[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]


                      THE CURRENT MORTGAGE MARKET:
                          UNDERMINING HOUSING
                      AFFORDABILITY WITH POLITICS

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

                                HEARING

                               BEFORE THE

                        SUBCOMMITTEE ON HOUSING
                             AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 17, 2023

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 118-24
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                __________

                                
                    U.S. GOVERNMENT PUBLISHING OFFICE                    
52-936 PDF                  WASHINGTON : 2023                    
          
-----------------------------------------------------------------------------------  

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas                EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota                 JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia            BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia   JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio                JUAN VARGAS, California
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina      SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina         AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania             STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York           RITCHIE TORRES, New York
YOUNG KIM, California                SYLVIA GARCIA, Texas
BYRON DONALDS, Florida               NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
MIKE LAWLER, New York                BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                 Subcommittee on Housing and Insurance

                    WARREN DAVIDSON, Ohio, Chairman

BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri, Ranking 
BLAINE LUETKEMEYER, Missouri             Member
RALPH NORMAN, South Carolina         NYDIA M. VELAZQUEZ, New York
SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York           RITCHIE TORRES, New York
MIKE FLOOD, Nebraska                 AYANNA PRESSLEY, Massachusetts
MIKE LAWLER, New York                SYLVIA GARCIA, Texas
MONICA DE LA CRUZ, Texas             NIKEMA WILLIAMS, Georgia
ERIN HOUCHIN, Indiana                STEVEN HORSFORD, Nevada
                                     BRITTANY PETTERSEN, Colorado
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 17, 2023.................................................     1
Appendix:
    May 17, 2023.................................................    33

                               WITNESSES
                        Wednesday, May 17, 2023

DeMarco, Edward J., President, Housing Policy Council (HPC)......     4
Parcell, Kenny, 2023 President, National Association of REALTORS 
  (NAR)..........................................................     6
Ratcliffe, Janneke, Vice President, Housing Finance Policy, Urban 
  Institute......................................................     9
Rossi, Clifford V., Professor-of-the-Practice and Executive-in-
  Residence, Robert H. Smith School of Business, University of 
  Maryland.......................................................     7

                                APPENDIX

Prepared statements:
    DeMarco, Edward J............................................    34
    Parcell, Kenny...............................................    53
    Ratcliffe, Janneke...........................................    58
    Rossi, Clifford V............................................    71

              Additional Material Submitted for the Record

Fitzgerald, Hon. Scott:
    Written responses to questions for the record submitted to 
      Edward J. DeMarco..........................................    79
Norman, Hon. Ralph:
    Written responses to questions for the record submitted to 
      Edward J. DeMarco..........................................    80
    Written responses to questions for the record submitted to 
      Janneke Ratcliffe..........................................    81
Waters, Hon. Maxine:
    Written statement of the Credit Union National Association 
      (CUNA).....................................................    82
    Written statement of Edward Golding, Executive Director, MIT 
      Golub Center for Finance and Policy, and Senior Lecturer, 
      MIT Sloan School of Management.............................    84
    Written statement of the Mortgage Bankers Association (MBA)..    90
    Written responses to questions for the record submitted to 
      Janneke Ratcliffe..........................................    97

 
                      THE CURRENT MORTGAGE MARKET:
                          UNDERMINING HOUSING
                      AFFORDABILITY WITH POLITICS

                              ----------                              


                        Wednesday, May 17, 2023

             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 p.m., in 
room 2220, Rayburn House Office Building, Hon. Warren Davidson 
[chairman of the subcommittee] presiding.
    Members present: Representatives Davidson, Posey, Norman, 
Fitzgerald, Garbarino, Flood, Lawler, De La Cruz, Houchin; 
Cleaver, Tlaib, Pressley, Garcia, Williams of Georgia, 
Horsford, and Pettersen.
    Ex officio present: Representative Waters.
    Chairman Davidson. The Subcommittee on Housing and 
Insurance will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``The Current Mortgage Market: 
Undermining Housing Affordability with Politics.''
    I now recognize myself for 5 minutes to give an opening 
statement.
    Today, we will receive testimony from experts in the 
housing industry to discuss recent actions taken by the Federal 
Housing Finance Agency (FHFA). Housing affordability is crucial 
to giving Americans the opportunity to build wealth through 
homeownership. Homeownership, in turn, paves the way for 
success in many other aspects of life. In essence, housing 
affordability is a cornerstone for pursuing the American Dream.
    The importance of maintaining a fair and undistorted 
mortgage market cannot be overstated. Currently, residential 
consumer mortgage debt accounts for approximately $12 trillion, 
which is spread across over 80 million mortgages. Of this $12 
trillion, Fannie Mae and Freddie Mac, collectively known as the 
Enterprises, guarantee approximately 70 percent of the market. 
The FHFA, the entity charged with supervising the Enterprises 
and acting as their conservator, must be immune to political 
agendas, regardless of how much any Administration pressures 
this Agency. The FHFA, therefore, retains an exceptional degree 
of authority to impose rules that shape the entire mortgage 
market. It is this authority that brings us here today in light 
of recent proposals to change the loan-level pricing 
adjustments (LLPAs) set forth by FHFA to be implemented by the 
Enterprises.
    When created in 2008, loan-level price adjustments (LLPAs), 
also known as guarantee fees, were put in place to allow the 
Enterprises to charge for the credit risk associated with 
mortgages which they were guaranteeing. These fees are designed 
to cover the risk of standing behind the mortgages and to 
protect the solvency of the Enterprises. The recent changes to 
these fees that went into effect on May 1st, however, are 
alarming because they disproportionately increase fees for 
borrowers who have higher credit scores. Any way you slice it, 
prices will go up for consumers who have credit scores above 
680, and even for some of those with down payments of more than 
30 percent of the loan. In other words, this pricing scheme 
would shift most of the cost burden to more-creditworthy 
borrowers.
    The FHFA contends that the loan-level price changes are 
attributed to higher capital standards that need to be imposed 
on the Enterprises. While this could justify some change in 
LLPAs, the change we saw imposed on May 1st clearly targeted 
new homebuyers with average credit scores and above. And we 
have also heard that the FHFA contends that interpreting the 
new LLPA chart must be coupled with mortgage insurance 
coverage, so as to paint a full picture for consumers. And 
while those with lower credit scores and low down payments are 
certainly likely to pay more for mortgage insurance given the 
risks they present, this is an entirely different credit 
product whose fees cover the cost of the insurance itself, and 
go to an entirely separate entity. Mortgage insurance payments 
do not help the Enterprises to build capital or to actually 
protect the taxpayers from risk.
    Make no mistake, these changes to the LLPAs ultimately hurt 
housing affordability for the majority of homebuyers. Even if 
it is a relatively small cost for some, it is inappropriate to 
place the burden on Americans simply because there is a 
misguided notion that, ``they can afford it,'' especially with 
the high cost of inflation that is plaguing our economy. Now, 
to be fair, we have already seen the FHFA reverse course on 
some components of the LLPA changes, while also issuing a 
request for input on its method for determining LLPAs. These 
are positive but small steps in the right direction, and while 
we welcome these changes, they are insufficient.
    This committee will ensure that we have appropriate risk-
based pricing and an efficient mortgage market. The witnesses 
here today will be critical to providing insight into how we 
can get that done. So, I thank our witnesses for their 
testimony today, and I look forward to the conversation.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from Missouri, Ranking Member 
Cleaver, for 5 minutes for an opening statement.
    Mr. Cleaver. Thank you, Mr. Chairman, and I thank you for 
calling the hearing.
    Let me first start by acknowledging that Government-
Sponsored Enterprises (GSEs) pricing frameworks are not the 
most-digestible set of information. Housing finance is complex. 
The complexity then lends itself to misunderstandings and 
sometimes to deliberate misinformation. I read a Fox News 
article last month entitled, ``Real Estate Expert Shreds Biden 
Rule Punishing Homebuyers with Good Credit.'' The argument was 
presented that pricing changes were a punishment for homebuyers 
with good credit, and designed to subsidize loans to higher-
risk borrowers, and the expert, by the way, was a former media 
host. I have since seen these claims repeated in several other 
media outlets. The Washington Examiner, for example, called it, 
``Biden's socialist housing scheme.''
    Reasonable minds can disagree resolutely about how to 
implement a complex pricing framework, and I appreciate the 
request for input released by FHFA Director Thompson earlier 
this week. But I fervently disagree with the way in which 
individuals have taken the liberty with the motivations of FHFA 
or have mischaracterized the FHFA's actions. We will hopefully 
get to the bottom of these claims during the hearing.
    Last year, I called on the FHFA to do a holistic review of 
up-front fees. The old FHFA pricing framework was extremely 
unfair. The GSEs were unfairly overcharging borrowers with 
lower down payments who had the added protection of private 
mortgage insurance, and undercharging others. The new pricing 
framework was a recalibration that was warranted, given the 
implications of a new capital regime in 2020. The new framework 
is not perfect, but it is more fair.
    Under both frameworks, no one is rewarded for having a 
lower credit score or making a lower down payment. Borrowers 
with lower credit scores and lower down payments continue to 
pay more than borrowers with higher credit scores and higher 
down payments, despite the adjustment made. These borrowers are 
some of the highest-credit borrowers in this country. The 
average credit score of a borrower in one of the Government-
Sponsored Enterprises' (GSE's) flagship affordable mortgage 
programs is 743. These are prime-credit Americans who simply 
don't have a great amount of wealth; they just want a 
reasonable chance for their family to own a home. In urban 
America, in suburban America, and in thousands of rural 
communities around this country, the average borrower with an 
Enterprise-backed mortgage is expected to receive a minimal 
increase of 4 basis points, or 0.5 percent, on their interest 
rate with these changes. Yet, the undersupply of housing has 
driven a nearly 300 basis point mortgage rate increase.
    Mr. Chairman, I appreciate the opportunity for us to 
discuss this important issue. The country needs Congress to get 
past these narratives that turn Americans against each other. 
Thank you.
    Chairman Davidson. I thank the ranking member.
    We now welcome the testimony of our witnesses.
    First, Mr. Edward J. DeMarco. Mr. DeMarco is the president 
of the Housing Policy Council (HPC). Prior to joining HPC in 
June of 2017, he was a senior fellow in residence at the Milken 
Institute's Center for Financial Markets. And from 2009 to 
2014, Mr. DeMarco was the Acting Director of the Federal 
Housing Finance Agency, where he served as the conservator for 
Fannie Mae and Freddie Mac, and as regulator of those companies 
and the Federal Home Loan Banks.
    Second, Mr. Kenny Parcell. Mr. Parcell is the 2023 
president of the National Association of REALTORS (NAR), and 
the broker-owner of Equity Real Estate Utah. At the national 
level, Mr. Parcell served as NAR's vice president of government 
affairs in 2018, and in 2021, REALTOR Magazine named him as one 
of its 30 under 30.
    Third, Dr. Clifford Rossi. Dr. Rossi is an executive-in-
residence and professor-of-the-practice at the Robert H. Smith 
School of Business at the University of Maryland. Prior to 
entering academia, Dr. Rossi had nearly 25 years of experience 
in banking and government. His most recent position was as 
managing director and chief risk officer for Citigroup's 
consumer lending group, where he was responsible for overseeing 
the risk of a $300-plus billion global portfolio of mortgage 
and home equity loans, student loans, and auto loans, with 700 
employees under his direction.
    Fourth, Ms. Janneke Ratcliffe. Ms. Ratcliffe is vice 
president for housing finance policy and leads the Housing 
Finance Policy Center at the Urban Institute. Ms. Ratcliffe 
came to the Urban Institute from the Consumer Financial 
Protection Bureau (CFPB), where she served as an Assistant 
Director, leading its Office of Financial Education. Ms. 
Ratcliffe serves on the Consumer Affairs Advisory Council of 
the Mortgage Bankers Association, and she is a member of the 
National Community Stabilization Trust Board of Managers.
    We thank you all for taking the time to be here. You will 
each be recognized for 5 minutes to give an oral presentation 
of your testimony. And without objection, your written 
statements will be made a part of the record.
    Mr. DeMarco, you are now recognized for 5 minutes to give 
your oral remarks.

   STATEMENT OF EDWARD J. DeMARCO, PRESIDENT, HOUSING POLICY 
                         COUNCIL (HPC)

    Mr. DeMarco. Thank you, Mr. Chairman. Chairman Davidson, 
Ranking Member Cleaver, and members of the subcommittee, thank 
you for the invitation to participate in today's hearing. I am 
here on behalf of the Housing Policy Council (HPC), a trade 
association comprised of the leading national mortgage lenders 
and servicers; mortgage, property, and title insurers; and 
technology and data companies. My written statement provides 
HPC's views on today's topic and offers HPC's perspective on 
the relationship between pricing, capital, safety and 
soundness, and expanding homeownership opportunities.
    The statutory purposes of Fannie Mae and Freddie Mac 
combined with FHFA's statutory responsibilities indicate that 
Congress expects the two companies to advance the stability and 
availability of mortgage credit while operating in a safe and 
sound manner. In other words, Fannie and Freddie have a mandate 
to facilitate and support the liquidity of the secondary 
mortgage market. Accomplishing this purpose directly enhances 
the availability of mortgage credit throughout the country and 
lowers the cost of such credit to homebuyers.
    Congress went a step further and instructed that Fannie Mae 
and Freddie Mac take steps to meet specific goals to expand 
mortgage credit availability in identified geographies and for 
low- and moderate-income families. For purposes of today's 
discussion, I will divide FHFA's most recently announced 
pricing changes into two buckets: first, FHFA introduced and 
then rescinded a new up-front fee adjuster based on the 
borrower's debt-to-income ratio; and second, FHFA made 
adjustments to the pricing grids that establish up-front fees 
calibrated to Fannie's and Freddie's risk in a particular 
transaction, the risk to Fannie and Freddie.
    HPC and others quickly recognized the challenges of the 
debt-to-income pricing element, and we asked FHFA for an 
implementation delay, which FHFA granted. After additional 
evaluation, HPC concluded that the proposed pricing element 
simply was not workable. We sent a detailed letter to FHFA on 
April 28th outlining our reasons for this conclusion. And on 
May 10th, FHFA announced it was rescinding the DTI pricing 
element, and HPC is grateful for this reconsideration.
    As for the recent changes to the up-front grids, they 
appear to be reasonably aligned with credit risk after 
accounting for the new capital framework, the cost of private 
mortgage insurance, and historical default and loss data. That 
said, only FHFA has the detailed data and models to fully 
explain how the grids align with risk and the recently-
finalized risk-based capital framework. This opacity may have 
contributed to the confusion and misreporting regarding the 
January announcement. HPC and its members believe the solution 
is to have greater transparency regarding the pricing across 
risk categories relative to these capital standards. My 
statement elaborates on this point.
    I would like to specifically address HPC's views on 
expanding sustainable homeownership. HPC and its members do not 
believe that either subsidized pricing or more-lenient 
underwriting, both of which increase risk and the cost of 
losses, is the way to go. Rather than ignoring risk or trying 
to compensate for it by charging all borrowers more, the 
government would better achieve sustainable expansion in 
homeownership with forms of assistance that lower borrower 
risk. I have testified on this issue before in front of this 
committee, and my written statement also elaborates on this 
point.
    HPC and its members would also like to point out that this 
entire discussion of g-fees reflects how poorly targeted the 
pricing framework is for accomplishing the GSE's housing 
mission. Congress established GSE housing mission goals to 
advance certain affordable housing priorities. It is unknown 
how much the goals actually benefit the targeted households, 
rather than simply being absorbed by other parties to the 
transaction, creating leakage of the intended cross-
subsidization benefit to the consumer. There would be far 
greater transparency of how much financial support actually 
reaches low- and moderate-income families and communities if 
the subsidy were directly allocated to those borrowers, not 
embedded in the price between the lender and the GSE.
    Thank you again for having me here.
    [The prepared statement of Mr. DeMarco can be found on page 
34 of the appendix.]
    Chairman Davidson. Thank you, Mr. DeMarco.
    Mr. Parcell, you are now recognized for 5 minutes to give 
your oral remarks.

 STATEMENT OF KENNY PARCELL, BROKER-OWNER, EQUITY REAL ESTATE 
  UTAH, AND 2023 PRESIDENT, NATIONAL ASSOCIATION OF REALTORS 
                             (NAR)

    Mr. Parcell. Chairman Davidson, Ranking Member Cleaver, and 
members of the Housing and Insurance Subcommittee, thank you 
for your service, and, most importantly, thank you for your 
time. My name is Kenny Parcell, and I am a broker-owner of 
Equity Real Estate Utah. I have been a REALTOR member for over 
27 years and I am now president of the National Association of 
REALTORS (NAR).
    Today, I am here on behalf of our 1.5 million members who 
live and work in every ZIP Code in America. We are the nation's 
largest trade organization. Thank you for the opportunity to 
share our perspective on the housing market and the recent 
pricing changes announced by the Federal Housing Finance 
Agency.
    It is no secret that today's market poses many obstacles 
for homebuyers. Typically, first-time buyers make up 40 percent 
of all buyers, but it is now at an all-time low of 26 percent. 
This is a very concerning statistic. Interest rates have risen 
nearly 3 percentage points over the last year. In March of 
2022, if you had a loan of $400,000 at a 3-percent interest 
rate on a 30-year mortgage, your principal and interest payment 
would have been $1,682. Now, that same loan amount at 6 percent 
would put your payment at $2,398. That is a 42-percent 
increase.
    With the cost of inflation, and additional fees, we have a 
real concern. Housing affordability and availability remain 
extremely restricted. Our members navigate these issues every 
day, which is why it's crucial for buyers and sellers to have a 
REALTOR on their side.
    I learned a hard lesson by not using a REALTOR when I 
purchased my first home going into my sophomore year in 
college. I was a young student-athlete, and all I wanted to be 
was a homeowner. I had 3 years left on my football scholarship, 
and I didn't want to rent. I had a dream of being a homeowner. 
Although it wasn't easy--when I closed on my first home, the 
seller removed the working white refrigerator and replaced it 
with a lime green one that didn't work, the kitchen cabinets 
were taken, and the AC and the garage door were removed. For 
the first 6 months, I lived out of a camping cooler. I would 
take the ice from the training room and bring it back to 
restock my cooler at home. It was a proud day when I eventually 
saved up enough money to buy a used refrigerator. I still own 
that home today, and it has increased in value by over 
$300,000. This experience led me into real estate, and later, 
NAR leadership.
    Our members abide by the code of ethics and have consumers' 
best interests at heart. REALTORS are committed to making the 
American Dream accessible to more people, whether by helping 
them navigate a difficult transaction like my family faced, or 
finding a solution to the supply and affordability crisis 
facing homebuyers nationwide.
    A recent report from NAR found that we are at a 5-million 
unit shortfall. Underbuilding, high interest rates, and rapid 
price increases are eroding housing affordability. 
Homeownership is still viewed as a vital part of the American 
Dream, but it is becoming increasingly out of reach for many. 
The average net worth of a renter is $8,000. The average net 
worth of a homeowner is over $320,000. The percentage of 
homeownership for Whites is 74.4 percent, 45.8 percent for 
Blacks, 61.6 percent for Asians, and 49.7 percent for 
Hispanics. We must and should improve the statistics for 
minorities. We believe any fee increase right now is not good 
for anyone wanting to purchase a home.
    This brings me to FHFA's recent loan-level pricing 
adjustments or LLPA's. NAR believes this pricing was a missed 
opportunity to help Americans who are already struggling to 
afford homes. NAR has worked with FHFA on this issue for years 
and raised concerns about the fees in January. Given the sharp 
rise in interest rates over the past year, we knew these 
changes would harm borrowers in an already-tight housing 
market. Additionally, with economic concerns mounting as 
Congress debates the debt limit, these fees only serve to 
further de-incentivize potential buyers.
    We are grateful to FHFA for listening to the concerns like 
these across the industry and announcing it would rescind its 
up-front fee on borrowers whose debt-to-income ratio is greater 
than 40 percent, which was set to take effect on August 1st. 
NAR will continue to work with FHFA and Congress to find a 
solution to lower barriers to homeownership while minimizing 
the risk to taxpayers.
    It is like we are all in the same boat, but there is a hole 
in one side, and the people on the other side yell out, ``Thank 
God the hole is not on my side.'' We need everyone's help on 
this important issue. It will take a bipartisan approach to 
address the housing affordability crisis in our country. Thank 
you for the opportunity to testify. We appreciate your time, 
and I look forward to your questions. Thank you.
    [The prepared statement of Mr. Parcell can be found on page 
53 of the appendix.]
    Chairman Davidson. Thank you, Mr. Parcell.
    Dr. Rossi, you are now recognized for 5 minutes to give 
your oral remarks.

 STATEMENT OF CLIFFORD V. ROSSI, PROFESSOR-OF-THE-PRACTICE AND 
  EXECUTIVE-IN-RESIDENCE, ROBERT H. SMITH SCHOOL OF BUSINESS, 
                     UNIVERSITY OF MARYLAND

    Mr. Rossi. Thank you, Chairman Davidson, Ranking Member 
Cleaver, and members of the subcommittee. My name is Clifford 
Rossi, and I am professor-of-the-practice and executive-in-
residence at the Robert H. Smith School of Business at the 
University of Maryland. I offer a unique perspective on this 
issue, having worked for 23 years in the financial services 
industry in a variety of C-level risk management positions, 
including 10 years at both Fannie and Freddie, where I actually 
helped design and work on the analytical methodologies that we 
are here to talk about today, using pricing, Enterprise 
guarantee fees, and risk-based underwriting matrices.
    There remains much confusion over the process employed to 
price credit risk by the Enterprises. Like much of the housing 
finance system, that credit pricing process is based on a 
legacy structure that, in a perfect world, would likely never 
have been designed the way it is today. Of critical importance 
to this hearing is the issue of cross-subsidies among mortgage 
borrowers.
    Changes in the LLPA grids that went into effect on May 1st 
sparked enormous controversy over the extent to which high-
credit-quality borrowers are subsidizing low-credit-quality 
borrowers. I, too, in opinion pieces, raised concern over the 
appearance that fees on some high-credit-quality borrowers 
would rise, while reducing fees on a number of low-credit-
quality borrowers. Those are immutable facts. The current and 
previous LLPA grids incorporate elements of risk-based pricing, 
although the current grids flatten that relationship between 
key risk attributes and credit default.
    Another fact is that the cross-subsidy and credit pricing 
has been in place for decades by way of average guarantee fee 
pricing used by both Enterprises. Effectively, then, what we 
see is a hybrid form of credit pricing that features flat or 
average pricing for the ongoing or guarantee phase and quasi-
risk based pricing. I don't actually call it risk-based pricing 
for up-front fees or LLPAs.
    About the time of the financial crisis, as both GSEs came 
under increasing stress from accelerating credit losses, they 
turned to a new device to raise funds to staunch those losses: 
LLPAs. The LLPAs are essentially an artifact of a last-ditch 
effort by the GSEs to save themselves rather than as a well-
thought-out credit pricing structure. The seminal question here 
is whether such a pricing scheme is the best structure to 
achieve the FHFA's objectives, cited earlier.
    So, when designing an optimal mortgage credit pricing 
structure for the Enterprises, I have a set of criteria that 
are essential in guiding that, and these principles are as 
follows. One, any credit pricing structure must achieve the 
FHFA's goal of ensuring the safety and soundness of the 
Enterprises. I think we would all agree about that. Credit 
pricing must be transparent and straightforward to understand. 
Credit pricing must be empirically-based, reflecting a through-
the-cycle view of loan performance, taking key risk attributes 
into account. Credit pricing should be operationally-tractable 
and designed to minimize implementation burden for the 
Enterprises and mortgage originators. And finally, credit 
pricing must seek to reduce and/or eliminate perverse 
incentives that may pose risks to borrowers or the GSEs.
    How do the current LLPAs actually comport with these 
criteria? Use of the Enterprise regulatory capital framework, 
the ERCF, along with the modeling approach for generating 
guarantee phase aligns generally with the first and third 
criteria, but the introduction of LLPAs violates the second, 
fourth, and fifth. So, while on the surface it can be argued 
that the LLPAs are transparent by virtue of pricing by risk 
attribute, the exact mechanics are murkier, thus setting the 
stage for second-guessing the new LLPA grids and the need for a 
new approach.
    I actually proposed eliminating the current FICO, LTV, and 
LLPA grids altogether, and updating the guarantee fees 
consistent with achieving a target rate of return, taking into 
account the ERCF, that is the regulatory capital requirements. 
My proposal meets all of the stated criteria of mortgage credit 
pricing laid out earlier. And a precedent has already been set, 
as we said earlier, with the FHFA's announcement of rescinding 
the LLPA fee for debt-to-income ratio.
    So instead of imposing LLPA fees for FICOs and LTVs, what I 
suggest is that a part of the guarantee fee would be determined 
by the FHFA to use as a legislatively-capped rebate account of 
sorts to borrowers who are income- and/or wealth-challenged. 
There is ample precedent for these kinds of guarantee fees for 
various reasons, such as the FHFA's requirement over the years 
to add 10 basis points to guarantee fees, to provide additional 
coverage for credit exposure, and let us not forget the 10 
basis points adjustment for TCCA.
    The proposal decouples safety and soundness objectives from 
affordable housing and credit pricing, and that is important. 
We need to decouple credit pricing from these other policy 
objectives, and thus, it provides transparency in credit 
pricing, reduces operational burden, reduces risk to borrowers 
and the Enterprises, and supports the goal of affordable 
housing. Thank you very much.
    [The prepared statement of Dr. Rossi can be found on page 
71 of the appendix.]
    Chairman Davidson. Thank you, Dr. Rossi.
    Ms. Ratcliffe, you are now recognized for 5 minutes to give 
your oral remarks.

STATEMENT OF JANNEKE RATCLIFFE, VICE PRESIDENT, HOUSING FINANCE 
                    POLICY, URBAN INSTITUTE

    Ms. Ratcliffe. Thank you. Chairman Davidson, Ranking Member 
Cleaver, and members of the subcommittee, thank you for the 
opportunity to testify today.
    I would like to start by mentioning that what I present 
today is based on my own views and should not be attributed to 
the Urban Institute, its trustees, or funders. I have been 
invited to discuss pricing decisions with regard to the loan-
level price adjustments. This complex topic has generated 
concern and confusion, and I hope that analysis by me and my 
Urban Institute colleagues will help make things clearer. In my 
written testimony, I provide additional context around LLPAs, 
which were first introduced in 2008.
    First, I want to emphasize that the recent adjustments to 
the LLPAs do not in any way compromise the safety and soundness 
of the GSEs. All Enterprise loans today are underwritten 
according to strict risk criteria and present low risk by 
historical standards. Indeed, even those falling in the lower-
right quadrant of the pricing grid, with down payments less 
than 20 percent and credit scores between 620 and 680, have low 
projected losses. We estimate less than 1 percent. Moreover, 
these made up less than 3 percent of Fannie Mae's 30-year, 
fixed-rate purchased, single-family-owner-occupied mortgages in 
2022, so a relatively small share.
    Second, rather than thinking about these adjustments as new 
cross-subsidies, they should be viewed in light of a series of 
changes made by the Director to better align pricing with the 
capital requirements established by the prior Director under 
the Enterprise regulatory capital framework (ERCF). The GSEs 
exist to support sustainable and affordable homeownership 
across communities and across cycles.
    GSE pricing is primarily structured so that they can meet 
their capital requirements and their overall target return on 
capital. They can set different profit margins for different 
types of loans, which is a standard business practice in order 
to maintain safety and soundness, serve their public mission 
and meet their overall return target. For example, they charge 
the same fees for loans in all States, even though some States 
have higher default rates than others, and are thus less-
profitable. They also have different margins on some products 
based on competitive pressures.
    Within the current pricing structure, it is helpful to 
recognize three categories the GSEs do price differentially. 
First, mission-remote loans like second homes, investment 
properties, million-dollar loans, and cash-out refinances, 
which are seen as less-appropriate for deep public support and 
less-central to the basic homeownership mission. For these 
loans, they charge as much as they can, while still providing 
enough benefit to retain that business. These higher returns 
offset lower-return targets on a second category, mission 
loans, which include mortgages to people with lower incomes, in 
rural markets, manufactured homes, and a few other categories. 
For this category, the aim is to price as low a margin as 
possible while still meeting profit targets, a practice that 
inherently makes these loans less risky.
    Then, we come to the third category, the bulk of the loans. 
These are purchase and rate-term refinances for all other 
owner-occupied homes, which are priced to hit capital 
requirements and target return on equity. The May 1st 
adjustments applied to the core loans. The May 1st pricing 
adjustment is the last in a series of steps taken over the past 
year, each to address different objectives. This has led to 
some confusion because these steps are being conflated, leading 
some to conclude that these changes are supporting mission 
business at the expense of the core business, but that is not 
correct.
    The May 1st changes result in a flatter grid across the 
core business. They give more credit where it is due for 
private mortgage insurance, and they split up some of the prior 
groups into smaller groups. The May 1st additions are 
relatively small, adding at most $40 per month to the median 
mortgage, and this adjustment applies to less than 1.5 percent 
of the core borrowers. Groups within the grid are all still 
priced to cover losses and make a profit.
    Finally, in the core business, which is the vast majority 
of their lending, those who pose more risk pay more, in some 
cases a lot more, than borrowers who pose less risk. Borrowers 
with low down payments or high loan-to-value (LTV) have to buy 
private mortgage insurance. Private mortgage insurance reduces 
losses to the GSEs and also raises costs for borrowers with LTV 
over 80 percent, who were likely overcharged in the prior grid, 
especially those with lower credit scores.
    With the May 1st changes, on a $300,000 mortgage, a 
borrower with a credit score of 660 and 5 percent down will 
still pay around $500 more per month--$500, I just want to 
emphasize that--in LLPAs and PMI than a borrower with a credit 
score of 700 and a 25-percent down payment. Ultimately, the May 
1st changes have little to nothing to do with cross-subsidy. 
They better align the core business, LLPAs, with the capital 
requirements and losses, and they address previous overcharges 
among high-LTV borrowers by accounting for mortgage insurance.
    Thank you, and I look forward to your questions.
    [The prepared statement of Ms. Ratcliffe can be found on 
page 58 of the appendix.]
    Chairman Davidson. Thank you, Ms. Ratcliffe.
    We will now turn to Member questions, and the Chair now 
recognizes himself for 5 minutes for questions.
    Regarding FHFA's LLPA changes instituted on May 1st, first, 
the pricing changes announced, both the LLPA and the DTI, did 
not sit well with many, a bit of an understatement. But second, 
the process, such as there was one, that FHFA used to convey 
these changes through a couple of press releases was neither 
formal nor inclusive. Third, FHFA can, and in the case of DTI, 
did make changes to its pricing plans when they fell flat. So, 
their argument that they had to do it this way doesn't really 
add up. And fourth, the data FHFA says justifies the changes 
has either been not available or at least not transparently 
presented, so it stoked a lot of opposition.
    It is really FHFA's burden to explain its own work, and 
FHFA fell far short of those standards, which is why we are 
having this hearing. It is also why we have attached a 
discussion draft of a bill to this hearing to have FHFA revert 
back to the old LLPA pricing for now, and to have GAO do a 
study of the process so that we can study what they did do to 
get to this point, and then require FHFA to use a transparent 
process if future changes are, in fact, merited. Quite simply, 
we ought to ensure fairness, oversight, and accountability when 
it comes to matters affecting the mortgage market.
    Does anyone on the panel disagree with that?
    [No response.]
    Chairman Davidson. I don't see anyone. Does anyone claim 
that it would cause harm to do it this way?
    [No response.]
    Chairman Davidson. That is the basic goal, and I appreciate 
the quiet affirmation of that, and I just want to highlight a 
couple of things that were out there.
    Mr. DeMarco, if the 2023 price changes were actually about 
capital rule compliance, now that FHFA has rescinded its 
proposed DTI fee that folks like Ms. Ratcliffe have noted, 
``penalizes lower-income borrowers,'' doesn't that mean that 
the GSEs will now have some level of capital shortfall since 
they are not going to implement the DTI rule? Would you support 
FHFA further revising LLPAs to raise fees again on GSE 
borrowers to backfill the missing revenue stream, or what are 
they going to do to hit the higher capital requirement they 
said they were going to try to hit?
    Mr. DeMarco. I think FHFA itself, both in its guarantee fee 
(g-fee) study published last November, and in particular, they 
made it even more clear in the request for input that they 
published this week, that in fact, the current g-fee, the new 
g-fee framework, is not going to produce the target rate of 
return given the increased capital requirements that were 
finalized in 2020 and became effective in 2022. I think this is 
really a root issue in this whole discussion, right?
    What was done under Director Calabria in terms of a 
material increase in the capital requirements for Fannie and 
Freddie included in those increases, not just a very granular 
approach to pricing mortgage credit risk, but also ensuring 
that there was a base amount of capital across all mortgages. 
So, even lower-risk mortgages, through the way the capital 
rules put together, would have a substantial capital 
requirement, additional capital requirements. It is not 
surprising then that if one comes along afterwards and is 
trying to align g-fees to this new capital framework, that one 
would see the sort of pricing changes that were done. I think 
this really was done to align with the framework, but because 
capital is so much higher, I am not going to be surprised if 
there are additional capital raises that take place over time.
    Chairman Davidson. Yes.
    Mr. DeMarco. I'm sorry, g-fee raises that take place over 
time.
    Chairman Davidson. They may not be done yet, and to the 
point, say, well, it is no big deal. Ms. Ratcliffe illustrated 
on page 12 of her testimony that about half of all GSE loans, 
46 percent, are facing higher LLPA costs, so that less than a 
third can wind up with lower costs, and that is on the new 
assessment. I understand it is not lower in the aggregate, but 
it is this assessment. So, there is kind of this bonus round 
where we are going to assess it to try to get higher capital 
standards.
    Mr. Rossi, does it strike you as something that would sit 
well with regular Americans trying to buy a home? Do you see 
why many constituents would regard this shift in the balance as 
unfair?
    Mr. Rossi. Absolutely, and I don't personally like the--
    Chairman Davidson. Sorry. I gave you no time to answer. I 
am going to run a little tighter gavel, and I would love to get 
your answer in writing when you get a chance.
    I now recognize the ranking member of the subcommittee, Mr. 
Cleaver, for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. Ms. Ratcliffe, 
leading civil rights agencies and organizations like the Urban 
League and many of the housing advocate organizations have, as 
long as I have been on this committee, called for the 
elimination of LLPAs altogether. The argument that is being 
made is that the LLPA pricing framework has had a 
disproportionate impact on borrowers of color, and has been 
inherently unfair, as it placed the burden of the Enterprises' 
financial recovery and future catastrophic risk on borrowers of 
color, even though they were the victims of the financial 
crisis, not the cause. And I am a card-carrying opponent of the 
tendency to blame the victim.
    My question is, regardless of what Congress does, there 
will always be an argument that something could be done 
differently or that there is a different and preferred way to 
analyze risk. Should the FHFA do away with LLPAs altogether, as 
suggested by some organizations? Do you see the value for 
perfecting the current framework, which has been worked on over 
the course of several FHFA Directors?
    Ms. Ratcliffe. Thank you for the question. I agree that 
LLPAs and private mortgage insurance costs will tend to fall 
heavier on borrowers with low down payments and those who 
haven't had the chance to build as robust a credit history. And 
I just want to remind everybody that all GSE loans today 
represent fully-underwritten loans with ability to repay, so 
these are not bad-credit borrowers by any means. But in any 
case, borrowers of color are less likely to have savings, and 
especially less intergenerational wealth than White borrowers, 
so they are more likely to need high-LTV loans, and thus pay 
higher LLPAs and pay for private mortgage insurance.
    So, I think that there is a good case to be made for doing 
away with LLPAs and just having everybody pay the same for 
access to the same benefit. All borrowers who access the GSE 
loans are getting a government benefit effectively that our 
research estimates amounts to about $6 billion a year. So, it 
is not really a tax so much as it is just a question of, how do 
we give people access to this benefit?
    There has been an argument here today for doing away with 
LLPAs, and I agree with that. I just want to say it is complex 
because right now, because of the higher LLPAs on the mission 
remote loans--the second homes, vacation homes, investor 
properties, cash-out refis, and high-balance loans--those are 
actually creating the potential to be able to reduce the LLPAs 
while still making the loans profitable for some of the more 
real mission-oriented loans, so there is a baby in the 
bathwater of the LLPAs as well. But other than those cross-
subsidies, I would agree with Dr. Rossi on doing away with the 
LLPAs.
    Mr. Cleaver. Mr. DeMarco, I am interested in your response 
to that question.
    Mr. DeMarco. I have a different position. I believe that 
risk-based pricing is an important element of operating a safe 
and sound financial institution. Fannie Mae and Freddie Mac are 
two enormous financial institutions that are integral to our 
country's housing finance system and to our financial system. 
And I believe that the capital required and then the pricing of 
a financial guarantee needs to be done on the prospect of risk.
    But, Mr. Cleaver, you raise a very important question about 
how we go about providing support to those segments of our 
country that Congress has designated as, for whatever 
historical or other reasons, warranting support. And what I go 
through in my testimony is providing a mortgage rate subsidy to 
these homebuyers so that instead of paying 6\1/2\ percent--they 
are paying 6\1/2\ percent or 6\1/8\--that I don't believe is 
going to get us where we want to go, instead, you think about 
the money that is being used to subsidize those rates. If that 
money was available and provided directly to the targeted 
borrowers, then we can work on enhancing their down payment, 
improving their credit position, and providing them with rainy 
day reserves so that they are going to be more sustainable when 
in their mortgage.
    I think these are the sort of steps that we can take rather 
than subsidizing the rate. Let's provide that money directly to 
these families, and let's make sure we identify which families 
we are providing it to.
    Mr. Cleaver. Thank you.
    Chairman Davidson. I thank the gentlemen. The Chair now 
recognizes the gentleman from Florida, Mr. Posey, for 5 
minutes.
    Mr. Posey. Thank you, Chairman Davidson. When I first read 
the proposal that we are going to charge people with good 
credit more, and we are going to charge people with poor credit 
less, I thought it was a bad joke. How that could possibly pass 
anybody's straight-face test is a mystery to me. Dr. Rossi, 
explain the principle of risk-based pricing mortgage lending, 
and should we preserve such principles?
    Mr. Rossi. I am a big believer, just to say at the 
beginning, in risk-based pricing in general. Basically, what 
happens is that every loan that comes through that the GSEs 
purchase will go through their pricing engine. It will take 
into account all of the usual variables, such as FICO score, 
loan or credit score, loan-to-value ratio, debt-to-income 
ratio, and probably another 10 or 15 of those variables that 
you see in this LLPA grid. So, we are already pricing for it in 
the ongoing g-fee.
    And I want to be clear here, there is the ongoing g-fee, 
and there is the up-front loan-level pricing adjustment, so 
risk-based pricing is inherently good. We all do it every day 
with auto insurance, right? We see that we each pay based on 
our driving habits and everything else, but it is different in 
the GSE world because we have this other dimension to it. So, 
it is not the case that I personally believe risk-based pricing 
has a purpose. I think it should be risk-based price into the 
g-fee. Every loan should be risk-based price, but then we 
average it at the end just like we do today. And 45 basis 
points, I think, is the average guarantee fee.
    Mr. Posey. Mr. Parcell, what are the views of the REALTORS 
across the nation on this?
    Mr. Parcell. Thank you, Congressman. We are against any 
increase in fee, period.
    Mr. Posey. In each of your written testimonies, you have 
offered some solutions, but, to me, it is so simple. Do we all 
agree that inflation drives the price up? Do we all agree that 
inflation makes it harder for low-income people to purchase 
homes? Do we agree that inflation makes it harder for them just 
to pay their bills every month, much less qualify for a home 
loan? All hands, I am sure we are unanimous on that.
    So, why won't the Administration do something to fix that? 
The Administration is raising rates to try and stop the 
inflation that it caused because it is trying to kill the 
fossil fuel industry. Nothing in this room does not have a 
fossil fuel industry component to it. The Federal Government is 
causing these problems and then asking people to come in and 
help solve it when the Federal Government could solve the 
problem relatively quickly.
    A housing shortage for everyone to have a home is nothing 
new. That has been around since the beginning, and we have 
tried to do everything possible, I think, the government, to 
make that, as some consider it, the American Dream, possible 
for every family. We know every generation is better off until 
possibly this one than the generation before because ownership 
of the rock has expanded, and we really want to do that. But it 
really seems that we are trying to solve a problem that could 
easily have been solved. It could easily be solved with almost 
a snap of a finger. We could bring prices down. We could bring 
affordability down. Does anybody want to dispute that on this 
panel?
    Mr. DeMarco. No, Congressman. More houses would certainly 
help.
    Mr. Parcell. Congressman, there are a few things that could 
help immediately, including the capital gains exemption for 
your primary residence, a law that was passed in 1997. It was 
$250,000 if you are filing separately, and $500,000 if you are 
filing jointly. There are people who are in their homes and 
would like to downsize, but they do not want to take the 
capital gains hit. Things have changed since 1997, so you all 
could help with that. There is also commercial office space 
that is not being utilized with COVID. There are people not 
coming in, and we could use some of that commercial space for 
conversion to homeownership. So, those are things that we would 
all welcome your help with, for sure. Thank you.
    Mr. Posey. Anybody else?
    Mr. Rossi. I have one. I would say if we eliminated the 10-
basis points on top of guarantee fees today for payroll tax, 
that would go a long way, too.
    Mr. Posey. Thank you. Mr. Chairman, my time is about to 
expire, so I yield back. Thank you.
    Chairman Davidson. Thank you, Mr. Posey. The gentlewoman 
from Texas, Ms. Garcia, is now recognized for 5 minutes.
    Ms. Garcia. Thank you, Mr. Chairman, and thank you to all 
of the witnesses for being here today.
    I would like to begin by expressing my concern that this is 
the first hearing that we have had on housing in this 
subcommittee, the Housing and Insurance Subcommittee, in this 
Congress. Our nation is facing a housing crisis, and this 
committee did constant work on this issue under the leadership 
of then-Chairwoman Waters. Now, however, the Republican 
Majority has chosen to ignore this very important housing issue 
and focus on one political and highly-technical issue. In fact, 
as I have been listening to some of your testimony, I think 
even I may have gotten a little confused there for a minute.
    My first question is about this issue that Republicans have 
decided to focus on and why it can actually be an effective 
tool. Ms. Ratcliffe, according to the National Fair Housing 
Alliance and the National Consumer Law Center, credit scoring 
has a history of discrimination. Today's median FICO score is 
742, which is much higher than individuals' credit scores 
throughout the nation, particularly in the South. Borrowers in 
my home State of Texas, and States like Georgia, Mississippi, 
Louisiana, Arkansas, and Oklahoma had average credit scores of 
less than 720. Do you believe that FHFA's recent pricing 
changes will help first-time homebuyers in these States access 
homeownership through conventional loans?
    Ms. Ratcliffe. Thank you for your question. And I do want 
to clarify that LLPAs went down for many borrowers with lower 
credit scores and many borrowers with higher loan-to-value 
compared to where they were in the previous grid.
    Ms. Garcia. When you say, ``many,'' it is not all.
    Ms. Ratcliffe. Certainly, it is not all of them.
    Ms. Garcia. So, how many, less than half, one-third, 20 
percent?
    Ms. Ratcliffe. I can work out the numbers while we are 
sitting here, but not right off the top of my head. But I am 
just emphasizing that when people say people are paying more, 
it is not that higher-credit-score borrowers are paying more 
than lower-credit-score borrowers. It is that higher-credit-
score borrowers are going to pay a little more than if they had 
gotten their mortgage before May 1st, and lower-credit-score 
borrowers would be paying less than they did before May 1st, 
but they are still paying substantially more than borrowers 
with high credit scores. So, I just want to clarify that.
    For sure, because of the weight of the fees and the slight 
reduction for people with lower credit scores, this should be 
more helpful in areas where more borrowers have lower credit 
scores. Again, to emphasize, all GSE loans are carefully 
underwritten. These are good-quality borrowers, all of whom are 
expected to be successful in homeownership.
    Ms. Garcia. So, you think it would help first-time 
homebuyers?
    Ms. Ratcliffe. Marginally, yes, it would.
    Ms. Garcia. Okay. I tend to agree with you, and I believe 
that supporting first-time homeownership is not only essential 
but, in fact, the responsibility of this subcommittee and all 
of us to encourage.
    I would like to take this opportunity to use the expertise 
of these witnesses to focus on other issues that have been 
ignored by the Republicans. I would like to discuss how 
Congress can support homeownership, particularly for low-income 
borrowers of color. My district is 77-percent Latino, and 
Latinos are on track to become the largest group of homebuyers 
in the nation very soon. Ms. Ratcliffe, how best can we support 
homeownership as potential buyers face high down payments, lack 
of generational wealth, a housing shortage, and high interest 
rates? Easy question.
    Ms. Ratcliffe. And I think there are many good answers here 
on the panel today. I will say there is no single silver 
bullet. I feel like it takes a bipartisan, coherent, across-
the-board effort at the national and local level. The biggest 
issue right now is lack of housing supply. I think we have 
already heard that, both for rental housing and homeownership, 
and this is driving up prices. So, it is really important to 
focus on supply. There are many ways in which the Federal 
Government can find ways to subsidize the building of 
affordable housing, both for rental and homeownership. I won't 
go through the whole list.
    I just want to say that at the same time that we are 
looking at the supply side, we also need to be sure to empower 
the borrowers, the homeowners of the future, the generations of 
the future to become homeowners. And that can be done through 
things like down payment assistance, perhaps interest rate, 
buy-down subsidies, things like that to support first-time 
homebuyers, as well as to help certain types of housing supply, 
like better loan options for manufactured housing, for purchase 
rehab lending, perhaps for condominiums as well. So, across-
the-board, these solutions could work together.
    Ms. Garcia. Mr. Rossi, you were nodding. Did you want to--
    Mr. Rossi. I am nodding because that was very eloquently 
stated, and I am not sure that I have much more to say other 
than I think that, as she said, there are many ways to get at 
this. And one of the ways is to be able to think about 
separating credit pricing as part of the mission of FHFA from 
the mission.
    Ms. Garcia. Okay. Thank you, and I yield back.
    Chairman Davidson. The gentlelady's time has expired. The 
Chair now recognizes the gentleman from New York, Mr. 
Garbarino, for 5 minutes.
    Mr. Garbarino. Thank you, Mr. Chairman, and I am going to 
yield briefly to my colleague from South Carolina, Mr. Norman.
    Mr. Norman. Thank you, Mr. Garbarino. I have a press 
conference to go to. This is the stupidest idea, raising these 
rates, what they are doing, charging those with good credit. I 
have been a REALTOR for 40 years. I built a lot of houses. The 
supply shortage is because of what this Administration is doing 
with our energy policies. There are no battery-operated dump 
trucks, and I don't know what affordable is for housing, I have 
no idea, but to penalize people for a good credit report is a 
joke.
    And also, the credit cards. Try getting a credit card when 
you don't pay your bills. You pay a higher rate, and you 
should. This isn't a racial issue of Black/White. This is a 
common-sense issue. It is a backward way to do things. I yield 
back.
    Mr. Garbarino. Thank you. I have a couple of questions. Mr. 
Parcell, I want to start with you. Prior to getting here, I was 
a private practice attorney, and I did hundreds of closings. I 
know that the spring is usually the best time for the housing 
market. Right now, we have seen the Federal Reserve approve its 
10th interest rate increase in just over a year. Can you 
describe what you and your members are seeing in today's 
housing market? How has it changed? Are we seeing fewer or more 
people purchasing homes right now?
    Mr. Parcell. Thank you, Congressman. We are seeing fewer 
people due to the affordability factor. It will break your 
heart when you see that single mom, mother of three children, 
with the rent increase, and for them just trying to get into a 
home. You are always trying to educate on rural housing loans, 
FHA loans, and there are some community grant programs. Many 
States are giving down payment assistance grant programs where 
you pay that back. But it is a huge issue, and that is why we 
are very much against any rate or fee increase at this time. 
This is not the time for it.
    Mr. Garbarino. Which is why I question why the FHFA is 
coming out with this policy change now. Can you tell us who 
would mostly be affected by this change?
    Mr. Parcell. It affects all buyers. It is going to affect 
all of them, and some people you hear say, well, it is only $30 
or $40, but $30 or $40 is a significant amount for that single 
mom, or the military vet who is just trying to make it, or the 
school teacher who is on a fixed income. They don't have that 
extra $30 to $40.
    Mr. Garbarino. Absolutely. And I think you mentioned it 
briefly in your testimony, but can you say again how much more 
the average borrower is paying for a mortgage now versus in May 
of 2021?
    Mr. Parcell. Correct. It was $1,682, and it is now nearly 
$2,400 just on that interest rate alone.
    Mr. Garbarino. Yes, it is insane. I know a lot of people 
are paying 6 percent at closing right now. Six percent a long 
time ago, people would have loved, but what we have seen, it is 
just raising rates. I am also the lead of the SALT 
Deductibility Repeal Act, and I know the REALTORS are very 
supportive of that, and that will also help. If we get that 
deduction back, I think that will help homeowners as well.
    Mr. DeMarco, I have a question for you. This hearing is 
entitled, ``The Current Mortgage Market: Undermining Housing 
Affordability with Politics,'' and mortgages are the biggest--
usually, the cost and availability of mortgages for middle-
class people allows them to buy what is probably the biggest 
asset of their life, but it is not the only cost. Title 
insurance is a cost that people face, and I have seen having 
title insurance policies save homeowners from possible 
mistakes. And the committee has heard a lot about a proposed 
pilot where Fannie would waive title insurance requirements and 
act essentially as the title insurer to a lender originating a 
mortgage. How does such a program or activity fit into Fannie's 
statutory mission, in your opinion?
    Mr. DeMarco. Title insurance is a primary market function. 
It is a critical element of protecting both the lender and the 
homeowner. And while there seems to be a lot of murkiness about 
what is going on with some potential pilot, from what I have 
heard, it certainly is disturbing to think that Fannie Mae or 
Freddie Mac might displace title insurance by taking on this 
insurance itself.
    And I would trust that any such discussions are undergoing 
careful scrutiny at FHFA, and would be subject to the new 
product rule at FHFA, and, frankly, the GSEs simply do not 
belong in the primary market. We have seen attempts by them in 
the past to get into private mortgage insurance, hazard 
insurance and so forth, and I would caution against that. They 
have a big enough job keeping the secondary market working.
    Mr. Garbarino. Absolutely. As I said, I was a practicing 
attorney, and I did closings back in 2008 before the crash or 
during the crash. And I feel like both the rule that we are 
talking about today and this possible title insurance rule is 
going to be the start of maybe another downturn.
    Mr. Chairman, I yield back. Thank you.
    Chairman Davidson. Thanks, Mr. Garbarino. The Chair now 
recognizes the gentleman from Nevada, Mr. Horsford, for 5 
minutes.
    Mr. Horsford. I thank the chairman and the ranking member 
for the hearing, and I want to thank our witnesses for your 
insight. I represent southern Nevada, Nevada's 4th District. It 
covers 50,000 square miles in the State of Nevada, both rural 
and urban areas. We were one of the hardest-hit States and 
regions after the last housing crisis, and housing 
affordability continues to be the most important issue that my 
constituents are concerned about. In fact, just last week, I 
had the opportunity to host, with our Southern Nevada Regional 
Housing Authority, a regional housing summit with 
representatives from the Congressional Hispanic and Asian 
Caucuses. I currently serve as the Chair of the Black Caucus, 
and I was fortunate to have the ranking member, Ms. Waters, 
there as well.
    I just find it interesting that the framing of this with 
some of my colleagues is that somehow people with good credit 
are overrepresenting and subsidizing in some way the impact to 
people with low credit scores. First of all, the credit score 
is a joke. We need to reform the credit rating system because 
it is biased, and it is inherently flawed in its methodology. 
It is not transparent. And I know under the leadership of the 
ranking member, this was a priority, and I hope that under this 
Congress, it can be as well.
    Now, the underlying issue with this LLPA, notwithstanding 
it is a factor, but it is not the only factor, as I heard 
several of you say. I did want to ask Ms. Ratcliffe if you 
could expand more on the historically-underserved communities 
who are fighting to keep a roof over their heads. And I agree 
with you that the May 1st statement, the LLPA adjustments are 
modest in nature and better align the balance and policy and 
market requirements that GSEs must consider. In your testimony, 
you note that while the number of significant variations is 
small, the recent pricing changes will result in some borrowers 
facing higher LLPAs and others will pay less. So, can you 
elaborate further on which borrowers are in which buckets, 
please?
    Ms. Ratcliffe. That is a great question. Thank you. And 
again, I want to emphasize that some will pay higher LLPAs than 
they would have paid before May 1st, and some will pay lower 
than they would have paid before May 1st, but the traditional 
relationship between higher credit score and lower credit score 
borrowers in the grid still remains.
    I will just give you some examples. These are some numbers 
from page four of my written testimony, but I have three loans 
I picked fairly randomly off the grid. Consider a borrower with 
a 700 credit score, which is towards the high end of the credit 
score distribution in the grid, and a 75 percent LTV or 25 
percent down. Before May 1st, they would have paid an LLPA that 
would have converted to a monthly payment of $50, and after the 
changes, that is going to go down to $44. That is on top of a 
mortgage payment--this is on a $300,000 loan--of about $1,877 
to begin with. So, the mortgage payment is $1,877. The LLPA 
used to be $50. It will now be $44.
    Now, I will take another borrower who has a 720 credit 
score, even a little better, but has an 80-percent LTV, so they 
are putting a little bit less down, 20 percent. They used to 
pay $38 per month on that same loan. Now, they will be paying 
$63 if they close their loan after May 1st, so that is a little 
less than a $30 increase a month.
    Finally, we will look at a borrower who has a credit score 
of 630 and just 5 percent down, which is pretty far into the 
lower right-hand quadrant of the grid. On top of the $1,800 
mortgage payment, they used to pay $175 a month in LLPAs, and 
that is going to go down to $88 a month, which is still higher 
than anybody else's, but they are seeing the biggest decrease, 
and that is to take into account mortgage insurance. And I just 
want to add this: The mortgage insurance premium on top of that 
is $465--$465--in mortgage insurance.
    Mr. Horsford. Thank you. I do think we need to look at this 
comprehensively. I wanted Mr. Parcell to know that I noted that 
the REALTORS were pleased with the adjustment that was made on 
the LLPAs' up-front fee on borrowers with debt-to-income ratios 
greater than 40 percent. That was slated to go into effect on 
August 1st, and I just wanted to give you an opportunity to 
elaborate on that.
    Mr. Parcell. Thank you, Congressman. Why that is so 
important is, if you can put yourself in a mortgage broker's 
situation, the loan process comes in, they send it to 
underwriting, and the buyers waive their earnest money because 
it is going through the underwriting process. That underwriter 
may flag that buyer and say, look, we don't like the over time, 
we don't like the bonus structure, so you no longer qualify. 
Now, it puts you over that 40 percent, and then that buyer is 
in a real pickle, and the mortgage broker can't honor that 
interest rate. Thank you.
    Chairman Davidson. I thank the gentleman. The gentlewoman 
from Texas, Ms. De La Cruz, is now recognized for 5 minutes.
    Ms. De La Cruz. Thank you, Chairman Davidson, for holding 
this hearing today. And I appreciate all of our witnesses being 
here today. My district is an unique community down in deep 
South Texas. My district is over 80-percent Hispanic, and I am 
really concerned about any increases, whether we say the 
increase is smaller than someone with a lower credit score or 
not. The point is that there are increases to housing. My 
question is for Mr. Parcell. In a district like mine that is 
over 80-percent Hispanic, how would an increase, no matter how, 
``small,'' it is, affect an Hispanic community such as mine?
    Mr. Parcell. Thank you, Congresswoman. It goes back to when 
I purchased my first home--$30 to $40 would have devastated me 
and kept me out of that opportunity, and that is exactly what 
is going to happen in your district. It is going to push people 
to where they just can't qualify or it is too tight as it is. 
It is a skinny margin with the cost of fuel, the cost of 
inflation, and the cost of food. Kids are more expensive. It is 
going to harm your people.
    Ms. De La Cruz. And when I think about housing, housing is 
so important for the community around its economy. You are not 
only talking about the sale of the house, but a broker who gets 
a fee or makes money, plus the city, plus if you go into the 
grocery store, things like that. So someone not purchasing a 
home in a community, like a rural community such as mine, 
actually affects the overall economy of a city. Would you say 
that is correct?
    Mr. Parcell. One hundred percent. They are buying local 
stuff at the hardware store, and they are buying stuff at the 
convenience store, which brings more property tax, which brings 
more value to your city and county.
    Ms. De La Cruz. So, it is important. How likely is it for 
someone who is actually purchasing a home in a city? Are they 
more likely to stay in that city and invest in that city?
    Mr. Parcell. One hundred percent. You are seeing that in 
test scores. You are seeing it all across-the-board, crime, 
everything. If you are a property owner, a homeowner, things 
just go a little smoother.
    Ms. De La Cruz. It sounds to me that if you put a barrier 
such as an increase of even a, ``small increase,'' on a 
potential homeowner, that really this is a layered effect, not 
only for the homeowner, but for the economy of the city, is 
that correct?
    Mr. Parcell. Yes, Congresswoman, 100 percent. The best way 
to build wealth is through real estate, but also, the best way 
to build back into the community is through real estate.
    Ms. De La Cruz. Thank you. With that, I yield back.
    Chairman Davidson. The gentlelady yields back. The Chair 
now recognizes the ranking member of the full Financial 
Services Committee, the gentlewoman from California, Ms. 
Waters, for 5 minutes.
    Ms. Waters. Before I raise a few questions with you, this 
one had not been thought about a lot. We just accepted the fact 
that with inflation and the increased interest rates that some 
families are faced with, even though they tell me it is not a 
huge number, I am getting from individuals who had these 
adjustable rate mortgages that their loans have increased over 
$1,000 in some cases. Can anything be done about that? Anybody? 
Ms. Ratcliffe, do you know?
    Ms. Ratcliffe. Congresswoman Waters, you are asking about 
people with adjustable rate mortgages who have seen their 
payments go up by $1,000?
    Ms. Waters. Yes.
    Mr. Ratcliffe. I would guess that those are probably not 
GSE-insured loans, Fannie Mae and Freddie Mac loans, which 
shows the importance of having well-regulated loans that are 
structured more safely. Since the great financial crisis, new 
rules have been put in place to make sure that borrowers don't 
end up with these toxic kind of mortgages that can explode on 
them. So, I would be curious to know more about these lenders, 
who they are, and how they are operating.
    Ms. Waters. I certainly appreciate that because, of course, 
all of us were around for what happened in 2008, and the 
devastation to not only families, but whole communities, as 
they ended up losing their properties, et cetera, et cetera. I 
don't know how many fall in this category of adjustable rate 
mortgages now, but even if it is only a relatively small 
number, they are going to lose their homes. And we don't know 
what is happening with inflation, except that thing. I am told 
that it is coming down, but these housing costs are basically 
what is happening with inflation.
    Ms. Ratcliffe, I am going to stay with you. I am so pleased 
that finally my colleagues on the other side of the aisle are 
becoming concerned about the rising costs of purchasing a home. 
Last Congress, Democrats sounded the alarm about rising housing 
costs and how these costs are a key driver of inflation. And 
that is why I and my colleagues, Committee Democrats, want to 
secure substantial new housing investments in the Build Back 
Better Act. You are familiar with that, right? We had $150 
billion in that Act.
    Mr. Ratcliffe. Yes, ma'am.
    Ms. Waters. And in that Act, we had money not only for 
Section 8 and for public housing, but for the development of 
affordable housing through the old Act that we put together in 
order to increase units that were so desperately needed, and 
money for homelessness, et cetera, et cetera. And I am still 
feeling very bad about what happened and the support that we 
did not get; we did not get any support from the opposite side 
of the aisle.
    And that Build Back Better Act, which would have created 
1.4 million homes and, in turn, reduced housing prices and 
inflation, unfortunately not a single Republican, again, voted 
in favor of it. But now I think, and I am hearing, and I am 
learning that wealthy homeowners with vacation homes, who were 
paying unfairly low fees under the prior FHFA fee structure, 
are now faced with the prospect of paying their fair share, and 
that maybe some of our friends on the opposite side of the 
aisle have seen the light because they are upset about the 
housing costs.
    Meanwhile, the underlying lack of housing supply due to 
years of underinvestment or disinvestment from the Federal 
Government and this private sector is continuing to fuel 
housing price increases all across the country, hurting those 
with lower incomes and lower wealth, and most even when they 
have excellent credit. Let's not forget that our friends on the 
opposite side of the aisle, their concerns about housing prices 
come as they were pressured by the former President of the 
United States. President Trump threatened to tank the national 
economy by forcing a default on the U.S. debt.
    So I am bringing in something different here, a little bit 
different, because we are all thinking about what is going to 
happen, and are we going to be able to deal with this debt 
crisis that we are in. Are we going to be able to raise what we 
need? Having said that, there is a lot to think about, and I am 
told that my time is up, and that is okay by me. I yield back 
the balance of my time.
    Chairman Davidson. The gentlelady's time has indeed 
expired. The Chair now recognizes the gentleman from Wisconsin, 
Mr. Fitzgerald, for 5 minutes.
    Mr. Fitzgerald. Thank you, Mr. Chairman. The changes to 
LLPAs raise the issue of the GSE system of cross-subsidies, 
which are approved by the FHFA. The GSEs generate these cross-
subsidies first by lowering the market rate return on their 
lower-income mortgage purchases, which they make up for by 
targeting a higher return on their other lending activities. 
Next, the GSEs charge higher-credit risk borrowers a lower 
guarantee fee than would be warranted purely on a risk-based 
pricing basis, while charging selected low-credit risk 
borrowers a higher guarantee fee than is justified by their 
individual risk profile and loan type or purpose.
    Mr. DeMarco, do these cross-subsidies distort the market by 
weakening the link between loan price and credit risk, and do 
the changes to the LLPAs lead to further distortion?
    Mr. DeMarco. Congressman, I believe that, as I state in my 
written statement, mixing mission into the pricing is 
problematic, and it adds overall risk to the system. I think we 
can deliver support to families in a much more direct way than 
doing it through the rate. That said, I feel like I really need 
to clarify here how this is actually working with what FHFA has 
been doing. The cross-subsidy, if you will, is chiefly in what 
was announced last fall, where FHFA eliminated what was left in 
terms of LLPAs for mortgage holders who meet the affordable 
housing goals that are set in statute. And Congress actually 
tells FHFA that it can go ahead and have a lower rate of return 
on those loans.
    The loans that are covered by the grid changes made in 
January are driven not by cross-subsidization, but are driven 
by the capital rule. And if we want more capital and are 
supporting this higher capital framework that was put in place 
by Director Calabria, and carried forward by Director Thompson, 
we have to come to grips with the fact that capital isn't free. 
There is a cost to capital, and I think what is going on in the 
grid change announcements that were made in January is focused 
not on cross-subsidization; it is focused on making sure across 
the grid that we are earning a rate of return sufficient for 
the capital that has to be raised, and that is not just for 
now. And conservatorship is preparing for a date in which these 
companies might be private, and there is actual private capital 
there, because that private capital is going to want to earn an 
appropriate rate of return.
    That is an important question, and it gets complicated 
because it is different parts of the books of business that we 
are talking about. And I hope that my answer helped to divide 
those up properly.
    Mr. Fitzgerald. No, that is good. The cross-subsidies are 
based on the borrower's credit quality, right? They are 
affordable. The housing goals are based on the borrower's 
income, right?
    Mr. DeMarco. It is based on their income, not on their 
credit score. The housing goals are based upon the borrower 
income relative to the area median or, in some cases, it is 
based upon geography, where the borrower lives, because 
Congress has also identified those as target areas.
    Mr. Fitzgerald. Yes, and I would further say that--and I 
have talked about this before--there is this whole group of 
adults right now in America between 25- and 35-years-old who 
had been frozen out of the housing market, mainly because of 
the increases in real estate, but quite honestly, they couldn't 
generate the cash, come up with the down payment if their life 
depended on it. So, that is really what we are fighting through 
here. It is not a generation obviously, but it is 10 years in 
which this group of adults are never going to have the 
opportunity to own a home and build wealth. That is our biggest 
issue.
    Mr. DeMarco. Yes, I think that is absolutely right. In some 
ways, we are now paying the cost of having suppressed mortgage 
rates for so long, because it did contribute directly to 
driving up house prices. We made the cost of mortgage credit so 
low, and those who were able to get in, got in, and those who 
are coming online now as young families, it is much harder for 
them, because now they have the double whammy that house prices 
have gone up, and mortgage rates are much higher.
    Mr. Fitzgerald. In situations where low-risk borrowers face 
higher rates under the new fee structure, could a larger-than-
expected subset of loans be originated away from the GSEs and 
open the door for more private market players?
    Mr. DeMarco. At the margin, that is possible, but I don't 
think that what was done in this last grid change is a needle-
mover with regard to that particular question.
    Mr. Fitzgerald. Thank you. I yield back.
    Chairman Davidson. The gentleman yields back. The Chair now 
recognizes the gentlelady from Colorado, Ms. Pettersen, for 5 
minutes.
    Ms. Pettersen. Thank you, Mr. Chairman, and thank you all 
for being here today and for this very important hearing. It is 
hopefully the beginning of many conversations. I think about 
this all the time, coming from Colorado. Our secret is out; it 
is one of the best places to live. No offense to my colleagues, 
but people are moving there at a significantly-high rate. Now, 
because it has become so unaffordable, it is starting to move 
in the other direction, but especially places in the southern 
district, in the rural communities, we saw through the pandemic 
people moving when they could work remotely. And we saw some of 
these houses increase threefold in just a couple of years, with 
people being pushed out of their communities.
    This is something that hits every aspect of the challenges 
that places across Colorado are facing when it comes to hiring 
workforces for small businesses, being able to keep our public 
servants in our community, and being able to hire firefighters 
or teachers. So, this is why I asked to be on the Financial 
Services Committee. This is something that I plan to work with 
all of you on and everyone here on this committee to address 
accessibility and affordability.
    The thing that I oftentimes think about is really the 
housing crisis. We still haven't actually come out of that. We 
are still seeing some of the effects. We know that home 
builders were wiped out during that time. It took us back in 
our ability to actually increase capacity to build houses. We 
have a housing supply issue, and one of the number-one barriers 
that we are facing is, it is not just our ability to produce 
and build this. And I can't talk about immigration reform and 
our failed policies there and actually fill in the gaps, but it 
is also the rising costs with local permitting.
    I had the opportunity to visit a business in my district 
called Fading West, and their goal is mass production of houses 
where they approach it in the way that we do with cars, have 
assembly lines in a warehouse, be able to turn them out and 
make them unique to the communities that are buying them. They 
said that even though they are able to reduce about 20 percent 
of the cost there, one of the largest costs ultimately comes 
down to the local permitting processes. It is what can we do to 
incentivize the mass production of houses, addressing the 
workforce shortages, and also incentivizing at the Federal 
level some type of local permitting process and streamlining so 
that we can actually address some of these significant barriers 
that people are facing.
    I know I covered a lot there. The last thing that I will 
talk about is, you all mentioned mortgage insurance, and we 
have talked a little bit about this, and it's something that I 
found out about as a homeowner, because I was lucky enough to 
get in right before the financial collapse. That is the only 
reason that I had any wealth as a public servant. I was paying 
mortgage insurance for years that I actually didn't have to 
pay. It doesn't automatically come off. You have to be educated 
enough to know your equity in your house, and you have to 
advocate for yourself.
    It seems like a really simple thing if we have that 
automatically come off to reduce costs as soon as you hit your 
20-percent equity. I would like your opinion on that. And also, 
I would like to hear your ideas about what we do around 
workforce shortage, how we address our immigration reform, 
immigration opportunities here in this country, as well as our 
local permitting process.
    Ms. Ratcliffe. I did want to jump in and say that mortgage 
insurance should now automatically cancel at 78-percent LTV.
    Ms. Pettersen. Great.
    Mr. DeMarco. Yes. I was going to say the same.
    Ms. Pettersen. When did that go into effect?
    Mr. DeMarco. That has been in effect for a long time, I 
believe.
    Ms. Pettersen. That is great.
    Mr. DeMarco. But, Congresswoman, I think the point there is 
that--
    Ms. Pettersen. The idea is gone.
    Mr. DeMarco. Right, no. This is where homeowner knowledge 
can be helpful because it automatically comes up based upon the 
amortization of the mortgage. But if the homeowner knows that 
their house price has been appreciating in their community, 
they can get it appraised and use that evidence to have the 
mortgage insurance removed sooner. It is important to have 
educated homebuyers, and that is going to make homebuyers more 
sustainable and smarter about the financial decisions they 
make.
    Ms. Ratcliffe. And again, I just want to emphasize that 
because of the new pricing grid, many borrowers will actually 
see a decrease in their LLPAs. And a lot of that is 
attributable to the fact that in the previous grid, there will 
be overprice because they were not being given enough credit 
for the capital and the losses that the private mortgage 
insurance protects the GSEs and the taxpayers from incurring.
    Ms. Pettersen. Great. And then, what I always talk about is 
our workforce shortage here in the United States, our inability 
to address the visas that we need for people who want to work 
here legally and a pathway to do so and how that affects home 
builders as well. Can you all talk about the significant--
    Chairman Davidson. The gentlelady's time has expired.
    Ms. Pettersen. --need in that area?
    Chairman Davidson. I am going to ask the witnesses to 
respond in writing, if so inclined.
    The gentleman from New York, Mr. Lawler, is now recognized 
for 5 minutes.
    Mr. Lawler. Thank you, Mr. Chairman. I listened with great 
intent to the ranking member's comments, and yes, she is 
correct. Democrats controlled all branches of government and 
passed their housing agenda, and yet here we are still talking 
about housing problems, so clearly, the policies have failed.
    If you look at New York State, for instance, Democrats 
control everything in Albany. Housing policies have created 
50,000 vacant units in New York City. Not looking too good. We 
talked about debt. The House Republican Majority is the only 
one that has actually raised our debt ceiling, thank you, 
raised our debt ceiling, and President Biden just yesterday 
appointed a committee of three people to finally negotiate 
after stalling for several months. So yes, we are going to 
avoid default because the President has finally come to the 
table to negotiate with Republicans in the House Majority.
    While I am glad to see that the FHFA has canceled their 
impending fees based on debt-to-income ratio, I find it frankly 
absurd that the Administration has chosen to saddle homeowners 
who have good credit, with potentially thousands of dollars of 
additional costs on mortgage fees in order to subsidize 
borrowers with riskier loans. Moreover, the fact that the FHFA 
has further chosen to pursue unfair policies that socialize 
credit risk and disfavor responsible homeowners under the guise 
of making the housing market more equitable at a time when 
Americans are facing such a serious affordability crisis is 
especially shocking. One key and frustrating aspect of the 
FHFA's botched rollout of these changes has been the complete 
lack of transparency in the decision-making process.
    Mr. DeMarco, given your previous tenure as the Director of 
FHFA, can you speak about the process through which these 
changes were implemented? What stakeholders were interacted 
with, and do you believe the recently-announced RFI is an 
important step forward for the public and Congress to provide 
commentary on changes to the GSE pricing framework?
    Mr. DeMarco. Congressman, I can't speak to what process 
FHFA followed in making these changes. I suspect that it was 
based upon a lot of careful modeling, analysis of both the 
capital rule and historical data on defaults and losses given 
default. Obviously, they have quite a capable internal staff. I 
don't know what they did in terms of their communication with 
the GSEs or anyone else.
    I will say FHFA had been communicating and signaling that 
these changes were coming, and so the fact that it happened did 
not come out of the blue. They have been talking about this in 
terms of their scorecards, and the g-fee report that they 
issued in November made it clear that these kinds of changes 
were needed because g-fees hadn't been changed yet to keep up 
with the changes in the capital framework.
    Mr. Lawler. All of your testimony made it clear that you 
applaud the FHFA's rescission of the debt-to-income up-front 
fee proposal. The decision came after significant stakeholder 
feedback and congressional oversight, and I am certainly 
pleased to see that this unworkable initiative was abandoned. 
But can you speak about the specific issues inherent with the 
DTI proposal for both lenders and borrowers? Do you see a 
scenario where an up-front fee based on DTI could be feasible 
for the market, and do you support congressional action to 
limit their ability to implement a DTI-based fee in the future?
    Mr. DeMarco. I am not sure we need congressional action 
here, but I do think that it is unworkable. We spent several 
months working with the biggest lenders in the country, and we 
tried to find a way to suggest, okay, if you want to do this, 
here is how to make it work, and we concluded it simply wasn't 
workable.
    I credit FHFA for stepping that back, but it is important 
to understand why. When a family applies for a mortgage, that 
mortgage goes through underwriting, and underwriting is really 
critical. And one of the fundamental things an underwriter is 
doing is trying to determine what is the borrower's ability to 
repay. They do that by wanting to learn how much income does 
the borrower have, and how much other debt does the borrower 
have, and that is an ongoing process throughout underwriting. 
And what we have learned is that the answers to those questions 
are not easy. Someone who is not a straight-salary W-2 worker 
can have a very complicated income stream, and it takes a while 
to figure that out. Hence, it is very hard to know debt-to-
income when the borrower first applies for a loan.
    Mr. Lawler. Thank you. I yield back.
    Chairman Davidson. Thank you. The gentleman's time has 
expired. The gentlewoman from Georgia, Ms. Williams, is now 
recognized for 5 minutes.
    Ms. Williams of Georgia. Thank you, Mr. Chairman. My 
colleagues heard me say this yesterday, and I will probably say 
it again and again and again until it changes. I represent the 
City of Atlanta, where we unfortunately have the largest racial 
wealth gap in the entire country. America and my constituents 
are sick and tired of hearing me say it and sick and tired of 
living it. And we all know that homeownership is the number-one 
way to build generational wealth, and that is why the best way 
that we can increase Black generational wealth is through 
homeownership. This means we need to be doing more to make 
homeownership a possibility and a reality for people who have 
less wealth, especially when the same people were subjected to 
redlining and racist housing policies not very long ago and are 
still feeling the effects of those discriminatory practices 
today.
    According to the latest data from the Census Bureau, at the 
end of 2020, Black homeownership in Atlanta was 48.7 percent, 
and White homeownership in Atlanta was 75.6 percent. This isn't 
far off from the national rates of 44.1 percent for Black 
people and 74.5 percent for White people. As false information 
is spread by my colleagues on the other side of the aisle, I 
want to make one thing very clear. FHFA's recent mortgage 
pricing update helps borrowers with less wealth become 
homeowners. It might make it cost a little bit more for wealthy 
people to buy that second home, but I am actually okay with 
that given the number of my constituents who just want to own 
that first home.
    As you know, FHFA's pricing grid was first developed in 
2008 in the wake of the financial crisis. Housing advocates 
have long pointed out that the pricing grid, which relies on 
credit scores and loan-to-value ratios, both of which tend to 
be predicated on wealth, has locked creditworthy individuals 
out of homeownership for generations. As a colleague already 
mentioned today, credit scores are steeped in a history of 
discrimination. Consumers across every income bracket in the 
South typically have much lower credit scores than consumers 
living in the Northeast, Midwest, or West.
    Ms. Ratcliffe, given that FHFA's recent pricing changes 
help more first-time homebuyers in Southern States access 
homeownership, do you think it is fair to say that FHFA's 
action is creating equity for everyday people who live in the 
South, rather than lining the pockets of affluent investors?
    Ms. Ratcliffe. Thank you for your question. This is a good 
opportunity. What you raised is why it is so concerning that we 
are looking at the old grid as though it was the right grid. 
The thing is, the old grid overcharged borrowers with lower 
credit scores and less wealth to put down on buying a home. And 
so, when you run the numbers and you look at the actual losses 
by loans, the new grid actually has just a much more consistent 
relationship between what people are paying and what their 
actual losses are. So, it is really important to recognize that 
the old grid was overcharging those very borrowers that you are 
talking about, and the new grid rectifies that, given, as Mr. 
DeMarco has talked about, the requirements of the capital 
regulation that was put in place by the prior Director.
    I also want to separate, which I think is useful in the 
case of Atlanta, that what I just discussed is not a cross-
subsidy. It is just applying an appropriate price for the risk 
of that group. The cross-subsidy, I would describe, is in the 
previous pricing changes that happened before that. Take, for 
example, investors--borrowers buying investment properties have 
to pay a higher-than-average profit margin, and that helps with 
the mission business. That helps lower-income borrowers. And I 
know Atlanta is a City where it is very hard for a low-income, 
first-time homebuyer to compete with the investors that are 
there, and so it is appropriate, I think, to think about how 
the additional charges and profit margin on that population can 
be used to give first-time homebuyers a little more level 
playing field.
    Ms. Williams of Georgia. I just saw a news alert that came 
across my phone yesterday, and I opened it up, and it said, 
``Guess which U.S. city has the most unaffordable housing 
costs?'' And I opened it up, and it is my home City of Atlanta, 
out of every city in the country. So, it is my job to make sure 
that we look into this more so that more people can access that 
generational wealth that closes the racial wealth gap.
    Fannie Mae and Freddie Mac's charters state that they must 
promote access to mortgage credit throughout the nation by 
increasing the liquidity of mortgage investments and improving 
the distribution of investment capital available for 
residential mortgage financing. Despite these obligations, huge 
disparities remain in terms of who gets access to a 
conventional mortgage. For example, in 2021, only 4.7 percent 
of Fannie Mae-backed and 4 percent of Freddie Mac-backed 
mortgages were taken out by Black homebuyers. And I am sure you 
already know, Ms. Ratcliffe, that research from the Urban 
Institute suggests that more than 1 million mortgages are 
missing from the U.S. financial market each year due to overly-
tight credit markets, and a disproportionate percentage of 
those opportunities are missed by borrowers of color.
    Ms. Ratcliffe, did the 2008 pricing framework serve to help 
or hinder credit access for homebuyers in communities of color?
    Oh, is the time up? I can't see the clock. I was going to 
keep going until you--
    Chairman Davidson. Apologies. I would just ask, Ms. 
Ratcliffe, if you could respond in writing.
    And the gentlelady's time has expired.
    Ms. Williams of Georgia. Thank you, Mr. Chairman.
    Chairman Davidson. You are welcome. The gentleman from 
Nebraska, Mr. Flood, is now recognized for 5 minutes.
    Mr. Flood. Thank you, Mr. Chairman. I would like to begin 
by just expressing some of the frustration that I have heard 
from my constituents in Nebraska about the Federal Housing 
Finance Agency's latest mortgage reassessment. One constituent 
in Bellevue, Nebraska, sent me an email which said, ``It 
infuriates me that those that have been responsible with their 
finances are now being punished to bail out those with lower 
credit scores.'' Nebraskans from Lincoln, Columbus, Omaha, 
Papillion, Seward, La Vista, and more have been writing into my 
office saying the same thing. They are absolutely appalled by 
this change. It is effectively a backdoor tax on the American 
people.
    However, I think that, most importantly, the American 
people have a certain natural sense of fairness, a feeling that 
if you pay your bills on time and improve your credit score, 
you will be rewarded when you need a loan. This fee assessment 
is a violation of that basic sense of fairness, and they should 
be upset.
    I am also deeply concerned that this clearly-political 
decision will lead to a future pattern of using the FHFA to 
make future decisions based on the same principles. If we are 
abandoning the premise that loan-level price adjustment fees 
should be based upon a loan risk, what is to stop the FHFA from 
taking things further? Could they use Fannie and Freddie to try 
and push their favorite social policies or punish individuals 
they feel are unworthy of well-priced mortgages? Once you open 
this Pandora's box, I fear what will come next. The FHFA's 
decision can now be used as a precedent going forward for 
whatever ill-conceived idea a future Director of the Agency 
comes up with.
    Dr. Rossi, do you have any concerns that this change in 
LLPA will set a precedent for further politically-motivated 
interventions for fees for mortgages?
    Mr. Rossi. I will start by saying, I completely agree with 
your constituent there, first of all, and it goes back to the 
fact that I have said before that we have to separate these 
missions that the GSEs have from each other. And I think we 
have heard Mr. DeMarco say the same thing, and several others 
have been saying the same thing today, which is we have to 
separate those from each other because it creates and it 
invites this kind of discussion, and I don't think it has to 
happen that way.
    We can actually meet safety and soundness for both GSEs, 
while at the same time doing everything we can to be fair to 
our fellow citizens. And I think that comes from being able to 
take a closer look at how we have to, I would say, jettison the 
LLPAs altogether, replace it, and build it back into a risk-
based pricing within the ongoing g-fee. And if you want to do 
something outside of that in terms of affordable housing, make 
it clear, make it transparent to the American public what you 
are doing.
    Mr. Flood. Do you have any concern that further changes, 
Dr. Rossi, to weaken the integrity of the credit pricing could 
expose the GSEs to greater credit risk?
    Mr. Rossi. Yes. There is always that possibility, and, 
again, it comes back to, Mr. DeMarco talked about this in terms 
of the Enterprise capital framework. We are taking a much 
closer look at the GSEs in terms of their risk-based pricing 
than ever before, particularly around these stress events. So 
again, when I saw the grids when they came out, it first caught 
me off guard a little bit, because as I said earlier, I want to 
make sure that what we do from differentiating affordable 
housing policy is not muddied up with how we actually are doing 
credit pricing. When we do credit pricing, it is for risk. It 
is for the safety and soundness of those entities. That is 
where I am at.
    Mr. Flood. I come back to this idea that it is just basic 
fairness for Americans, that if you pay your bills on time, you 
earn a good credit score, and there are many folks in this 
country who have done that, and they should be rewarded for the 
lower amount of risk that they pose to the financial 
institution. I would say this: This pricing change is a flat-
out disaster. I look forward to working with my colleagues, 
including Chairman Davidson, to push legislation that will 
rescind these changes.
    The people in Nebraska, along with people across the 
country who believe in basic fairness, are depending on us to 
serve as a check on the Biden Administration on this matter 
specifically. I thank you all for your testimony. I yield back.
    Chairman Davidson. The gentleman yields back. The 
gentlewoman from Michigan, Ms. Tlaib, is now recognized for 5 
minutes.
    Ms. Tlaib. Thank you, Mr. Chairman. And thank you all so 
much for being here. Michigan, especially in Wayne County, 
really didn't recover fully from the last recession. You are 
all nodding your heads. You probably saw. Some of the things 
that we have seen include private equity firms coming and just 
swallowing up, not only for mortgage foreclosures, tax 
foreclosures. So, we got hit pretty hard and haven't truly been 
able to recover, and we also lost more Black homeownership than 
any other State in the country. One of the things I have been 
looking at on this committee are some structural issues.
    Mr. Parcell, one of the things that I have been really 
trying to get the Administration to do, the previous one and 
the current one, is to look at small-dollar mortgages, because 
the majority of homes in my district are less than $100,000, 
and it is not profitable for some of the institutions. And what 
happens is they become rental properties for those investors 
that come in and swallow them up. And I know there was a report 
recently, but there are not a lot of recommendations, just 
identifying the problems we already know about.
    What do you think, Mr. Parcell, we could do as a Federal 
Government, and maybe it is a public-private partnership, I 
don't know, in trying to help our families, working-class 
families, who, if they could get access to those homes that are 
$70,000, $80,000, would probably be paying less towards housing 
costs than, again, continuing to rent?
    Mr. Parcell. Thank you, Congresswoman. I appreciate that. 
To be clear, we represent 1.5 million in every ZIP Code, and 
yours is one of them. We think that a reduction of all the fees 
would be helpful. We also think that if you can make some kind 
of an incentive for that investor to sell back to a homeowner, 
a first-time homeowner, some kind of a tax break that they may 
be able to have. Also, to work with some of the accessory 
dwelling units (ADUs), so that maybe they can rent out part of 
their basement to help subsidize that payment to start building 
wealth. It is the number-one--
    Ms. Tlaib. Who is going to give them the loan?
    Mr. Parcell. They need to be able to get a loan for--
    Ms. Tlaib. That is what I am saying. Who is going to give 
them a loan for $70,000 or $80,000? Ms. Ratcliffe, by the way, 
we are always going to have frontline workers as our neighbors. 
You all know that. There will always be those in hospitality, 
and those in agriculture, who will not be in that income class 
where they are going to be able to afford $150,000 or more for 
a house. Ms. Ratcliffe?
    Ms. Ratcliffe. Yes. I think the fundamental challenge we 
have there is that the costs to make a new mortgage are the 
same, no matter how big the mortgage is. So, when it comes down 
to limited resources and loan officers making decisions about 
where they are going to spend their time, it is very hard for 
them to, for economically working.
    Ms. Tlaib. So, would it be an incentive to say, hey, if it 
is this amount of money, then we should be--
    Ms. Ratcliffe. FHFA recently had a request for information 
on low-balance mortgages, and some of the recommendations are, 
in fact, to subsidize that. I would also add another tool that 
might be useful in a case like this is better financing for 
purchase rehab, because a lot of the homes today are older 
investors having an advantage because they can come right in 
with deep pockets and fix them up. And the buyer can only 
borrow based on the as-is value and can't get credit for it. 
So, you know this whole story.
    Ms. Tlaib. Yes. I think, Ms. Ratcliffe, you are right. I 
think it is really important to know that some of those homes 
are never move-in ready, especially at that cost. They do need 
rehab.
    Dr. Rossi, did you have something to say?
    Mr. Rossi. No. I was nodding my head vehemently in favor of 
what she said about FHFA. I think that is a good response.
    Ms. Tlaib. The other important thing that I have been 
working on is our credit scoring system. It is broken. Do you 
all agree that it needs some sort of overhaul? Let me tell you 
why. For instance, medical debt is treated the same way. I know 
some are not actually looking at medical debt now, I 
understand, but it really does hold back some of my folks 
because something they did at 18 is on their credit report for 
7 years. I have a bill that reduced it to 4 years, which I 
think is a great bipartisan bill. Economists say 4 years is a 
better indicator anyway than 7 years. Can any of you talk about 
that?
    Mr. DeMarco. Medical debt is being adjusted in mortgage 
underwriting, but the credit score issue, Congresswoman, is a 
serious one. And we have been spending this whole hearing 
talking about FHFA, so here is another place where FHFA is 
playing a significant role, right? They have come out with a 
new framework in which we are going to update the credit score 
model that is used. There are going to be two different credit 
scoring models used. But the thing I would caution about that 
is it holds the potential for improved accuracy and so forth, 
but that is a very hard thing to implement given that credit 
scores appear in so many different models and uses in housing. 
So, having a timeline to get this done right is going to be 
really important to it being implemented successful.
    Ms. Tlaib. I have so many other questions for you, but I 
ran out of time. Thank you, though, I appreciate it.
    Chairman Davidson. I would like to thank our witnesses and 
my colleagues for their testimony and questions today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record. I ask our witnesses to please respond as promptly 
as you are able.
    This hearing is now adjourned.
    [Whereupon, at 3:40 p.m., the hearing was adjourned.]

                            A P P E N D I X

                              May 17, 2023
                              
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