stevens on another issue, because Mr. Brad Sherman and I share some of your criticism of the PACE (property-assessed clean energy) loan program. And on the face of it, helping homeowners improve energy efficiency is certainly a good thing, but the structure of these loans and the sales practices really have raised some concerns. What role should the GSEs play in addressing these concerns, in your opinion? Mr. Stevens. Thank you for the question. The PACE program we view as a great danger to the average homeowner. Actually, one of the problems is it is not a loan, it is a tax assessment, which means it is not subject to the traditional consumer disclosures and consumer protections that have been established under the CFPB's consumer disclosure requirements. And as a result, it creates this opportunity for a cottage industry of whoever can invent the next energy enhancement without oversight can go sell it to consumers who may have no idea whether the value is there. And it also takes first lien rights after the fact. So our view is that the GSEs should be forbidden from allowing PACE loans in their portfolio, as well as the FHA. Mr. Royce. Let me let Mr. Brown jump in here, too, if he wants to on this. Mr. Brown. Sure. I totally agree. I think that there needs to be a consumer educational component. I think most consumers that get these PACE loans don't really understand what they are, and then it takes a first lienholder position. So I very much agree. Mr. Royce. Thank you, Mr. Brown, Mr. Stevens. Thank you, Mr. Goodwin, and the entire panel here. I appreciate it very much. And I yield back, Mr. Chairman. Chairman Duffy. The gentleman yields back. The Chair now recognizes the Ranking Member, Mr. Cleaver, for 5 minutes. Mr. Cleaver. Thank you, Mr. Chairman. Mr. DeWitt, any time we start talking about dealing with the issue of housing, whether we want to or not, it inevitably is going to lead to some discussion about FHA. And I am wondering what you see as a role for FHA, considering the role they played in helping us get beyond the economic crisis of 2008. Mr. DeWitt. Thank you. The FHA, I think they provide some construction financing for the apartment sector, and that is important for those who can't get the construction financing from the commercial banking system. So I think that is really the primary role that they are playing for us today, important provider of capital. Mr. Cleaver. Do you think we still--is there still a need for FHA? Mr. DeWitt. You know, it depends entirely on what you are going to do with Fannie and Freddie. But I think so. I think that you would still need that construction lending capability which doesn't exist in the two GSEs. Mr. Cleaver. Ms. Edelman. Ms. Edelman. I just wanted to emphasize how important FHA is to both the rental market and the home ownership market. FHA traditionally has been how many first-time home buyers, lower- wealth borrowers, are able to buy homes. There are ways that we can strengthen FHA, including giving them the funds they need to have the technology systems in place to really serve the market well. But proposals that have been on the table to either raise prices for consumers or narrow the footprint and who is eligible, I think, really could undermine what FHA does. Mr. Cleaver. Thank you. Mr. Stevens, the multifamily housing in our country was just blasted into little bits from 2008. What happened? And what do you think we need to put in place to create a whole new spirit of multifamily housing, understanding that most builders are not anxious to do that because they are not going to make money? So what do we do, because we know we need it? Mr. Stevens. Yes. I was the FHA Commissioner in 2009. And actually, there was a line at the door of FHA to finance apartment buildings that couldn't get financing everywhere else because the CMBS markets had all but disappeared for a period of time. Multifamily requires a variety of capital sources to provide for the varieties of multifamily financing in the market. The greatest challenge we have today is the affordable entry-level rental housing stock. You can see just here in Washington, D.C., that the units that are being built are A- quality units, but the gentrification process can ultimately impact the affordable rental side of the community. LIHTC (Low-Income Housing Tax Credit) has been helpful in that effort, but there needs to be more focus in being able to make sure that we have both consistency of liquidity to the apartment markets, and that there are other incentives to provide opportunities to build more affordable entry-level apartment housing stock as well. Mr. Cleaver. Well, in a lot of the urban centers there are vacant apartment buildings. In Missouri, both Kansas City and St. Louis, you can find many of them. But the rehab cost is prohibitive. And so you have the potential, but unless there is some gap financing from somewhere, from somebody, those buildings will eventually just be knocked down or unless the government comes up with something creative to save them. Do any of you have any concrete, flawless comments on how to preserve these buildings? Ms. Edelman. Well, two opportunities. First, the Duty to Serve rule, Fannie and Freddie have been instructed to serve three underserved markets. One of them is around affordable rental preservation, and they should be running with that. Another opportunity is for FHFA to set more rigorous, affordable goals for multifamily. Fannie and Freddie are soaring past the goals that have been set while the percentage of the portfolios that is actually affordable has been in decline. So I think there are a couple of opportunities to really push what we have got right now. Mr. Cleaver. Thank you. Chairman Duffy. The gentleman yields back. The gentleman from Nevada, Mr. Kihuen, is recognized for 5 minutes. Mr. Kihuen. Thank you, Mr. Chairman, and thank you, Mr. Ranking Member. And thank you all for being here to testify. As most of you know, I represent the Fourth Congressional District of Nevada, which is one of the most diverse districts in the country. Geographically, demographically, it is basically a microcosm of the United States of America. We have rural, we have urban, suburban, Latino, African American, Asian, younger, older. I mean, it reflects what this country looks like. Now, the question is more for the panel, but according to the Urban Institute, among others, mortgage credit standards are excluding good credit risks, and this is disproportionately impacting minority borrowers. Do you agree with this? And if so, what could be done to improve access to credit in the GSE space? Mr. Brown. You know, the National Association of Realtors is very much in favor of alternative credit scoring. We realize that a lot of people that are being underserved are being shut out of the housing market. And so we are open to exploring alternative ways of people having their credit measured so that they can get a loan. People pay, even though they are renters, they pay utility bills, they pay telephone bills. If they are paying those bills on time, why can't that be part of their credit score. So we are totally open to alternative measures to get more of those people in the marketplace. Ms. Edelman. Fannie Mae and Freddie Mac have also changed their pricing approach in recent years and now they have moved toward risk-based pricing. So you pay a higher fee if you are a borrower who has a 680 credit score relative to somebody with a 780. So while they have, theoretically, this big credit box that they can lend into, it doesn't make economic sense for anybody to really get a loan from Fannie and Freddie if you have a credit score from really under 700. So we think they should move toward how they more traditionally price credit across the book of business instead of at the individual level. That would be one thing. And then another piece, and I will defer to Mr. Howard on this, there are serious inventory shortages at the starter home level. And so a lot of time folks aren't even coming to the door to a bank because they can't find a place to buy. Mr. Kihuen. Right. Thank you. Mr. Stevens. I would just add that I think it is a really important question. This is a precipice that we need to all get engaged in. We have families in this country that come from oftentimes countries that were unbanked or underbanked, and so the trust in the banking system was something that wasn't part of the family culture. We have multiple family members living together, in some occasions contributing to the mortgage, which doesn't fit into the traditional square peg, square hole underwriting. And to the point made previously, alternative forms of credit needs to be something that becomes more main stream. Thin-file, creditworthy sustainable borrowers have to become underwritten in a way that allows them access to home ownership, again, assuming that the rest of their profile is sustainable. Mr. Kihuen. Thank you. And my next question is for Ms. Edelman, and I know you have been here before, and thank you for always being accessible. Now, as you all know, we have a staggering home ownership gap between white and minority households in this country. The home ownership rate for a white household is 72 percent, while it as low as 42.3 percent for black African American households and 45.5 percent for Hispanic households. Why do you think it is important to acknowledge this history and resulting trends in the next context of debating housing finance reform? Ms. Edelman. Thanks so much for the question. When you look back through the history of housing finance policy in the U.S., as I mentioned in my opening statement, government intervention in the housing market through insurance programs, the chartered entities, built the middle class. But all that time when they were building the middle class, the 1940s through the 1970s, black homeowners were shut out, other homeowners of color were shut out completely. And so since then, we have been trying to make up for that deficit, and instead of really expanding sustainable home ownership, instead in the early 2000s, we got predatory lending, which just stripped wealth from communities of color. So the wealth gap is staggering, and the decisions that are made about what the housing finance system looks like going forward will determine whether home ownership can be a tool to help build wealth or whether we are going to continue to solidify the trends that are ongoing. Mr. Kihuen. Thank you. Mr. Goodwin. I would like to make a brief comment from the private label security side of things. This is another reason to encourage the growth of private capital in the mortgage space. Its flexibility in using alternative credit models, in providing alternative solutions, especially around nonstandard credits and thin-credit files, when done in a responsible way, can help expand home ownership. Mr. Kihuen. Thank you. Thank you, Mr. Chairman. Chairman Duffy. The gentleman yields back. The Chair recognizes the gentleman from Illinois, Mr. Hultgren, for 5 minutes. Mr. Hultgren. Thank you, Chairman Duffy. Thank you all so much for being here. I appreciate it very much. I am going to address my first question to Mr. Stevens, if I may. I would like to get your opinion on FHFA's somewhat recent rules to limit the eligibility of FHLB (Federal Home Loan Banks) membership through captive insurance companies. As you point out in your written testimony, and I quote, ``In eliminating this category of members, FHFA removed some companies that are active sources of private capital in the mortgage market, such as market REITs,'' end quote. I absolutely agree that this should be revisited. It is why I have been working with my friend and colleague from the other side of the aisle, Representative Gwen Moore from Wisconsin, to reduce the Housing Opportunity Mortgages Expansion Act. As you might know, the two States served by the Federal Home Loan Bank of Chicago, Illinois and Wisconsin are arguably hardest hit by FHFA's rule. For example, Redwood Trust, one of the bank's largest members and an exemplar of private capital in the mortgage market, will lose its membership. So I wondered, in general, can you comment on the role that mortgage REITs (real estate investment trusts) play in contributing private capital to the housing market and how permitting FHLB membership for mortgage REITs augment their ability to contribute private capital to the housing market? Mr. Stevens. Well, thank you for the question, and thank you for your leadership on this issue. As we have learned over these past several years, the distribution of capital sources has gone beyond just banks to nonbanks and a variety of other capital sources. Real estate investment trusts are critical providers of capital and liquidity to the mortgage finance markets. Many were members of the Federal Home Loan Bank System for many, many years prior to the modification of the rule by the director. And the Federal Home Loan Banks provide an important source of liquidity to the real estate investment trusts that can ultimately be distributed to communities across the country. We strongly support the effort to allow those, at minimum, the real estate investment trusts that had access to the Federal Home Loan Bank system prior to the rule, that they should be allowed to be retained in the program. They provided no risk to the Federal Home Loan Bank model whatsoever and brought a lot of private capital and liquidity to the marketplace. Mr. Hultgren. Thank you. Mr. Goodwin, if I could address the next few questions to you, if that is all right. I believe I share the view of most when I say that the government should not be subsidizing homes with values around half a million dollars. The role of government is to help those who need it the most. Your testimony suggests private capital can step in with no or negligible increase in the cost of the mortgage if conforming loan limits are reduced. I wondered, how much can these limits be reduced and how quickly? For example, 5 percent a year, 10 percent a year? What do you think? Mr. Goodwin. I hesitate to put a specific number on it. I think you are absolutely right, that it can be done. We see now the difference between mortgage rates offered in the jumbo space and mortgage rates offered in the agency space are very, very close, which indicates the fact that there isn't a substantial difference in financing cost to the consumer. I think that it should be done in a measured way. I think that there is enough private capital which has shown interest in the mortgage space, as evidenced by the health of the CRT market and the fact that other mortgage yields are clearing out there, points to the fact that there is liquidity. But I think, like in everything, that things should be done in moderation and in a measured way. Mr. Hultgren. Following up, do you have any recommendations for updating conforming loan limits to maximize private capital without impairing affordability? And also, do you believe there are any issues with tying conforming loan limits to average housing prices? Mr. Goodwin. I don't--membership doesn't have an opinion on tying it to home limits. I think that is something that is worth discussing with membership, and that I would be happy to come back at another time and discuss with you. Mr. Hultgren. That would be great. Let me move on with my last minute here, a little bit about the QM (qualified mortgage) patch. As you know, all agency loans are deemed to be qualifying mortgages, providing lenders more legal certainty. It also provides an unlevel playing field with private capital. This QM patch is set to be phased out at the earlier of the GSEs' existing conservatorship or January 10, 2021. How significant is QM status for lenders and what does this mean for the cost of financing for the mortgagees? Mr. Goodwin. Thanks for bringing this up. I think this is an important point that does not get as much attention as it should. The QM patch provides the GSEs with an advantage over the rest of the originating institutions out there, basically gives them a pass on a lot of the rules that other lenders are subject to. And with it expiring in the earlier end of conservatorship or 2021, I think we need to begin the work of transitioning to the time when that patch is no longer available. And whether that means that we begin the work of standardizing QM across all lenders, GSE or non, or bringing, expanding the non-QM patch to other lenders, I think the work needs to start happening to get us so that we avoid a disruption in the marketplace when it expires and we avoid a situation where it drives up our end cost. Mr. Hultgren. Thank you. My time has expired. I have more questions. I may follow up in writing, if that is all right. Thank you all so much. I yield back. Chairman Duffy. The gentleman's time has expired. The Chair now recognizes the gentleman from Texas, Mr. Green, for 5 minutes. Mr. Green. Thank you, Mr. Chairman. I thank the witnesses for appearing. And I thank the Ranking Member for all of his services to this committee as well as to his country. Same to you, Mr. Chairman. Friends, I am concerned about the housing market, and I am concerned about the mortgage interest deduction. As you know, there is a move afoot to move it from $1 million to $500,000. Does that cause anybody else concern? If so, would you raise your hand? OK. Let me tell you why it causes me some consternation, and then you give me your indications. It causes me consternation because if we lower it from a million to 500,000, we will probably lower it to 250,000, and we will probably lower it to something else. My fear is that this is the next step in elimination of the home mortgage interest deduction. I don't support that. I don't support elimination. And I am concerned that this is a step in that direction. So let me ask my friend who is with the National Association of Home Builders your position on it as tersely as you can state it, please, sir. Mr. Howard. We are angry. That is about as tersely as can I put it. We think it is very bad policy. We think it picks geographic winners and losers. We think it is going to lower house values, and it could lead to a housing recession. We think it is a very misguided proposal. Mr. Green. And if I may go to Mr. Brown, who is with the realtors, please. Mr. Brown. We feel the same way. We feel that--in fact, our--the comments came up with a number, with the repeal of the SALT (State and Local Tax), as well as doubling the standard deduction, and we feel that it is going to be like a 10 percent drop across the Nation, nationwide. As far as the $500,000 deduction, we don't know how much, if you throw that in, how much it will--or the $500,000 cap, we don't know how much that would reduce the housing market further, but it is significant, especially in the high-priced States. Mr. Green. The question now becomes whether or not this will be allowed as a part of a Christmas package. There seems to be an indication that this is something that should be done by Christmas. A sad Christmas for a lot of people who are hopeful and want to buy homes. I know that $1 million to $500,000 may not seem like a lot, but when you understand that that is only one step and there can be a lot more, I think it is going to cause some heartburn. But I appreciate what you have said in terms of how it will impact the market. And my hope is that we will find reason to let people know that we have this consternation. You are doing a great job here today, but we may have to do more. Now, with reference to the alternative credit scoring, we were talking about that just a moment ago, I believe. We have a bill, H.R. 123, that addresses this question to a certain extent. But we found it better to call it additional credit scoring as opposed to alternative, because we are adding more. We are not taking one thing or another thing. We are adding more. It is my belief that people should have additional credit scored if it really is credit. And if you pay your light bill, your gas bill, your phone bill, your water bill, why not have it scored if you pay it timely, if it can make a difference in your credit score. In examining this, we found that a good many people would benefit. In fact, there are people who are paying more for rent than they would pay to purchase a home if we had additional credit scoring. So it is H.R. 123. I would commend it to you and ask that you review it for your consideration. H.R. 123. This passed the House, by the way. It is not something that is new to us. And we had with HUD (Housing and Urban Development) to develop an automated system for us to examine and see how it worked. And we had a 5-year window and it didn't get done. This is in the interest of full disclosure. So my hope is we will get it passed again and this time we will get the automated system. There are some institutions that do this on a case-by-case basis, so it is not anything new, additional credit scoring, it is just that we would like to see it done so that a good many more people can benefit from it. I greatly appreciate your time. I have 6 seconds left. So thank you. And I will yield back to the Chair 1 minute--1 second, excuse me. Chairman Duffy. The gentleman is over by 1 second but yields back none the same. We are now going to go into a second round of questions, and the Chair recognizes himself for 5 minutes. Just to follow up on Mr. Green's point. I think it was--Mr. Ellison and I were partners in the alternative credit scoring issue. I agree with it. We want to look at all factors to make sure if you are qualified to get a home you can actually purchase a home. Mr. Green. Would the Chair be so kind as to yield for a positive comment? Chairman Duffy. No, because I only have 5. I will give you 5 minutes, though, if you stick around. Mr. Green. That works for me. Chairman Duffy. What concerns me is Mr. Stevens comes out and says, ``Listen, those lenders who might make a bad loan, they might have some skin in the game.'' You are OK with them having skin in the game. Mr. Stevens. Yes. Chairman Duffy. On the realtor front--which, by the way, the realtors and I get along well. My dad was a realtor. We have worked well on FUD together. But once you get your 6 percent, you are out. You have no skin in the game after the sale. That shouldn't taint the remarks, but as we look at housing finance, I think those are considerations, as we talk about policy, we have to consider. We have had a lot of conversations about tax. Now I want to get to that as well. Mr. Howard, so we have gone from the mortgage interest deduction, this proposal, from $1 million down to $500,000. In your world actually what should it be? If you are able to write the bill, it should be unlimited? Mr. Howard. Prior to 1986, it was unlimited, sir. So I think we have been operating fine for the last 30 years at the million-dollar level. Taking it down to $500,000 and not indexing it for inflation I think is a policy mistake. Chairman Duffy. How many middle-income folks do you know are buying a house for $1 million. Mr. Howard. It depends on where you live, sir. Middle income here is different than middle income in Wisconsin. Chairman Duffy. Do you know what the mean home cost in D.C. is? Mr. Howard. I don't know off the top of my head. Chairman Duffy. $538,000. Mr. Howard. That is mean. Chairman Duffy. That is right. But my concern is, you have heard a debate: No tax breaks for the rich. This is economic warfare. But then when, you know--listen, a million-dollar home? A million-dollar home and we have people who go, ``Oh, my gosh, I don't want to give tax breaks to the rich.'' But when there is a reduction in write-offs for the wealthy, they are the first ones to grab the microphone and go, ``Whoa, whoa, whoa, this isn't fair, this isn't right. We have to make sure the SALT is still in place so I can to write off my mortgage interest.'' And, by the way, I don't disagree with you. But as a matter of policy and the debate that happens here, you have people talking out of both sides of their mouth. Mr. Howard. Mr. Duffy-- Chairman Duffy. ``I want to go after the rich.'' Mr. Howard. Mr. Duffy-- Chairman Duffy. Until you go after the rich, and then they are like, ``Well, those are my people.'' Because guess what? Do the rich live in my district? No. Do they live in Boston? In New York? In San Francisco? Yes. And who represents those districts? The very people who are arguing to raise their taxes, and the very people, when we meet the call to raise their taxes, they complain about it. And I find that to be rich and frustrating. If you want to give tax breaks to the rich, say it. Let's all go, ``You know what, if you buy a $2 million home, we want to let you write off that interest.'' Mr. Howard. Mr. Duffy, are you aware of the alternative proposal that the National Association of Home Builders brought to the Ways and Means Committee and the House leadership? Chairman Duffy. No. I am on Financial Services, not Ways and Means. But if you want to send it my way, I will be happy to look at it. Mr. Howard. We would be happy to do that, sir. Chairman Duffy. But to Mr. Brown, I want to throw another question by you. Mr. Brown. Can I comment, Chairman, on-- Chairman Duffy. Let me give you a question and I will give you time to respond. Mr. Brown. OK, OK. All right. Chairman Duffy. Because I think I heard you say that the realtors are in a position where we go, ``You know what, I want to make sure that Americans are itemizing for their mortgage interest deduction.'' And that is a good thing for home ownership. I am going to give you some pushback, because I have to tell you what I think. Most people in my district go, ``I don't want to itemize for that. If you give me a standard deduction of $24,000 and I don't have to go to my accountant and itemize my taxes, I am applauding.'' So I think we have to be cautious. Is this good for realtors or is this good for Americans? And I think most Americans go, ``I don't want to itemize, and I want the deduction.'' And if you come in--and I think you are in the hardest place. I told you this before, we had this conversation. I think you are in a hard place arguing that you want Americans to itemize their mortgage interest deduction. That is a hard place to be because they don't want to do it. It is complicated. They want our plan to go, ``Right here, baby, one sheet, you can put it on all there.'' You can go, Mr. Brown. Mr. Brown. Chairman Duffy, I disagree with you. Chairman Duffy. You can go to both things, too, if you want to hit me on both of them. Mr. Brown. What we are in favor of is home ownership, and we are against anything that diminishes home ownership. You know, the Federal Reserve just came out with some numbers not long ago, and what they said is the average net worth of a renter is falling, from $2,900 to $2,100. The average net worth--since 2010. Since 2010, the average net worth of a homeowner has gone from approximately $168,200 to $232,000. That information is from the Federal Reserve. We believe in home ownership. If you take the incentives out of home ownership, people will not buy homes. Chairman Duffy. Mr. Brown-- Mr. Brown. And people have, if I can just finish. Chairman Duffy. Sure. Mr. Brown. I will make it quick. You know, there are so many tangible and intangible benefits of home ownership. I mean, people use their equity to invest to send their kids to school, to invest in their family. It is security. I mean, those people that are building equity and not throwing it away, they could care less about a postcard. They care about that equity in the home. Chairman Duffy. Home ownership is the American Dream. People want to own a home. And I am telling you what, maybe where you come from in California it is different from Wisconsin, but no one says, ``I want to buy a house because I get to itemize my taxes and get a mortgage interest deduction.'' They don't talk about that. What they say is, ``I want to buy a house. What is it going to cost me? What is the impact on me?'' And if you are saying that they really think about their taxes and itemizing the deduction, I think you are absolutely wrong. My dad, my best friend, some of my best supporters, they are all realtors, and I love you guys. But I think you are wrong on this one because that is not what people are thinking about. Mr. Brown. And I strongly disagree with you, because I think that is what--that is exactly what many people are thinking about. If those incentives are taken away, why buy a house? Why not just rent? Chairman Duffy. Because you own your house. It is an equity builder. And it is like yours. That is great. I mean, I love Mr. DeWitt, but people want to go and rent or they want to go buy? I want to buy a house, and I want Mr. Howard to build it for me, because it is mine. I don't do it for taxes. And I am way over my time. But I think we can't--we have to be honest about this conversation. Mr. Brown. I am being honest. Chairman Duffy. And, again, I come at this with a pure heart, and I love you guys, but I think on this issue you are playing a set of cards that I don't think benefit most Americans. Maybe the industry, but not most Americans. My time is up by 2 minutes. Mr. Brown. Mr. Duffy. Chairman Duffy. I am going to give it to Mr. Cleaver. Mr. Brown. Chairman Duffy, can I say one more thing? Chairman Duffy. My time has expired. The Ranking Member, Mr. Cleaver, is recognized for 5 minutes. Mr. Brown. Can I say just one more thing, Chairman? Mr. Cleaver. Take 45 seconds to finish your response. Mr. Brown. What I was going to say is that, don't forgot the impact that home ownership has on the economy. If you take real estate and all the ancillary services and businesses that are involved in real estate, the construction and so forth, multifamily, it is a huge part of the economy. It is perhaps 16, 17, 18 percent. In some States, like California, it is even higher. It is closer to 20 percent. Tinkering around with tax laws could jeopardize that. That, in and of itself, could push us back into recession. Some economists feel it could push us back into recession. So I am just saying, be careful what you wish for in terms of changes with the tax law. We don't want to do anything that is going to negatively impact the housing market and home ownership. Mr. Cleaver. Mr. Goodwin, are you--are any of you-- concerned that next year the capital buffer will drop to zero? Does that cause any of you to tremble a bit? Mr. Goodwin. Speaking for membership, we really don't have an opinion on whether there is--money is--a small amount of capital is set aside to GSEs or if they draw on the Treasury line. I think the only concern that we would have is that to the extent that that then leads to a recapitalization and relief, our concern is the absence of the guarantee under that scenario would cause the markets some serious concern. Mr. Cleaver. Yes, Mr. Stevens. Mr. Stevens. Congressman, what concerns us about the dialog on capital is it takes our focus off reform. These two entities have been in conservatorship for 9 years. They have a line of credit in excess of $260 billion. If you talk to investors globally, they have no concern about this capital question. They have full faith that the MBS, that these institutions put into the market, are backed by the extensive line of credit. And our goal is to have Congress work on the real job of GSE reform. And our worry, quite frankly, is if there is something arbitrarily done on retention of capital, that that could cause even more consternation in the political arena that could cause even greater damage. So again, our goal is not to talk about capital because it is not an issue when they have $260 billion-plus and a lot of credit protecting them today. Mr. Cleaver. All right. Because time is running, I may have to move around a bit. And to Ms. Edelman, you are familiar with 202 and 232 HUD? Ms. Edelman. Uh-huh. Mr. Cleaver. You know, we have this affordable housing issue. What do we need to do with the 202 project--I mean, why do you think we are not doing more 202 projects? Is it we don't have enough Federal money going into it, we are not able to get adequate rental payments from the seniors? Ms. Edelman. Ranking Member Cleaver, I would love to think about this more and get you a more robust response. But in the short term, I will say that one thing that--the budget proposal, the President's budget proposal, for instance, would be very bad for the 202 program. And I think that as Congress moves toward a budget in the coming--before the end of the year, or another CR, that the 202 program be prioritized because we don't want to go further backward. But I will get you a more robust response on how to improve it. Mr. Cleaver. And 232. One final question. I am preoccupied with multifamily housing. Put on your creative hats right now. What can we do, either in terms of Federal participation, trying to put some kind of attraction so that we can get public-private participation? Do any of you have any ideas on what we can do to trigger some affordable housing projects, affordable housing projects all over the country? Mr. DeWitt. If I might, Ranking Member Cleaver. So the National Multifamily Housing Council is strongly in favor of almost anything that we could do to enhance the supply of affordable housing. And we recognize that the cost to develop new affordable housing and the State and local impediments to being able to develop affordable housing make it very difficult to do so. We do have, obviously, scarce Federal resources, and how we deploy those scarce Federal resources most efficiently to create more housing, affordable housing. Two ways that we currently have, one, obviously the LIHTC program. So to the extent--and I know that NMHC has advocated for additional funds to flow through the LIHTC program, in fact, to expand that to a MIHTC program for middle-income tax credits. But to get the credit to the builders who have found land and found a community that is willing to accept affordable or middle income housing would be a terrific start. On the rent side, of course, we have Section 8, which can be used to subsidize the income levels of people who can find housing in other neighborhoods. But I would say utilizing the two avenues that we currently have and just expand them makes the most amount of sense to us. Mr. Howard. Mr. Cleaver, the Low Income Housing Tax Credit Program is the subject of a bill introduced by Mr. Tiberi, which would make several changes to it to make it more efficient. That is one way to go. Another thing to be aware of is that the recently proposed tax bill also does away with a State's ability to issue private activity bonds for housing. Those bonds are very important because they are generally combined with the Low Income Housing Tax Credit Program to produce affordable rental housing. Chairman Duffy. The gentleman's time has expired. The Chair now recognizes the gentleman from Texas, Mr. Green, for 5 minutes. And I will just note that we have 7 minutes on the clock to vote. Mr. Green. Thank you, Mr. Chairman. I will speak quickly. Let me go back to you, Mr. Howard. You had something that you wanted to say about the tax credit? Mr. Howard. Yes, sir. Going back to the question of home ownership, we disagree with our friends the realtors on whether the standard deduction should be raised. We think it should be raised. We think putting money into the pockets of the American people is a good thing. What we proposed is a revenue-neutral--revenue-neutral by tax standards--tax credit to be taken in addition to the standard deduction to promote home ownership. If the value of upper-income housing is being diminished by changes in the Tax Code, one way to stop a housing recession from coming is to put money in the pockets of the American middle class so that they push the value up from the bottom, from the entry-level rung up. We proposed that credit to the House Ways and Means Committee and we are proposing it to the leadership. And I look forward to the opportunity to explain it to all of you gentleman as well. Mr. Green. Well, just remember that I support the home builders. And nobody can accuse me of favoring you because you support me. So now let's talk about what I think is important here, this is the home mortgage deduction. I said at the genesis of my commentary that I am afraid we are going to lose it. And, Mr. Howard, you indicated that before 1986 it was unlimited. Now it is a million dollars. If we pass this bill, it will be $500,000. Where does the decline end, is the question. Mr. Howard. Mr. Green, I agree with you that the tax bill-- Mr. Green. Just saying you agree with me is enough for me. Now let's go on to Mr. Brown. Mr. Brown, you sell property. Where are you located currently? Mr. Brown. Oakland, California. Mr. Green. In Oakland, California, a $500,000 house, is that a mansion? Mr. Brown. No. Mr. Green. Tell us, generally speaking, what you can get for about $500,000. Mr. Brown. I really don't know what you can get for $500,000. You can get a starter home in probably a less desirable area. A lot of people would not want to live in some of the areas where you can buy a $500,000 home. I mean, our median price in the East Bay is $868,000-some-odd thousand dollars, I believe. Mr. Green. Well, for the record, I am trying to protect the home mortgage interest deduction. I want to maintain it. And to maintain it, I am afraid we cannot continue to diminish it. At some point, it will go to zero. And by the way, for edification purposes, when we started this debate, there were my friends across the aisle who wanted to eliminate it completely. So somewhere along the way, they have made a compromise at $500,000. I am not a part of the compromise because I see that as the next step in the elimination of it. Nothing to do with millionaires. Everything to do with hardworking Americans who don't have the benefit of all of these lawyers to help them so that they can have a deduction that will be a benefit to them. And finally this, on the H.R. 123, the bill that I called to your attention. I am honored to know that Mr. Duffy has worked on a similar bill. And I would love to work with him and anyone else so that we can try to get this done so that persons who pay all of their bills can have this additional credit scoring. And finally this. My heart is pure. And you are right. My heart is pure, too. So thank you very much. And I will give you back a minute and 15 seconds, Mr. Duffy. I will yield to you, Mr. Duffy. I think after having said my heart is pure, I will yield you the rest of the time. Chairman Duffy. I appreciate the gentleman with the pure heart yielding. Anyone else want to respond to it? My time was up and I shut you all down. So if you want to respond to what I was saying. Or, Mr. Stevens, you have your hand up. Mr. Stevens. Yes. Actually, MBA and our membership, which has a Tax Policy Committee, is open-minded to and looks forward to working on tax reform, because we agree with you it is complex. And there are benefits to MID (mortgage interest reduction), but for entry-level home buyers, many of them don't itemize. So are there better solutions? The tax credit concept suggested by the Home Builders is something that goes along those lines. As we analyze the initial--the proposed tax legislation, it is the combination of factors that ultimately is something that we are looking closely at. It is the impact to capital gains, it is the cap on property tax deductions, and it is the MID deduction, the collective potential impact to real estate. We are not going to be dogmatic on the issue. We just want to make certain that we don't create a disincentive for real estate that ultimately-- Chairman Duffy. If I can reclaim the gentleman's time. What is unique is we can fight about a lot of stuff, but we agree that home ownership is a good thing. We want to make sure that people can afford a house, they can get a loan when they have the right credit, that the realtors and the home builders and the mortgagers, I mean, this is a good American issue. And I think we just have to think through it as a group of folks who care about it, are in the policy weeds on this stuff. And so I appreciate the gentleman from Texas yielding to me. I want to thank our witnesses for their testimony today. And what I would just ask all of you, as this committee is working through these issues, we look for your partnership and your insight and your expertise to make sure we get this right and, again, do what is best for the homeowner as we go through this process. And so with that, without objection, all members will have 5 legislative days within which to submit additional written questions to the Chair, which will be forwarded to our great panel of witnesses. I would ask the witnesses to please respond as promptly as possible should we have questions that are submitted to you. And with that, and without objection, this hearing is now adjourned with 1 minute on the clock for votes. [Whereupon, at 5 p.m., the subcommittee was adjourned.] A P P E N D I X November 2, 2017 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] [all]