[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
ARE THERE GOVERNMENT BARRIERS
TO THE HOUSING MARKET RECOVERY?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
INSURANCE, HOUSING, AND
COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
FEBRUARY 16, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-7
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64-555 WASHINGTON : 2011
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
Larry C. Lavender, Chief of Staff
Subcommittee on Insurance, Housing, and Community Opportunity
JUDY BIGGERT, Illinois, Chairman
ROBERT HURT, Virginia, Vice LUIS V. GUTIERREZ, Illinois,
Chairman Ranking Member
GARY G. MILLER, California MAXINE WATERS, California
SHELLEY MOORE CAPITO, West Virginia NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina WM. LACY CLAY, Missouri
LYNN A. WESTMORELAND, Georgia MELVIN L. WATT, North Carolina
SEAN P. DUFFY, Wisconsin BRAD SHERMAN, California
ROBERT J. DOLD, Illinois MICHAEL E. CAPUANO, Massachusetts
STEVE STIVERS, Ohio
C O N T E N T S
----------
Page
Hearing held on:
February 16, 2011............................................ 1
Appendix:
February 16, 2011............................................ 47
WITNESSES
Wednesday, February 16, 2011
Caldwell, Phyllis, Chief, Homeownership Preservation Office, U.S.
Department of the Treasury..................................... 12
Farrell, Michael A.J., Chairman, CEO, and President, Annaly
Capital Management, Inc........................................ 33
Gordon, Julia, Senior Policy Counsel, Center for Responsible
Lending........................................................ 37
Holtz-Eakin, Douglas, President, American Action Forum, and
former Director of the Congressional Budget Office from 2003 to
2005........................................................... 32
Schwartz, Faith, Executive Director, HOPE NOW Alliance........... 35
Stevens, Hon. David H., Assistant Secretary for Housing/FHA
Commissioner, U.S. Department of Housing and Urban Development
(HUD).......................................................... 8
Tozer, Theodore ``Ted'', President, Government National Mortgage
Association (Ginnie Mae)....................................... 10
APPENDIX
Prepared statements:
Caldwell, Phyllis............................................ 48
Farrell, Michael A.J......................................... 56
Gordon, Julia................................................ 60
Holtz-Eakin, Douglas......................................... 96
Schwartz, Faith.............................................. 101
Stevens, Hon. David H........................................ 122
Tozer, Theodore ``Ted''...................................... 133
Additional Material Submitted for the Record
Westmoreland, Hon. Lynn A.:
Written responses to questions submitted to Hon. David
Stevens.................................................... 141
ARE THERE GOVERNMENT BARRIERS
TO THE HOUSING MARKET RECOVERY?
----------
Wednesday, February 16, 2011
U.S. House of Representatives,
Subcommittee on Insurance, Housing,
and Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:50 p.m., in
room 2128, Rayburn House Office Building, Hon. Judy Biggert
[chairwoman of the subcommittee] presiding.
Members present: Representatives Biggert, Hurt, Miller of
California, Capito, Garrett, McHenry, Duffy, Dold, Stivers;
Gutierrez, Clay, and Sherman.
Also present: Representative Green.
Chairwoman Biggert. Good afternoon. This hearing of the
Subcommittee on Insurance, Housing, and Community Opportunity
will come to order.
We will begin with opening statements. I apologize for
keeping all of you waiting. I really didn't think that we were
going to have 18 votes, so it did take quite a bit of time. So
I will start and recognize myself for 3 minutes.
Good afternoon, and thank you for attending this hearing.
It is the first hearing of the subcommittee.
Today, we will hear testimony that explores how government
barriers are driving private capital away from housing while
impeding market recovery. We will also examine options for
promoting long-term stability in housing and moving toward a
housing market that is financed by the private sector.
At no other time in our Nation's history has housing
finance been so controlled and so dominated by the Federal
Government. While private investors or borrowers benefit on the
upside, taxpayers assume the risk and foot the bill for
failure. It is a distorted equation: congressionally-created
mortgage giants Fannie Mae and Freddie Mac received nearly $150
billion in a taxpayer-backed bailout, and programs like the
Federal Housing Administration, or FHA, compete with the
private sector businesses. In fact, according to HUD's Web
site, FHA is the largest insurer of mortgages in the world,
insuring over 34 million properties and over 47,000 multifamily
projects, and this is since the inception in 1934.
Combined, Fannie, Freddie, and FHA have well over 90
percent of the mortgage market. And in recent years,
government-created and managed mortgage programs united with
the private industry and investors. They loosened underwriting
standards and offered borrowers risky but low-cost loans, and
all with a government guarantee. The result has been that we
have seen turmoil not unlike the Great Depression. The
government's role in housing and finance is unsustainable.
Thus, during today's hearing we will examine the future of
housing finance: Where are we now, what government barriers are
fostering uncertainty or preventing a housing market recovery?
And finally, what mid- and long-term steps should the
Administration and Congress take to enable the private sector
to reenter the business of housing finance?
Housing is one of the most important cornerstones of our
economy and we must get it right. I look forward to working
with my colleagues on reforms to facilitate the private sector
and reentry, eliminate the taxpayers' risk, and generate a
vibrant housing finance system that serves creditworthy
Americans.
So, I welcome today's witnesses and now call on the ranking
member, Representative Gutierrez, for 4 minutes.
Mr. Gutierrez. Thank you.
Good afternoon. I want to thank our witnesses for being
here today.
Before we move on to discuss the role of government in
housing and what kind of barriers may be hindering the housing
market recovery, I believe we need to have an honest and open
discussion about the harsh realities facing hundreds of
thousands of hardworking families across our Nation who have
lost or are at risk of losing their homes. People are still
being displaced, neighborhoods continue to fall apart in some
parts of our country, and communities are still suffering due
to the foreclosure crisis and the devastating economic
condition facing our Nation's housing system.
Since we are all familiar with the current housing
situation, I think we should use this platform as a venue to
discuss ways to ameliorate the housing crisis and restore faith
in America's housing system.
I would like to be clear about something; contrary to what
some of my colleagues may believe, I do not believe that the
government is hampering the recovery by placing burdensome
barriers and driving away private investment in the housing
market. Let me join the voices of those wiser and more expert
on this subject--and I mean the voices of the Financial Crisis
Inquiry Commission. It stated: ``The government did not cause
the collapse of the housing bubble.''
Importantly, there is also consensus among the majority of
the members of the Commission that Fannie Mae and Freddie Mac
were not primary causes. And lastly, they concluded that the
Community Reinvestment Act was not a significant factor.
Today, our government is serving the housing market at a
time when private capital is scarce. Since the Federal Housing
Authority, FHA, was created in 1934 to serve the housing market
in a time of financial crisis, it has worked hard to ensure
that housing finance credit is available to the American
worker. And I would like to thank them, as I was able to obtain
my first home because of FHA.
We are now, once again, in a time of financial crisis, and
the FHA is doing what it was created to do: make housing credit
available to help struggling homeowners avoid foreclosure. Our
government needs to continue to play the crucial role of
providing homeowners with the assistance they need during these
tough economic times. At this moment, if the government were to
leave the housing market, there is no assurance that private
investment would take its formidable place to help families
save their homes.
So as we move forward and look at ways to bring back the
housing market to recovery, we need to give thoughtful
consideration to real solutions that will help protect
hardworking families. We have seen the devastating effect of
lack of credit. Ask business people. It is my belief the same
would happen in terms of housing.
I would like to just take a moment and introduce this
draft. It is the summary of conclusions of the Financial Crisis
Inquiry Commission. It has the majority report. I would just
like to say importantly the majority, three out of the four
dissenters, concluded that Fannie Mae and Freddie Mac were not
primary causes, and they were Republicans. This was a
bipartisan group of people, much wiser and much smarter than
many others on the issues.
And I would just like to read the second dissent--there was
one person who did blame Fannie Mae and Freddie Mac, and that
was Mr. Wallison. This dissident blamed the crisis on the
government housing policy, a factor that all the other
commissioners concluded was not a primary cause, and concluded
that almost all of the causes on which the majority report and
the first dissent agreed were not primary clauses.
I would like to ask unanimous consent to introduce this.
And thank you so much for calling this valuable hearing, Madam
Chairwoman.
Chairwoman Biggert. Without objection, it is so ordered.
The gentlelady from West Virginia is recognized for 2
minutes.
Mrs. Capito. Thank you, Madam Chairwoman. And I would like
to thank Chairwoman Biggert for holding today's hearing and to
congratulate her on this being her first hearing as the
chairman of the Insurance and Housing Subcommittee. I look
forward to working with her and Ranking Member Gutierrez on the
many challenges facing our Nation's housing market.
Since the start of the housing collapse, the FHA and the
Government-Sponsored Enterprises, Fannie and Freddie, have
grown in market share to the size where they now collectively
insure or guarantee more than 90 percent of all the mortgages
in the United States. While the government has played an
important role in enhancing the flow of credit to targeted
sectors of the economy, excessive risk exposure coupled with
lax underwriting standards--and we learned more about that this
morning--resulted in a government rescue at the taxpayers'
expense.
I think we could all agree that the taxpayer should no
longer be on the hook for losses, and that reforms to the
housing finance are long overdue. In laying out a plan for
housing recovery, I was happy to hear the Administration
acknowledge the need to bring private sector capital back into
the mortgage market while taking steps to minimize government
support and housing finance.
I think generally their report, I welcomed it and thought
it was a very good step towards hopefully a bipartisan solution
for this. It is important to keep in mind, however, that
reforms to reduce the presence of Fannie and Freddie must
coincide with FHA reforms to ensure that increased market
opportunities flow to the private market and not into FHA. I
hope that the efforts that were made last Congress to restore
the capital reserves and to enhance financial stability to its
deteriorating FHA will continue this Congress so that we may
see FHA return to serve its intended role in the housing
market.
I believe the Commissioner shares some of those--maybe not
entirely, but some of the thoughts there. And I would also like
to thank him for all of the work that he did with me and our
staff in crafting the FHA reform bill last year. I am sorry we
didn't get it all the way through, but we are still here to
fight another day.
I look forward to hearing from our panel of experts on the
challenges to housing recovery and the future role both the
private sector and government support will play in housing
finance.
Thank you again to the chairwoman for holding this hearing,
and thank you to our witnesses for their testimony.
Chairwoman Biggert. The gentleman from California, Mr.
Sherman, is recognized for 4 minutes.
Mr. Sherman. The title of this hearing is, ``Are there
Government Barriers to the Housing Recovery?'' I think the real
title ought to be, ``Are there Government Barriers to the
Housing Market Collapse?''
Right now, there are too few buyers, the prices are lower
than we saw just 2 years ago by a very significant percentage,
and we are clinging to the leverage under which we fell just 2
years ago. And now some want to push us off the ledge on the
theory that free flight is more ideologically consistent.
We are in a crisis here still, and I don't think we should
be deciding what to do with housing finance based on
ideological purity. If we were having a long-term hearing about
what to do 4 or 5 years from now, I would say that then we
would focus on how we want to build for the future. But right
now, we are just a few headlines away from another housing
collapse, another 10, 20, 30 percent, and with that would be a
double-dip recession.
And so it is fortunate that the Federal Government has
stepped up to the plate; they should do so in the most
responsible manner. And after I am no longer obsessed with
dealing with the present crisis and that crisis has passed, I
look forward to hearings of this subcommittee to look at a new
structure.
I want to thank our witnesses for playing an important role
in preventing the collapse that would otherwise occur. I would
point out that in the absence of Federal involvement, we might
see this market dominated by two or three financial
institutions, just as even under the current circumstance,
Wells, Bank of America, and Chase originate well over half of
the mortgages.
But my greater concern is that--and I see this in my own
area because just outside my area, I see houses selling for
such a price that they are above the conforming loan limit,
even the higher conforming loan limit. If the homes are out in
Malibu, the person buying them is able to get financing from
their bank, which they may own. But when the home used to be
worth $3 million, is now $2 million, you can't get financing
for it, and that home ends up dropping further. And I can't say
what it would do to the economy of Los Angeles and so many
other cities if middle-class neighborhoods were to face that
kind of implosion. That is why we need to maintain the
conforming loan limit at $729,000 to $750,000 for high-cost
areas, and it is why we need to have Fannie and Freddie
involved in every community for the next phase of our effort at
economic recovery.
This economic recovery hasn't hit Main Street. We are still
in a crisis, and ideological purity should not be the enemy of
fiscal sanity and economic stability.
I yield back.
Chairwoman Biggert. I thank the gentleman for yielding
back.
The gentleman from California, Mr. Miller, is recognized
for 2 minutes.
Mr. Miller of California. Thank you. Welcome, Commissioner
Stevens. It is good to see you here.
This is the most difficult housing market I have seen in
the 40 years I have been involved in it. I have never seen
anything like this occur. We have done what we could in the
past; we have increased GSE and FHA participation in high-cost
areas, and basically we moved into about 92 percent of the
marketplace. That, I believe, staved off an incredible crash
that could have occurred had we not done that.
We have tried to encourage homeownership. We have tried to
give tax credits for first-time homebuyers. We have done some
things out there that I think are pretty good. And we are
trying, at this point in time, to encourage more private market
participation in the marketplace, but liquidity is a problem as
we all see it.
The Administration has proposed three options we have to
look at, and they are on pages 21 through 29 of the written
testimony, I believe. The first 20 pages talk about things that
are really not in the three proposals, like guaranteeing low-
and moderate-income housing, stability in the marketplace,
being able to move into a marketplace in case it becomes
illiquid, which one, two, and three do not do. But my concern
is that while we are doing this, at the same time the
Administration is proposing to increase guarantee fees,
reducing larger loans in the high-cost areas, requiring larger
downpayments--which I understand some of these--but at the same
time, when a market is illiquid, before we have an opportunity
to resolve the GSE issue, we are pulling FHA back out of the
marketplace.
I understand you are up to 30 percent and you would like to
get back to 10, 15 percent where you should be, but these are
major changes in the current market and they are going to have,
I believe, a major effect and a negative impact on the market
too. In this fragile marketplace, dangerous actions like this
can take steps that I believe are negative, and I think they
can have consequences that we don't want to see. These actions
are being proposed in the short term before we ever decide what
we are going to do in the long-term. That doesn't make sense to
me. We need to have a long-term resolution in place before we
start making short-term moves that have a dramatic impact
immediately on the marketplace.
I think we need to take a step back, look at how these
proposals are already impacting a fragile marketplace, and what
we need to do to guarantee financing availability in the
future. I just think we are moving in the wrong direction.
I yield back.
Chairwoman Biggert. The gentleman's time has expired.
The gentleman from North Carolina, Mr. McHenry, is
recognized for 2 minutes.
Mr. McHenry. I thank the chairwoman. And congratulations on
your first hearing as well.
Obviously, the dual mandate of Fannie and Freddie
supporting both government housing policy and chasing profits
for shareholders ended with predictable catastrophic results,
proving that the Federal Government isn't really well equipped
to deal in competing in the marketplace, especially with an
unfair advantage with reduced costs of lending for the Federal
Government.
Since Fannie and Freddie's failure and subsequent placement
into conservatorship, the Federal Government's intrusion into
the housing market has been the most expensive market
intervention of the financial crisis. Surprising to most, but
with taxpayers on the hook for close to $150 billion, it is a
very real impact. It is time we end this disastrous bailout and
let private capital get back into the marketplace. That is what
we need to do in order to move forward.
I am pleased the Obama Administration supports our call to
wind down Fannie and Freddie and I look forward to hearing from
our witnesses about how we move forward.
Chairwoman Biggert. The gentleman from Virginia, our new
vice chairman, is recognized for 1 minute.
Mr. Hurt. Thank you, Madam Chairwoman, for the opportunity
to serve in this capacity, and for holding the subcommittee's
first hearing on the state of the housing finance market. I
also want to thank the witnesses for being here.
In response to the financial crisis, the role of government
in the housing finance market has grown dramatically. This
growth not only increases the risk of substantial financial
burdens on the taxpayers in Virginia's Fifth District, my
district, but also across the country. It also prevents the
private sector from competing in the market.
I am particularly concerned about the Administration's
foreclosure and mitigation initiatives, which do not appear to
be helping a sufficient number of distressed homeowners to
justify the program's enormous cost. The Administration's ever-
shifting strategies and massive expenditures of taxpayer
dollars may only be forestalling a necessary bottoming in house
prices, thereby hindering a more sustainable recovery in
housing and the broader economy.
Again, I appreciate your being here, I look forward to your
testimony, and I yield back my time.
Chairwoman Biggert. The gentleman from Ohio, Mr. Stivers,
is recognized for 1 minute.
Mr. Stivers. Thank you, Madam Chairwoman. I want to thank
the chairwoman for calling this hearing today. I think it is
especially timely given last week's focus on GSE reform in the
Capital Markets Subcommittee and the delayed release of the
Administration's report to Congress last Friday, talking about
the need to limit government's involvement in the housing
industry.
Due to the burst of the housing bubble and changes to FHA
eligibility requirements, FHA's market share has increased in
the recent past. For example, in my district in Columbus, Ohio,
and central Ohio, in the 15th Congressional District of Ohio,
FHA now makes up over half the loans in my district.
Unfortunately, FHA, along with the rest of the market, has been
facing higher mortgage defaults. So in reviewing reforms, we
don't want to limit access to the American dream, but I think
it is important for my constituents to understand what is going
on here and to focus on what we can do to make sure that we
avoid damage to the economy and make sure that we look out for
the American dream.
I look forward to learning more from the witnesses today on
how we can ensure the stability of the mutual mortgage
insurance industry without removing this important resource
from homebuyers.
Thank you. I yield back the balance of my time, Madam
Chairwoman.
Chairwoman Biggert. The gentleman from Illinois, Mr. Dold,
is recognized for 2 minutes.
Mr. Dold. Thank you, Madam Chairwoman.
I certainly want to take this opportunity to thank the
witnesses for their time, their effort, and their
participation, and I look forward to hearing from each and
every one of you.
All too often, well-meaning government efforts go too far
and end up having unintended consequences, which are usually
very negative and which frequently create more and larger
problems than those that they were ostensibly intended to
solve. These government policies often distort resource
allocations, disrupt market mechanisms, manufacture artificial
investment risk profiles, and put taxpayers on the hook for
huge amounts of money. And by doing so, they frequently drive
the private sector out of the market to the detriment of our
families, employees, businesses, and our overall economy.
And then some say that the government must increase its
role in the marketplace because it is the only marketplace
participant, sometimes forgetting about why the government
became and remains the only marketplace participant.
We have seen these results in the housing market, which is
one of our most heavily regulated economic activities.
Right now, the Government-Sponsored Enterprises have more
than 90 percent of the mortgage market, and it is not
surprising that the private sector capital can't compete with
this kind of political force that drives out private sector
capital and misallocates resources, and that also puts
taxpayers at potential risk for hundreds of billions of dollars
and potential liabilities, all with, I would argue, little
accountability.
Fortunately, I think we have reached a consensus in this
country that we must return to a more stable mortgage market
with far less potential taxpayer exposure and with far greater
private sector participation. I understand that the
Administration and Members of Congress on both sides of the
aisle agree that we must move quickly toward this important
objective.
We as Congress have some important questions to consider,
including the two most fundamental questions: first, what are
the existing government policies or regulations that are
keeping private capital out of the mortgage market; and second,
what existing government policies or regulations are extending
or deepening these difficult housing market conditions? I agree
with the Administration that the government must not be a
barrier to the housing market recovery, and I look forward to
hearing from each and every one of you.
Madam Chairwoman, thank you for the time.
Chairwoman Biggert. The gentleman's time has expired.
Now, I would like to ask unanimous consent for a member of
the Financial Services Committee as a whole, Mr. Green from
Texas, to make an opening statement for 1 minute.
Mr. Green. Thank you, Madam Chairwoman. I thank the
witnesses for appearing today.
I think that there are some things that we agree on. I
think that we agree that the VA loans are not a real problem,
and my hope is that we won't disrupt that agency and the way it
benefits our veterans.
Most people don't perceive FHA to be a significant problem,
and my trust is that as we move forward, we will realize that
there is a meaningful place for FHA. Those of us who do concur
and agree that Fannie and Freddie are going to have to have
some adjustments made--and we understand that we don't know
exactly where we are going, but we don't want to go back to
that era before Fannie and Freddie when you had to have a
balloon payment every 5 to 10 years, when you had to have an
enormous downpayment, when housing was for the few, not the
many, in terms of ownership compared to the number of people in
the United States of America. The American dream should not now
be put out of reach because of the crisis.
Thank you, Madam Chairwoman. I yield back.
Chairwoman Biggert. The gentleman's time has expired.
And now again, let me welcome the witnesses. Thank you for
being here, and thank you for spending quite a bit of time
before we even got back from voting.
I would like to introduce the witnesses now from Panel I:
David Stevens, the Assistant Secretary of Housing and the
Commissioner of the Federal Housing Administration, U.S.
Department of Housing and Urban Development, commonly known as
HUD; Theodore ``Ted'' Tozer, President, Government National
Mortgage Association, known as Ginnie Mae; and Phyllis
Caldwell, Chief, Homeownership Preservation Office, U.S.
Department of the Treasury.
Without objection, your written statements will be made a
part of the record. You each will be recognized for a 5-minute
summary of your testimony.
I will now recognize Commissioner Stevens of the FHA for 5
minutes.
STATEMENT OF THE HONORABLE DAVID H. STEVENS, ASSISTANT
SECRETARY OF HOUSING/FHA COMMISSIONER, U.S. DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT (HUD)
Mr. Stevens. Thank you. Chairwoman Biggert, Ranking Member
Gutierrez, and members of the subcommittee, thank you for the
opportunity to testify here before you. It is particularly an
honor for me to testify today because I have not yet had the
privilege of appearing before you or many of the other new
members of this committee.
I am here today on behalf of HUD and the FHA regarding the
Obama Administration's efforts to encourage the return of
private capital to the housing market.
It is important to understand the context of the crisis
that led to government intervention in the first place. With
home prices falling every month for 30 straight months, $6
trillion lost in home equity that wiped out the wealth for many
families, and the loss of 750,000 jobs a month for 22 straight
months of job losses, this Administration faces an economic
crisis second only to the Great Depression.
With private capital in retreat, the Administration had no
choice but to intervene. The Administration kept mortgage
interest rates at record lows. We also provided critical
support for Fannie and Freddie while FHA stepped in to enable a
robust market to emerge. The FHA's loss mitigation policies,
combined with the Administration's HAMP program, set the
standard for mortgage modification that the private market has
finally begun to meet.
We stopped the slide in home prices. Since April 2009,
nearly 13 million homeowners have been able to refinance their
mortgages. Monthly foreclosures starts are down more than
30,000 per month from the same period a year ago. And we have
seen 13 straight months of private sector job growth. But the
time has come for the next step as we begin to reduce the
government's role and develop policies that will help bring
back private capital.
As you know, in the absence of private capital, FHA's role
expanded significantly, from less than 4 percent of the market
in 2006 to more than one-third of new home purchases today. FHA
has helped over 2 million families buy a home since President
Obama took office, 80 percent of whom were first-time home
buyers.
FHA's role in the multifamily market is equally striking.
In 2008, we supported the development of about 49,000 rental
homes. In 2010, however, it was 150,000 rental homes. But as
proud as we are of the historic steps we were forced to take to
support American families, we are very aware of the risks of
this elevated role. FHA has already made important reforms to
reduce our footprint and strengthen our reserves. With new
authority granted by Congress, we have been able to raise our
FHA mortgage insurance premiums, including the 25 basis points
additional increase we announced this week.
FHA has also implemented a two-step credit score policy for
FHA purchase borrowers, requiring that borrowers with lower
credit scores make significantly larger downpayments. But the
result of these actions that we have already taken are clear as
we reduce financial risk to taxpayers and lay the foundation of
the return for private capital. The quality of loans made over
the last 2 years is much improved. Fiscal year 2010 represents
the highest quality book of business in FHA history.
It is clear that FHA is in a stronger position today, but
more needs to be done. That is why we delivered this report to
Congress last week that provides a path towards a return of a
responsible private mortgage market and suggests how FHA can
help make that possible.
First, returning FHA to its traditional role as a targeted
lender of affordable mortgages by decreasing the maximum FHA
loan size by allowing the present increase of those loan limits
to expire as scheduled.
Second, continue to reform and strengthen FHA itself. The
Administration will make sure that creditworthy borrowers who
have incomes up to the median level for their area have access
to FHA mortgages, but we will not allow the FHA to expand
during normal economic times to a share of the market that is
unhealthy or unsustainable.
Madam Chairwoman, I believe it is necessary for Congress to
give FHA more flexibility to respond to market conditions and
manage its risks more effectively.
Third, through broader commitment to affordable rental
housing. To be clear, the Administration is committed to
providing families with rental housing choices and believes
that affordable options for the millions of Americans who rent
is essential to a more balanced, sustainable housing policy.
Having spent all of my career in the private sector, I know
that one of the barriers we face to reform isn't government,
but rather a trust deficit that the housing finance industry
faces in its relationship with everyday Americans who associate
housing with exploding ARMs, predatory loans, and foreclosures.
Reducing that trust deficit is one thing the government can't
do alone. The Administration is not only committed to restoring
a healthy balance in the housing market, it is committed to
working with Congress to find the common ground we need to
build a 21st Century system of housing finance rooted in a
strong, healthy market for private capital that harnesses the
vitality, innovation, and creativity that has been at the
foundation of our system for centuries. FHA's role in restoring
this balance will be critical. We look forward to working
closely with Congress to ensure people have the tools they
need. That is what all our efforts are about.
Thank you for this opportunity to testify here today.
[The prepared statement of Commissioner Stevens can be
found on page 122 of the appendix.]
Chairwoman Biggert. Thank you, Commissioner.
And now, we have Mr. Tozer. You are recognized for 5
minutes.
STATEMENT OF THEODORE ``TED'' TOZER, PRESIDENT, GOVERNMENT
NATIONAL MORTGAGE ASSOCIATION (GINNIE MAE)
Mr. Tozer. Thank you, Chairwoman Biggert, Ranking Member
Gutierrez, and members of the subcommittee for inviting me
today.
To provide context for our discussion, I would like to
describe Ginnie Mae's role in the U.S. housing finance market
and efforts we have taken to reduce that role.
Ginnie Mae serves as the financing arm for FHA and other
government-insured or guaranteed mortgage products. We are a
wholly-owned, self-financed government corporation.
Since inception in 1968, our corporation created and issued
the first mortgage-backed security in U.S. history. Since then,
we have guaranteed $3.7 trillion in mortgage-backed securities
and we have brought liquidity and stability to the market
through all economic environments.
The recent decline in housing clearly led to retreat of
private label securities investors. As it has before, Ginnie
Mae stepped in to ensure liquidity. That is our historic role--
to provide the counter-cyclical support in times of crisis.
During this crisis, our market share rose from 4 percent to
nearly 30 percent. In 2008, our total MBS outstanding stood at
$577 billion, but in June of 2010, we crossed the $1 trillion
mark. Currently, outstanding Ginnie Mae securities have
financed the homes for 7.2 million homeowners and 1.1 million
rental units.
Additionally, our corporate performance has been strong.
Last year, our net income was $541 million. We have earned this
profit despite increasing our loss reserve to $1 billion, and
we are well positioned to deal with future market volatility
with $1 billion of the loss reserve, plus we have $14.6 billion
in capital.
This performance is largely due to our business model. Let
me explain. We work with lenders to pull loans guaranteed or
insured by FHA, VA, Rural Development, and PIH to issue Ginnie
Mae MBSs, mortgage-backed securities. Although securities are
commonly referred to as Ginnie Mae's, we are not the issuer.
These lenders who service and manage the mortgage-backed
securities are the issuers and they pay us a fee to guarantee
their bonds through investors. Ginnie Mae's business model
mitigates the taxpayers' risk associated with secondary market
transactions.
Before Ginnie Mae's guarantee is at risk, three levels of
protection have to be exhausted: first, the homeowner's equity;
second, the insurance provided by the government agency to back
the loan; and third, the corporate resource of the entity that
issued the mortgage-backed security. We are in the fourth and
last position before a guarantee comes into place. In effect,
our issuers must exhaust all their corporate resources before
we step in. We are the only entity involved in the housing
market today that has this model.
Madam Chairwoman, our business model has positioned us well
for this volatile economy, but issuers have issued Ginnie Mae's
securities at levels during the past 2 years that cannot
continue. We must revise the private label securities market.
To help us in that direction, we have implemented policies
that increase accountability among our issuer base. We have
increased capital and established new liquidity requirements
across all product lines. These requirements can be looked at
as a different but very effective form of ``skin in the game.''
We have expanded our loan data disclosures, announced
changes to allow small lenders to more easily do business with
us, and we have worked with the GSEs to implement standardized
loan delivery requirements.
For investors, uncertainty about the future of GSEs impact
their decision-making. It is difficult to plan production when
you are not clear which secondary market outlets will remain.
The Administration's proposal to increase the GSE guarantee
fees, increase capital, and wind down portfolios will help end
uncertainty and create space for the private label securities
investment.
As the financing arm for the government-insured products
such as FHA, the level of MBS for guarantee are directly
related to the level of mortgages these agencies ensure.
Commissioner Stevens outlined plans to reduce FHA's role in the
market. Our mortgage-backed security bond will decrease
respectively.
In recent years, financial flaws occurred at almost every
link in the mortgage process. We now are aware of the advantage
and disadvantage of securitization. When securitization is
managed appropriately, it is a very efficient conduit for
capital. However, if insufficient attention is paid to the
quality of the collateral, consequences can be disastrous.
Many investors in the private label securities market
believe that investing in today's market requires them to take
excessive and unpredictable risk. Restoring their faith will
require great transparency, standardization, and
accountability.
Addressing the GSEs alone will not give rise to a market
that meets the needs of investors, nor will it guarantee that
private markets can effectively play a more dominant role. We
must work together to map our way forward by looking at some of
the additional forms I have outlined.
Thank you again very much for giving me this opportunity to
testify, and I am happy to answer any questions you might have.
[The prepared statement of Mr. Tozer can be found on page
133 of the appendix.]
Chairwoman Biggert. Thank you.
Ms. Caldwell, you are recognized for 5 minutes.
STATEMENT OF PHYLLIS CALDWELL, CHIEF, HOMEOWNERSHIP
PRESERVATION OFFICE, U.S. DEPARTMENT OF THE TREASURY
Ms. Caldwell. Thank you.
Chairwoman Biggert, Ranking Member Gutierrez, and members
of the subcommittee, I appreciate the opportunity to testify
today. I would like to share with you some of the lessons we
have learned from responding to the most serious housing crisis
since the Great Depression.
To begin, I believe it is important to remember where the
housing market stood just over 2 years ago. When the Obama
Administration took office in January 2009, home prices had
fallen for 30 straight months, home values had fallen by nearly
one-third, Fannie Mae and Freddie Mac had been in
conservatorship for over 4 months, and American families were
struggling to buy and keep their homes.
Treasury, in partnership with other Federal agencies,
responded by taking a series of aggressive steps with a
strategy focused on providing stability to housing markets and
giving families who can afford to stay in their homes a chance
to do so.
In particular, under the Troubled Asset Relief Program, or
TARP as it is better known, we launched the Making Home
Affordable Programs to help responsible homeowners avoid
foreclosure. Through one such program, the Home Affordable
Modification Program, or HAMP, Treasury worked to leverage the
private sector to bring homeowners and their mortgage servicers
together to find reasonable alternatives to foreclosure. So
far, HAMP has helped close to 600,000 struggling families stay
in their homes, and the median monthly payment reduction in
these modifications is $520 per month, or close to 40 percent.
The programs only pay for successful modifications, and they
pay over time as the loan remains current.
In addition, HAMP has spurred the mortgage industry to
adopt similar programs that have helped millions more at no
cost to the taxpayer. Mortgage assistance provided to
homeowners through HAMP, the Federal Housing Administration,
and private sector participation in the HOPE NOW Alliance has
outpaced foreclosure sales by more than two-to-one. At the same
time, implementing this program has been challenging on many
fronts. I would like to share a few lessons we have learned
over the past 2 years.
First, when HAMP was launched in early 2009, mortgage
servicers were totally unequipped to deal with the crisis.
Servicers were set up to collect payments on performing
mortgages. They did not have the staff, the systems, or the
procedures to help people avoid foreclosure. By participating
in HAMP, servicers had to build a modification infrastructure.
They had to comply with HAMP requirements on how to modify
mortgages and how to deal with homeowners. This has changed the
industry.
Second, engaging homeowners is key. Families facing
foreclosure are often overwhelmed by their situation and
frustrated by poor communication from their servicer. As such,
we launched a national public service advertising campaign and
outreach efforts aimed at engaging homeowners. We have also
established systems designed to address homeowners' questions
and complaints and improve the service they receive from their
mortgage provider.
Third, homeowners need safeguards. Being evaluated for a
modification at the same time one's house is being foreclosed
upon can be frustrating and confusing. In response, Treasury
required HAMP servicers to evaluate a homeowner for HAMP before
initiating foreclosure.
And fourth, affordability matters. Mortgage modifications
work only if they are affordable. Because HAMP sets a clear
affordability standard, median savings for borrowers is close
to 40 percent from their mortgage payments, and because of
these reductions HAMP modifications have lower redefault rates.
Nearly 85 percent of homeowners remain in their permanent
modifications.
We have faced many challenges in developing and
implementing our programs, and much work remains to ease the
housing and foreclosure crisis, but that should not obscure the
importance of what has been accomplished. Our housing programs
have established key benchmarks and borrower protections that
are now viewed as industry best practices. We will continue to
reach out to as many eligible homeowners as possible through
our program's expiration in 2012, while safeguarding taxpayer
resources every step of the way.
Thank you for the opportunity to testify, and I welcome
your questions.
[The prepared statement of Ms. Caldwell can be found on
page 48 of the appendix.]
Chairwoman Biggert. Thank you.
We will now proceed to questions. Members will be
recognized for 5 minutes each to ask questions. I will start
and yield myself 5 minutes.
Commissioner Stevens, the report that was issued to
Congress on modernizing the housing finance stated the goal of
reducing the market share of FHA from historic high levels to a
more normal level in the future.
However, at the same time, I have been hearing about
discussions of the Qualified Residential Mortgage (QRM) among
the regulators, involving creating a very narrow QRM, such as
perhaps mandating a 20 percent downpayment requirement.
Wouldn't a narrow QRM, coupled with winding down of Fannie Mae
and Freddie Mac, exclude many qualified and worthy borrowers,
but also drive them to FHA rather than into the private sector?
Mr. Stevens. Yes. Thank you for that question, Madam
Chairwoman.
There are two components here. As it relates to QRM, we are
one of the regulators that are involved in this rulemaking
process, and so to some degree, I am a bit limited in what we
can discuss related specifically to what may come out there.
But I would say this: Experience that has proven itself over
the decades in this housing system is that FHA traditionally
has always played a much smaller role in the housing market,
driven mostly by curtailments around loan limits as well as a
robust competitive market that was functioning well. We don't
have the robust competitive market functioning well, and we
have loan limits that clearly cover a much larger section of
the market than what FHA was ever intended to do.
I remember buying my first home with an FHA mortgage and I
paid a 3.8 percent mortgage insurance premium on my home--which
is much higher than we charge today. The loan limits were far
lower in terms of what we were able to qualify for. And FHA
played a very important role in the housing market.
So as we go forward, whatever the QRM--Qualified
Residential Mortgage--guidelines are and as we work to try to
find avenues for private capital to reengage, there are
measures within the FHA that can control that volume in a
responsible way and remain targeted towards the purpose it
would serve. Loan limits are one; mortgage insurance premiums
are clearly another; and product guidelines are a third. I
think those are the three primary methods that would ultimately
be used, again, over time as we carefully transition to a more
normalized market where private capital is reengaging.
Chairwoman Biggert. The White Paper also talks about
phasing down Freddie and Fannie. And there is some angst about
how could private investors be encouraged to increase
investments in both the single-family and multifamily housing
if there is no guarantee. What mortgage metrics could help
investors gain confidence in investing in private mortgage-
backed securities that don't have a government guarantee? Is
that possible?
Mr. Stevens. That is really the crux of what the White
Paper is meant to tease out from a debate standpoint. And that
is why, when we presented the three options, we clearly
eliminated a couple of additional options that we debated and
excluded. One was a no guarantee system and one was a much
larger guarantee system. We recognize that there would be a
guarantee literally in all three of those options, at a minimum
for FHA and underserved families. But I have been through
market cycles before and I have seen private capital exit and
return. They have done so under various terms. One of those
terms is to come with stabilized home prices. As home prices
continue to decline, it creates trepidation from private
investors to come into that market. Another is return on
investment, that the credit risk has to be priced appropriately
for private capital to engage.
I think the White Paper is very careful in spelling out
that while we need to wind down Fannie Mae and Freddie Mac,
this is a multiyear process to be done very carefully, this
idea of transition. And as we transition and we begin to take
the first steps, we will have test points to see how private
capital reengages. But I want to be clear: I am confident--
having been in these cycles before, never to this extreme, but
I have been in these cycles when private capital exited
markets--that capital returns when it believes that the
investments are safer, sounder, and more secure and at the
return rates that are needed to make sound investments. And
that is what we will have to test as we engage with policy and
look to see signs that market is returning.
Chairwoman Biggert. Then isn't one of the lessons that we
have learned from the crisis that it may not be feasible for
everyone to own a home at this time, and some may be in a
better position to rent? In your testimony on page 2, you
mention that the Administration will be looking for reforms
that balance the impacts on low- and moderate-income families
as you consider further FHA reform.
Can you describe what that balance would look like?
Mr. Stevens. Yes. And I think that is absolutely critical.
Everybody has to recognize that not everybody should have owned
a home in this past period. We created a bubble based on stated
income, 100 percent financing, exploding loans that ultimately
damaged the wealth and credit histories of those families who
took out those programs in search of perhaps more instant
wealth in that process. That was irresponsible.
Secretary Donovan, this Administration, has been very clear
that we need a much more balanced housing policy. And you can't
have a balanced housing policy without a specific focus on
rental housing.
And so in the White Paper, we talk about it. We look
forward to engaging in a dialogue with Members of Congress on
going forward and making sure that there is safe, affordable,
accessible housing, and that there is explicit focus on making
sure that there is liquidity behind that market.
That could come with a couple of suggestions we have in the
White Paper. One is looking at smaller rental properties.
Today, it is difficult to find financing for multifamily
properties in the 50-unit range, particularly in many urban
markets where there is older multifamily housing stock. Another
is making sure that there is rental housing in rural markets
where traditionally the multifamily investment market and
rental investment market hasn't really concentrated. This is an
area we think needs to be looked at as we look at balancing the
ownership/rental markets to make sure America is well housed
generally, whether they own or rent.
Chairwoman Biggert. Thank you. My time has expired.
Mr. Sherman is recognized for 5 minutes.
Mr. Sherman. Thank you.
First, I want to comment that even in good economic times,
divorce, unemployment, death, illness--and we hope the health
care bill will diminish the economic impact of illness, but it
can cause people not to be able to work--all those things
happen. They happen to such a large percentage of mortgages--
not a huge percent, but a large percentage, so that the private
sector is going to be reluctant to get into this market unless
they are confident that if they need to foreclose, the housing
market is going to be a stable market. And with the work that
government is doing now, we are not going to convince the
private sector that we have stabilized housing prices.
You can make the ideological argument that today's problems
are because we have strayed from the principles of Ayn Rand or
not, and I am not here to have that ideological argument. But
we do need to prevent a collapse now in a market that is what
it is, whether it conforms to anybody's ideology or not.
First, Mr. Stevens, a recent report showed, as I mentioned
in my opening statement, that only three banks originated over
half of the mortgages. Does this concern your department? And
what can be done about it?
Mr. Stevens. This is an absolutely important part of the
discussion that we all need to engage in. Concentration risk,
``too-big-to-fail'', those kinds of statements are being made
in headlines as we talk about the participants in the mortgage
market going forward. I think we are very careful in the White
Paper to express concern for community banks and smaller
financial institutions to access and participate in the
mortgage market.
You are absolutely correct that we have seen the market
consolidate. Reports have come out in the last couple of days
giving new data in that regard. And much of that has to do with
the broad weakness in the financial services system and some of
the larger institutions' ability to use the capital and balance
sheet to continue to engage in this market.
We need to make very certain that as we think about policy
going forward, particularly the options that we have laid out
in the White Paper, that they don't, as a result--you talked
about unintended consequences--create the unintended
consequence of forcing even greater consolidation in the
market. We benefit greatly by a broadly distributed housing
finance system. This country has traditionally operated under
that construct. Today we are in very unique times, and a policy
that we think about has to address that on a go-forward basis.
Mr. Sherman. The FHA was designed to fill the gap when the
private market is unavailable. Is that what the FHA is doing
now?
Mr. Stevens. Yes, it is. Absolutely. It is absolutely
filling that gap. I think this question has to come into play:
If FHA is financing 3 percent down mortgages at $729,000, is
that the principle under which it was originally designed? I
think the other way to ask the question is: Are there borrowers
in that population who could come up with a larger downpayment
and are using the FHA program simply because it doesn't require
it?
And those are the considerations that we think are very
important because, without question, one thing I have come to
appreciate is FHA has some of the best employees and committed
people I have ever seen in the housing finance system, but they
are limited by appropriations and budgets, and they just can't
handle an endless amount of volume and risk coming onto that
balance sheet.
Mr. Sherman. If I could just interject, we lost a fortune,
the Federal Government. We failed to prevent a collapse, we
failed to prevent a bubble, and a decision was made that I
certainly didn't agree with, that we would honor the implicit
guarantee as if it was a real legal guarantee, penny for penny.
Those decisions have been made. The question is not whether
FHA, Fannie, and Freddie may lose money on loans written up
until today. The question is, how much is it costing to allow
you to go forward in the future? What does the CBO think that
it costs to allow the FHA to do through the end of this fiscal
year exactly what you are planning to do? I know everybody can
argue with the CBO, and I still think the Lakers won the game
last night, but the ref said otherwise. So the CBO is the
accepted referee. Go ahead.
Mr. Stevens. I appreciate that question, Congressman
Sherman. Let me just give you the critical data. At the time
they scored the budget, OMB estimated--I want to show the two
numbers--OMB estimated that FHA would generate $5.7 billion in
negative subsidy, meaning receipts to the taxpayer. CBO scored
it at $1.8 billion, a much lower number.
Mr. Sherman. So these folks are just arguing about how much
money you make. And does that take into account the actuarially
best determined cost of the guarantee you provide? That is not
just a cash receipts kind of a thing--
Mr. Stevens. No. It absolutely takes into account an
actuarially sound expectation of losses against the backdrop
of--
Mr. Sherman. So you are making money for the Federal
Government on the best analysis that we can provide from OMB
and CBO.
What about Fannie and Freddie, not looking at the fortune
they lost on previously existing mortgages. Are they making
money or losing money for the Federal Government? Best estimate
of the CBO.
Mr. Stevens. I do not have the CBO estimates of Fannie Mae
and Freddie Mac.
Mr. Sherman. OMB? My time has expired.
Chairwoman Biggert. The gentleman from Virginia, Mr. Hurt,
is recognized for 5 minutes.
Mr. Hurt. Thank you, Madam Chairwoman.
In a report released in December of last year, the
Congressional Oversight Panel wrote, ``In some regards, HAMP's
failure to make a dent in the foreclosure crisis may seem
surprising. Yet despite the apparent strength of HAMP's
economic logic, the program has failed to help the vast
majority of homeowners facing foreclosure.'' It is my
understanding that HAMP has resulted in only 483,000 permanent
mortgage modifications, far short of the 3 to 4 million that
the Administration predicted when the program was unveiled.
Ms. Caldwell, I was hoping that you could respond to that
criticism.
Ms. Caldwell. Thank you for the question.
First of all, I would say that HAMP has not been a failure.
While it has not achieved as many modifications as we would
have hoped, we have to keep in mind that close to 600,000
families have had their loans modified in an affordable and
sustainable way, and that number continues to grow each month.
Second, I think we have to keep in mind that before HAMP,
there were no standards for the private market to modify loans
this way. And by looking at loans and running them through a
net present value model, modifications are now done when it is
in the best interest of the investor and the financial system
to have that homeowner in a sustainable modification. So while
it hasn't achieved the volume, I think it is very important to
keep in mind what it has done, the successes it has had, and
the families who have been helped.
Mr. Hurt. An additional criticism is that the terms have
been changed again and again, and servicers have said that
every time, a change to HAMP requires a costly investment of
time, personnel, and technology, and that the changes have
created confusion in the marketplace.
Do you believe that confusion has made it more difficult to
reach the 3 to 4 million that were predicted?
Ms. Caldwell. As I said at the beginning of my testimony,
the servicing industry was set up to collect payments and was
ill-equipped to handle the crisis of this response.
I think when we talk about changes to the program, it is
very important to keep in mind that the terms and structure of
the modification for HAMP have stayed the same throughout the
program. What has changed throughout this couple of years is
how to get these servicers to implement the program correctly.
And one of the things that we learned, we learned early on they
had no way of figuring out how to reach homeowners, so we had
to put systems in place to do that. They had no way to respond
to checks and balances, so through our compliance mechanisms we
asked them to go back and reevaluate people and do things. They
could not implement a net present value model, so we had to put
in procedures.
So the more procedures that we put in place, it did slow
time as they made investments in systems, but had they not,
millions more American families would have gone to foreclosure.
Mr. Hurt. Do you think that homeowners are shopping around
for the best government deal and then holding out for the best
Federal assistance that they might get in trying to seek these
modifications? And if so, do you think that hinders private
sector capital from coming into the market?
Ms. Caldwell. One of the things we have learned in the HAMP
program is that mortgages and mortgage securities may look
identical at the securitization level, but you don't know about
the underlying homeowner until they pick up the phone and
identify themselves.
What we see is homeowners who are struggling and confused
and frustrated and sometimes in this position for the first
time in their life.
Does that mean that there aren't some in a broad swath of
people who may be shopping, we can't really say that. What we
do say is that we have, at least for those modifications that
are getting taxpayer subsidy, we have fraud controls; we have
hardship affidavits; and we try to make sure that we are only
using taxpayer resources for those homeowners who need help.
Mr. Hurt. This morning we heard from Mr. Angelides, who is
chairman of the Financial Crisis Inquiry Commission. And one of
the things that I thought was surprising in his report was how
government housing policy contributed very little if anything
to the crisis that we are now trying to understand and prevent
in the future.
Do you believe that the government housing policy
contributed nothing to this, to our current crisis, and if so,
why?
Ms. Caldwell. Right now--that is a very important question
and one that has been debated in the past and will continue to
be debated about the future of housing finance reform.
I think the one thing that we are focused on in terms of
foreclosure prevention is the one thing that we can all agree
on, and that is a homeowner who is behind on their mortgage
payments who doesn't get help will ultimately go to
foreclosure, and it is in the best interest of the financial
system to avoid those foreclosures to the extent possible.
So really I think it is--you can talk about stabilizing the
market, addressing the problem now and in the future. We are
focused on addressing that problem.
Mr. Hurt. Ms. Caldwell, thank you for your answers.
Chairwoman Biggert. The gentleman's time has expired, even
though the clock was off.
The gentleman from Missouri, Mr. Clay, for 5 minutes.
Mr. Clay. Thank you so much, Madam Chairwoman, and thanks
for conducting this hearing.
Commissioner Stevens, according to a recent report by the
Special Inspector General for TARP (SIGTARP), only 15 FHA short
refinances have been completed so far. Why has there been such
a lack of participation in this program?
Mr. Stevens. Just to be clear, the number is higher but not
much higher, but that was their most recent report.
Without question, the FHA short refi program has been a
difficult one to get off the ground, for several reasons. One
reason is that it is optional. The participants in the program
have to choose to do principal write down. But with roughly 27
percent of all American homeowners underwater today, there is
certainly an opportunity.
We have begun to talk to institutions that are beginning to
create the capabilities to do short refi, but it requires an
operations investment. They have to invest in technology and
systems. It is almost like creating a new product. We think
that will have some impact on the numbers.
Without question, however, this is an area in which we
continue to focus. We believe that principal write down is
absolutely needed. It is one of the key variables left to
address, outside of modifications, to get this housing economy
right-sized. But it does require, again, the voluntary
participation of servicers and investors.
These are awkward handoffs. And there has been some natural
resistance to wanting to engage by some, and we continue to
work with them.
Mr. Clay. Any examples of success in prodding any of the
institutions to come along?
Mr. Stevens. I can't name institutions without--they would
have to--I would prefer that they announce that they are going
to participate. But I will tell you that I had conversations
with the CEOs of virtually all the major lenders in this
country on this process. So has the Secretary and so has
Secretary Geithner.
And I do know a couple of the large ones are actually
building out the capability to be able to roll out the program.
We do need more. And there is no question about it that we
maintain and continue to maintain that this is an area that
needs continued focus and pressure to get this market right-
sized.
Mr. Clay. Thank you for that response.
Mr. Tozer, can you expand on Ginnie Mae, on how Ginnie Mae
has handled the housing crisis we are facing differently from
Fannie Mae and Freddie Mac?
Mr. Tozer. Thank you, Congressman Clay.
Basically, Ginnie Mae's role is completely different than
the GSEs, Fannie and Freddie. Fannie and Freddie are in a
situation where they insure the borrower. Like a lender that
would originate a loan, Fannie and Freddie buy it; they buy
without recourse. So if a lender follows the rules, the lender
has no legal obligation to have any financial obligation to any
losses that occur. Fannie and Freddie take all losses. They
also take those loans, create a Fannie and Freddie security
they are obligated for, and at that point, the security then is
their obligation, and they have to make good to the investor if
the borrower goes delinquent.
Ginnie Mae is different in the fact that we do not buy any
loans. The lenders take their loans, and they are insured by
FHA, VA, various government programs. They create a security.
That security is the obligation of that lender. And what we do
is, for a fee we will put a government wrap on that security so
that we are guaranteeing to the investor that if that servicer
cannot perform the obligation of making the principal interest
payment for delinquent borrowers, we will then step in and make
sure there is a servicer who will make those payments.
So we basically are almost like a surety bond making sure
that the servicer performs their obligation. And what happens
if an issuer cannot revoke their obligation and fails, we then
would actually take the servicing, all their servicing that is
Ginnie Mae and move it to another servicer. So, from that
perspective, we are never taking any credit, borrower credit
exposure, except for the fact however much it stresses the
issuer. Because like I said, the issuer has to make all the
payments to the investor, all the way through to the time that
they buy it out of a Ginnie Mae security.
They can buy it out as early as the borrower being down
three payments or wait all the way through to foreclosure. But
as soon as they buy it out of the Ginnie Mae pool, our
guarantee no longer applies to that loan. So once we move the
servicing, it is pretty--it is easy to move because most of the
delinquent ones have been bought out so most servicers will
take on the business. That is the reason why our guarantees
come into play so few times.
But in the uncertainty in the capital markets, having the
government guarantee has allowed us to make markets for FHA/VA
loans, to central bankers, to insurance companies because of
the uncertainty in the capital markets for what they are going
to get. That way, they know they get their principal and
interest.
Mr. Clay. I yield back, Madam Chairwoman.
Chairwoman Biggert. The gentleman's time has expired.
The gentleman from North Carolina, Mr. McHenry.
Mr. McHenry. Thank you, Chairwoman Biggert.
Mr. Stevens, are HUD and the Administration currently
contemplating any loan modification or principal reduction
programs or changes?
Mr. Stevens. We are not contemplating at this point any new
modification programs. FHA has always operated in a very unique
way. We have a long history of modification programs.
Mr. McHenry. But certainly, you would be a part of that
discussion if they changed these?
Mr. Stevens. Absolutely.
Mr. McHenry. Okay. Are you aware of any--let me just
restate this one more time to give you an opportunity. Are you
aware of HUD or the Administration contemplating any new loan
modification or principal reduction programs in connection with
a possible resolution of the current Federal and State attorney
general review of the robosigning related problems at the major
banks?
Mr. Stevens. Thank you for that clarification of your
question. We are in discussion with 11 regulators, the State
attorneys general, the Department of Justice, in talking
directly about several large servicers that we have publicly
mentioned in terms of this effort working together, with one
possibility being enjoining in some sort of settlement with
these institutions.
This is premature. There would not be necessarily any--
there would not be any new program created that doesn't exist
already in anything we have been discussing.
Mr. McHenry. Will there be new funds?
Mr. Stevens. There would not be new funds associated with
this program, with any settlement that we have been discussing
to date.
Let me just step back for a moment, because what is said in
this regard is very important. We have a significant
foreclosure crisis. All the regulators, especially since the
robosigning news that became so prevalent in the fall, have
gone onsite and done various levels of investigating or looking
into servicer performance standards. Most of the regulators
found something that others may not have. We were very open at
HUD stating that we had found some irregularities and variable
performance.
And there are two ways we can proceed to a conclusion here.
We can work with the other regulators to try to come up with
one set of solutions, assuming the general findings are the
same, or we can proceed individually, and that process is being
worked through right now.
But none of this involves Federal funds in any settlement
or if any fines or penalties will be assessed to institutions
in due course based on the authorities that we currently have
at HUD for example.
Mr. McHenry. Can you describe--you described the
consideration. Will you commit that any such programs that are
proposed and funded through the regular budget process with
Congress and subject to congressional authorization, will you
come back to us for authorization?
Mr. Stevens. So if I can--sorry to answer with specificity,
but I would like to make sure that I am not saying something
that is incorrect. If there is anything associated with a
potential settlement that involves the creation of a new
program or new subsidies, I will absolutely come back.
Mr. McHenry. So with the settlement money, how will you
allocate that, will you come back to Congress for authorization
on how that is allocated?
Mr. Stevens. The settlement money would be penalties
assessed to institutions within existing authorities at HUD. We
have assessed penalties or taken action against over 1,800
institutions since I have become FHA Commissioner. We have a
mortgagee review board that assesses penalties on a monthly
basis.
Mr. McHenry. I certainly understand that.
But we are talking about a larger magnitude than those
previous numbers. Will you come back to Congress with
authorization of how to allocate those resources?
Mr. Stevens. If authorization is required, we will come
back to Congress.
Mr. McHenry. I am asking you, will you come back regardless
of what you think your current opportunity is under the law to
ask for authorization?
Mr. Stevens. I cannot commit to that at this time.
Mr. McHenry. Okay.
Ms. Caldwell, I want to follow up with you about the same.
Are you a part of these discussions as well?
Ms. Caldwell. I am part of some of them but not all of
them. I am generally aware.
Mr. McHenry. Generally aware. What is your awareness on how
this will come about, or what will come about, rather?
Ms. Caldwell. I think it is important to keep in mind that
while Treasury is one of the Federal agencies that is involved
in the process, Treasury is not a primary regulator of any of
the institutions, so we do not have the authority, as Mr.
Stevens referenced that HUD may have.
Mr. McHenry. What part of the discussions are you involved
in?
Ms. Caldwell. We are involved in both the discussions with
the servicers as they relate to the HAMP program and the
discussions among those agencies that have chosen to describe
some of the things that they have found.
Chairwoman Biggert. The gentleman's time has expired.
The gentleman from Illinois, Mr. Dold, is recognized for 5
minutes.
Mr. Dold. Thank you, Madam Chairwoman.
If I could, Mr. Stevens, I just have a quick question for
you. I think you said during your testimony that about one-
third is the market share that the FHA has right now in terms
of single-family lending at this point in time; is that
correct?
Mr. Stevens. Actually, it has dropped. The current FHA
market share levels are closer to 20 percent today.
Mr. Dold. Closer to 20 percent.
Mr. Stevens. Yes.
Mr. Dold. What is the optimal market share in a normal
market?
Mr. Stevens. I would be glad to share with you as a follow
up and sit down and go over market shares in the history of
FHA. It has ebbed and flowed over the years. The traditional
market share has been somewhere in the 10 to 15 percent range.
I do think it is important, however, to recognize, and
let's just use one different market correction, the oil patch
crisis, FHA's overall market share remained in the teens, but
we were as much as 40 percent of the market in States like
Colorado, Texas, and Oklahoma during that period. But the
overall national market share was able to remain very low. And
again, that is more of a normalized market.
Mr. Dold. What policy changes would you recommend for this
body to be considering to promote a more healthy role for the
private sector or private capital in mortgage finance?
Mr. Stevens. I very much look forward to that dialogue. I
would like to share with you the policies we have taken over
the last couple of years: three mortgage insurance premium
increases; changing FICO requirements; changing actual
underwriting policies of programs. Our market share from first
quarter of 2010 to fourth quarter of 2010 per Inside Mortgage
Finance dropped from 24 to 14 percent in the fourth quarter,
14.8 percent. That is their data.
We have already clearly seen from the policy changes we
have implemented a reduction in FHA shares of market. As I said
in the opening comments to the chairman, there are several
levels we can work on, but clearly, pricing the risk
appropriate to the mortgages we are insuring is a critical
component. I think we have done an outstanding job on this with
the help of Congress in giving us more authority.
Mr. Dold. What do you deem in the next 18 months will be
success if you are able to accomplish or we get what part of
the private sector in, what will you deem a success in the next
18 months for FHA?
Mr. Stevens. I would encourage us all, as we are working
together on this process, to make sure that we don't act too
quickly with the absence of private capital. I am a huge
supporter of private capital; it is my entire background,
coming into the market.
Mr. Dold. That is why I am asking.
Mr. Stevens. But I will say this. Ultimately, the policies
we put in place, and as I said earlier, we are going to have
test points along the way with loan limits will be--my
estimation will be the next round, along with these price
changes we have currently put into place. We will see how
private capital is reengaging. Assuming a normalized rate of
reentry of private capital in the market, I think we should
strive to get FHA's market share level back down to its more
normalized market share.
As I quoted our fourth quarter data, we actually could be
on a trend of returning closer to that level rather than the
levels we have been at for the last couple of years. And all of
that I think we need to be sensitive about. I would love to
have an ongoing dialogue with all of you, and you specifically
as you are interested, to talk about what is happening in the
market more broadly so we don't create this double dip or
unnatural outcome that can harm families even more.
Mr. Dold. Some have suggested, and again, I am sorry to
continue to focus on you, Mr. Stevens, and I apologize to the
other panelists, and please chime in if you feel it necessary.
Higher downpayments have been talked about in terms of
asking homeowners. We have seen it going back to previous
generations. They saved, they saved, and they had to put down
20 percent. And that obviously was a big difference, I think,
in what is going on today as we have seen those capital
requirements for downpayments drop significantly. What are your
thoughts with regard to requiring additional capital for home
buyers?
Mr. Stevens. If I can answer it this way, I have been doing
this for 3 decades in the finance system. I bought my first
home with an FHA loan back in the 1970s with a 3 percent
downpayment, believe it or not, because they did it the same
way back then.
The problem ends up being if you have too broad a box in
which you can originate FHA loans, the market people are going
to naturally use that program, even when home buyers could come
up with a larger downpayment and they don't necessarily meet
the original objective of FHA.
I do think a small downpayment provides a value,
particularly for underserved families who may not have the
additional disposable income to save up, virtually trapping
them in a world where they can never become homeowners because
they will never be able to save for a downpayment, even though
they have a good job, they have a family, and they can afford a
home. So I believe targeted assistance in those markets should
continue.
But I do believe, if it is the trend of the questions you
are asking, that we clearly need to contain and reduce the
footprint of FHA over time safely, but we do need to reduce the
footprint so it isn't playing the kind of role it is today and
perhaps providing financing at low cost to families who could
otherwise come up with a downpayment.
Chairwoman Biggert. The gentleman's time has expired.
The gentleman from Ohio, Mr. Stivers, is recognized.
Mr. Stivers. Thank you, Madam Chairwoman.
I would like to thank Mr. Stevens for what FHA has done to
address their risk pricing and modernize the agency a little
bit.
I do have a couple of specific questions for Mr. Stevens
about FHA with regard to condominiums. You changed your rules
last year with regard to spot approvals, with regard to
concentration, with regard to having at least 50 percent of the
units pre-sold, and I know that has reduced your concentration
in condominiums. I know condominiums were part of the problem.
But I have heard from some constituents in my area that we
have a lot of bank-owned condos and now it is really hard to
get financing for those and they are stuck in sort of limbo,
because the bank took it back. Now you can't get an FHA loan.
You can't get a conventional loan, and therefore those condos
are sort of stuck. Has FHA and anybody on the panel looked at
that issue, and is there a way out of that, because obviously
we need to get those properties in productive use?
Mr. Stevens. Congressman, I very much appreciate the
question, and it is an area that we have spent an extraordinary
amount of time focusing on. I think, as you may know, we
actually put a temporary extension in, we have now done it for
2 years in a row, to provide more lenient policies to the
condominium market. Keep in mind most of this relates to new
condominium approval.
Mr. Stivers. Right.
Mr. Stevens. We are currently one of the few institutions
that will insure a condominium, particularly at a high loan to
value. Most of the private insurers will not engage in this
market. And so we are the sole source provider. And FHA has
experienced some fairly significant losses on condominium
buildings that went completely belly up during this last
economic crisis.
But we also recognize that condominiums are often an entry
point for first-time home buyers. And in underserved
communities, it is really important we provide that service. It
is a difficult position that we are in to be responsible to the
taxpayer and to make sure we are providing needed liquidity. I
meet frequently with the National Association of REALTORS and
the home builders, mortgage bankers, all who constantly want to
discuss these policies. I am very open to discuss them.
Today we have--I have given temporary extensions to
policies at much more lenient levels because of the concerns
you have, but I would be very interested in any insight or
input that you or your staff would have.
Mr. Stivers. I do have some input. Is there some
flexibility we could give you to charge risk-based pricing on
those condominiums that are obviously different because your
risk is higher than other places? And I know currently you
don't offer a lot of differentiation. Have you looked at that
as a way to offset that--
Mr. Stevens. You know, Congressman--
Mr. Stivers. --and have people pay for what they need.
Mr. Stevens. We have been looking at ways to implement a
risk-based pricing pilot, as we are authorized to do by
Congress. Actually, it is an interesting idea. It is one I
would like to go back and look into, and I would be glad to
follow up with you on how and if we could do something like
that.
Mr. Stivers. And I would love if you could follow up with
me in my office because it is impacting a lot of our districts,
but especially, again, on whole projects that have fallen into
bank foreclosure now, if over 50 percent of them are--it is
just hard. They can't get private financing. They are having
trouble getting FHA financing. I sympathize with folks trying
to get that property in productive use.
So that was the thing I really wanted to get at in today's
hearing because I heard from a constituent on this issue and
wanted to follow up on it, and I would love to follow up with
you.
I yield back the balance of my time, Madam Chairwoman.
Chairwoman Biggert. Thank you.
Mr. Duffy from Wisconsin, you are recognized.
Mr. Duffy. Thank you, Madam Chairwoman.
I yield my time to my colleague from North Carolina.
Mr. McHenry. I thank my colleague from Wisconsin for
yielding, and just wanted to follow up on my previous line of
questioning.
Mr. Stevens, in terms of the settlement contemplated or
being discussed that you mention with the 11 regulators and the
servicers, what is the magnitude and dollar amount that we are
talking about?
Mr. Stevens. I am actually glad you got the time back
because I wanted to--this is a great opportunity to follow up.
First of all--
Mr. McHenry. What is the magnitude and dollar amount?
Mr. Stevens. The magnitude is in a broad range.
Mr. McHenry. What is the broad range we are talking about?
Mr. Stevens. It would be premature to even give a dollar
amount because we are not there yet.
Mr. McHenry. Are you talking billions?
Mr. Stevens. We are talking a range that could be above or
below.
Mr. McHenry. Okay, I am hearing ranges in the tens of
billions range. Is that--would you say that is not correct.
Mr. Stevens. Here is what I can tell you. That the range--
this comes down to, what are the actual violations that have
been identified? We haven't aggregated those. What are the
potential costs that each individual agency and State attorney
general could ultimately assess against these institutions? We
need to understand what that total potential estimation could
be. And off of that, that is what we will have to work on to
determine if there is a way we can come together and make this
less disruptive in the market. So I cannot give you the--
Mr. McHenry. Okay. I understand that, I understand that. Is
there a timeframe we are looking at? Is this something that is
going to happen in the next month?
Mr. Stevens. We would like it to be sooner rather than
later. As you can imagine, I am relatively new to government,
but we are working with multiple agencies, multiple regulators
that have different obligations, but we would like it to be
sooner rather than later.
Mr. McHenry. Is it this quarter? Is it this month?
Mr. Stevens. I would say a month timeframe is probably in
the reasonable range if we are to reach some sort of
conclusion.
Mr. McHenry. Are there discussions about what the money
will then be used for in this settlement?
Mr. Stevens. There are a variety of discussions. There are
different views that we are working on.
Mr. McHenry. Are there some options that you are
contemplating or you are recommending?
Mr. Stevens. There are options that we are contemplating.
It could include anything from what you suggested in terms of
having them modify loans so they stay performing in the market,
which would improve the economy. There are options also just to
purely collect penalties and have those deposited in the
Treasury, and there are whole varieties of--
Mr. McHenry. Are principal reductions being one of the
options?
Mr. Stevens. Yes.
Mr. McHenry. Thank you.
Ms. Caldwell, in terms of your involvement, have you been
involved in these discussions that I have questioned Mr.
Stevens about?
Ms. Caldwell. I have been involved in some of them, yes.
Mr. McHenry. Have you been in the room with various
regulators when these discussions are going on.
Ms. Caldwell. With some, yes, particularly as--
Mr. McHenry. What regulators?
Ms. Caldwell. --it relates to foreclosure prevention. As
you said earlier--
Mr. McHenry. What regulators, if you might inform us?
Ms. Caldwell. Actually, most of the Federal regulators that
regulate these institutions.
Mr. McHenry. Okay. Are you there in terms of, using this in
terms of HAMP or a different type of HAMP program, using the
settlement money towards that?
Ms. Caldwell. At this stage, there are no contemplated
changes to HAMP in terms of--
Mr. McHenry. No, I mean, in these discussions, why are you
there?
Ms. Caldwell. Primarily because of my expertise and
experience in foreclosure prevention servicing practices and
loss mitigation in overall housing finance.
Mr. McHenry. So the regulators don't have that expertise is
what you are saying, so you have to be brought in from Treasury
to provide that?
Ms. Caldwell. No. Treasury is there in Treasury's role. And
you asked specifically what role I am playing. There are a
number of people at Treasury who participate, and you asked
specifically for mine, and it is with respect to that area of
expertise.
Mr. McHenry. Okay. In terms of HAMP, have there been
discussions about a second HAMP, a HAMP 2?
Ms. Caldwell. That is a good question. I think it is
important to remember--
Mr. McHenry. And that is why I am asking. I hope you give
me a good answer.
Ms. Caldwell. I think the answer is, based on the authority
we have under EESA, there cannot be any new programs in HAMP
that were not in place as of June of 2010. We do not have
authority for new programs. We continue to get ideas.
Mr. McHenry. Could you use settlement money in order to
create a new program?
Ms. Caldwell. As I said, at this point, there are--we do
not have authority for new programs.
Mr. McHenry. Even if you have a settlement in the terms of
billions of dollars, that could not be used for principal
reduction is what you are saying?
Ms. Caldwell. I would just say one of the focuses of HAMP
has not been the need for more funds. The focus of HAMP has
really been getting more attention on homeowners to make sure
we use the funds that are available.
Mr. McHenry. Madam Chairwoman, I know my time has expired.
If I may ask Ms. Caldwell one final question? Do you believe
that HAMP has been a success?
Chairwoman Biggert. Mr. McHenry--
Mr. McHenry. It is a simple yes-or-no answer, Madam
Chairwoman. Do you believe that HAMP has been a success?
Ms. Caldwell. I believe that HAMP has been a success at
reaching the people it was intended to reach with a
modification that is sustainable in changing the industry.
Chairwoman Biggert. The gentleman from New Jersey, Mr.
Garrett, is recognized for 5 minutes.
Mr. Garrett. Thank you. I may not use the whole 5 minutes,
but thank you.
Mr. Tozer, I just came back from another hearing. Secretary
Geithner is just down the hall, actually in the other building,
and made reference to the fact that we just had a hearing in
the committee with regard to the GSEs and GSE reform and the
like. And in that hearing, we discussed ways to treat the book
of the GSEs and basically put it on the book of the Federal
Government, the liabilities and the assets. And one of the
comments that was made by one of the witnesses was that if you
do that, it may actually have a negligible impact on the
balance sheet, so to speak, because the assets basically would
offset the liabilities.
And that if you put it on the books of the U.S. Government
as the GSE securities began, the short-term securities would
begin to run off, right, you would reissue U.S. securities to
back it, okay. And the reason you would do that is because the
spread is a little bit different between them, about 25 basis
points, and theoretically you would save money over time which
would be good for the taxpayers because we are basically
funding them right now.
So just if you could comment: (a) on a proposal about
putting it all on the balance sheet; and (b) are there any
practical implications with regard to if we did all that over
here with the GSEs and how that might affect the pricing of
Ginnie Mae securities?
Mr. Tozer. Again, since I really haven't seen the proposal,
but as I understand what you are saying is that as GSE's
liabilities roll off, you would replace them with government-
guaranteed liabilities on the liability side of the balance
sheet, as I understand what you are saying.
Mr. Garrett. Yes.
Mr. Tozer. From my perspective, I would indicate from
Ginnie Mae, it should probably have a negligible impact. The
reason I would say that is, and again not understanding all the
facts of it, but the fact that since we are in a situation
where we are dealing pretty much with a 30-year fixed-rate
market and our issuers are creating 30-year securities, you are
really dealing with two different investor bases. You have
people who invest in short-term assets, which are going to be
more banks, money markets and so forth. Our investor base is
more central bankers, pension funds, insurance companies. So I
would think from that perspective from what you said, I would
say it would have a negligible impact because of the long-term
investors for us and short-term ones for the short-term
liabilities.
Mr. Garrett. Okay.
And the second question is for Commissioner Stevens. You
made some more comments which I agree with, with regard to as
we all go through the process here of GSE reform, we sort of
have to do it at the same pace or track, if you will, with
regard to FHA reform at the same time, right.
Mr. Stevens. Yes.
Mr. Garrett. And I think that is crucial because I guess if
you don't do that, if all of a sudden we do all the reform
tomorrow and that is not a timeline, but on the GSEs, then
what, everything will just--if you begin to do as the
Administration says, try to move that in a more private fashion
that could have the effect of funneling a lot of the business
over to FHA, right.
Some of the Treasury proposal says that over time their
proposal is to change the downpayments for the GSEs to 10
percent. So if you have that effect over here in the GSEs and
you guys are over here at what, 3.5 percent, the natural
implication is that part of that book will just extend over to
you folks. They also--I think they discussed in their proposal
as far as raising the GPs over at Fannie and Freddie, so the
same thing. If it is getting more costly over here, what is the
natural implication of that? Folks are just going to be coming
over to FHA, right?
Mr. Stevens. If we do nothing, that is correct. We have
done three premium increases at FHA in the last year alone, and
I just increased premiums on Monday one more time. And so I
think, to that extent, there are levers you can address within
FHA to make sure that there is balance in any steps that take
place to change the size and scope of the FHA footprint.
On the downpayment piece, we are looking forward to the
dialogue on downpayments. Today, FHA doing minimum downpayments
up to $729,000 is something that we clearly endorse with a
White Paper to say that needs to scale back. And that is why we
do believe, however, there needs to be--
Mr. Garrett. Scale back?
Mr. Stevens. Scale back at least at a minimum at the end of
the year to HERA levels. And as the White Paper states, we
believe we should have a discussion about whether we should
increase those further.
Mr. Garrett. As far as those limits. And as far as the
downpayments then for them, how would that go?
Mr. Stevens. The same issue on the downpayments. I think
there is a good dialogue in the White Paper that gives this as
a suggestion: We need to make sure that we provide within the
role of FHA a much reduced footprint that has explicit support
for underserved families that otherwise would not have the
disposable income or means to potentially ever buy a home. So
you can scale that market down by looking at loan limits and
other measures. And for the remainder of the portfolio, you
could theoretically change downpayment requirements.
We talk about an explicit funding mechanism that would be
budget-neutral in the White Paper that would help support
downpayment assistance. And if that was created, you could
clearly adjust loan to values within the FHA program.
Chairwoman Biggert. The gentleman's time has expired.
The gentleman from Texas is recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman.
Again, I thank the witnesses for appearing. And I also
thank the witnesses on the second panel, and apologize that I
may not be here to hear your testimony, but I assure you I will
review it.
Just for edification purposes I would like to take a moment
and explain that when we talk about reforming a system, we
impact more than the buyers and the sellers. I think it is
important to what we do at the banks, especially small banks,
and what we do with the consumers, the actual persons who are
purchasing homes, is important.
But also we have Realtors who are in this process. And I
can tell you--I meet with them, talk to them--Realtors are very
much concerned about how we will reform this system because
they understand how the loans move from the portfolio of the
bank to some other entity, and then it gets securitized. They
have a lot of consternation about this. And we don't hear a lot
from them. I suppose they are quietly suffering, to a certain
extent.
But I want to be a voice for them and let people know that
Realtors are very much concerned about what will happen when we
start to reform, if you will, the system.
And I do advise, as I have been advised, that we proceed
with a great degree of caution because the system is very
fragile right now. And while there is a movement toward
recovery, we can, if we are not careful, do things that may
thwart the recovery in an effort to be helpful. So we have to
be very careful as we move.
I would like to move next to Mr. Tozer. Am I announcing
that correctly, sir?
Mr. Tozer. Yes, you are.
Mr. Green. Okay.
Mr. Tozer, sir, some things bear repeating. You have given
us a good deal of intelligence about Ginnie Mae. We understand
that it originated out of Fannie Mae: Fannie Mae in 1938;
Ginnie Mae in 1968. But you talked about the layers of
protection and you talked about how you don't come into play as
often as some of the other agencies. Can you better define for
us how often you come into play with these mortgage-backed
securities?
Mr. Tozer. In the past year, we have had four issuers we
had to deal with their servicing. And in reality, out of the
four, two of them were ones where they were banks that received
the FDIC. So the servicing was fine. There was no problem with
servicing. We were able to move it, because again, it was an
FDIC issue that made us move them. The other one, we actually
were able to move the servicing to someone else, too; then put
a mortgage banker. So really we have had to deal with our
guarantee as far as ceding the servicing four times. Only one
time we even had to even get involved long term. And even with
that, it didn't cost us anything. Because what we did was we
took the servicing. We have two back-up servicers, people who
are willing to service for a fee for us, and they are servicing
on our behalf.
So as of this point, the four organizations that have
failed this year to this point have not cost the guarantee any
money because we were able to replace the servicing. Because
that is the key. Our guarantee comes into play if the
servicing--the whole servicing pool, not just the ones that are
bad, but the whole servicing pool, because these servicers are
paid a fee to service a portfolio, and it is a very lucrative
fee.
So when we go out to put the servicing out to the private
market, as long as there is enough current loans, we can place
it and not cost our fund any money at all. It has really not
come into play, and it has worked very well.
Mr. Green. You have indicated, and I will restate this, you
don't originate loans. You don't purchase loans. You don't sell
securities. As a matter of fact, you really are not involved in
derivatives, are you?
Mr. Tozer. No. Again, our whole position is that we have
lenders that have taken FHA/VA insured or guarantee loans,
government housing, and they have created pools, basic almost
like private label pools. What we have done is we have wrapped
those securities. So really we don't get involved in
derivatives.
The only thing we are involved with is we do offer a REMIC
program, again to help create liquidity for the Ginnie Mae
security. But it is not really a derivative; it is more of a
situation of just kind of helping the market. But overall, we
are not involved with derivatives. Again, we are truly just an
insurance company.
Mr. Green. My time is about to expire. Let me just ask you
one additional thing. You deal with institutional investors,
correct?
Mr. Tozer. That is correct.
Mr. Green. Could you just quickly define this so that there
won't be any question as to what an institutional investor is,
please?
Mr. Tozer. The institutional investors that buy our
securities are mutual funds like Vanguard. It is central
bankers around the world. It is pension funds. It is insurance
companies. It is the people who have a natural interest in
long-term investments and that like the government guarantee
because that way they know they have liquidity to get in and
out of the security business. But it is mainly like central
bankers, insurance companies, mutual fund owners.
Mr. Green. Thank you, sir. My time has expired.
Thank you, Madam Chairwoman.
Chairwoman Biggert. Thank you.
The Chair notes that some members may have additional
questions for this panel which they may wish to submit in
writing. So, without objection, the hearing record will remain
open for 30 days for members to submit written questions to
these witnesses and to place their responses in the record.
And I would like to thank the panel for spending this time
with us and for being very patient before we started. So, with
that, thank you, thank you very much.
We will move to the second panel as quickly as possible.
While we are moving quickly to the second panel, I do want to
acknowledge something, so if I could have your attention
please. This committee has also acknowledged this, but I would
like to recognize a senior professional staff member, Cindy
Chetti, for her decades of service to this committee and this
institution.
Cindy, thank you, thank you, thank you for your service to
this committee. And as you all know, Cindy is leaving us or
retiring, we could say, but to a new career, and we wish her
the best, and thank you so much.
I now recognize the second panel. And I thank you for your
patience. Certainly, I hope there weren't any airplanes that
were leaving now.
Our second panel consists of: Douglas Holtz-Eakin,
president, American Action Forum, and former Director of the
Congressional Budget Office from 2003 to 2005; Michael Farrell,
chairman, CEO, and president of Annaly Capital Management,
Incorporated; Faith Schwartz, executive director, HOPE NOW
Alliance; and Julia Gordon, senior policy counsel, Center for
Responsible Lending.
And as we said to the first panel, without objection, your
written statements will be made a part of the record, and you
will each be recognized for a 5-minute summary of your
testimony.
We will begin with Mr. Holtz-Eakin for 5 minutes.
STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION
FORUM, AND FORMER DIRECTOR OF THE CONGRESSIONAL BUDGET OFFICE
FROM 2003 TO 2005
Mr. Holtz-Eakin. Madam Chairwoman, Mr. Clay, and members of
the subcommittee, thank you for the chance to be here today.
You do have my written statement, so I will be brief. Let
me make two major points about the role of government policy in
housing recovery. And the first has to do with the broad
macroeconomic recovery that the United States is engaged in at
the moment where I think housing enters in two important ways.
The first is that an important feature of this economic
setting is the bad damage to household balance sheets during
the financial crisis and recession, housing being a key part of
that. It is one of the reasons that I do not believe that any
consumer-led strategy will be successful in generating faster
economic growth.
Housing policy enters there in that the sooner the
valuations are settled in the housing market, the better. And I
at least have come to the conclusion that I am skeptical that
any government intervention can speed the clearance of excess
inventories from the market and otherwise stabilize housing
values. The quicker this gets done, the better, and I think
getting government out of the way is the fastest way for that
to happen.
The second is that in the end, this recovery will be
powered by investments, business spending in workers, plant
equipment, and in residential and nonresidential construction.
There, I think the most important thing is to settle the rules
of the road. Some of this debate is familiar. What will be the
future of tax policy past 2012 now? What will be the nature of
regulatory burdens, where we have seen over the past year a
record number of Federal Register pages with regulations coming
from Dodd-Frank, now the Affordable Care Act, EPA, all of which
have impacts on housing construction, but also the future of
mortgage finance, where it will be essential for folks to
understand how exactly this is going to be operated?
There I think it is worth stepping back quite a bit and
looking at what the objectives are. And I would say, broadly
speaking, the U.S. tradition of subsidizing debt-financed
owner-occupied housing in ways which are invisible and not
transparent for the taxpayer has been a great disservice to the
taxpayer, certainly to homeowners in the end and to those in
the housing community.
The mortgage interest deduction is a classic example of
rewarding debt finance of owner-occupied housing, not merely
owner-occupied housing. And the implicit subsidy provided
through the GSEs with affordable housing goals off the books
that left taxpayers massively exposed is a very indirect and
inefficient subsidy to policy goals.
And so I think the primary objective for the members would
be to identify policy roles clearly. Are they to subsidize
housing or is it owner-occupied housing, or is it debt
financing of owner-occupied housing where we reward leverage?
But identify the goal and provide those subsidies in a budgeted
fashion, put them on the budget so that they are transparent to
taxpayers and to members, and they control those subsidies;
target them as directly as possible on the communities you wish
to affect, low-income Americans, veterans, as it may be, and
not indirectly through secondary mortgage markets, which make
it very difficult to have efficient subsidies and end up
costing very, very much.
So I think that there is a lot to be done and it must be
done relatively quickly. Because until this is settled, where
the housing finance industry is going, what then you can plan
in the way of sensible transitions in phasing out, clearly, the
taxpayer finance hedge fund that was Fannie Mae and Freddie Mac
portfolios, and indeed, in some circumstances, phasing out the
guarantee function, which you could easily do in a future
government-free housing finance world; the sooner that is
settled, the more clarity you will have and the faster we will
get genuine recovery in both the housing sector and also the
larger economy of which it is such an important part.
I thank you for the chance to be here today and I look
forward to answering your questions.
[The prepared statement of Mr. Holtz-Eakin can be found on
page 96 of the appendix.]
Chairwoman Biggert. Thank you so much.
Mr. Farrell, you are recognized for 5 minutes.
STATEMENT OF MICHAEL A.J. FARRELL, CHAIRMAN, CEO, AND
PRESIDENT, ANNALY CAPITAL MANAGEMENT, INC
Mr. Farrell. Chairwoman Biggert, Mr. Clay, and members of
the subcommittee, my name is Mike Farrell. I run Annaly Capital
Management. I am the chairman and CEO and the founder.
We are a large residential mortgage real estate investment
trust, or a REIT, listed on the New York Stock Exchange.
Collectively, between Annaly and the other companies that we
run, we run about $100 billion worth of mortgage-backed
securities and mortgage loans through our portfolios as
investors.
I represent an important constituency in the housing
market, the secondary mortgage investors, who provide a
majority of the capital to finance America's homeowners. Just
for the Annaly family companies, we estimate our shareholders
collectively help finance the homes of 1 million American
households or 3 million American citizens.
I would like to begin by focusing on the fact that the
secondary mortgage market investors provide 75 percent of the
U.S. housing market capital. That is approximately, of the $10
trillion in outstanding home mortgage debt, about $7.5 trillion
is funded by mortgage-backed securities and investors that fund
those securities. Of that $7.5 trillion about $5.5 trillion is
in the government-guaranteed mortgage-backed securities and
about $2 trillion in so-called private label mortgage-backed
securities. The balance, or $2.5 trillion, is held in loan
form, primarily on bank balance sheets.
Since our country's banks have about $12 trillion in total
assets, there is not enough money in the banking system to fund
our Nation's housing stock for cash, at least not at today's
current levels. It is axiomatic that without a healthy
securitization market, our housing finance system would have to
undergo a radical transformation.
Right now, securitization is attracting significant amounts
of private capital, at least to that part of the NBS market
that is government guaranteed. The problem is that in the
nonagency part of the sector or the so-called private label
market, it is dormant, and only one small deal has been done in
the last 2\1/2\ years.
I now would like to discuss several reasons why the private
label market is not restarting. First, the economics don't
work, for a number of reasons but mainly because mortgage rates
have to rise in order to compensate investors for the risk that
they are taking in those securities.
Second, there is a higher yielding alternative for
investors who want to take a residential mortgage credit risk,
older private label mortgage-backed securities and seasoned
loans that have been repriced and are cheaper by the market
after the events of the past few years. As long as this
disparity exists it will impede the restart of the new issue of
private label market.
The third reason is the difficulty in sourcing enough newly
originated loans. Without the outlet to sell mortgages and
securitizations, banks have gotten more comfortable holding
nonconforming loans on their balance sheet, not only by
tightening underwriting standards but including sizable
downpayments. In short, banks are only willing to make loans to
highly capitalized borrowers.
The fourth reason is the uncertainty over the future
regulatory environment. The many different mortgage
modification programs and delays in foreclosures have made it
difficult for investors to analyze cash flows.
Finally, I want to get to the heart of the current debate.
Can the private label mortgage-backed securities market come
back and fill the gap that is currently filled by the GSEs? The
short answer is, yes, it can, but not at the same price and not
in the same size.
Most investors in agency mortgage-backed securities won't
invest in private label mortgage-backed securities at any price
or only in much reduced amounts because their investment
guidelines preclude taking credit risks. These investors
include money market funds, mutual funds, banks, foreign
investors and governmental agencies. Some investors could cross
over, but we don't know how many or at what price, and we won't
know until we have a lot more information to make that analysis
clear.
But back at the end of the day, I have to refer to my two
market truths: first, securitization is a source of about 75
percent of the capital to the housing market; and second, the
private label securitization market is not working right now.
I thank you for your time today, and I look forward to your
questions.
[The prepared statement of Mr. Farrell can be found on page
56 of the appendix.]
Chairwoman Biggert. Thank you.
Ms. Schwartz, you are recognized for 5 minutes.
STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, HOPE NOW
ALLIANCE
Ms. Schwartz. Thank you, Chairwoman Biggert, and members of
the subcommittee.
Thank you for having me come today and testify before you.
I am Faith Schwartz, the executive director of the HOPE NOW
Alliance. And I have served in that capacity since 2007, where
I work with servicers, nonprofit housing counselors,
regulators, and the government to help homeowners avoid
foreclosure.
The comments I make today are my own and represent my
experience at HOPE NOW and my breadth of experience in the
capital markets prior to HOPE NOW. I will focus my oral
testimony on the HOPE NOW data collected over the past 3 years;
the state of the market, including government programs; and
summarize issues to consider associated with a return of
private capital.
Foreclosure intervention programs have contributed to a
record number of borrowers seeking help to avoid foreclosure
and have assisted millions of borrowers stay in their homes.
These public-private efforts have also contributed to longer
foreclosure timelines across the country. The information
shared today should assist you as you think about the important
issue of bringing the private capital back.
In early 2010, we had over 4 million borrowers who were 60
days or more past due on their mortgages. The industry
completed 1.7 million loan modifications. Of that, 1.2 million
were private industry modifications and another half million
modifications were done through the HAMP program, the
government program. To keep it in context, you should compare
that with 1 million foreclosure sales that happened through the
same year of last year.
What has changed from 2007 through 2011? Early on, the
efforts on foreclosure prevention were focused on subprime
securitizations, freezing interest rates, capitalizing
arrearages, and extending terms of mortgages to keep them
intact. There were few government program resources focused on
foreclosure prevention, and the industry did pull together with
government to collaborate and with nonprofits to keep people in
their homes. The scale of the problem remained large, and the
government got more involved.
Some of the government programs rolled out were as follows:
FHA HOPE for Homeowners. It is a targeted refinance program
with servicers and investors willing to write down principal
and consumers have to equity share with the U.S. Government.
The HARP program was a GSE refinance program targeted at loans
at 80 percent up to 120 percent for negative equity borrowers
at risk of default. Making Home Affordable, HAFA, a short sales
and deed in lieu program focused on detailed processes for many
players, forgiveness of a deficiency if you sell the home lower
than what is owed on the loan and extending the timeline of
loans up to 120 days.
Making Home Affordable. HAMP--government loan modifications
that set standards; safe harbors and PB tests focused on
affordability; tools including 31 percent DTIs; rate reduction
to 2 percent; extension of terms of 40 years. And a detailed
review on HAMP is in my lengthier written testimony.
Treasury also rolled out $7.5 billion to the hardest hit
States--18 States and the District of Columbia--to address
unemployment, principal reductions, and other modification
supplements to the current modification efforts going on.
Lastly, on the government intervention, we have had the
State mediation guidelines that have been rolled out from 26
States that have a lack of uniformity in them, but their
intentions are good: to keep people meeting with each other
prior to going to foreclosure. What we recommend, however, is a
comprehensive review for the various programs which are all
unique to create universal documentation requirement standards
and agreements on how to measure success.
Our proprietary solutions and modifications have been up to
3.5 million since July of 2007. This is without taxpayer
dollars, and it happens only after a loan has been considered
for a government modification and is ineligible for a
government modification.
The efforts have improved, and the modifications are more
sustainable and affordable. And permanent solutions for
borrowers who are seeking to stay in their home are now getting
permanent affordable payments: 84 percent of the proprietary
mods have an initial duration of set rate of 5 years or
greater; 81 percent have lower principal and interest payments;
and 80 percent of the proprietary mods, on average, are less
than 90 days past due that have been performed over this past
year.
Summary and recommendation: Foreclosure timelines have
increased considerably. While effective interventions have made
a difference to millions of homeowners and investors,
homeowners and communities have also experienced tremendous
losses. Vacant housing abounds, and the foreclosure process
remains drawn out. The average delinquency of a foreclosure in
2008 was 300 days, and in September 2010, it was 500 days
across the country.
Measuring risk has been difficult in the changing
marketplace. Investors will want to see standards and
uniformity. Whether it is State or Federal programs, uniformity
and improved execution will be important to improve the cost of
servicing, managing multiple programs, and mandates.
Clear reps and warranties need to be in place.
Identification of roles and responsibility of the servicer, of
the borrower, and of the investor will be spelled out and the
terms of the contract must be enforceable.
Duration and prepayment risk, credit risk, and all of the
Federal programs will also add to the uncertainty for
investors.
Thank you.
[The prepared statement of Ms. Schwartz can be found on
page 101 of the appendix.]
Chairwoman Biggert. Thank you.
Ms. Gordon, you are recognized for 5 minutes.
STATEMENT OF JULIA GORDON, SENIOR POLICY COUNSEL, CENTER FOR
RESPONSIBLE LENDING
Ms. Gordon. Thank you, Chairwoman Biggert, Mr. Clay, and
members of the subcommittee. I serve as senior policy counsel
of the Center for Responsible Lending, a nonprofit research and
policy organization dedicated to protecting homeownership and
family wealth. We are an affiliate of Self-Help, a CDFI that
finances safe and affordable mortgages and small business
loans.
Over the next several years, the toxic combination of
unsustainable loans, high unemployment, and underwater
borrowers could mean a stunning total of more than 13 million
foreclosures during this crisis, which is about a quarter of
all the mortgages in the country. The spillover effects of
these foreclosures will cost our Nation billions if not
trillions of dollars, and the additional excess supply of homes
will drive still further declines in home values.
Things did not need to be this bad. Mortgage servicers are
supposed to be capable of handling loans even when problems
arise, but the profits made during the years when servicing was
simple were not reinvested to prepare for the rainy days.
Instead, nearly 4 years since the start of the crisis, the
industry is still struggling to catch up to the new reality.
If market principles applied here, customers would have
voted with their feet by now. But mortgages are not like cell
phones; homeowners do not get to choose their servicer or
switch providers if service is poor. Even investors have very
little control over the servicing of the loan pools on which
their income depends. For this reason, it made a lot of sense
for the government to offer tools to help servicers do a better
job of protecting the assets of both investors and homeowners.
HAMP, the principal government effort, has proved
disappointing, in large part because it is a voluntary rather
than a mandatory program. And servicers who failed to make the
modifications they were supposed to suffered little consequence
for these failures. But it is not productive to respond to
HAMP's tepid performance by throwing our hands up and declaring
that we will just let foreclosures continue to wreak havoc on
America's families, neighborhoods, and cities.That is reckless
endangerment of the housing market, not to mention an
abandonment of the interests of every homeowner in the Nation,
all of whose wealth is reduced by continued foreclosures.
Rather, it is time to do what we should have done all along:
require all servicers across the entire industry to review all
loans for alternatives to foreclosure and enforce that
requirement.
There is little disagreement that affordable loan
modifications are a win-win. Not only do they give families a
shot at keeping their homes, but they provide greater returns
to investors even when many of those homeowners redefault.
There is also consensus that for vacant homes and for homes
that the borrower cannot possibly afford, it is best to free up
that home for a new family. But the servicing system simply
cannot sort out which is which right now. It is crippled by
overwhelming volume, and the financial incentives don't line up
with investor and homeowner interests. More than 60 percent of
borrowers in trouble have had no evaluation of their situation
at all. In other words, many foreclosures that shouldn't
happen, happen; and foreclosures that should happen languish in
the vast shadow inventory.
A few commonsense principles are crucial. Servicers should
review loans for alternatives even before foreclosure
proceedings are started, and loss mitigation and foreclosure
processes should not go forward on a dual track. Servicers
should provide borrowers a single point of contact to guide
them through the modification maze. Banking regulators should
enforce existing rules and establish additional duties and
standards to prevent detrimental servicing practices.
Last but not least, as we retool the mortgage finance
system, consider that any market needs a continuous influx of
new customers, especially at a time when we suffer from an
oversupply of homes. The failure to meet the needs of first-
time homebuyers and customers from low-wealth backgrounds could
be catastrophic for market recovery and growth. It is important
to note that the current crisis was not caused by first-time
homebuyers who constituted only 10 percent of those who
received risky subprime loans. Rather, it was caused by
existing homeowners being refinanced by predatory lenders into
bad products.
Excessive fees and large mandatory downpayments that keep
people out of the market are the wrong way to keep the market
safe. Instead, a healthy market needs sensible rules resulting
in affordable, safe, sustainable loans. And we should make sure
that lenders don't discriminate against people who have the
ability to pay for a mortgage but who live in a low-wealth or
minority neighborhood.
Thank you for your time. And I look forward to your
questions and to working with you to restore health to the
housing market and economy.
[The prepared statement of Ms. Gordon can be found on page
60 of the appendix.]
Chairwoman Biggert. Thank you.
I now recognize the committee for 5 minutes for questions,
and I will yield myself 5 minutes.
Uncertainty seems to be the word that I am hearing here and
we heard in the former panel. Uncertainty is a theme.
Ms. Schwartz, can you just tell a little bit from your own
experience about the impact uncertainty is having on
participation of private capital in the mortgage finance?
Ms. Schwartz. I am relating it to servicing and the
investment. In a mortgage as a whole, you have to have care of
how you process a loan in the servicing department and also
through the foreclosure process. And the uncertainties abound
in the length of time it takes to just foreclose on a loan, and
someone might have abandoned the house. So we have overlapping
government programs in that Fannie, Freddie, FHA and HAMP, all
really well-intentioned, I work well with all of them, but they
have different processes and procedures to do likely the same
type of things. We would really benefit from more uniformity
and create less uncertainty in timelines and getting through
the system.
Chairwoman Biggert. Thank you.
And Mr. Farrell, in your testimony you talk about
uncertainty over the future regulatory environment, and the
many different mortgage modification programs and delays in
foreclosure have made it difficult for investors to analyze
cash flows.
Could you elaborate a little bit about how the
Administration is exploring the option of implementing national
servicing standards with no real timeframe for a decision? And
the avalanche of rules resulting from Dodd-Frank are still in
the pipeline. So are you concerned that this will really make
much more uncertainty about private capital coming into the
market?
Mr. Farrell. I think that the uncertainty of regulatory
capital, charges on banks, the changes that have emerged in
coordination with other central banks, Basel 3, etc., are
unquestionably creating an uncertainty of commitment of capital
to the market in some respects and in some asset classes.
If we go back to 2008 during the middle of the crisis,
virtually every mortgage security--which is unquestionably just
a cash flow that needs to be analyzed by investors and compared
to other allocations of other cash flows--all of the mortgages
in the United States at that point in time were considered to
go bad by investors. And the assumptions that were being taken
into the market for secondary mortgages as well as for primary
mortgages was that there was going to be a much higher default
rate than actually what has occurred, the severity rates, the
recovery rates, etc. That uncertainty only bleeds over into the
kind of dialogue that we have had about the servicing standards
that are going to emerge out of this, the continuation of
Fannie Mae and Freddie Mac.
We have to complete globally for this capital when we go
out and we try to raise it to compete for other asset
allocations. When we look at the influence of cash flows on our
earnings and our returns to our investors--who are primarily
domestic investors, everyone from individual investors to
institutional funds--we need to be able to clearly explain to
them what we think the variance in those earnings are going to
be. And the uncertainties of policy, modification, tinkering
with the cash flows, all lead to us having to essentially take
a discount and hair-cut those cash flows, and therefore raise
interest rates, in effect, in the private market.
So my short answer is yes, that uncertainty is there. There
is capital to do that, but it is exacting a higher toll in
terms of the absolute rates that people need to pay for their
mortgages.
Chairwoman Biggert. Thank you.
And then I would like to move on to Dr. Holtz-Eakin. You
also talk about the uncertainty and the stress. You talk about
the stress that housing valuations have caused homeowners and
how they restrict their spending.
Have you identified any policies as having a destabilizing
effect on the housing valuations?
Mr. Holtz-Eakin. I think at this point, the sad reality is
the best thing we can do is to let housing markets clear. And
prices will decline where they have to to get excess
inventories off the market, and at that point they will
stabilize and we will also hopefully begin to create some jobs.
You will get a somewhat closing of the gap between the
underlying household formation and demographic demand for
housing, which is probably double the housing starts we have
right now and the actual demand we see due to diminished wealth
and low income.
So I have thought for 2 years now, if not longer, about
housing policies that might speed this, and I have come to the
reluctant conclusion that there are no magic bullets out there.
You can't fool Mother Nature. We are going to have to just let
this play out.
Chairwoman Biggert. Thank you. I yield back my time.
The gentleman from Missouri is recognized for 5 minutes.
Mr. Clay. Thank you, Madam Chairwoman.
And let me start with Ms. Schwartz on a district-specific
question. Would you be able to supply me with any data on how
many permanent loan modifications HOPE NOW has performed in the
First District of Missouri?
Ms. Schwartz. I can't on a district basis, but I can on a
State basis. I can have that data for you.
Mr. Clay. That would be fine. Thank you.
Let me ask you a series of questions to get a feel for your
take on servicing reform, and these are basically yes-or-no
questions.
Would you support servicing reform that mandates a single
point of contact for borrowers for the life of their loan
modification?
Ms. Schwartz. I would support reform to make sure borrowers
had someone to talk to, who knew their situation and could help
them, but that might look differently to different companies.
Mr. Clay. Okay. How about would you support mandates,
disclosure of the complete chain of title, and whether or not
the servicer used a loss note affidavit in the notice of
default? Support or oppose?
Ms. Schwartz. I think that there should be a clear chain of
title, and you should be able to find it and use loss note
affidavits as needed.
Mr. Clay. Would you require in contracts a formula that
would govern how second liens had to be written down in the
event of a first-lien modification?
Ms. Schwartz. I support the co-modification of a second
lien and a first lien in the new MP program level.
Mr. Clay. Would you require that an independent master
servicer provide oversight and resolve disputes regarding
servicers' actions?
Ms. Schwartz. I am probably not familiar enough with the
master servicer rule to answer that.
Mr. Clay. What in Ms. Gordon's suggestions would you
support to improve modification?
Ms. Schwartz. We both were talking and we both were in firm
agreement that simplicity--and this complex system of
modifications can be simplified to help more people and be more
effective.
Mr. Clay. I see. Thank you for your responses.
Ms. Gordon, the Federal Housing Finance Agency has
announced that it would like to make changes to how servicers
of loans guaranteed by Fannie and Freddie are compensated. The
reason for this change is that the FHFA has recognized that
servicer compensation leads to misaligned incentives and harm
the investor and the homeowner. Can you comment on FHFA
initiative and the impact it would have on changing the
misaligned incentives?
Ms. Gordon. We welcome this initiative, which is not just
FHFA, it is also FHA and VA as well. That is a conversation we
hope to be participating in, because we do think the question
of servicer incentives has likely impacted the performance of
the servicers during this crisis.
Mr. Clay. All right. Thank you for that response.
And Mr. Farrell, the future of the housing market going
forward, according to your testimony, does not look that
promising. Not to say that your testimony brought a dark cloud,
but I guess it is more realistic than anything else as far as
what we can expect going forward with homeownership and people
actually securing mortgages. Is that what I heard? Did I hear
that correctly?
Mr. Farrell. I would say I am a realist, but I would also
say I am a total optimist. I think that this clearance will
happen. I think that at the end of the day, as an asset
allocator and a cash flow allocator, the resounding message
that we have received from the markets in our business model--
which is a very circular business model, the Reid model--and I
would congratulate Congress for the 1960 rule that put Reid in
place, which I think have really served the Nation very well
over the past few years and helped stem some of the crisis in
terms of capital raising and allocation.
But when we talk to investors, they have to make a choice
about where they are going to put their money and what that
return is going to look like. And the resounding message that
we have heard from investors is that they would rather lend to
their neighbors at 6 percent than to another sovereign credit
at 6 percent. It is up to us as a Nation to figure out what is
the process and the price of that credit and how that sovereign
credit will work versus the private market credit, but I am
confident that we will figure it out.
Mr. Clay. Thank you, Mr. Farrell.
I yield back.
Chairwoman Biggert. The gentleman's time has expired.
The gentleman from Virginia, Mr. Hurt, is recognized.
Mr. Hurt. Thank you, Madam Chairwoman.
This is really a question for all four, and maybe we can
start with Dr. Holtz-Eakin.
This morning we heard from the Chairman and the Vice
Chairman of the Financial Crisis Inquiry Commission, and one of
the statements that was made in the majority report that I
found interesting was that government housing policy did not
play any significant factor, was not a significant factor in
the crisis that we are now going over with a fine-toothed comb
and trying to assess and trying to find ways to make sure that
we prevent this in the future.
I was wondering, in light of the fact that I think
certainly my constituents would believe that irresponsible
lending led to the subprime mortgage crisis, it seems to me
that government housing policy may actually have a lot to do
with where we are and how we got here. I was wondering if each
of you could maybe speak on that briefly and maybe offer the
top government policy that you think that we need to examine,
change, and shoot for in order to address this.
Mr. Holtz-Eakin. I will try to be brief.
Having issued a dissenting report from the majority, I will
not relitigate all of the things I think they got wrong. But I
would point out that Fannie Mae and Freddie Mac may not have
caused the financial crisis, but they are the poster child for
many of the phenomena that we highlighted in our dissent. They
were key in the securitization chain, which during the panic
did not serve us well. Its opacity contributed to what was a
plain financial panic. They are the poster children for excess
leverage, very little capital backing, implicit backing only by
the taxpayer. They were the biggest phenomenon of ``too-big-to-
fail'', and the quandary that policymakers were faced with in
September 2008 about which institutions to aid and not to aid,
and they were the most expensive to rescue.
So the policy that I think is absolutely imperative to
reexamine is those housing subsidies which are off the Federal
budget, which are implicit in their nature, which in the end
become most dramatic when things fall apart. They are the best
example of that and certainly worth reconsidering.
Mr. Hurt. Thank you.
Mr. Farrell. I would say that my view of the crisis as an
investor was and is being addressed by the legislature now,
which is the amount of leverage that was embedded in the
balance sheets of the GSEs. As they were reporting to the twin
masters of Congress and to the capital markets. The allocation
and the misallocation of pricing in terms of allowing their
balance sheets to grow to $1 trillion-plus balance sheets
forced other lenders to do things that were creative and modify
loans and loan terms and make reps and warranties that were
incorrect.
I think that it is wise to downsize those portfolios. I
don't think that the government should be in the portfolio
business. People like me do that for a living. We live with the
consequences of that, day to day, in terms of the scrutiny of
not only regulators, but the shareholders and the investors who
have to allocate capital to do that.
So I think that if I had to point towards one critical
moment during the past 25 years of looking at the market, I
would think it is once those balance sheets began to balloon to
levels of unsustainable growth, that is when lending practices
were forced into different players that do different things.
And I commend the Congress and the Administration for looking
to downsize those.
My one recommendation as an investor to remove the
uncertainty would be to not let that take a long time, because
that inventory overhang is just as serious in the securities
market as it is in the actual allocation of houses that we have
in inventory around the Nation. Those securities need to be
cleared; we have to find clearing prices for them.
The capital markets are ready to do that. We prove that
every day, and we raise money against that every day. And the
quicker that uncertainty is out, at that time we will know the
true price of what that premium is worth.
Mr. Hurt. Thank you.
Ms. Schwartz. I think it is fair to say that the early part
of this crisis was led by risk-layering on loans that fell
largely outside of the GSEs, Alt A, and subprime; however, they
participated in some of that as well.
My recommendation on how to think about government
involvement in all of this is, had we been able to detect
things earlier, systemwide, on performance of loans in addition
to the front end of the loans, and linking the two makes some
sense for the regulatory review of systemic risk. So that would
be my other observation.
Mr. Hurt. Thank you.
Ms. Gordon. Much of what I would say was already said by
Mr. Farrell and Ms. Schwartz. Irresponsible lending was most
certainly a key driver of the crisis, but most of that lending
was backed by private capital. And the GSEs actually maintained
standards for their loan purchases that would have excluded
many of the toxic loans that were so problematic. It was an
instance here where the bad money was crowding out the good
money. And without the standards that Fannie and Freddie did
have, I don't know how much farther these bad products, these
toxic products, unsustainable loans, could have gone.
That said, going forward, the Dodd-Frank Act creates a
framework for safer lending, and that should provide some
protections. But the system is always evolving. New ideas come
up, and it is important to--the government has an interest in
making sure that lending is safe beyond just protecting the
individual homeowner. As a Nation, we have an interest in
helping people build wealth and in helping people be housed.
And so as we go forward in reforming this system, it is
important to remember that government has played an important
role in that for a very long time now. Really, nobody here
remembers the time before that.
Mr. Hurt. Thank you.
Chairwoman Biggert. Thank you.
The gentleman from Wisconsin, Mr. Duffy, is recognized for
5 minutes.
Mr. Duffy. Thank you, Madam Chairwoman.
I appreciate the witnesses coming in this afternoon and
testifying.
Ms. Gordon, just to clarify your testimony, is it your
position that folks who have come into risk with other
mortgages and are potentially near foreclosure, that we should
provide them alternatives to modify their loans; is that right?
Ms. Gordon. When it would return a greater amount of cash
flow to the investor to modify the loan rather than not modify
it--and if you don't modify it, generally it goes on to
foreclosure--then it does make economic sense to modify that
loan. That is why all of the contracts that you look at will
contemplate the possibility of modifying loans.
Mr. Duffy. But should that be the choice of the investor or
should that be the choice of government to step in and dictate
that cash flow?
Ms. Gordon. Right now it is--the spread sheet that the
servicers run has to do with the amount that would be returned
to the investor. The government actually doesn't play a role in
making that decision.That decision is made by the private
servicer.
Mr. Duffy. So you are not advocating that government should
step in and help play a bigger role in writing down principal
or being part of renegotiating interest rates, are you?
Ms. Gordon. Unfortunately, the private system has failed us
here in terms of their capacity and their competence.
Mr. Duffy. But government does have a role in doing that?
Ms. Gordon. I think that government has a role in helping
the servicers figure out a way to make the choices that help
not just investors, but help the whole housing market recover.
Honestly, I don't think that government has deployed the right
tools to do that or deployed them forcefully enough.
Mr. Duffy. So even when a homeowner and a bank have entered
into an agreement, two private parties, you believe that it is
the role of government to step in and potentially negotiate a
resolution by a potential principal writedown or a decrease in
interest rate?
Ms. Gordon. I should add that in the HAMP program, for
example, as one of the principal government programs, the
servicers have entered into a contract there with Treasury,
under which they receive financial incentives to do the job
that, frankly, they are obligated under all of their contracts
with private parties to do anyway.
Mr. Duffy. And Ms. Schwartz, one part of your testimony,
you indicated that the foreclosure times from 2008, 300 days,
have gone up to now 500 days in 2010. What impact does this
have on prolonging this housing crisis?
Ms. Schwartz. I think it gets at the bigger issue, that we
kind of have overlapping inefficient processes through the
foreclosure prevention. And some of it is good because you are
protecting consumers who might have fallen through the cracks,
but a lot of it has drawn out housing that otherwise should go
to foreclosure, like abandoned houses. And the deterioration of
neighborhoods happens when you have longtime lines of empty
houses of 2 years, because that is an average of 500 days. So
investors need certainty on what they are investing in in the
mortgage business, in the mortgage markets, to get back to kind
of normal timelines.
Mr. Duffy. Is it fair to say that we want to work through
this crisis as quickly as possible, hit our bottom, and
hopefully rebound? Is that a fair assessment of what you think
is an appropriate--
Ms. Schwartz. I think that is right. I think we have to get
through the delinquent and past-due loans and get through them
and hopefully save as many people who are eligible for a loan
modification, and then get them foreclosed--or do a short sale
and a deed in lieu. There are other methods; it is not just a
foreclosure.
Mr. Duffy. And maybe to the whole panel, are the policies
that we have in place right now facilitating a movement of
these bad mortgages through the process so that we can bottom
and hopefully come back up? Are the policies helping or hurting
the movement?
Ms. Gordon. Something that I think is important to
recognize is that there is no bottom that you and I can look at
and say, oh, look, the bottom is right over there, we need to
get into it. Foreclosures beget more foreclosures. As you have
more foreclosures in the neighborhood, there are price
declines. As people are underwater on their mortgages, they are
more vulnerable to any kind of income interruption, and in that
case, they end up going to foreclosures.
We can talk about letting the markets clear, but the
markets can clear at various levels. And the importance of
keeping people in loans when they can afford them and when they
return a greater value for their investment--
Mr. Duffy. My time is almost up. When we have this
timeframe go from 300 days to 500 days, when it prolongs the
foreclosure process, doesn't that put more pressure on the
housing market because there are more foreclosures on the
market and we haven't worked through them, Mr. Holtz-Eakin?
Mr. Holtz-Eakin. I would say yes. Everyone has the ideal
notion that if there is an economically rational workout that
could be done between private parties, it should happen. When
you start intervening in dramatic ways, two things happen: one,
the rules aren't clear and it leads to uncertainty; and two,
there is an actual incentive to wait for a better deal. Maybe
taxpayers will stick a little more money on the table. What
happens next? And this has slowed down, not speeded up, the
overall housing adjustment.
Mr. Duffy. Thank you.
Chairwoman Biggert. The gentleman yields back.
I would like to thank the panel for their expertise. And
the Chair notes that some members may have additional questions
for this panel that they may wish to submit in writing. Without
objection, the hearing record will remain open for 30 days for
members to submit written questions to these witnesses and to
place their responses in the record.
Again, thank you very much for being here, and thank you
for your patience.
This hearing is adjourned.
[Whereupon, at 5:15 p.m., the hearing was adjourned.]
A P P E N D I X
February 16, 2011
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