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+
+ - ARE THERE GOVERNMENT BARRIERS TO THE HOUSING MARKET RECOVERY?
+
+[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
+
+
+
+ U.S. GOVERNMENT PRINTING OFFICE
+64-555 WASHINGTON : 2011
+-----------------------------------------------------------------------
+For sale by the Superintendent of Documents, U.S. Government Printing Office,
+http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected].
+
+
+ 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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+