[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
SUSTAINABLE HOUSING FINANCE:
PRIVATE SECTOR PERSPECTIVES ON HOUSING
FINANCE REFORM, PART IV
=======================================================================
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
__________
DECEMBER 6, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-63
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
31-294 PDF WASHINGTON : 2018
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
Subcommittee on Housing and Insurance
SEAN P. DUFFY, Wisconsin, Chairman
DENNIS A. ROSS, Florida, Vice EMANUEL CLEAVER, Missouri, Ranking
Chairman Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
STEVAN PEARCE, New Mexico MICHAEL E. CAPUANO, Massachusetts
BILL POSEY, Florida WM. LACY CLAY, Missouri
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
STEVE STIVERS, Ohio STEPHEN F. LYNCH, Massachusetts
RANDY HULTGREN, Illinois JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DANIEL T. KILDEE, Michigan
LEE M. ZELDIN, New York JOHN K. DELANEY, Maryland
DAVID A. TROTT, Michigan RUBEN KIHUEN, Nevada
THOMAS MacARTHUR, New Jersey
TED BUDD, North Carolina
C O N T E N T S
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Page
Hearing held on:
December 6, 2017............................................. 1
Appendix:
December 6, 2017............................................. 23
WITNESSES
Wednesday, December 6, 2017
Canter, Michael S., Director, U.S. Multi-Sector and Securitized
Assets, Alliance Bernstein L.P................................. 4
Krohn, Jeffrey N., Managing Director, Guy Carpenter & Company,
LLC............................................................ 8
Rippert, Andrew, Chief Executive Officer, Global Mortgage Group,
Arch Capital Group, Ltd........................................ 9
Sinks, Patrick, Chief Executive Officer, Mortgage Guaranty
Insurance Corporation, on behalf of the U.S. Mortgage Insurers. 11
Wachter, Susan M., Sussman Professor, Professor of Real Estate
and Finance, The Wharton School, Co-Director Penn Institute for
Urban Research, University of Pennsylvania..................... 6
APPENDIX
Prepared statements:
Canter, Michael S............................................ 24
Krohn, Jeffrey N............................................. 35
Rippert, Andrew.............................................. 42
Sinks, Patrick............................................... 49
Wachter, Susan M............................................. 66
Additional Material Submitted for the Record
Beatty, Hon. Joyce:
Written responses to questions for the record submitted to
Patrick Sinks.............................................. 72
Written responses to questions for the record submitted to
Susan Wachter.............................................. 74
Valazquez, Hon. Nydia:
Written responses to questions for the record submitted to
Andrew Rippert............................................. 76
SUSTAINABLE HOUSING FINANCE:
PRIVATE SECTOR PERSPECTIVES ON
HOUSING FINANCE REFORM, PART IV
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Wednesday, December 6, 2017
U.S. House of Representatives,
Subcommittee on Housing and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:08 a.m., in
room 2128, Rayburn House Office Building, Hon. Sean P. Duffy
[Chairman of the subcommittee] presiding.
Present: Representatives Duffy, Ross, Royce, Posey,
Luetkemeyer, Stivers, Hultgren, Rothfus, Zeldin, Trott,
MacArthur, Cleaver, Valazquez, Kildee, Delaney, and Gonzalez.
Chairman Duffy. The Subcommittee on Housing and Insurance
will come to order.
Today's hearing is entitled Sustainable Housing Finance:
Private Sector Perspectives on Housing Finance Reform, Part IV.
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 purposes of making an opening statement and questioning
our great panel of witnesses.
The Chair now recognizes himself for 3 minutes for an
opening statement.
I first want to welcome our panel and thank them for
participating in today's hearing on housing finance reform. We
have had many. I don't know if you followed all of them, but
this is a particular interest to us today on this topic.
We have witnesses that offer credit enhancement products
and participate in credit risk transfers. As we look to reform
the housing finance system, I hope to explore whether they can
play a larger role in this space as we move forward.
Expansion of private sector capital into the housing
finance system should be a key goal of any restructuring of our
housing finance. We have seen how successful these products
have been in offloading risk in recent years. And the Federal
Government has engaged in these products and programs to some
extent.
Now, Fannie, Freddie, and Ginnie themselves use forms of
credit risk enhancements in the present day to offload their
risk to the private sector. And I look forward to hearing from
our witnesses about how the various programs work to help
relieve the burden of our taxpayers should we see another
malfunction in our housing finance market.
These programs and products include mortgage insurance and
credit risk transfer (CRT) programs such as Structured Agency
Credit Risk, or STACR, and Credit Insurance Risk Transfers, or
CIRT. I think it is important to note that just yesterday FEMA
(Federal Emergency Management Agency) announced that, in the
NFIP (National Flood Insurance Program) program, they will
recover over $1 billion in reinsurance coverage under their
2017 reinsurance program. It seems like the program actually
worked. Wow. Maybe we can learn lessons from what FEMA did and
apply this in the housing finance space. And it could bode well
not just for homeowners, for the private sector, but, man,
would it be cool if it worked well for the taxpayer too.
Everyone could be a winner.
Seen as the first reinsurance purchase by the Federal
Government was--has borne fruit in terms of a successful
transfer of risk, I am interested in hearing how reinsurance
already plays and can play an increased role as we look at
offloading risk in the housing finance space.
As any private sector capital product, we must look at the
availability of coverage or capacity and the impact of cycles
on these products. While I believe these products will
ultimately help bring in capital to the housing finance system,
we must make sure taxpayers are protected and not left holding
the bag in economic downturns.
And so I want to re-emphasize that we must look at ways to
make sure that the housing finance system relies primarily on
private capital and utilizes the tools and products that are
available. Development in this space is an example of how the
private sector will react in developing a free market and fill
the void the Government I don't believe can fill.
With that, my time just now expired, so I recognize the
Ranking Member, the gentleman from Missouri, Mr. Cleaver, for 5
minutes.
Mr. Cleaver. Thank you, Mr. Chairman, and thank you to the
panelists for being here in your wide array of stakeholders and
individuals who can perhaps help us as we deal with this issue,
because one of the things that is troublesome to me is that we
are seemingly just holding on in keeping Fannie and Freddie in
conservatorship, and I don't think that to do so is
sustainable. I don't think that it is prudent. And as one who
was here when this was done, I can tell you I don't think there
was anybody on this committee who believed that that was a
permanent arrangement, but it is moving along as if it is.
And so today our hearing is going to focus on private
capital credit risk and credit enhancement as well as the steps
that the FHFA (Federal Housing Finance Agency) has undertaken
in the past few years to transfer the risk and assets and new
ways to do so as we move toward the end of one year and into a
new year.
Right now, according to the most recent progress report
from FHFA, since 2013, the enterprise transferred a portion of
the risk on 1.8 trillion of unpaid principal balance with a
combined risk in force of about 60.6 billion, or 3.3 percent of
UPB. And so I want to discuss with those of you who have been
kind enough to come, find out whether or not you believe that
these steps have and will have a positive impact on the overall
housing finance system.
And it would be helpful, at least to me, to hear how
different kinds of risk transfers, such as the front-end credit
risk transfers, would affect the housing system.
Last week we held a hearing. The acting president of Ginnie
Mae provided testimony. And he proposed a housing finance
reform plan that would rely on Ginnie Mae as the centerpiece of
the housing finance system. And this proposal would also
introduce private credit enhancers to compete with the Federal
agencies in taking on some of the credit risk.
And so I am hopeful that you will be willing to share your
views on the proposal as well as discuss the impact that such a
proposal would have on small lenders and the issue that I am
extremely concerned about, affordability.
The path to housing finance reform may not be easy--well,
it is not going to be easy. But I am encouraged, and I say this
interplays, because I think we are having a robust bipartisan
dialog, and I feel very good about it.
So thank you for being here today. We look forward to you
solving most of the problems that we have before us.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the Vice Chair of the committee,
the gentleman from Florida, Mr. Ross, for 2 minutes.
Mr. Ross. Thank you, Chairman, and thank you again for
holding another hearing on this important issue. And also thank
you to our great panel, the witnesses, for sharing your
insights with us this morning.
We want all homeownership to be more affordable, but
affordability isn't just for home buyers eager to own a part of
the American Dream. If the Government is involved, we need to
make it affordable for taxpayers too.
Today we will examine the financial tools that allow Fannie
and Freddie to take such a balanced approach. It wasn't long
ago that Fannie and Freddie took major risks in the housing
market. Reasonable minds may disagree about the impetus for
that risk, whether it was overzealous profit seeking or, as I
believe, misguided Government policy. Regardless, one thing is
clear, the result was a systemic calamity that reverberated
throughout the world economy.
Those homeowners we were trying to help were ultimately
hurt. Many couldn't afford to stay in their homes, and
taxpayers could barely afford to bail out Fannie and Freddie.
Fortunately, there is a smarter way. You see, many Americans
think of risk as a feeling or a worry, but it is not. It is a
way of looking at an investment that ensures we consider the
context of that investment.
What is the likelihood something will fail? High? Low? If
we are guessing, we are losing. Thankfully we have inherited an
intellectual tradition that allows us to calculate our
likelihood of success and transform the threat of failure into
a commodity. I bring this up because I think there is something
to be applauded in the new approach as Fannie and Freddie have
taken into managing risk.
During the financial crisis, most lawmakers were taken by
surprise because they were completely unaware of the risk our
GSEs (government-sponsored enterprises) took on. They were also
surprised because there didn't seem to be a way of effectively
mitigating that risk as it stood. One might even say that the
risk management strategy was, quote, ``If something goes wrong,
the taxpayers will pony up,'' unquote.
This implicit taxpayer insurance was opaque. It was a moral
hazard, and we are done with it. We are developing new and
better approaches that take into account the realties we face
today and pave the way for a better tomorrow. The credit risk
transfer programs we will discuss in this hearing are a
remarkable demonstration of how markets and human
entrepreneurship can solve many of the problems created or made
worse by the Government.
I am excited that today we will talk about how your
organizations participate in that conversation and make it so
that our housing market continues to thrive and our taxpayers
aren't on the hook.
I yield back.
Chairman Duffy. The gentleman yields back.
We now welcome our witnesses here today.
And by way of introduction, our first witness is Mr.
Michael Canter, Director of U.S. Multi-Sector and Securitized
Assets at Alliance Bernstein. Welcome.
Our next witness is Dr. Susan Wachter, Professor of Real
Estate and Finance at the Wharton School at the University of
Pennsylvania.
Next we have Mr. Jeffrey Krohn, Managing Director at Guy
Carpenter and Company. Welcome.
Our fourth witness is Mr. Andrew Rippert, CEO of Global
Mortgage Group at Arch Capital Group. Welcome.
And finally, last but not least, our fifth witness is Mr.
Patrick Sinks, the CEO of Mortgage Guaranty Insurance
Corporation, or MGIC, headquartered in the greatest State in
the Nation, Wisconsin. Welcome all of you.
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 your 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.
You will note on your table you have three lights. Green
means go, yellow means you have 1 minute left, and red means
your time is up. We will try to be cognizant on our end of the
time. But please, on your end too, try to be aware of those
times and lights. Your microphones are sensitive, so please
make sure you are speaking directly into them.
And so with that, Mr. Canter, you are recognized for 5
minutes.
STATEMENT OF MICHAEL S. CANTER
Mr. Canter. Good morning, Chairman Duffy, Ranking Member
Cleaver, and members of the subcommittee. Thank you for the
opportunity to testify before you today. My name is Michael
Canter, and I am the head of Securitized Assets at Alliance
Bernstein, also known as AB.
At AB we manage over $500 billion of assets on behalf of
many different types of investors ranging from individuals and
retail mutual funds to pension funds, insurers, and global
corporations. I am appearing here today on behalf of AB and not
any specific trade group, though we are members of SIFMA and
the Association of Mortgage Investors. AB is one of the largest
investors in the credit risk transfer market, and I hope that
our experience will be helpful to the subcommittee in the
important work that it is doing.
Today the CRT market has $40 billion of securities
outstanding, referencing over 1.3 trillion of mortgages. That
is 32 percent of the GSE's overall mortgage exposure. In fact,
50 percent of all GSE mortgages created today go into CRT's
transactions. So without a doubt, the CRT bond market is
crucial to how mortgages get financed in the country.
CRTs also play a prominent role in many GSE reform
proposals. The fact that the GSEs have multiple ways to hedge
their risk is important, and all of them have value, but we see
the fixed income market solution as the cornerstone to any
system going forward. I will highlight a few reasons why.
First, a CRT bond is fully funded at issuance, so the GSEs
do not have any counterparty risk. There is no risk of
nonpayment. In contrast, there are some proposals that urge
greater use of mortgage insurance, sometimes called deep MI. It
is important to remember that the ability and willingness of MI
companies to pay claims becomes highly questionable in times of
stress. It certainly did during the crisis.
The GSEs already have $200 billion of counterparty exposure
to the MIs. A deep MI would only increase that. Also, once risk
is in bond form, it can be distributed across a wide swath of
investors and included in diversified portfolios across the
globe. This is not the case for mortgage insurers, of which
there are eight, whose entire levered capital base of 12.5
billion is exposed to mortgage losses.
Last, CRT bonds pay claims immediately whereas recouping MI
payments can be a long, drawn-out process involving negotiation
and sometimes litigation.
So what are the key attributes needed to perpetuate the
success of the CRT market in a new housing finance system? The
first I will mention is the ability of the GSEs to take risk
alongside of investors. This alignment of interest has been
crucial to investors' comfort in buying CRT securities and is a
must-have in any new system. This is especially true when
transferring first-loss risk. There is an abundance of capital
willing to take this first-loss risk with the right structure
and risk sharing by the GSEs.
Second, the GSEs are trusted by investors for the power
they have in not only setting underwriting and servicing
standards but ensuring that they are enforced. Confidence in
any guarantor's ability to do this is essential. Such
confidence, however, may be difficult for new guarantors to
replicate.
Third, there has been a healthy competition between the
GSEs to attract investor dollars. This dynamic allowed for
innovation and kept the GSEs open-minded to investors' needs.
In my view, there is no magic number of guarantors for a new
system, but I think it is probably safe to say that it is
greater than two.
Last, I would state that the FHFA has been very effective
at encouraging risk transfer to protect the U.S. taxpayer. We
think the lesson learned here is that it may be best for
policymakers and regulators to avoid being overly prescriptive.
Instead, a thoughtful capital framework needs to be put in
place that puts a high value on risk transfer.
All this being said, I would like to mention two ways the
CRT market could be improved. First, the broker-dealer capital
charge for holding and trading these securities is
unnecessarily onerous at 100 percent or greater. This is
detached from the risk in these bonds and does nothing to help
support the housing market.
Second, the GSEs need to more rigorously evaluate and
perhaps separate out the natural catastrophe risk that is
embedded in CRTs. If homeowners default on their mortgages
because of a flood, hurricane, or earthquake, any resulting
loss flows through to the CRT structure. This may be good for
the taxpayer in the short-term, but I would venture to say that
these risks had been woefully undermodeled and underconsidered
by the GSEs and the rating agencies.
In conclusion, I want to thank you all for proceeding with
this critically important reform effort. And we at Alliance
Bernstein stand ready to assist the subcommittee in any way we
can. And I look forward to answering your questions.
[The prepared statement of Mr. Canter can be found on page
24 of the Appendix]
Chairman Duffy. Thank you, Mr. Canter.
Ms. Wachter, you are now recognized for 5 minutes.
STATEMENT OF DR. SUSAN M. WACHTER
Dr. Wachter. Good morning, Chairman Duffy, Ranking Member
Cleaver, and other distinguished members of the subcommittee.
Thank you for the invitation to testify at today's hearing. I
am the Sussman Professor of Real Estate and Professor of
Finance at the Wharton School of the University of
Pennsylvania. It is an honor to be here today to discuss the
future of the housing finance system and the role of credit
risk transfers in helping to assure a stable and sustainable
housing finance system going forward.
In the past crisis, the housing finance system failed
borrowers and taxpayers, and it is important to understand why.
We now know but did not know the shift toward unsound lending
as it happened. The bubble in housing prices at the expansion
of unsound credit enabled masked the increasing credit risk.
The failure to identify credit and systemic risk must be
corrected going forward. Credit risk transfer programs, if
properly structured, can help. Securities trading can
discourage excessive borrowing if credit risk is priced
accurately and in this way counter housing bubbles.
Securitization markets, including the overcounter market for
residential mortgage-backed securities failed in this, in the
run-up to the crisis.
Beginning in 2013, under the direction of FHFA, the GSEs
have developed credit risk transfers to share and trade credit
risk. How CRTs are structured matters greatly to their
potential role in reducing systemic risk. In addition, the
eventual reform of the housing finance system will influence
how well the CRT markets work or even whether the market can
work at all.
What is necessary for the structuring of credit risk
transfers and, more generally, for the reform of the GSEs to
enable the CRT market to inform on credit risk going forward.
First is the direct linkage of CRTs' performance of the
risk of default of the underlying mortgages. This is in place.
In addition, the use of a reference pool allows the so-called
TBA market to trade inefficiently priced interest rate risk,
which is important separately from the pricing of credit risk.
A second requirement to afford the pitfalls of the past
mispricing credit risk is transparency and standardization to
allow the identification of aggregate credit risk. The full
provision of information on mortgages in the GSE portfolios
referenced by CRTs does this as well.
Third, to avoid counterparty risk, credit risk transfers
must be structured so that, in the event of losses, funds are
transferred and available to be transferred automatically. This
is achieved now also in the so-called back-end credit transfers
by writing down the outstanding principal balance of the CRT
securities thereby reducing the amount the GSEs are obligated
to repay to holders of CRT securities.
Fourth, there needs to be trading of the credit risk
instruments with open pricing and liquid markets unlike in the
crisis where credit risk instruments traded over-the-counter
and infrequently. This too is in place. Currently CRTs provide
information on how markets price credit risk without mandatory
linking of GIFIs to credit risk trading pricing and without
mandating the level of use of CRTs by the GSEs. Both are
important to market stability.
While the performance of CRTs should be linked to the
underlying performance of mortgages in the reference pool as it
currently is, in back-end credit transfers, the pricing of CRTs
should not determine GIFIs or mortgage interest rates. In a
period of market stress, investors and CRTs are likely to pull
back. If so, interest mortgage rates, if automatically linked,
would have to rise. And this would cause a decline in housing
prices. And that would, in turn, cause a pullback in credit and
a follow-on decline in housing prices and a reinforcing cycling
as we saw in the crisis.
The discretionary setting of GIFIs over the cycle is
necessary to avoid reintroducing market instability. For the
same reason, the use of CRTs should not be mandatory; that is,
their use should be discretionary. Mandatory risk sharing is an
inefficient policy, and it encourages transactions where the
cost of the risk transfer is greater than the cost of the GSEs
retaining the risk thus potentially raising the cost of
mortgage lending.
Currently, the trading of CRTs provide information about
what private market capital markets would trade for the credit
risk generated by the credit guarantee business of the GSEs,
but it is not automatically linked to GIFIs. GIFI is set
administratively with significant guidance from the FHA
(Federal Housing Administration). This should not change. The
structure of the housing finance system itself is important to
the functioning of CRTs. If there are many guarantors each with
its own CRT market, such markets would not be liquid. Moreover,
with many entities each setting its own standards and its own
GIFIs, even with the guidance of FHA, there would be a tendency
to compete over the standards and undermine them overtime.
The pricing of the housing finance should be set over the
cycle, and standards should be maintained over the cycle as
well to limit risk and to provide sustainable housing finance
for the long-term.
I thank you for the opportunity to testify today, and I
welcome your questions.
[The prepared statement of Dr. Wachter can be found on page
66 of the Appendix]
Chairman Duffy. Thank you.
Mr. Krohn, you are now recognized for 5 minutes.
STATEMENT OF JEFFREY N. KROHN
Mr. Krohn. Chairman Duffy, Ranking Member Cleaver,
distinguished members of the committee, it is an honor to have
the opportunity to provide this testimony regarding the
sustainability of housing finance.
My name is Jeff Krohn. I lead the global mortgage credit
practice at Guy Carpenter. Our company is part of the Marsh and
McLennan Companies and occupies a unique position within the
mortgage credit reinsurance market.
In my role, I oversee all client relationships with our GSE
clients, Fannie Mae and Freddie Mac, and our global mortgage
insurance clients. Separately, our organization is the broker
for FEMA's National Flood Insurance Program. This program was
put into place last year and proved to be a success by
responding to Hurricane Harvey and reduce the burden to the
taxpayer by over a billion dollars.
Today, the U.S. economy enjoys a very strong housing
market. However, the last financial crisis revealed the GSEs
and private mortgage insurers carried all the weight of the
losses caused by borrowers that could not make their mortgage
payments. As a result of the crisis, material reform has taken
place. The most notable change occurred in 2013 when the FHFA
mandated Fannie Mae and Freddie Mac to initiate a credit risk
transfer program that derisked their portfolios and protected
the U.S. taxpayer by introducing private bond investors and
multiline global reinsurers into the system.
Today, reinsurers, bond investors, and private mortgage
insurers provide the GSEs with a countercyclical force that
sustains the housing market during uncertain times.
The reinsurance market represents a significant and
attractive source of private capital for the GSEs, because the
industry bears a small amount of U.S. residential mortgage
risk. And its other forms of risk are not correlated to
mortgage credit risk to any meaningful degree. A.M. Best's top
50 reinsurers have $727 billion of capital, and the stability
of the reinsurance market has stood the test of time. Before,
during, and after the crisis, the composite ratings of core
reinsurers writing mortgage credit have remained strong and
within a very narrow band of S&P ratings between A and A plus.
The recent $73 billion in industry losses from this year's
hurricanes, wildfires, and earthquakes have not impacted
pricing or available capacity for the various GSE and mortgage
reinsurance placements. The reinsurance market will continue to
be an attractive and significant source of private capital for
years to come.
The Federal Housing Administration's mission is vitally
important to first-time home buyers, low income borrowers, and
consumers with limited credit history. But it is not a mission
without risk for the U.S. taxpayer. The FHA's mission leads it
to provide broader coverage on a pool of loans that is riskier
than those of the GSEs. And the FHA lacks a credit risk
transfer mechanism.
The FHA capital requirements to support portfolio risk
remain low. The latest actuarial report estimates the mutual
mortgage insurance fund to be at 2.09 percent, just above the
minimum 2 percent threshold.
Guy Carpenter believes the FHA should fully explore ways to
introduce private capital to effectively manage its credit risk
and fulfill its mission. Private capital will introduce a
market-like view of FHA's portfolio and provide valuable
insights. Real-time pricing discovery and feedback could be
incorporated into the FHA's insurance premium rates,
underwriting, and loan programs. The results of which would
make a more stable and predictable mutual mortgage insurance
fund.
Guy Carpenter's mission remains to develop broad and
diversified reinsurance markets that reduce taxpayer risk,
maintain liquidity, and help to build a strong housing finance
system. Credit risk transfer has the interest of the American
people at heart and will ensure continued access to affordable
credit to underserved borrowers and act as a countercyclical
force that sustains the housing market in uncertain times.
Thank you again for the opportunity to provide this
testimony.
[The prepared statement of Mr. Krohn can be found on page
35 of the Appendix]
Chairman Duffy. Thank you.
Mr. Rippert, you are recognized for 5 minutes.
STATEMENT OF ANDREW RIPPERT
Mr. Rippert. Chairman Duffy, Ranking Member Cleaver, and
members of the subcommittee, thank you for the opportunity to
testify. My name is Andrew Rippert, and I am the CEO of Arch
Capital Group's mortgage operations. In this role, I am
responsible for the global mortgage guarantee and credit risk
transfer business of Arch with an emphasis on the U.S. housing
market. This includes Arch MI, the largest private mortgage
insurer in the country. More importantly, Arch Capital Group is
committed to expanding sustainable home ownership and
affordable lending.
Housing finance reform legislation has the potential to
increase private investment, economic growth, and the
availability of mortgages for creditworthy borrowers. The
continued conservatorship of the GSEs increases systemic risk
and policy uncertainty. These issues are keeping private
capital on the sidelines and have contributed to a more anemic
housing recovery and lower home ownership levels than we might
have otherwise experienced.
Legislative reform will help ensure that the system is
prepared to handle an eventual and an inevitable market
downturn. The work done to diversify risk through the CRT
programs developed by the enterprises with the support of the
FHFA has been significant in bringing private capital to the
market. In fact, Arch has been a major supporter of and
participant in CRT through our reinsurance operations.
Arch recommends that the GSEs continue to innovate and
expand on the available risk transfer structures. Additionally,
legislation is needed to codify these policies and ensure that
programmatic CRT is a permanent feature of the housing finance
system. It is critical to lock in the advances made over the
past 5 years to avoid the possibility of reverting to previous
counterproductive norms and ensure the permanency and
consistency of these programs.
Existing CRT programs have reduced taxpayer exposure and
provided important diversification of private capital sources.
But the GSEs still hold significant first loss exposure
concentrated on two highly leveraged balance sheets with an
implicit taxpayer backstop. This structure needs to change to
institute an explicit government guarantee at the security
level, expand to include multiple guarantors, and ensure that
private capital is positioned ahead of taxpayers in a
meaningful way.
Until structural changes are made to the guarantor model,
the GSEs should continue to expand their use of back-end and
front-end CRT transactions with reinsurers, mortgage insurers,
and capital debt markets. There are a variety of CRT options
available to the enterprises that offer practical and cost-
efficient ways to transfer risk that have yet to be
implemented.
Reinsurers, in particular, offer a highly rated pool of
capital that is dedicated to housing finance reform on a long-
term strategic basis. They broaden the base of available
capital and provide greater taxpayer protections.
The most important thing that Congress can do from Arch's
perspective to encourage the return of private capital is to
make programmatic CRT a permanent feature of the housing
finance system through legislation.
With CRT assured as a permanent feature, private capital
will make the necessary investments to underwrite mortgage
credit risk across all market conditions. This will also
provide regulators and policymakers with tremendously valuable,
well-informed, and timely feedback on both the level of risk in
the market and the economic cost associated with that risk.
Reforming the U.S. housing finance system calls for a
significant volume of private capital. Arch believes that if
Congress were to enact legislation passed on the following key
factors, additional private capital will be drawn into the
system and promote a greater level of market certainty and
sustainability.
First, we need to position private capital ahead of
taxpayers in a meaningful way.
Second, we need to establish a regulatory framework that
requires mortgage guarantors to follow a countercyclical
capital model that is responsive to the dynamic nature of
housing market risk.
Third, require mortgage guarantors to follow and accumulate
to distribute model that programmatically moves risk to diverse
pools of private capital.
Fourth, require additional transparency into the cost of
credit risk as identified through CRT and its relationship to
guarantee fees. And finally, reform the FHA to eliminate
negative competition between the enterprises and the FHA
programs.
Thank you for the opportunity to testify. Arch is committed
to working with this committee. I look forward to answering
your questions.
[The prepared statement of Mr. Rippert can be found on page
42 of the Appendix]
Chairman Duffy. Thank you.
Mr. Sinks, you are recognized for 5 minutes.
STATEMENT OF PATRICK SINKS
Mr. Sinks. Chairman Duffy, Ranking Member Cleaver, and the
members of the subcommittee, thank you for this opportunity to
come before you to discuss the housing finance system and
opportunities for reform.
This here marks the 60th anniversary of the modern-day
private MI industry when my company, MGIC, was founded by Max
Karl as a private sector alternative for borrowers and lenders
to the government-backed and mortgage insurance provided by the
FHA.
We also appreciate the opportunity provide you with our
experience of being providers of first loss credit risk
transfer and recommendations for encouraging use of a loan-
level credit enhancement like MI in the mortgage finance
system.
While I will focus merely exclusively on the value and role
of MI in my testimony, I will note that we believe in a future
system of housing finance where there will be enough credit
risk transfer that there will be a need for a variety of types
of private capital, each playing a unique role.
Private mortgage insurance's unique loan-level approach
shields taxpayers from mortgage-related credit risks while
ensuring creditworthy borrowers have consistent access to
mortgage financing.
Over the last 60 years, MI has helped more than 25 million
families attain home ownership in a prudent and affordable
manner, the majority of whom were first-time home buyers and
more than 40 percent of incomes below $75,000.
In my written testimony, I have covered a number of issues
related to the MI industry, but here I will focus on three
important attributes of MI that are critical to any housing
finance system: Flexibility, stability, and reliability.
First flexibility. Private mortgage insurance is typically
provided at the individual loan level at the same time as a
loan is originated. The mortgage insurance protection travels
with the loan wherever it goes, whether or not that is onto a
lender's balance sheet, sold to an investor, or placed into a
securitization pool. As a result, private MI is fully
compatible with the broadly shared goal of a housing finance
system with multiple funding sources, a feature that
distinguishes MI from other forms of credit risk transfer.
It also means that MI is accessible to lenders across the
country, from the biggest money center banks and nonbanks to
small community banks, credit unions, and independent mortgage
bankers. And because government insurance program like FHA are
loan level as well, borrowers can easily compare mortgage
offerings available to them.
Over our history, we have readily adapted as the mortgage
finance system has evolved from savings and loans to the GSEs
and independent mortgage bankers. We are confident of our
ability to continue to evolve and serve any new system that is
created with virtually no disruption to the origination and
servicing of mortgage loans.
The ability of MI companies to scale up to cover a broader
segment of the market is primarily controlled by the amount of
capital they hold. That said, MI companies are no strangers to
expanding or shrinking their capital to meet the need for their
product in adapting to housing market trends.
Since 2007, MI companies have collectively raised more than
$14 billion to meet capacity, support new business, and pay
claims. And we have seen three new companies enter the market
since the crisis. In addition, we have used the same resources
as the GSEs, reinsurance and capital markets transactions, to
supplement our equity capital.
We are confident in our ability to grow our capital, all of
which will stand in front of the taxpayers to support an
expanded role in the housing finance system.
Next stability. Housing and mortgage markets are, by their
nature, cyclical and can produce extraordinary catastrophic
losses both at the national and individual levels. In this type
of environment, there are sound reasons for creating monoline
entities to provide coverage against that risk. The monoline
regulatory regime for MI is intended to ensure the industry
does not create systemic risk even during the worst downturn.
It is not because regulators and MIs do not understand the
value of diversification, which is evident in our investment
portfolios and our insurance in force over time, and across
geographies.
Additionally, because MI's regulatory regime was designed
with cyclical mortgage markets in mind, the MI industry has a
commercial interest in remaining in markets being prepared for
downturns. Indeed, this regulatory regime ensured that the MI
industry continued to ensure new loans and pay claims. We are
not too big to fail. We provide predictability and stability to
the housing finance system.
And finally reliability. Since the onset of the financial
crisis, private MI companies have paid over $50 billion in
claims, almost all of which directly reduce the amount required
to rescue the GSEs. And during that time, MI has continuously
been available at a reasonable cost in all markets across the
U.S.
Increased capital and operational standards in the PMI
eligibility requirements, along with revised master policy
terms developed with the GSEs, ensure that the private MI
industry will be able to cover an even greater amount of
mortgage risk in the next crisis.
The private MI model has worked for 60 years. Each market
cycle brings new lessons and adaptations. But the fundamental
approach has been tested multiple times and still works. No
other form of credit enhancement has a similar record of
performance or resilience. Any policymaker looking at what
works now for inclusion in a reform system would add MI to the
list.
With that said, I thank you again for the opportunity to
testify and to answer your questions.
[The prepared statement of Mr. Sinks can be found on page
49 of the Appendix]
Chairman Duffy. Thank you, Mr. Sinks.
The Chair now recognizes himself for 5 minutes to ask
questions of the panel.
Mr. Canter, I don't know if you just heard Mr. Sinks'
testimony, but if I read your testimony correctly, I think you
said downturns, MI doesn't pay; is that correct? Is that a
correct characterization of your--I kept you two separated,
either side of the table.
Mr. Canter. Yes. Certainly when there are large amounts of
mortgage losses, the MI companies are going to come under
stress. So that is--I think that is just a fact. If you buy
hurricane insurance from an insurance company that just insures
hurricanes, do you really want to keep buying hurricane
insurance from them when there is a hurricane approaching? That
is the issue. And that is all they do.
That has a lot of value. I don't want to say that it
doesn't. It has a lot of value. It is just that, when we talk
about increasing how much exposure Fannie and Freddie are going
to have and what the best way for them to hedge their risk, the
fixed income markets provide a way for them to do that without
taking that counterparty risk. And that is really the key.
It is not that deep MI doesn't have any value. It does. And
it should be pursued. It is really a matter of, when we are
talking about what the cornerstone of the system is going to
be, we think it should be the capital markets.
Chairman Duffy. Mr. Sinks, what is your pushback?
Mr. Sinks. As I said in my testimony, we paid $50 billion
in claims. That would have increased that GSE number of 189
billion by net 50.
In addition to that, the MI's have paid 97 percent of the
eligible claims coming out of the Great Recession, and the
remaining 3 percent will be paid over time. So while there was
stress and companies were impacted, at the end of the day, the
claims were paid.
Chairman Duffy. OK. That wasn't my main question, but I
thought it was unique. You guys had different positions here,
so I thought I would bring it up to start with.
But the panel's view on the availability of private capital
to assume first loss mortgage credit risk, there has been some
debate on that topic. Any thoughts, Mr. Canter?
Mr. Canter. So at the beginning of 2016, the GSE started to
hedge their first-loss risk. And what I mean by ``first loss,''
it is important to understand, is that they hedge what we would
call the bottom tranche of risk, meaning they start to--they
pay for insurance or a bond issuance. That covers them from
losses starting at 0 and going up to, say, 1 percent or up to 4
percent.
In the beginning of 2017, they changed that. And now they
are retaining the bottom .5 percent of risk. So they are no
longer hedging their first-loss risk from where we sit. We
think, if the goal is for them to hedge as much risk away from
the taxpayer as possible, they're not doing that. They are
operating as if they are a finance company or a bank looking to
achieve a certain return on what they think their capital is.
Chairman Duffy. Anybody else? Thoughts, Mr. Rippert?
Mr. Rippert. Private capital is, today, assuming first-loss
risk. Mortgage insurers assume a meaningful amount of first-
loss risk. They are the biggest single counterparty to the
GSEs, $200 to $250 billion of limited exposure. And reinsurers,
frankly, are taking a first-loss risk as well through quota
share reinsurance programs. And, frankly, they are positioned
to take more first-loss risk.
And I think an important distinction between mortgage
insurers, reinsurers, and capital market's participants is
mortgage insurers and reinsurers are set up to take first-loss
risk on a front-end basis, to take the risk away from the GSEs
before they even own the mortgage loan or at the time they
purchase the mortgage loan. That is something that mortgage
insurers and reinsurers can do much more effectively, frankly,
than the capital markets can today.
Chairman Duffy. I only have a minute left.
We hear a lot of debate about, so when times are great,
private capital is going to flow in, it is going to be
wonderful. But when the cycle turns against us, everyone runs
for the hills. Thoughts on that point? Any pushback on that
point, Mr. Rippert?
Mr. Rippert. I think--yes. I think that one of the biggest
things, keeping private capital on the sidelines, is this
uncertainty about--is the credit risk transfer programs of the
GSEs here to stay, or is it, frankly, a science experiment? And
if it is here to stay, private capital will make meaningful
deeper investments to understand mortgage credit risk at a more
fundamental level and be there over the long-term.
Chairman Duffy. Even in a downturn. Even in an 2008-esque
cycle?
Mr. Rippert. I would give the example of reinsurance
markets and, frankly, mortgage insurers as well. If you look at
reinsurers as one example, they make an investment in a line of
business to understand that risk and underwrite it, and they
stay in it through the ups and downs. They moderate their
exposure. They change their pricing. But they stay in the
businesses through the cycle.
The same is true of the mortgage insurers. They stay in the
business through the cycle. So, yes, I do completely believe
private capital can do that.
Chairman Duffy. My time is up. And I want to be respectful
of all the other members. I wanted to actually get to Mrs.
Wachter's point on tying CRT pricing to GIFIs. I thought that
was an interesting point that you made, and also the natural
disaster risk separated from credit risk, which Mr. Canter
brought up in his testimony, I don't have time for that, but I
look forward working with all of you as we are trying to do a
bipartisan product here on the committee.
So I thank you.
My time has expired.
I now recognize the gentleman from Missouri, Mr. Cleaver, 5
minutes.
Mr. Cleaver. Thank you, Mr. Chairman. I am struggling a
little bit.
A few weeks ago, I had the opportunity to meet--spend some
time with Edward DeMarco, and we--he talked about this, what I
thought was an interesting proposal that would use Ginnie Mae
as the centerpiece for the housing finance system and then
create a new kind of credit enhancer to transfer risk.
Dr. Wachter, Mr. Canter, I am interested in your response
to--are you familiar at all with--all right. Would you just let
me allow you--what your response is to his proposal?
Dr. Wachter. Today's hearing is on credit risk transfer,
and so I would like to respond to your question in the light of
credit risk transfer efficacy. And it seems to me that, while
competition, of course, is important in many regards,
competition over standards is not helpful. So to the extent
that we have many guarantors or many credit enhancers, each
with its own standards, each with its own premiums, this, in
fact, can be destabilizing.
So particularly, the purpose of CRTs, from my perspective,
is to complete the market, inform the market, bring information
to the market. And CRTs that are tied to individual guarantor
portfolios, which is my understanding of how that proposal
would work, would not be very liquid, and they would not be
referencing the risk of the market as a whole, nor would they
actually be referencing the risk only of the particular
guarantors, because the risk that is created by one guarantor
affects the entire market.
So that is exactly what we want to avoid. We want to have
the risk transfer--risk transfer programs pricing the overall
market risk.
So one thing you could do is require all of the guarantors,
all of the credit enhancers to participate in one single credit
risk transfer program and to have one single set of standards
and one single set of rates. That would be very much like FHA
and Ginnie Mae works now. And that would work.
Mr. Cleaver. Before I hear from Dr. Canter, what is your
opinion over collaterization as that one new standard?
Mr. Canter. So we are very supportive of the Bright-DeMarco
plan. We agree that there needs to be a balance between
competition and underwriting guidelines. And that is really
important, because if we have--if we had just one entity like
some of the plans out there had envisioned, we don't think
there would be enough incentive to respond to what investors
need, and that could be long-term detrimental.
On the other hand, if we have too many guarantors, the
sizes of the deals get very small, and the capital markets find
it difficult to participate, the liquidity of the bonds that we
buy would suffer. And so there is this balance. And that is why
I say there needs to be more than two guarantors in any new
system, whether it is five or eight. It is probably less than
10 is the way we would think about it. And the bond solution
being fully collateralized is why we think it is such a key
component.
Mr. Cleaver. So do we have too much concentrated risk? Did
that play a role, do you think, in the housing crisis? Dr.
Wachter.
Dr. Wachter. It wasn't concentrated risk. It was correlated
risk. It was risk created by sectors that were underwriting
unsoundly which then pervaded the entire market.
So I don't think the problem was a problem of one set of
standards. It was a race to the bottom, it was a race of
declining standards, and a race where credit was not accurately
priced, it was underpriced.
So, no, absolutely not. That wasn't the problem. I am not
saying that we can't have that problem, but that wasn't what
caused the crisis.
Mr. Cleaver. The last question. I am concerned about any
kind of transfer. Is that going to be a very long process?
Anybody. If we are going to transfer risk, we can't vote on it
today and have that settled tomorrow.
My time is up. I would like to talk to you about it at a
later time.
Thank you.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the Chair of the Subcommittee on
Financial Institutions, Mr. Luetkemeyer, the gentleman from
Missouri, for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman, and thank the
panel this morning.
I want to follow up. Mr. Chairman made a good comment here
which was something I was concerned about as well. Mr. Canter
made--I believe it was--made the comment with regards to the
GSEs' new takeout of the natural catastrophe loss risk and
separate that from the credit risk. Can you explain that a
little bit and what your thought process would be on that, sir?
Mr. Canter. Sure.
So right now, the way CRTs are constructed, if there are
natural catastrophes like Harvey, Irma, and Maria, and there
are resulting losses, that loss flows through to the CRT
investor. If that loss happens through an MI policy, the MIs
don't pay that claim if that house is uninhabitable. So from a
CRT investor perspective, we are experts in valuing mortgage
credit risk.
Mr. Luetkemeyer. Who pays the loss, then, on the mortgage
insurance?
Mr. Canter. Fannie and Freddie. And eventually the CRT
losses, if it is--
Mr. Luetkemeyer. No other outside insurance, like
homeowners insurance or the flood insurance, or whatever the
takeover?
Mr. Canter. Right. Obviously, if there is homeowner
insurance, great. But a lot of hurricanes are not covered by a
standard policy. Earthquakes are not required to be covered by
Fannie and Freddie for California. So these are risks that my
insurance colleagues, I think, have spent a lot of time on. I
don't think that the GSEs and the rating agencies spend enough
time on.
And so from my perspective, the reason why this is
important is because the capital markets are investing in this
because they think they are there taking mortgage credit risk.
We know we are also taking some natural catastrophe risk. But
if losses were to happen, it could jeopardize the whole CRT
market.
And to me it is much more important that the CRT market is
here to absorb financial condition losses and economic losses,
because there are plenty of insurance companies throughout the
world that can take natural catastrophe risk. And so that is
what I am interested in is the long-term viability of the CRT
market.
And I just think that this natural catastrophe risk is
misplaced in CRTs. But most importantly, the GSEs need to
provide us the data and analysis to really be able to evaluate
it, and they haven't really done so yet.
Mr. Luetkemeyer. Mr. Krohn, in your testimony, maybe I
misunderstood you, but you said something like FHA lacks the
ability to lay off--work with CRTs to lay off some of the risk;
is that correct?
Mr. Krohn. That is correct.
Mr. Luetkemeyer. Can you expand on that a little bit?
Mr. Krohn. The risk remains within the FHA. There is no
mechanism to transfer out of the system to bond investors, to
reinsurers. That is the way it exists today.
Mr. Luetkemeyer. OK. What are your suggestions on that?
Mr. Krohn. I'm sorry?
Mr. Luetkemeyer. What are your suggestions on how to solve
that problem?
Mr. Krohn. Well, we think the FHA should explore credit
risk transfer. There are a number of things that we think might
come out of that. It should increase the availability of
coverage for the FHA if it can go through the cycles. They
should get real-time pricing feedback, pricing discovery is
part of the CRT process, and feedback around underwriting and
the loan products offered by investors, by the reinsurance
market.
Mr. Luetkemeyer. OK. During the discussion here, it seems
as though we--the word hasn't been used with regards to the
different tools with the CRTs. But there seems to be, in my
mind, a diversification that is necessary. But it wasn't, so
there was no concentration within one particular area, whether
it is reinsurance or whether it is the bond market or whether
it is mortgage insurance. Would that be the assumption that--or
would that be something--would you agree with that statement?
There needs to be some diversification of each one of these
different types of credit risk transfers would be necessary, or
do you think one entity can handle all the risk?
Mr. Sinks. If I may, I will take a shot at that.
Our view is that you need to have multiple sources, which
is inherent in your question. The smart people think that they
are in a mature market. Private capital needs to put up about
$200 to $250 billion of capital to support a multi-trillion
dollar market. I don't think there is any one execution that
can consistently deliver that through all markets, good times
and bad times.
And thus they need to try multiple executions, whether it
is reinsurance, mortgage insurance, capital markets
transactions. It is all of the above. It will take a commitment
from everybody to meet the market needs.
Mr. Luetkemeyer. Do the other guys agree with that?
Dr. Wachter. No.
Mr. Krohn. I agree with that statement.
Mr. Rippert. I agree with that statement. And I think that
the most popular--or the most effective source of capital,
rather, at this point in time will change with conditions in
the market.
Mr. Luetkemeyer. Diversification is always the way you want
to spread your investments.
With that, Mr. Chairman, I yield back.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the very gentlelady from New York,
Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Rippert, I believe that a strong and well-functioning
secondary market should encourage lending to all income levels
and communities.
So my question to you is: What is the best thing we can do
to ensure that private investors continue to invest in the
secondary market? And what type of front-end or back-end credit
risk transfer should we be looking at? And will that help
first-time buyers or lower income borrowers?
Mr. Rippert. I believe that the best way to address
affordable lending standards, low income borrowers, is with a
responsible lending platform that has three basic components.
That is one of financial literacy and education to help inform
borrowers that the responsibility they are taking on before
they get into a mortgage product. I think that product
guidelines need to be set forth that put guardrails on the
system, that we are not offering mortgage products to borrowers
that have this concept of a teaser rate initially and then
escalated costs after a period of time. These are some of the
sorts of products that cause problems in the market.
And I think a third element is we really need to think
carefully about making mortgage loans to borrowers, especially
low income borrowers, when housing markets are overheated,
housing prices are overinflated. In that scenario, based on the
credit risk analytic work that we do, when borrowers get into a
property that is significantly overvalued, their propensity to
default, to reach financial stress, to not be able to make
their mortgage payments, increases dramatically, anywhere from
five to tenfold.
And so we need to think carefully about extending mortgage
credit to a borrower when prices are overheated, because this
has a significant disproportionate impact, especially on low
income borrowers. I think if we have a framework like that,
then private capital will show up and support that.
Ms. Velazquez. Dr. Wachter, will you please respond?
Dr. Wachter. I think that the potential for front-end
discount to be procyclical is great. That, therefore, in good
times, the front end would be their pricing, in good times. And
bad times it withdraws. And in the good times it has the
potential for effectively raising prices and creating a bubble
if it goes too far.
That destabilizes the market raising risk overall, and that
higher risk overall will be eventually priced in and will cause
less affordability. What we need is a stable system which will,
then, be less risky so that the market pricing of that less
risk makes housing more affordable. This goes in the other
direction.
Ms. Velazquez. Thank you.
Mr. Canter, in addition to exploring various types of
front-end and back-end credit risk transfers, the GSEs have
also explored expanding their investor profiles in the CRTs,
including rates.
What advantages do you believe expanding the investor
profiles in CRTs will have? And do you believe that expanding
the CRTs could disrupt the TBA market?
Mr. Canter. So, no, I think the CRT market today is
functioning very well, and the TBA market is functioning very
well. So as the system stands today, there are no issues with
TBA or the CRT market.
As one of the members mentioned earlier, the transition to
a new system is extremely important, probably just as important
as the system that is actually decided upon. But in terms of
the REITs (real estate investment trusts), the GSEs have been
innovative. They have come out with a new structure that will
make the CRTs more REIT friendly.
So here we are talking about mortgage REITs. So that is a
dedicated pool of capital that invests in mortgage products.
And so we are going to see that as positive, because it brings
down the cost of credit risk transfer the more investors that
there are. It brings down the cost to Fannie and Freddie. And
when that cost comes down, it means that potentially it has an
effect on the GIFI, which can affect the borrower. Or even if
it doesn't do that, it means that the U.S. taxpayer is paying
less for the insurance, which ultimately is good for the
taxpayer.
Ms. Velazquez. Thank you. And I guess I will yield back.
Chairman Duffy. The gentlelady yields back.
The Chair now recognizes the gentleman from California, Mr.
Royce, for 5 minutes.
Mr. Royce. Thank you, Mr. Chairman.
In Mr. Rippert's testimony, you wrote: ``One of the biggest
regulatory risks we see is the potential for the progress made
over the past 5 years to be abandoned, in the absence of
statutory changes.''
So this is a concern I have as well. I think we have to
lock in successes and build on those successes. And so, as some
of you know, Representative Gwen Moore and I have introduced
legislation requiring the GSEs to maintain the credit risk
transfer market while increasing the amount and types of CRT
transactions.
To date, I suspect everyone on the panel would agree that
Fannie and Freddie's CRT initiatives have been a success, in
the sense that they are decreasing the exposure to unexpected
loss and, in turn, decreasing risks to the taxpayers.
We have heard more today on ensuring that CRT works as a
stable source of capital through the economic cycle, even in a
downturn. We need to get more institution-based capital
involved. We have kicked that around. We need more players. We
need mortgage insurers in this deeper. We need REITs and
reinsurers, and we need to bring transparency and competition
to front-end deals.
So I would just ask the entire panel here, is this a
laudable goal and how do we get there? I would just like to
hear from you.
Mr. Rippert. I think it is a very worthy goal. It aligns
well with how we at Arch Capital Group think about the market
and creating a more sustainable market that facilitates
affordable lending to creditworthy borrowers. So we think that
diversity of capital is critical, not just because at various
times some capital will work more efficiently than others--and
by more efficient, lower cost to borrowers--but you need it
because of the amount of risk that needs to be transferred,
this is approximately $250 billion of risk to be transferred to
private capital.
I think the functioning of capital across a cycle will be
very effective as well in giving feedback. This concept of
price discovery that gives an indication of the level of risk
in the market will be a very important feedback mechanism from
all these various sources of capital as well.
Mr. Sinks. If I may, I would add I concur it is a laudable
goal. I think it is necessary to have not only the variety of
capital alternatives, but also the permanence of the capital.
We need to know, in creating a housing policy system, that
capital is going to be there in all markets. And so we need to
clarify rules, develop capital requirements, and make sure that
people can participate in all markets.
Mr. Royce. So I think that experience shows that risk
transfer worked and is working now at Fannie and Freddie. And
we have also seen private reinsurers add about a billion
dollars to the National Flood Insurance Program during the
storm season, and there is even more capacity in the private
market for increased risk transfer. Aon Benfield puts the
reinsurance capital and derisking capacity at about 600 billion
worldwide.
So why not look elsewhere in the Federal Government? Why
not--on the housing front, why not replicate risk transfer at
FHA and Ginnie Mae, and why not encourage derisking for all
Federal credit guarantee and insurance programs? That was the
question I just wanted to ask in general of the panel. I don't
know, Mr. Krohn, if you would care to comment.
Mr. Krohn. Yes. I believe you need to look at these
alternative sources of capital. The reinsurance industry, you
mentioned the NFIP was incepted last year on January 1. In its
first year, the program returned the entire limit to the
Federal Government. This year, as it is being renewed,
reinsurers have not fled for the hills. They are back, and they
are having discussions with the NFIP and pricing that now,
going forward.
Mr. Royce. Yes. Well, with that in mind, I plan to
introduce legislation to direct the Office of Management and
Budget to identify other areas in the Federal balance sheet
where derisking could be used to protect taxpayers. I think it
is a strategy that would accrue to the benefit of stability all
the way around, and in terms of proper pricing of risk and
offsetting moral hazard in the system.
But thank you very much.
And, Chairman, thank you for the hearing.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the Vice Ranking Member of the
full committee, the gentleman from Michigan, Mr. Kildee, for 5
minutes.
Mr. Kildee. Thank you, Mr. Chairman.
Chairman Duffy. It rolls off the tongue, doesn't it?
Mr. Kildee. You got it right. You can just say assistant to
the regional manager, that is fine.
Before I turn to the panel, I do want to commend the
Ranking Member and the Chairman for this series of hearings and
reiterate what I think has been discussed previously, and that
is this is an area of policy where I think the divisions that
often manifest on this committee might be able to be overcome.
And so I want to encourage the leadership of the subcommittee
to continue on that path.
Very often, I think we imply ideological differences where
technical solutions are really at the core of the issue. And as
long as we know what direction we are going, I do think there
is enough common ground for us to try to knit together some
policy that we could all work together on, not 100 percent, but
perhaps at least something that we could present to the full
Congress in a bipartisan fashion. So I want to encourage that.
It is also very good to see Professor Wachter. We worked
together in my--well, when I was in real life before I came to
Congress. And so it is good to see you and to have you here.
I want to follow up a bit on the line of questioning that
Representative Velazquez initiated. Not so much dealing with
the secondary market or the structure on that end, but actually
thinking about how the structure of the market and the way we
manage risk could have an impact on certain cohorts of the
housing market.
And I am particularly concerned about the impact in weak
markets and low-value markets, where we are already seeing real
difficulty in getting mortgage financing. It is a pretty simple
problem we face. And for those who don't know, I come from
Michigan, from a string of older industrial cities that
includes my hometown of Flint.
And I recall having conversations in this committee about
small mortgages. And I do remember--I don't want to throw any
member under the bus, but I was crowing about the need for
small mortgages and somebody said, oh, you can get a small
mortgage. You can get a $150,000, $200,000 mortgage, no
problem. In my hometown of Flint, we are looking for ways to
finance home mortgages $25,000 and $30,000. And we just cannot
get financing, because the risk associated with that mortgage
versus the value of that mortgage on a balance sheet makes it
really impossible for a lot of lenders to justify engaging.
So I guess a couple of questions. What impact--well, I
guess I will turn it around the other way. What suggestions can
any of you offer that allow us to balance this question of the
institutional risk in the marketplace and the need to make sure
that we are penetrating with mortgage products into these
really weak markets?
So that it is not just a question of creditworthiness,
which is another part of the question I want to get to, but the
market in which a person lives with great credit, very often
they are locked out of the housing market because they can't
get a small mortgage in the size that I am talking about.
Perhaps starting with Dr. Wachter, but I want to go to Mr.
Rippert on a couple of other questions as well. Could you
comment on that particular issue?
Dr. Wachter. Yes. It is a very difficult problem. And it
goes to the question of the lack of supply of mortgages affects
the prices. So the very fact that mortgages are not there means
that the properties are valued less. That is a reinforcing
cycle.
And that was the point of the CRA, Community Reinvestment
Act, because the thought is that there are good risks out
there, but they are being avoided. There is good lending,
creditworthy lending that is being avoided just because of the
perceived risk; and that other entities will not come into the
market, so that is artificially limiting the pricing of that
market. That is a real problem.
My concern is that it is a natural outcome of cycles that
pricing of capital does change over the cycle and it does
change over place. So if we allow each place to have its own
credit risk and that changes over the cycle, we will basically
undo a national credit market, a national insurance market for
default risk.
That national insurance market for default risk has been
very liquid and has efficiently priced interest rate risk,
allowing for a 30-year fixed rate mortgage, and has allowed for
credit risk to be priced relatively reasonably. But if we had
every size of property, every geography having its own price,
that would be very volatile over the cycle. So the problems you
describe, which are very real, would become far worse.
The way to directly take on your problem is to go back to
the concepts behind the CRA and think of revitalizing
communities with pools of capital. And that we need to return
to, but it is probably a subject of another discussion.
Mr. Kildee. Thank you. I appreciate it. I know the Chairman
is a pretty good timekeeper. I think I have gone over a little
bit. I appreciate the indulgence.
Chairman Duffy. The regional manager yields back. Thank you
for that.
Listen. It looks like we have had a lot of members come in,
but I think they have been pulled away so we don't have any
other members to ask questions.
But I want to thank the panel for their time--I know you
are all very busy people--for sharing your expertise with us.
This is an important space that we want to make sure we get
right, and I can guarantee you that we will all be having
additional conversations with you, if you don't mind,
continuing to consult with the subcommittee and the committee
as a whole. So we again thank you for your participation today.
Without objection, all members will have 5 legislative days
within which to submit additional written questions to the
Chair, which will be forwarded to the witnesses. I would ask
the witnesses to please respond in as prompt a timeframe as you
can.
Without objection, this hearing is now adjourned.
[Whereupon, at 11:20 a.m., the subcommittee was adjourned.]
A P P E N D I X
December 6, 2017
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