[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE FUTURE OF HOUSING FINANCE: THE
ROLE OF PRIVATE MORTGAGE INSURANCE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS,
INSURANCE, AND GOVERNMENT
SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
JULY 29, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-149
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
PAUL E. KANJORSKI, Pennsylvania, Chairman
GARY L. ACKERMAN, New York SCOTT GARRETT, New Jersey
BRAD SHERMAN, California TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas PETER T. KING, New York
CAROLYN McCARTHY, New York FRANK D. LUCAS, Oklahoma
JOE BACA, California DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts EDWARD R. ROYCE, California
BRAD MILLER, North Carolina JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia SHELLEY MOORE CAPITO, West
NYDIA M. VELAZQUEZ, New York Virginia
CAROLYN B. MALONEY, New York JEB HENSARLING, Texas
MELISSA L. BEAN, Illinois ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
RON KLEIN, Florida JOHN CAMPBELL, California
ED PERLMUTTER, Colorado MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi BILL POSEY, Florida
CHARLES A. WILSON, Ohio LYNN JENKINS, Kansas
BILL FOSTER, Illinois
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
C O N T E N T S
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Page
Hearing held on:
July 29, 2010................................................ 1
Appendix:
July 29, 2010................................................ 47
WITNESSES
Thursday, July 29, 2010
Goldberg, Deborah, Hurricane Relief Program Director, the
National Fair Housing Alliance................................. 16
Ratcliffe, Janneke, Associate Director, University of North
Carolina Center for Community Capital, and Senior Fellow,
Center for American Progress Action Fund....................... 11
Rodamaker, Marti Tomson, President, First Citizens National Bank,
Mason City, Iowa, on behalf of the Independent Community
Bankers of America (ICBA)...................................... 9
Sanders, Anthony B., Distinguished Professor of Finance, George
Mason University, and Senior Scholar, The Mercatus Center...... 13
Sinks, Patrick, President and Chief Operating Officer, Mortgage
Guaranty Insurance Corporation, on behalf of the Mortgage
Insurance Companies of America................................. 7
Taylor, John, President and Chief Executive Officer, the National
Community Reinvestment Coalition (NCRC)........................ 14
APPENDIX
Prepared statements:
Kanjorski, Hon. Paul E....................................... 48
Goldberg, Deborah............................................ 50
Ratcliffe, Janneke........................................... 60
Rodamaker, Marti Tomson...................................... 68
Sanders, Anthony B........................................... 81
Sinks, Patrick............................................... 89
Taylor, John................................................. 101
THE FUTURE OF HOUSING FINANCE: THE
ROLE OF PRIVATE MORTGAGE INSURANCE
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Thursday, July 29, 2010
U.S. House of Representatives,
Subcommittee on Capital Markets,
Insurance, and Government
Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2128, Rayburn House Office Building, Hon. Paul E.
Kanjorski [chairman of the subcommittee] presiding.
Members present: Representatives Kanjorski, Sherman,
Hinojosa, McCarthy of New York, Baca, Miller of North Carolina,
Scott, Perlmutter, Donnelly, Adler; Garrett, Manzullo, Biggert,
Capito, Hensarling, Neugebauer, Posey, and Jenkins.
Chairman Kanjorski. This hearing of the Subcommittee on
Capital Markets, Insurance, and Government Sponsored
Enterprises will come to order. Without objection, all members'
opening statements will be made a part of the record.
We meet today to continue our hearings about the future of
housing finance. As we work to reform this complex system, we
must learn more about private mortgage insurance and determine
whether to make changes related to this product. We will
therefore examine the structure, regulation, obligations, and
performance of mortgage insurers.
Since its creation more than a century ago, private
mortgage insurance has, without question, allowed countless
families to achieve the American dream of homeownership. It has
also worked to safeguard taxpayers by providing a first layer
of protection against foreclosure losses for lenders and for
mortgages securitized by Fannie Mae and Freddie Mac.
Over the years, the industry has had to respond to
significant economic changes. During the Great Depression,
inadequate capital reserves and an inordinate amount of
mortgage defaults drove every mortgage insurer into bankruptcy.
As a result, the private mortgage insurance industry
disappeared for more than 2 decades.
Many, including me, feared the recent collapse of the
housing bubble could produce a similar result. For a while, the
industry teetered on the brink of extinction. Some mortgage
insurers also sought, but never received, direct TARP
assistance.
We had good reason to worry. Historically, about 4 percent
of mortgages guaranteed by mortgage insurers go into default in
an average year. During this crisis however, approximately one
in three mortgages made in 2006 and 2007 and insured by
mortgage insurers are expected to go into foreclosure over the
life of the loan. As a result, some estimate the industry will
lose between $35 billion and $50 billion when all is said and
done.
Nevertheless, it appears the industry will survive because
of some economic luck, many regulatory waivers, and its
distinctive capital structure. In particular, mortgage insurers
maintain contingency reserves of 50 cents on every premium
dollar earned for 10 years. Thus, they build up capital in good
times in order to pay out claims in rocky financial periods.
While these countercyclical reserves are unique to the
mortgage insurance industry, they provide an important model
for Congress to consider in reforming the structure of the
housing finance system. If Fannie Mae and Freddie Mac had held
similar reserves, both Enterprises may have weathered the
recent financial hurricane much better.
Still, the industry's performance has been far from perfect
during this crisis. Some have questioned whether mortgage
insurers held enough capital. Because they had to seek
regulatory forbearance and curtail underwriting, this reduction
in new business has probably slowed the recovery of our housing
markets.
Others have raised concerns about whether mortgage insurers
have increased the government's cost related to the
conservatorship of the Enterprises. Specifically, mortgage
insurers only pay claims on foreclosed homes. They have no
affirmative obligation to prevent foreclosures. As a result,
Fannie Mae and Freddie Mac, rather than mortgage insurers, have
often had to bear the financial losses related to loan
modifications. Mortgage insurers exist to provide the first
level of protection against losses and should not evade their
responsibilities by contractual technicalities. We must review
this arrangement.
We also need to explore the present credit enhancement
requirements under the charters of Fannie Mae and Freddie Mac.
While the standard U.S. mortgage insurance policy indemnifies
against losses created by a default in an amount equal to the
first 20 to 30 percent of the lost loan principal, an
Australian policy covers 100 percent of the home loan amount.
Additionally, we should examine the consumer protection
issues, the State regulation of the industry, and its indirect
Federal regulation. The problems of Fannie Mae and Freddie Mac
resulted, in part, from the competing mandates of two
regulators. As we reform our housing finance system, we may
therefore want to streamline the oversight of mortgage
insurers.
In sum, all options for reforming our housing finance
system are on the table, including those related to private
mortgage insurance. I anticipate a fruitful and productive
discussion around these and other issues today.
I now recognize the gentleman from New Jersey for 4
minutes.
Mr. Garrett. I thank the Chair and I thank the witnesses.
And I thank the Chair for holding this important hearing on the
PMI, or the private mortgage insurance industry. Now,
unfortunately, because of the current Federal Government
policies, their role right now is very limited, almost
nonexistent.
If I could direct your attention, following yesterday's
chart, to the chart over here, this chart illustrates the
percentage amount of new high loan to value, or LTV, loans that
PMI writes and the percentage that the government backs.
Currently, the Federal Government, as you see in the chart
there, which you can say is the taxpayer, is underwriting 99
percent of every high LTV mortgage through FHA and GSEs. And
so, this level of taxpayer support for the mortgage market, you
must admit, is completely unsustainable and also unwise.
We constantly hear that the government has to play this
large role because the private sector is unable or maybe
unwilling to reenter the market and provide the needed capital.
But if you look at the details, you will see that is false.
Over the last 2 years, private mortgage insurance companies
have raised roughly $7.5 billion in new capital that could
support $260 billion in new high LTV loans. However, the
current marketplace only allows the PMI industry to support
between maybe $40 billion or $50 billion of such loans.
So what are some of the specific factors preventing more
private capital from returning to the mortgage market through
the private insurance? First are the changes in the loan limits
for FHA that were made during the financial crisis.
So if I could now direct your attention to my second chart,
you will see that, before the crisis, the GSE loan limits were
$417,000 and the FHA loan limits varied from 48 percent to 87
percent of the GSE limits based on the area median price. Now,
after the changes, the FHA loan limits vary from 65 to 175
percent of that $417,000 house price number. So most of the
attention in the debate over loan limits centers on the top-
line limit in the high-cost areas, as you see on the chart
there.
Now, while that is important, it is not the only area where
the private market is being basically squeezed out. And as you
can see on the chart, down there at the bottom, the changes
that were made essentially increase the loan limits for the FHA
in the lower-cost areas, as well. What does this mean? This
means that in areas where housing is less expensive, say in
Nebraska, where the average median home price is $150,000, the
FHA can insure loans up to $271,000. And that is almost 100
percent more than the average price in that low-cost area.
So you have to ask yourself, why should the taxpayer be
insuring mortgages that are almost double the average median
home price in those lower-cost areas? And this is after
mortgage prices have, I would just note, declined by 30 percent
over the last 3 years. This area is prime territory for PMI to
become more active while we roll back the taxpayers' support
and liability.
Another way that the government is prohibiting the return
of private capital to our mortgage market is a rule instituted
by the Federal Housing Finance Agency, and that is the loan
level price adjustment. You see, when these fees were
implemented, it was a turbulent time in the economy when
housing prices were declining, particularly in distressed
areas. However, it is 2 years later now, and we are seeing some
encouraging signs that house prices are stabilizing, in
addition to the fact that loans are being originated today at
full documentation, amortized, and being prudentially
underwritten.
What I have been told is that Fannie and Freddie are not
reserving these fees, so they are not providing any additional
stabilizing effect. And I think these fees need to be given
more attention, and Congress should more closely examine how
these fees are pushing more people to FHA loans and away from
conventional mortgages.
Finally, just 2 months ago, Treasury Secretary Geithner
told Congress, ``The government's role in the housing finance
system and level of direct involvement would change,'' and
that, ``The Administration is committed to encouraging private
capital to return to the housing market.'' However, as you can
see from my first chart, if he and President Obama are serious
about restoring the housing market and relieving the taxpayer
of the risk--and that is a pretty big risk, all the blue area--
they must return to traditional and more responsible methods of
financing.
The current loan limits, coupled with new and arbitrary
fees by the GSEs make it impossible for the private capital to
compete in the market. And this is exactly the opposite of what
we want. The government has created a perverse incentive to
provide private capital from being used in this market and
relieve some of the burdens.
So, Mr. Chairman, if we don't make changes, the FHA and
GSEs will continuing to service a radically disproportionate
share of the market, and they will collapse under their own
weight, and we will face another taxpayer bailout from the GSEs
and FHA. We need to shift the burden of mortgage finance off
the backs of the American taxpayer and back onto the private
investor.
With that, I thank you, Mr. Chairman.
Chairman Kanjorski. The gentleman's time has expired.
We now recognize the gentleman from California, Mr.
Sherman, for 3 minutes.
Mr. Sherman. Thank you, Mr. Chairman.
First, I should congratulate the survivors. To think that
you could be in the business of insuring real estate loans in
America at this time and still be here shows, as I think the
chairman pointed out, perhaps some luck, but it also shows that
both the regulators of the industry and the participants in it
were prepared for the thousand-year flood. Very few other
entities in our country are prepared for the thousand-year
flood or even the hundred-year flood.
Right now, the taxpayers are involved in the real estate
market to a greater degree than in the past. Taxpayers are,
therefore, taking an extraordinary percentage of the risk. I
look forward to returning to a more traditional level of
taxpayer involvement.
And while I don't think that we can return to 2007, in
terms of who can get some sort of mortgage, we don't want to
return to 1920 either. And so, as the taxpayers play less of a
role in absorbing the risk, we don't want to say, as in some
European countries, ``Wait till you have a 40 percent
downpayment, and then you can buy a home.'' Therefore, there is
a need for a robust private mortgage insurance industry.
One way to make sure that it is robust is to turn to the
financial regulatory reform bill, where we require that the
securitizer retain, I believe it is 5 percent, of the risk in
that pool, unless the pool consists of plain vanilla, safe,
not-risky, not-possibly-risky mortgages.
Regulations have to be written that define what is ``plain
vanilla.'' I suggest that plain vanilla includes both American
vanilla and French vanilla--that is to say, that it includes
not only mortgages which by themselves meet the criteria, but
mortgages that meet the criteria of low risk to the investors
when one factors in the fact that private mortgage insurance
applies to some or all of the loans in that pool.
To do otherwise would be to ignore economic reality, but,
worse than that, it would be to deny a route to homeownership
that does not put the taxpayer at risk. And certainly, we want
the lowest possible taxpayer risk with the best possible
opportunities for people to acquire a home.
I yield back.
Chairman Kanjorski. The gentleman's time has expired.
We will now hear from the gentlelady from West Virginia,
Ms. Capito, for 2 minutes.
Mrs. Capito. Thank you.
I would like to thank Chairman Kanjorski and Ranking Member
Garrett for holding this hearing today. I look forward to
hearing from our witnesses on the current status of private
mortgage insurance and how we can work together to get a more
vibrant private mortgage market, or to restore one, in any
event.
As my colleagues know, over the last few years, the Federal
Housing Administration has dominated the residential mortgage
market, providing federally backed mortgage insurance to
borrowers. While FHA does have a role to play in the market, I
am very concerned--we have had hearings, and I have made
numerous statements about my concern over this recent expansion
in market share, especially when the FHA is struggling
financially. In order to have a healthy residential mortgage
market, we must reduce FHA's market share and restore the
private market.
Earlier this year, the House passed much-needed FHA reform
legislation that I believe will make significant improvements
to the FHA program. While more reform may be needed, the
legislation that we authored will give the FHA the ability to
charge higher premiums. And this is important not only for the
health of the FHA capital reserve fund, but it could also have
the effect of leveling the playing field between FHA and the
private mortgage insurance industry.
I also have concerns with sections of the recently adopted
Dodd-Frank financial reform bill and the effect it will have on
the return of the private mortgage market. Included in this
large package is a section requiring risk retention for
mortgages but an exemption from this requirement for FHA
mortgages. I was able to insert an amendment that will study
the effect of this dichotomy and what effect it would have on
the private mortgage market. I look forward to seeing these
results to see if there is an unfair advantage for FHA and to
level that playing field.
Again, thank you, Mr. Chairman, for the hearing, and I look
forward to the witnesses' testimony.
Chairman Kanjorski. I thank the gentlelady from West
Virginia.
And now, we will hear from the gentleman from Georgia for 2
minutes, Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman.
It is difficult to deny that the American dream remains
today to own a home. That is the American dream. However, once
that goal is achieved, it has become increasingly harder for
some Americans to hold on to their homes and avoid foreclosure.
Indeed, right now, as we speak, the foreclosure pipeline is
full and getting overflowing.
More access to mortgages, and thus homeownership, often
coming to fruition due to use of private mortgage insurance is,
ideally, a positive aspect of the current system. However, with
job instability and unemployment rates reaching over 10 percent
in much of the country, many Americans are finding it difficult
to hold on to their homes despite their initial success.
And when a homebuyer has less than 20 percent as a
downpayment for their home, they are required to purchase a PMI
policy, private mortgage insurance. This permits an individual
the ability to afford a home who otherwise could not purchase a
home. However, the use of subprime mortgages and jumbo loans
contains obvious risk, namely traditionally higher default
rates. And about a third of the mortgages made in 2006-2007 and
insured by PMI's providers are expected to go into foreclosure
during the life of the loan.
We need to ensure that risky mortgages that are unsafe to
potential lenders are avoided. The American dream of owning a
home is something that I hope most Americans will certainly
someday see fulfilled, but without the excessive risk that come
with the use of certain PMIs. I hope to learn more about what
PMIs are doing to reduce mortgage defaults and to protect
potential homeowners.
Thank you, Mr. Chairman.
Chairman Kanjorski. Thank you very much.
We will now hear from the gentleman from Texas, Mr.
Hensarling, for 3 minutes.
Mr. Hensarling. I thank you, Mr. Chairman.
Private mortgage insurance is clearly a rarity in our
mortgage market: a private-sector solution for a private-sector
challenge that, number one, actually worked, seemingly free of
Federal handouts, bailouts, and also an industry that survived
this market turmoil in relatively good shape, and also--I don't
know how--it managed to survive competition with the GSE
oligopoly.
It seems like ancient history now, but there was a time,
very recently in America's history, where one could actually
get a mortgage on a home without having to go through their
Federal Government. But now we know that Fannie and Freddie,
which were left untouched, if nothing else, affirmed in the
recent Dodd-Frank financial regulatory bill, now control
roughly three-quarters of the new loan originations. FHA, whose
own capital reserve losses are currently 75 percent below its
statutory minimum, has roughly 20 percent of the market. We
don't need to have a Ph.D. in economics to know that this is
neither healthy nor sustainable.
Again, private mortgage insurance has been an exception to
the rule. It has been a very valuable, consumer-friendly,
private-capital-backed tool, sold in a competitive market, that
allows Americans to buy a home, and keep a home, without
exposing taxpayers to risk. And this is a market, I think, that
we would want to see flourish.
Again, it appears, relatively speaking, to have weathered
the recent economic crisis well. And, as I said earlier, these
companies did not succumb to the temptation to take TARP money,
bailout money from the Federal Government. And, in fact, we see
that this is an industry that is back to raising capital in the
private market, showing again that private-sector competition
can work if we allow it to work.
But, clearly, the private mortgage insurance market faces
challenges. They were articulated very well by our ranking
member from New Jersey. And so I continue to lament and decry
the fact that this committee has yet to take up any type of
reform of Fannie and Freddie, notwithstanding the fact that we
have $150 billion of taxpayer-spent money, trillions of dollars
of exposure. They continued to flourish, and yet we need this
market to flourish.
There is an old saying, ``If it ain't broke, don't fix
it.'' Please don't bail it out; just let freedom work and allow
this market to flourish.
I yield back.
Chairman Kanjorski. Thank you very much.
We will now go to our panel.
Thank you very much for being present today. And, without
objection, your written statements will be made a part of the
record. You will each be recognized for a 5-minute summary of
your testimony.
Our first witness will be Mr. Patrick Sinks, president and
chief operating officer of the Mortgage Guaranty Insurance
Corporation, testifying on behalf of the Mortgage Insurance
Companies of America.
And I would like every panelist to respond to Mr.
Hensarling's opening remarks. Is there no further need for a
secondary market? Shall we just allow the existence of
financing of mortgages to be made in the tradition prior to the
1929 crash? If you could give that answer, it would be very
helpful, because we are certainly thinking about that.
So, Mr. Sinks, start off, if you will.
And I would like to hear this panel say that the government
should get out of supporting the secondary market and probably
do away with any involvement in the mortgage market other than
you folks doing it all in the private sector. That would be a
welcome relief for me, because I anticipate it would probably
save me the next 2 years of my life.
STATEMENT OF PATRICK SINKS, PRESIDENT AND CHIEF OPERATING
OFFICER, MORTGAGE GUARANTY INSURANCE CORPORATION, ON BEHALF OF
THE MORTGAGE INSURANCE COMPANIES OF AMERICA
Mr. Sinks. Let me go with my prepared remarks, and I will
get to answering your question.
First, thank you, Mr. Chairman, and Ranking Member Garrett.
I appreciate the opportunity to testify on behalf of the
Mortgage Insurance Companies of America, the trade association
representing the private mortgage insurance industry.
Mortgage insurance enables borrowers to responsibly buy
homes with less than a 20 percent downpayment. Many of these
borrowers are first-time or lower-income homebuyers. Since
1957, private mortgage insurance has helped 25 million families
buy homes. Today, about 9 percent of all outstanding mortgages
have private mortgage insurance.
This afternoon, I would like to make four important points.
First, mortgage insurance is essential to ensuring
mortgages are both affordable and sustainable. These goals are
not mutually exclusive, and such loans are vital to the housing
recovery.
Mortgage insurance is in the first-loss position on
individual high-ratio loans, and, as a result, private-sector
capital is at risk. If a borrower defaults and that default
results in a claim, mortgage insurers will typically pay the
investor 20 to 25 percent of the loan amount.
Because we are in the first-loss position, mortgage
insurers' incentives are aligned with both the borrowers and
the investors. As a result, mortgage insurers work to ensure
that the home is affordable both at the time of purchase and
throughout the years of homeownership.
My second point: The mortgage insurance regulatory model
works. The mortgage insurance regulatory model has been in
place for over 50 years. This model has enabled the industry to
write both new business and meet its claim obligations through
many different economic environments, including some severe
housing downturns such as we are currently experiencing.
The most important element of the model is that it requires
capital to be maintained through one of three reserves, known
as the contingency reserve. Private MIs are required to put 50
percent of every premium dollar into a contingency reserve for
10 years so adequate resources are there to pay claims. This,
in effect, causes capital to be set aside during good times
such that it is available in bad times. It serves to provide
capital in a countercyclical manner.
Since 2007, the private mortgage insurance industry has
paid over $20 billion in claims. In fact, mortgage insurers
have paid $14.5 billion in claims and receivables to the GSEs,
which is equivalent to 10 percent of the amount taxpayers have
paid to the GSEs to date.
My third point: The private mortgage insurers are well-
capitalized and can help with the housing recovery. Not only
does the MI industry have ample regulatory capital, but it has
attracted capital, even during these difficult times. We have
raised $7.4 billion in capital through new capital raises and
asset sales, and a new entrant has raised a further $600
million since the mortgage crisis began.
In fact, based on industry estimates, the MI industry has
sufficient capital to increase our total insurance exposure by
$261 billion a year for the next 3 calendar years. If this
additional volume would be realized, it would mean that
approximately 1.3 million additional mortgages would be insured
in each of those years. Many of these new, prudently
underwritten insured mortgages would go to low- and moderate-
income and first-time homebuyers.
My final point: Mortgage insurers are committed to helping
borrowers stay in their homes. Because mortgage insurance
companies have their own capital at risk in a first-loss
position, we have very clear incentives to mitigate our losses
by taking action to avoid foreclosures. We have a long history
of working with servicers and community groups to help keep
borrowers in their homes.
Mortgage insurers have fully participated in the
Administration's loss-mitigation programs and other programs.
These combined efforts have resulted in over 374,000 completed
workouts from 2008 through the first quarter of 2010 by the MI
industry, covering $73.8 billion in mortgage loans.
In summary, the private mortgage insurance model has worked
over many years. We have capital sufficient to meet the needs
of the market, and we plan to continue to play a crucial role
in the future of housing finance.
Thank you for this opportunity to testify, and I will be
happen to answer any questions.
[The prepared statement of Mr. Sinks can be found on page
89 of the appendix.]
Chairman Kanjorski. Thank you.
We will now have our next witness, Ms. Marti Rodamaker,
president of the First Citizens National Bank of Iowa,
testifying on behalf of the Independent Community Bankers of
America.
Ms. Rodamaker?
STATEMENT OF MARTI TOMSON RODAMAKER, PRESIDENT, FIRST CITIZENS
NATIONAL BANK, MASON CITY, IOWA, ON BEHALF OF THE INDEPENDENT
COMMUNITY BANKERS OF AMERICA (ICBA)
Ms. Rodamaker. Thank you very much, Chairman Kanjorski,
Ranking Member Garrett, and members of the subcommittee.
First Citizens National Bank in Mason City, Iowa, is a
nationally chartered community bank with $925 million in
assets. I am pleased to represent the community bankers and
ICBA's nearly 5,000 members at this important hearing on ``The
Future of Housing Finance: The Role of Private Mortgage
Insurance.''
Residential mortgage lending, supported by conservative
underwriting, is a staple of community banking, and mortgage
insurance is an indispensable risk-management tool. The MI
business model has been tested by the housing crisis, with
repercussions for all participants in the lending process. I
expect that it will emerge from the crisis looking
significantly different than it has in the past, as a result of
business imperatives but also as a result of policy decisions
made by Congress.
Any reform of MI must be made in coordination with the
reform of other elements of housing finance, notably the GSEs.
ICBA hopes to participate in all aspects of housing finance
reform. Our members and their customers have a great deal at
stake in the outcome.
MI is used by lenders to insure mortgages of greater than
80 percent loan to value. It enables lenders to reach those
borrowers who cannot make a 20 percent downpayment, which is a
sizable portion of today's market. These borrowers include the
younger, first-time homebuyers who have traditionally used MI,
as well as current homeowners who don't have enough home equity
to sell and make a 20 percent downpayment on their next home.
Most Americans have also experienced a drain in their
savings accounts, depleting yet another source of downpayments.
MI will be used to serve a broader segment of homebuyers than
ever before. Without MI, the housing recovery will take longer.
With MI, the recovery can be managed prudently.
From the lenders' perspective, perhaps the most significant
function of MI is to allow for the sale of high loan-to-value
loans to Fannie or Freddie, who require insurance for such
loans. Fannie and Freddie provide secondary market access and
critical funding to community bank mortgage lending. Lenders
who hold high LTV loans in portfolio also require mortgage
insurance because our regulators apply a higher capital charge
to uninsured high LTV loans.
In sum, the only practical means of making high loan-to-
value loans, whether they are sold or held in portfolio, is
with the credit enhancement provided by MI. If prudently
underwritten, high loan-to-value loans can't be made, the
market will take longer to recover, consumer options will be
more limited, and banks will have fewer lending opportunities.
Unfortunately for all parties, the MI market was severely
disrupted during the housing crisis, and the MI companies have
tightened their underwriting requirements in response to the
market conditions. As a consequence, MI underwriting has fallen
out of lockstep with GSE underwriting.
Before the crisis, approval by Fannie or Freddie implied
approval by the insurer--a linkage that greatly facilitated the
loan processing. The breakdown of this linkage has impeded the
recovery. We need to achieve a new consensus in which lenders,
mortgage insurers, and Fannie and Freddie are all using the
same underwriting and appraisals standards. This new consensus
may not be achievable until the housing market stabilizes.
In addition to tightening the underwriting of new loans,
the MI companies are also disputing some claims. Denied MI
claims on defaulted loans sold to GSE have become increasingly
common and generally result in a buy-back request from Fannie
or Freddie to the original lender.
While some of these claim denials are supportable, many are
based on questionable challenges to the original underwriting
or appraisal. As a banker, I understand the reality of higher
defaults and losses during difficult economic times. It is part
of the price of doing business. However, high levels of denied
claims and GSE buy-back requests have put an additional strain
on all market participants, including community banks.
In closing, ICBA appreciates the opportunity to participate
in this subcommittee's review of MI. The recent dislocation in
the MI industry has only underscored the critical role that it
plays in housing finance. Restoration of a strong and
competitive MI industry will be a critical part of the housing
recovery.
We would be pleased to comment on any proposals to reform
MI that emerge from this subcommittee, and we hope to have the
opportunity to share our views on other aspects of housing
finance reform, as well.
Thank you.
[The prepared statement of Ms. Rodamaker can be found on
page 68 of the appendix.]
Chairman Kanjorski. Thank you very much, Ms. Rodamaker.
Next, we will hear from Ms. Janneke Ratcliffe, associate
director of the University of North Carolina Center for
Community Capital, and senior fellow at the Center for American
Progress Action Fund.
Ms. Ratcliffe?
STATEMENT OF JANNEKE RATCLIFFE, ASSOCIATE DIRECTOR, UNIVERSITY
OF NORTH CAROLINA CENTER FOR COMMUNITY CAPITAL, AND SENIOR
FELLOW, CENTER FOR AMERICAN PROGRESS ACTION FUND
Ms. Ratcliffe. Good afternoon, Chairman Kanjorski, Ranking
Member Garrett, and members of the subcommittee. I am Janneke
Ratcliffe, associate director at the UNC Center for Community
Capital and a senior research fellow at the Center for American
Progress Action Fund. I am honored to have the opportunity to
share my thoughts about the role of private mortgage insurance,
an industry that plays a key part in facilitating
homeownership.
Indeed, a discussion on the role of private MI must begin
by stressing the importance of giving families the opportunity
to buy homes when they have not yet accumulated enough wealth
to make a big downpayment, which is what private mortgage
insurance exists to do.
To put that in context, to make a 20 percent downpayment on
the median home sold in the United States in 2009 required
$34,000, which is more than the annual earnings of 35 percent
of U.S. households. When done right, high loan-to-value
mortgages are essential for the U.S. housing system to offer
opportunities and a pathway to the middle class. And the best
way to put this opportunity within reach for more first-time
and minority and low-income households is to reduce the
downpayment barrier.
Many of us started up the homeownership ladder with a
modest downpayment and a loan made possible because of some
form of mortgage insurance, be it private or a Federal Housing
Administration or Veterans Administration program. In an
average year, in fact, between a quarter and a third of all the
mortgages made are to families with less than 20 percent
equity. And among these are the families who will later buy
another house, perhaps yours or mine.
We have ample evidence that the risks associated with high
LTV lending can be managed. One example is the Community
Advantage Program that has funded affordable mortgages to
50,000 lower-income, low-downpayment borrowers nationwide. The
results: Defaults are low, and the median borrower accumulated
$20,000 in equity through the end of 2009.
This is just one example of how high LTV lending makes
sense for lenders and for households when done right, in this
case through fixed-rate, 30-year amortizing mortgages
underwritten for ability to repay.
The private mortgage insurance industry provides on a
larger scale another answer to the right way to support high
loan-to-value lending. An industry built on insuring mortgages
with low downpayments has weathered the mortgage crisis, paid
substantial claims without Federal support, and even managed to
attract new capital.
Three principles contribute to this outcome. First, as we
have heard, are the countercyclical reserving requirements
imposed by State insurance regulators. These days, we hear a
lot about regulatory failures, but here is one story of
regulatory success. The system of State regulation, combined
with Federal oversight, played a critical role in maintaining
systemic stability, and its principal elements should be
preserved.
Second are the standards set by mortgage insurers
themselves, because their interests are aligned with keeping
the borrower in the home. From underwriting through foreclosure
prevention, they live or die by whether they get this right.
And a third virtue of the mortgage insurance industry lies
in its role as a pooler of risk. Mortgage insurance companies
smooth risk out more efficiently, across multiple lenders,
across securities, regions, and by reserving across time
periods. In this way, they bring efficiency and stability to
the entire system.
But mortgage insurance only covers a portion of the high
loan-to-value loan market. During the bubble, less regulated
alternatives became increasingly cheap relative to the
institutional monoline sources, both primary mortgage insurance
and FHA. Lack of consistent oversight enabled risk to be laid
off where no or low capital requirements existed.
At the time, this looked like innovation, but in hindsight
it was recklessness. The lesson learned is that an effective
mortgage finance system must consider total system capital at
risk on each loan, inhibit capital arbitrage, and prevent a
race to the bottom.
Justifiably, private mortgage insurance has special
consideration in the GSE charter and is a qualified residential
mortgage factor to offset risk-retention requirements. But this
implies that this industry will play a critical role in
determining who gets access to homeownership. This is no small
concern because today, barriers are actually growing,
particularly for those households and communities hit by the
full cycle: first, by lack of access to capital; then, by
subprime lending; then, by foreclosures; and now, by income
losses and tight credit. Rebuilding will require the
affirmative involvement of all market participants.
Going forward, PMI insurance should have an important role
in the market, but let me suggest three provisos. First,
policymakers should maintain a level regulatory playing field,
one that considers long-term, systemwide risk-taking capacity.
Second, mortgage insurers must be held accountable to public
policy goals of enabling access to safe mortgage products under
affordable and transparent terms that do not unfairly handicap
some market segments. Finally, recognizing that some markets
may still go underserved, it is important to ensure alternative
channels exist for innovation and expanding constructive credit
to those markets.
Thank you for the opportunity to testify, and I look
forward to your questions.
[The prepared statement of Ms. Ratcliffe can be found on
page 60 of the appendix.]
Chairman Kanjorski. Thank you, Ms. Ratcliffe.
Next, we will hear from Mr. Anthony B. Sanders,
distinguished professor of finance at George Mason University,
and senior scholar at The Mercatus Center at George Mason
University.
Mr. Sanders?
STATEMENT OF ANTHONY B. SANDERS, DISTINGUISHED PROFESSOR OF
FINANCE, GEORGE MASON UNIVERSITY, AND SENIOR SCHOLAR, THE
MERCATUS CENTER
Mr. Sanders. Mr. Chairman and distinguished members of the
subcommittee, my name is Anthony B. Sanders, and I am a
distinguished professor of finance at George Mason University
and a senior scholar at The Mercatus Center. It is an honor to
testify before you today.
The Federal Government purchases or insures over 90 percent
of the residential mortgages originated in the United States.
The proliferation of government programs for homeownership
purchase and insurance of low-downpayment loans by the GSEs and
tax incentives for homeownership were largely responsible for
the housing bubble that occurred in the 2001 to 2006 period.
The problem is that public policy and risk management are
intertwined, resulting in bubbles and devastating bursts. And
the most vulnerable households are the ones who are most often
hurt. The affordable housing crisis cycle must be broken.
Even though trillions of dollars were pumped into the
housing market during the last decade, homeownership rates rose
from 67.8 percent in 2001, peaked at 69 percent in 2004, and
declined down to 67.4 percent in 2009, less than where they
started in 2001. The United States has comparable homeownership
rates to other G-7 countries, even though they do not have
entities like Fannie Mae and Freddie Mac.
Given that there is a reasonable housing alternative in the
form of renting, rather than owning, it is time to rethink the
crisis cycle. We can break the cycle by getting private
mortgage insurance and banks back in the game and downsize the
government involvement in the housing finance area.
The problem is that the Federal Government offers explicit
guarantees on residential mortgages, which makes it difficult
for the private sector to compete. This crowding-out phenomenon
is exacerbated by the raising of the loan limits after the
stimulus for the three GSEs to $729,750 in certain areas, which
has effectively crowded out the private insurance market.
My recommendations are as follows:
Fannie Mae, Freddie Mac, and the FHA must downsize their
market shares to open up the market for the private sector
again. This can be done in the short run by curtailing the
government purchase and insurance of low-downpayment mortgages
and a lowering of loan limits to pre-stimulus levels at first
and then a gradual phaseout of government insurance.
Second, alternatives to Fannie Mae and Freddie Mac, such as
covered bonds and improvement to private-label securitization,
must be implemented.
In order for capital to return to the market, it is
necessary to restore confidence. The newly created Bureau of
Consumer Financial Protection is generating significant
uncertainty in the minds of investors as to how this agency
will function. Congress should pass clear guidelines and
provide assurances that limit the reach of this new agency.
Fourth, the long-run structure of Fannie Mae and Freddie
Mac must be resolved as soon as possible. However, true changes
are not possible if the Administration and Congress insist that
there must be an explicit guarantee. I do not see any way that
the explosive combination of public policy and prudent risk
management can work together. It failed in the housing bubble
and crash, and nothing has been done to prevent this from
occurring over and over again.
Thank you for the opportunity to share my thoughts with
you.
[The prepared statement of Dr. Sanders can be found on page
81 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Sanders.
We will now hear from our next witness, Mr. John Taylor,
president and chief executive officer of the National Community
Reinvestment Coalition.
Mr. Taylor?
STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, THE NATIONAL COMMUNITY REINVESTMENT COALITION (NCRC)
Mr. Taylor. Thank you, Chairman Kanjorski, Ranking Member
Garrett, and other distinguished members of this subcommittee.
And congratulations to those members of this subcommittee
who voted for and passed the Dodd-Frank regulatory reform bill.
I think that effort was owed to the American public and bodes
well for consumers across the land.
Private mortgage insurance also serves a vital part of
America's system of mortgage finance by protecting lenders from
losses associated with mortgage defaults. Done responsibly,
private mortgage insurance can help those working their way up
the economic ladder to achieve the American dream of
homeownership. Coupled with the Community Reinvestment Act,
private mortgage insurance can help underserved people,
including minorities, to gain access to safe, sound, and
sustainable mortgages.
Today, the business of mortgage finance has become the
business of the Federal Government. Without FHA, VA, Fannie
Mae, and Freddie Mac, most mortgage lending in America today
would not occur. NCRC is very concerned that the Federal
Government is increasingly positioning itself as the sole
gatekeeper to homeownership and mortgage lending in America.
And much of this is done with the requirement of a government
guarantee.
It is imperative that we increase the role of the free
market in producing and securitizing mortgages. The private
mortgage insurance companies assist in this goal while
remaining unsubsidized, without TARP funds--not that they
didn't apply--and without government guarantees.
The capitalization and reserve requirements placed on
private mortgage insurance companies by the government is a
perfect example of how government regulation, coupled with
free-market enterprise, can result in healthy and profitable
business. In spite of our great recession and the collapse of
the mortgage banking sector in America, all the private
mortgage insurance companies remain standing, indeed have even
expanded their ranks.
Having said all this, there are some improvements that I
hope this subcommittee and the Congress might consider making
to this industry.
First, regulation of the private mortgage insurance
industry occurs on a State level. We believe the industry and
consumers would be better served by having Federal standards
regulating this industry. Consumers, in particular, would
benefit from having these new standards under the purview of
the new Bureau of Consumer Financial Protection.
Second, data currently available on the performance of the
private mortgage insurance companies is limited and raises more
questions than it answers. The FFIEC prepares disclosure,
aggregate, and national aggregate data reports on the private
mortgage insurance activity. To their credit, the private
mortgage insurance companies voluntarily provide data on the
disposition of applications for mortgage insurance using some
categories of information used on the HMDA, the Home Mortgage
Disclosure Act.
In preparation for this hearing, NCRC analyzed the
voluntarily provided data. There is enough evidence of
disparity in the mortgage insurance access between Whites,
Blacks, and Hispanics to suggest that Congress should enhance
the data collection and increase the transparency on the
performance of this industry.
This data collection should be mandatory and include data
on cost of premiums and amount of losses incurred by the
various private mortgage insurance companies. Such additional
information will assist us all in determining whether the
denial disparities are based on sound business practices or
have some basis in discriminatory practices. This will ensure
fairness in that industry.
NCRC would recommend that the Bureau of Consumer Financial
Protection make recommendations on reasonable pricing standards
that the private mortgage insurance company industry can employ
to ensure that premiums are not keeping working-class,
responsible borrowers out of the homeownership market.
Further, we should explore the possibility of the lender
sharing in the cost of the private mortgage insurance, since
the benefit of insurance really directly accrues to the lender.
Next, when a homeowner has reached the 20 percent equity
threshold of ownership in their home, there should be a
seamless and automatic allowance for borrowers to withdraw from
the mortgage insurance product that is no longer necessary for
these borrowers. Currently, some lenders do a better job than
others at alerting consumers about their having reached that 20
percent threshold.
Finally, the appraisal methods, including automated
valuation models, used by many private mortgage insurance
companies ought to be scrutinized. We should learn once and for
all from the injury done to our system of mortgage finance by
shoddy, quick, and inaccurate appraisals.
In conclusion, private mortgage insurance is vitally
important to our national system of mortgage finance and can
help refuel our economy by expanding opportunities for safe and
sound mortgage lending to those who do not have the ability to
make a 20 percent downpayment.
Let me close by saying, to answer your question, Mr.
Chairman, I do believe we need a federally sponsored
securitization sector. And I think that what is prohibiting,
really, the private sector from being successful today, more
than anything, more than anything we will talk about today, is
the fact that people no longer trust foreign governments,
companies' pension funds. They don't trust America now to come
and invest in here. We have to change that.
And I think the law you just passed, more transparency,
more accountability, sends a very strong message to the world
that it is safe to come back and reinvest in America. Because
the banks and everybody else do not have the money unless we
have investors.
So hopefully, we are beginning to turn the corner and say
to the world, our economy is stable, we are bottoming out on
housing prices and housing values, and there is more
accountability, it is safe to come back to America and reinvest
in America's economy. And I think that is going to help to, as
much as anything, boost the private sector in being able to
provide mortgages and to have the mortgage insurance companies
support that.
[The prepared statement of Mr. Taylor can be found on page
101 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Taylor.
Our last witness will be Ms. Deborah Goldberg, hurricane
relief program director of the National Fair Housing Alliance.
Ms. Goldberg?
STATEMENT OF DEBORAH GOLDBERG, HURRICANE RELIEF PROGRAM
DIRECTOR, THE NATIONAL FAIR HOUSING ALLIANCE
Ms. Goldberg. Thank you, Mr. Chairman.
Chairman Kanjorski, Ranking Member Garrett, and members of
the subcommittee, I want to thank you for the opportunity to
testify here today on behalf of the National Fair Housing
Alliance.
In the face of our current foreclosure crisis, some say
that we put too much emphasis on homeownership. We at NFHA take
a different view. We continue to believe that homeownership,
done right, can be a viable path to building wealth and
economic security. It is one of our most promising tools for
eliminating the enormous racial and ethnic wealth disparities
in our country.
But we need to understand how to make homeownership both
achievable and sustainable, and also understand clearly the
forces that have worked to undermine sustainability in recent
years. Only then can we avoid repeating our past mistakes.
In this context, we believe that private mortgage insurance
has a very important role to play in expanding access to
homeownership for those with limited wealth, particularly
people of color. The requirement for a 20 percent downpayment
on a mortgage is a big barrier for many people who could
otherwise be very successful homeowners. Private mortgage
insurance makes it possible for families with limited wealth to
put less money down and still get a mortgage. This benefits the
homeowner, the lender, the investor, and, of course, the
private mortgage insurance company.
You asked whether additional consumer protections are
needed with respect to the private mortgage insurance industry.
And one concern for us is the fact that PMI is sold directly to
the lender and not to the borrower. This means that borrowers
can't comparison-shop for the best deal. It also gives insurers
an incentive to make the product as profitable as possible for
their customers, the lenders, rather than as cost-effective as
possible for borrowers.
A situation like this calls out for greater transparency
and oversight than we have now in the private mortgage
insurance market. In other markets, this kind of situation has
opened the door to adverse practices and discriminatory
treatment. And we urge the subcommittee to make sure that is
not happening in this market.
Another issue of great concern to us, from both a fair-
housing and a broader consumer perspective, is the use of
credit scores for underwriting and pricing private mortgage
insurance. We have long had concerns about the impact of
credit-scoring models on people of color, who have lacked
access to the kind of mainstream financial services that help
boost scores.
Recently, we have seen credit scores drop even when
consumers continue to make all of their payments on time, as
lenders lower credit limits in order to minimize their risk
exposure. And research suggests that certain loan features--
research that one of my co-panelists has done--certain loan
features, such as prepayment penalties and adjustable interest
rates, along with loan distribution channels, are more
important in explaining loan performance than are borrower
characteristics.
But credit-scoring models do not make this distinction
between risky borrowers and risky products. This places
borrowers of color, whose communities have been targeted for
risky products, at a tremendous disadvantage.
We urge the subcommittee to look at this question in more
detail. It has profound implications for the future, not just
for access to PMI, but also for many other aspects of people's
lives.
The Federal Government has a unique relationship to the PMI
industry, having done quite a bit to create a market for this
product. One example that has been cited by several of my co-
panelists is the charter requirement that prohibits the GSEs
from purchasing loans with LTVs above 80 percent unless those
loans carry a credit enhancement.
The recently enacted Dodd-Frank Wall Street reform bill
also creates a carveout for private mortgage insurance. As a
result, it is our view that the Federal Government has both an
opportunity and an obligation to make sure that the industry
operates in a manner that is fair and nondiscriminatory.
In particular, Congress, the public, and ultimately the
industry, as well, would all benefit from having access to more
detailed information about how private mortgage insurers
operate. This includes information about underwriting standards
and also where, to whom, and at what price mortgage insurance
is being offered.
It could also include information about the impact of
mortgage insurance on loss-mitigation outcomes for borrowers
facing foreclosure. This is a question the subcommittee raised,
but there is no publicly available information on which to base
an answer.
Better data on a range of issues related to private
mortgage insurance and its impact on the housing finance system
would put us all in a better position to have an informed
debate about what the system of the future should look like.
You can make such data available, and we urge you to consider
doing so.
Thank you for the opportunity to testify here today. I look
forward to your questions.
[The prepared statement of Ms. Goldberg can be found on
page 50 of the appendix.]
Chairman Kanjorski. Thank you very much, Ms. Goldberg.
I guess I am the first one on the firing pad today, so let
me go back and just see if I can pick up.
Could everybody on the panel, just have a show of hands,
who would support a secondary market?
Okay.
Oh, a slow ``yes.''
Mr. Sanders. Clarification.
Chairman Kanjorski. I think the impression that I received,
at least, from the opening statement of Mr. Hensarling, was
that we ought to really do away with the secondary market and
government involvement therein. And I think there is a large
portion of the American population who are taking that sort of
tea-party effect--I am sorry, I didn't want to suggest that
comes from a particular element--but that they follow that
thought process.
And on the other end--
Mr. Garrett. Constitutionalist? Is that the word you are
looking for?
Chairman Kanjorski. Constitutionalist? I did not see that
in the Constitution, but you may be right.
This morning, I had the pleasure of sitting in on a
briefing from Dr. Shiller and Dr. Zandi, which went over and
explained the real estate market for the last 40, 50, 60 years,
or perhaps 100 years, which was quite revealing and
interesting, insofar as the bubble that occurred in 2006 to
about 2009 was extraordinary and a one-time deal in the last
100 years. Other than that, real estate was in a relatively
staid and standard position without great fluctuation.
And, quite frankly, neither one of them attributed any
particular action to that, other than the changing from risk
investment in the stock market in equities to risk investment
in the real estate market, for one reason or another. And they
looked at it as the bubble in the early 1990's and late 1990's
and then moving into real estate in the 2004 or 2005 period.
That all being said, everybody is trying to do a postmortem
here and find a guilty party. I thought we had one, but that
slow motion of the hand said we did not.
In reality, I think we all have to accept the fact that the
real estate market is a fundamental part of the American
economy. If the real estate market doesn't stabilize and then
improve, we do not have a great deal of hope for stabilization
of unemployment and for a good recovery to the middle-class
economy that we were blessed with for almost 20 years.
Would the panel agree? And if you disagree, speak up as to
what your disagreement is.
Nobody heard my question, so they don't know whether they
want to commit.
Does George Mason want to speak to that?
Mr. Sanders. Oh, the guy from George Mason, yes. Thank you.
I agree, the real estate market is a fundamental part of
the U.S. economy. I disagree with Mr. Shiller and Mr. Zandi.
Again, if you look clearly at the evidence, when we pumped
trillions of dollars into the housing market over the 2000's
and we, at the same time, lowered downpayment requirements,
rates fell, etc., you were going to get a housing bubble,
period.
And I don't understand why I haven't talked with Mr.
Shiller before about this, and--
Chairman Kanjorski. If I may interrupt you for a second,
though, not too far from where you are sitting, if you moved
over to Ms. Ratcliffe's position, about 5 years ago Alan
Greenspan testified before our full committee, and he was
sitting right in her seat. And he said he was not worried at
all about a real estate bubble; it just was not going to occur,
did not occur, and it was nothing for us or anyone else in the
country to worry about.
That was in 2005. Precipitous, because at that precise
moment very strange things were beginning to happen in the real
estate market, and all of us were a little worried. But, not
having the expertise of Dr. Greenspan, we relied on him for his
expert opinion.
Subsequent to that, he has apologized for having been dead-
wrong on the issue. And I think that shows a big man and a good
man, but, nevertheless, he was wrong.
You do not feel that he was wrong? Or do you feel it does
not matter? I am not sure I get the--
Mr. Sanders. Oh, do I think Alan Greenspan was wrong? Two
reasons: one, he confessed he was wrong; and two, when all of
us looked at the housing prices going up like this, and
simultaneously Freddie and Fannie's retained portfolio is going
up about the same speed, we all knew that something has to
give.
Why Mr. Greenspan didn't choose to recognize that is--who
knows? Maybe he thought it was a new plateau. But I can
guarantee you other people at the time were scared about what
was going on in the market.
Chairman Kanjorski. Yes, sir?
Mr. Taylor. Chairman Greenspan was the ultimate
libertarian. And perhaps he was locked into that ideology as a
way of not being able to respond to what was going on.
The real estate market is absolutely an important part of
our economy, but we need a system of checks and balances. And
if we learn nothing else from this hearing today, it is the
system of checks and balances over the mortgage insurance
industry that required capitalization of 25 to one. Fifty cents
of every premium dollar that came in was put into a reserve so
that they could survive.
Mr. Hensarling said earlier--I am sorry he is not here; I
wanted to get to agree with most of what he said, and that is a
rare occurrence for me--that it appears the MIs somehow
weathered the storm. It wasn't ``somehow.'' It was because we
had regulation that required them to be adequately capitalized.
Had we done that with the rest of the industry, and if
there was enough oversight of the rest of the industry, we
could have avoided a lot of the problems and still had a
healthy real estate practice.
Chairman Kanjorski. So I am supposed to conclude that
regulation may sometimes be a good thing?
Mr. Taylor. Yes.
Chairman Kanjorski. In this era, I do not often hear that.
Ms. Ratcliffe, you were shaking your head. Do you agree
with that position?
Ms. Ratcliffe. I entirely agree. There are a couple of
dimensions that are worth exploring. One is the issue of
regulatory capital requirements being inconsistent across the
industry that led lending to occur in places there were no
capital or very cheap capital requirements that led to much of
the bubble.
One of the great ironies, I think, given the discussion we
are having today, is the issue of AIG who, in their credit
default swap business helped inflate the bubble and needed
substantial billions of dollars of government support. They are
the parent company of a mortgage insurance company who followed
these capitalization rules when they took credit risk on
mortgages. Right there within one company, you see this example
of capital arbitrage that we need to make adjustments for in
this. Thinking about the secondary market reform, we have to
think beyond whatever quasi-government agency you have to the
rest of the playing field.
Chairman Kanjorski. Should there be a bar to the nexus of
those two companies in the same structure?
Ms. Ratcliffe. I'm sorry?
Chairman Kanjorski. Should there be a bar to having a nexus
or relations between those companies existing in the same
structure?
Ms. Ratcliffe. Again, I think if we set common capital
requirements, that wouldn't necessarily be necessary.
Mr. Sinks. If I may take a shot at that, not speaking on
behalf of AIG, but speaking on behalf of the mortgage insurance
companies, I would submit there is a bar.
The mortgage insurance companies are controlled by the
State insurance departments, and they have the ability to
control what goes in and out of that company. So despite the
fact it was part of the very broad AIG organization, I would
submit, again in a general sense, that capital was, in fact,
walled off and the policyholders were protected.
Chairman Kanjorski. Very good. I now recognize the
gentleman from New Jersey, since I have also taken additional
time.
Mr. Garrett. Thank you, Mr. Chairman.
Let me start, a quick show of hands, how many think anyone
who wants to get a loan, a home loan, should have to, in one
way or other, go through the Federal Government, rely upon the
Federal Government?
Okay.
And how many think that the Federal Government should
essentially be backstopping or underwriting where we are,
around 99 percent of loans, high LTV loans or otherwise?
Good. So somewhere in between then. All right.
On your point, Mr. Taylor, that Mr. Greenspan is the
ultimate libertarian; I don't know. A lot of people now in
retrospect say his monetary policy was one of the reasons that
brought us to that bubble that Mr. Sanders was speaking to
before. And I think most libertarians would say that the
central bank should not be playing that role. But you can
debate that.
Professor Sanders, you saw that chart, that is the chart.
The blue is showing where 99 percent of the high LTVs are being
underwritten by you and I, and everybody else in the room, the
American taxpayer. Is that where we want to be? Are you
concerned about this?
Mr. Sanders. The answer is it is not where we want to be,
and we should be extremely concerned about this. Again, the
same thing I said before, if Genworth or MGIC or one of the
other private mortgage insurance companies want to go out and
underwrite a 3 percent down mortgage, and they are going to do
it and suffer the consequences of their folly if it fails, so
be it.
Again, as I said, Fannie, Freddie, and the FHA have this
combustible joint process where they are doing public policy
and risk management. And guess which one wins out, so we end up
with a market capture of 99 percent.
In addition, although you didn't bring it up, if we take a
look at the percentage, 99 percent and over LTV occurring now,
you have all of the GSEs, doing about 40 percent of their
business, is low LTV lending.
Once again, I sympathize with all of the people who say
that they would like to see homeowners get that. You just have
to understand, that is bubble creating. That creates another
one of these incredible wave-type effects, and it is not good
for the stability of the economy.
Mr. Garrett. Mr. Taylor, you talked about the adverse
market fees?
Mr. Taylor. Am I going to get to respond this time?
Mr. Garrett. Yes. You discussed the adverse market fees
that the GSEs are charging. Can you elaborate on the fees and
what that all means?
Mr. Taylor. Yes. They have defined that they get to charge
25 basis points in addition to what they define as adverse
markets anywhere in the country. We are actually quite
concerned about that.
Mr. Garrett. Why?
Mr. Taylor. Because we think it is unfair. The notion that
because somebody lives in a declining market, that somehow they
have to pay a premium seems fairly anti-American to me. You
ought to be able to judge the person on their capability, their
individual financial status, and their creditworthiness and so
on, not by the neighborhood they necessarily live in. In fact,
that is precisely why we created the Fair Housing Act and other
laws to prohibit these kinds of discriminatory practices just
based on geography.
Mr. Garrett. What would the GSEs say if they were sitting
next to you?
Mr. Taylor. That they have an incredibly bad balance sheet,
and they are doing everything they can to create strong,
positive cash flow that will, when they separate out all of
those bad assets, leave them standing.
Mr. Garrett. Two points. Your one point you make is: Yes,
that may be true, but they are making it on the backs of those
people. That is your point.
Mr. Taylor. I agree, yes. I agree with my point.
Mr. Garrett. I just wanted to get that out.
The second point here is, how are they using those fees?
Mr. Taylor. I think they are using it to create
profitability for the GSEs, and hopefully sustain themselves
into the future. I'm not sure if that is getting at your point.
Mr. Garrett. Yes. You can make the argument, hey, we have a
bad balance sheet and we want to put this aside as reserves.
Mr. Taylor. They are also concentrating on the safest and
the easy to make--they have raised their credit scores in terms
of who they are willing to make loans to. They are doing stuff
that essentially is survival stuff for them.
Mr. Garrett. Ms. Ratcliffe?
Ms. Ratcliffe. I wanted to add that not only is it not fair
to apply those kinds of pricing factors, but it is procyclical.
That is exactly what we have been talking about. If you layer
additional costs on in weaker times and take them out in good
times, you end up exacerbating upsides and downsides.
Mr. Garrett. I didn't think about that part of it. Thank
you.
Chairman Kanjorski. In fairness, before I recognize the
next individual, the chart was beautiful, Mr. Garrett, except I
do want to indicate it is misleading, because I think the chart
showed 99 percent or 97 percent, but this morning, Inside
Mortgage Finance released facts and information to indicate
that it has fallen from 97 percent to 82 percent, and that was
an extraordinary period of time that it went up to 97 percent.
So I don't think we should allow the impression that it has
been and continues to be at 97 percent.
Mr. Garrett. These are LTV loans, high LTVs. I think they
are still at 99 percent. Overall, it has come down, but not the
high LTV.
Chairman Kanjorski. We will check it out. Would it be
surprising if they stay up and everything else goes down?
Mr. Garrett. No. That is part of the consequence, and that
is part of the concern.
Chairman Kanjorski. We will check.
Mr. Garrett. You put your chart over there. And we will
have our chart here.
Chairman Kanjorski. We will have the war of charts. With
that, Mrs. Capito?
Mrs. Capito. Thank you, Mr. Chairman.
Mr. Sanders, in my opening statement, I mentioned concerns
I have. I am the ranking member on the Housing Subcommittee,
and we worked on the FHA reform bill, and have been trying to
work on, with the Administration's help, the FHA capital
reserve fund. As you know, FHA has played a much, much larger
role in mortgage insurance than probably historically. I don't
know that, but I assume it is close to that. Have you looked at
the announced changes on the premium changes and do you think
this will have any effect on FHA market share and open up some
of the private markets? Do you have an opinion on that?
Mr. Sanders. First of all, I also want to point out, not to
pick on Mr. Taylor, but when he mentioned Fannie and Freddie
have horrible balance sheets, we should ask ourselves: And how
did they end up with horrible balance sheets?
What is happening right now is, true, Freddie and Fannie
have increased their standards for purchasing loans. However,
the FHA has jumped in and filled the void so the whole point
is, we still have tons of these low-downpayment loans being
made. It just shifted. The FHA is now growing faster than
Fannie and Freddie.
But having said that, I think that the proposed legislation
on the FHA is a very good thing. I think the fee schedules make
a lot of sense. I think even the FHA would agree that they
would like to actually have higher downpayment standards.
Absolutely. They have some data. They can see how this can
happen again.
Mrs. Capito. They did raise some of their downpayment
requirements for those with FICO scores of 570 or 580.
Mr. Sinks. 580.
Mrs. Capito. They raised them up to 10 percent. So I think
that is a recognition by the FHA. In your opinion, that may not
be enough.
Mr. Sanders. Baby steps. The direction is great. I love to
see it. However, once again, I keep trying to make this clear,
the more we rely on low-downpayment loans, while it is very
satisfying for many households, and I appreciate it, the slow
rental market, it is inflationary in housing prices.
And again, and I want to make this point, I appreciate what
the FHA and Fannie and Freddie have done. On the other hand, if
you are sitting out in Las Vegas, California, Florida, etc.,
you have a 3 percent down loan, which you were encouraged to
do, housing prices fall 20 percent, how did we help out
homeowners by encouraging them to take out a low-downpayment
mortgage? These households are devastated.
Again, we have to rethink shoving everyone into low
downpayment. To say that the housing market is now stable and
will never go up again, like Mark Zandi says, I think that is
ridiculous. We have set the table. Warning, we have set the
table for another lurch and crash. I don't want to see that
again, and I don't think anyone in here really wants to see
that either. But I think the FHA is a good step forward.
Mr. Sinks. If I may, first of all, the housing prices have
dropped significantly in the markets that Mr. Sanders alluded
to. And there is a sense, and Mr. Zandi, for instance, will
forecast the drop a little more. But our sense of it at the
Mortgage Insurance Companies is that the worst is over in terms
of the price drops. From peak to trough, the worst is over, we
believe.
The other thing is, I would not overemphasize the
importance of downpayment. It is a criteria, and the example
used is an important one. However, there are a number of
factors that led to what happened.
We talked about low interest rates and we talked about how
easy it was to get a mortgage. But also things like instrument
types, subprime mortgages, reduced doc loans, things of that
nature. It was much more than downpayment.
High-ratio lending can be done properly. It doesn't
necessarily equate into high risk. What you have to be careful
of is layering risk, where you only have 3 percent down, you
have 580 FICO score and a BPI of 45 percent, when you layer all
of those things in, that is when you walk into a problem. So
downpayment is an important criteria, but we would submit it is
not the only criteria.
Mrs. Capito. Excellent point. Thank you.
Ms. Goldberg. If I may add a comment to that, one of the
other things we saw in the dramatic increase in the subprime
lending and other kinds of exotic lending was a misalignment of
interest between the borrower and the folks on the other side
of the table, where people on the other side of the table were
getting paid tremendous amounts to put folks in loans that were
not sustainable, that had these many layers of risk that
several of us have talked about. So it is not like it happened
organically. There were profit motives and strong market forces
driving people into those loans when they were not really in
their own best interest.
Mrs. Capito. Thank you. I would add this to that, coming
from a State like West Virginia which has some of the highest
homeownership in the Nation and some of the lowest foreclosure
rates, we don't have the bubble of the real estate. We have
responsible borrowers who, when they sit down to pay their
bills, they pay their mortgage. That is the first check that
they write. And so, there is an element of personal
responsibility here that sometimes I think, not to say this is
the only thing, and certainly there are people out there taking
advantage of other people, absolutely. But the borrower has to
take responsibility here.
Part of my frustration has been in some of the foreclosure
modifications when we were doing the trial modifications, there
was such pressure to get people into trial modifications, they
weren't even taking documentation on those. That just
exacerbates the problem.
We all want to keep everybody in a home, but at the same
time, we can't keep repeating the same mistakes that have led
folks to be thrown out of their homes and have led to this
crisis. I just wanted to make that point. But I appreciate your
remarks.
Mr. Taylor. Mr. Chairman, if I may comment, I do think
personal responsibility is important, and I think everybody
needs to understand that and needs to live by that.
But I think when you see almost 10 million Americans in a
situation where they are facing foreclosure, it is not like the
American public overnight became personally irresponsible about
purchasing things and going into homeownership. What really
changed is not the desire for homeownership or the individual
personal responsibility of taxpayers or voters, what really
changed is the malfeasance of the industry willing to make
loans that they didn't care what happened to them because all
they cared about was the fee.
There wasn't the regulatory apparatus that ensured
integrity and ethics in the industry. That and the
piggybacking, as I think Mr. Sinks said, it is the layering of
all of these different things on these loans--interest rates,
options, payments, changing exploding loans, no documentation,
all of these things that they were actually willing to make
loans to people they knew didn't have an ability to pay. That
is what changed. The industry before that was pretty good at
making loans to people who could afford to pay them back. It
wasn't that all of a sudden, the American public became
irresponsible. That is my perspective.
Chairman Kanjorski. Thank you, Mrs. Capito.
We will now hear from the gentlelady from New York, Mrs.
Maloney.
Mrs. Maloney. Thank you, Mr. Chairman. Following up on the
gentleman who just spoke, that what was happening was that no
responsibility was in the process, but just fee-generated
activity, could you elaborate? So it was more or less like a
casino, and could you elaborate more? And are the safeguards
put in the bill adequate with the 5 percent securitization and
skin in the game and bringing everyone under regulation, does
that, in effect, end these types of abuses, in your opinion?
Mr. Taylor. I think the bill will go a long way towards
addressing a lot of the abuses. I think what will be important
is the real independence of the Bureau of Consumer Financial
Protection and its oversight and ability to respond to things.
Look, I think what we had was an industry gone wild on Wall
Street that had so much money that was looking for a home. And
America had a reputation, you buy these CDOs mortgage-backed
securities, you could get good rates of return, and we had
rating agencies that were willing to slap AAA ratings on 80
percent of the high-cost loans. AAA rating on 80 percent of the
high-cost loans. And you had appraisers--
Mrs. Maloney. And these mortgage-backed securities had no
insurance behind them, and did the public know that, that there
was no--
Mr. Taylor. The public, I remember sitting with some of the
agencies before the crash and asking them, how could they be
rating these things at triple A ratings, and sitting across the
table, they would tell me, we are not really a due diligence
agency.
Mrs. Maloney. Then what were they?
Mr. Taylor. I don't know. I think they were agents of the
investment banks because that is who paid them. That is the
fundamental problem. I know in the bill, you have language in
there to recommend what to do with these agencies.
But listen, it was top to bottom. It was appraisers. It was
brokers. It was everybody getting fees, and nobody with the
ability to step in and say, we can't have this kind of stuff
because it is not sustainable, it is predatory, and it is going
to cause problems for everybody, not only homeowners, but the
investors. The investors, they are thinking they were buying
American triple rated securities that are going to give them
double digit, maybe high single digit rates of returns, safe as
gold. That is what happened up and down the line.
Hopefully, what you have in passing this financial reform,
and God bless you for supporting it, is that you are putting
sanity back into this industry, accountability, and you are
protecting the American consumer in the process. And hopefully,
we will get back to the business of banking in which they made
loans to people who could actually afford to pay them back.
Mrs. Maloney. Mr. Sanders, did you want to comment?
Mr. Sanders. Thank you. Before we take the rating agency
punching bag approach, I want to point out that a lot of
investors bought many of these securities, and they didn't even
take time to do due diligence and take a look because all of
the loan files were available. They could have done their own
modeling. I know this for a fact.
Instead they just jumped in, said triple A rated, I will
buy it, and then after they lost money, they said, ``Oh, my
gosh, those damn rating agencies.''
From the street, and I am sure if you had Mr. Zandi in here
again, most people on the street know rating agencies--ratings
don't mean much. They have a 6-month lag when things go back.
I put the onus on the buyers. Buyer beware. Remember that
one. I think a lot of times they substituted in a quick
decision when they didn't do proper due diligence, and now they
want their pound of flesh for doing it.
Mr. Taylor. So, personal responsibility of investors.
Mrs. Maloney. I began this morning at a meeting, a briefing
that Chairman Frank had on housing, and he had several
economists there. And Mr. Zandi, who was the economist for
Senator McCain, testified that housing is roughly 25 percent of
the economy. If we don't have a robust housing market, then we
are not going to have a recovery and our recovery is still
somewhat fragile. One thing that the private mortgage insurance
does is help us finance housing and thereby help us dig our way
out of this recession.
Would anyone like to comment on the way that the private
mortgage insurance business successfully raises millions of
dollars for us to finance housing which under the new
guidelines is following investment principles? Would anyone
like to comment on that?
Mr. Sinks. On behalf of MICA, I would say, first of all I
think the attraction of capital to the industry that we have
experienced in the last couple of years is a realization that
prudent underwriting has returned. While we have the legacy of
the older business and how that develops, first and foremost,
prudent underwriting has returned. I think that goes a long way
towards it.
I also think that the industry has taken numerous steps.
One of the key values that we bring, and perhaps lost sight of
during a period of time but now bring again is a second set of
eyes. We like to use the term ``friction.'' In other words,
there is a second set of eyes looking at that loan, looking at
that loan file to make sure that it meets the criteria and to
make sure that the loan is proper and people can afford the
loan, not only at the time they originate the mortgage or day
one when they move in the house, but 3 or 4 or 5 years later
they can stay in that home. So in many respects, it is back to
basics. That is what it is.
Mrs. Maloney. Back to basics. That is a good ending. My
time has expired, but Mr. Taylor has a comment.
Mr. Taylor. It is more than a second set of eyes. It is
having skin in the game. The MIs know that if that mortgage
goes bad, they lose. So they will make sure it is a good loan.
That is critical because they have financial skin in the game.
Mrs. Maloney. My time has expired. I thank the gentleman.
Chairman Kanjorski. The gentleman from Texas, Mr.
Neugebauer.
Mr. Neugebauer. Thank you, Mr. Chairman.
I appreciate the rehashing. We have had a number of
hearings where we rehashed what happened. I kind of am more
interested in where we go from here because that is what is
going to drive the economy, how to get these markets back
functioning again and somehow divorce the taxpayers from having
to subsidize and backstop these financial markets.
Mr. Sinks, one of the things that people are kicking around
is how we get the securitization market back operating again,
and certainly the mortgage insurance industry plays an
important part of that in the primary origination. One of the
things that is being kicked around a little bit is instead of
Fannie and Freddie basically securitizing and guaranteeing
those portfolios, possibly there is room for private entities
to do that.
So instead of MI, you have SI, securitization insurance. Do
you think that the industry would embrace a concept where there
was another piece of business there where you would not only
be, the private mortgage insurance on the underlying mortgages,
but also on the securitization piece?
Mr. Sinks. We would embrace it obviously if done correctly.
In fact, we have in the past. We did insure private label
securities over many, many years. I think the challenge and our
position on it is, and we used to ask ourselves this at MGIC,
many years in the boom time, is Wall Street patient capital?
And they have proven that very well, they are not patient
capital, for a variety of reasons.
So to answer your question directly: Would we entertain it?
Yes. However, we do believe the government needs to play a role
because that ensures liquidity. And as long as there is
liquidity in the market, again with proper oversight, with
transparency, and the proper regulators, we are better and more
in line with kind of a combination of private partner. And by
that, I mean two different securitizers, not the Fannie Mae
ownership.
Mr. Neugebauer. People talk about how we need the
government for liquidity. To me, liquidity is saying, if you
need me to loan you some money against your securities for a
period of time, I will do that. That provides liquidity.
But then there is another piece of that. Some people say,
we need the Federal Government to step in and take some of the
risk with us. Certainly, I don't embrace that concept.
We had a private securitized market before the crisis. We
need to figure out a way to restore it. As Professor Sanders
said, we need the industry to be willing to take risks, do
their due diligence and make sure that understand what they are
buying. But we also need to make sure that we don't take away
the tools for some of those entities that are willing to make a
market for those securities, to protect some of that risk. And
that comes with hedging and derivatives.
When we talk about liquidity, are we talking about for the
Federal Government to take some of the credit risk when you say
that?
Mr. Sinks. We are talking in particular about liquidity to
be able to move money in the secondary market, the capital
markets. It is not so much taking credit risk. I think that is
the role the private mortgage insurance companies can play. As
I reported earlier, we have great capacity to be able to do it.
That doesn't mean that the new entity, the new GSE wouldn't be
exposed. It would depend on the layer of private mortgage
insurance coverage you have.
So on our terms, it would be more along the lines of the
ability to transfer capital from those originating loans to
this entity or into the secondary market and free up capital to
make more loans.
Mr. Neugebauer. Ms. Rodamaker?
Ms. Rodamaker. From a community bank's perspective, I would
wholeheartedly agree with that. As we originate loans, we need
an avenue to sell those into the secondary market to free up
capital to originate more real estate mortgages.
We sell about 60 percent of our mortgages that we originate
in our communities. We retain 100 percent of the servicing. We
still manage those accounts and those customers, but we have to
have a vehicle to get that sold and generate the liquidity.
It does help us manage our interest rate risk because we
sell our long-term fixed-rate mortgages. However, we utilize
the same underwriting as if we were holding those loans in
portfolio, and assume that credit risk even though we have sold
it to Freddie Mac. I think that is true of most community
banks. We are not looking to sell a credit risk; we are looking
to generate liquidity.
Mr. Neugebauer. I think that is important. I think everyone
agrees that we need to get the secondary market back
functioning again. Otherwise, we won't have much of a housing
market if we don't have housing credit. And it will be
difficult for us to address the Freddie and Fannie issue if we
don't have an alternative because it has been pointed out that
they are the only game in town right now, on top of FHA.
I want to encourage the panel, as we begin to address
Fannie and Freddie, we have to also I think simultaneously be
addressing how we get the private securitization market back,
started again, because otherwise we will be creating a very
difficult situation to bring up any kind of a housing recovery,
and really I think a long-term economic recovery for our
country. I encourage, if you have some ideas, we will be
listening.
I yield back.
Chairman Kanjorski. Thank you. The gentlelady from New
York, Mrs. McCarthy.
Mrs. McCarthy of New York. Thank you, Mr. Chairman. I
apologize that I had to leave. I had constituents coming in
that I had to see.
I am hoping that the question I want to ask hasn't already
been asked. Mr. Taylor, when I read your testimony, you
indicated that the mortgage insurance can play a crucial role
to help troubled homeowners. Can you further explain the
proposed partnership of the industry with the Administration
and explain how further we can work along towards economic
recovery? If you have answered that, I have another question.
Mr. Taylor. I have, unfortunately, had to be fairly
consistently critical of the lack of success of the
Administration's HAMP program, considering that 390,000 people
got permanent modifications out of the 4 million goal that they
set for themselves, from over 16 months of running the program.
So, it has been difficult that I have had to take that
position.
I have tried to look for creative things that can be done.
I think one of them is the role that mortgage insurance
companies could play because what is coming now, as of October
1st, is the principal reduction, the call for principal
reduction by the lenders on these mortgages to see whether that
can save enough borrowers from going into foreclosure. And
perhaps the role that the mortgage insurance companies could
play is to offer mortgage insurance for those borrowers who are
under 20 percent of value, loan to value, and perhaps encourage
some of those lenders to be dropping the interest, and if
necessary, principal, to reach a point where they are
comfortable there will be mortgage insurance in play so if this
redefaults, which is a concern for a lot of lenders, if there
is a redefault, that there is somebody who can cover some of
those defaults.
I think the mortgage insurance companies, it is new. It is
novel. I think the mortgage insurance companies, I urge them to
work with the Administration and work with the lenders to see
whether they can play a role in helping me make HAMP more
effective.
The final thing I will say on that is unless and until
there is a mandatory requirement for lenders to participate in
the HAMP program, as long as it is voluntary, we are going to
see the poor numbers that we are seeing in that program.
Ms. Goldberg. If I may just add one comment to that,
because I think the mortgage insurance industry really deserves
credit for stepping forward early on in this HAMP process, to
recognize the fact that mortgage insurance exists on the loans,
could be effectively the thumb on the scale, tipping the
balance in the equation about what is going to be the best
return for the investor towards going to foreclosure because
that is when the claim, the mortgage insurance claim, is
traditionally paid.
I have been in a number of meetings with people from the
industry and people from the government where they said this is
a potential problem. We need to make sure that it doesn't
happen. I think they have been trying very hard to work with
servicers and to work with Treasury to prevent that from
tipping the balance unfairly because it is not in their
interest; it is not in the borrower's interest, and it is
certainly not in the community's interest to have the fact that
there is a mortgage insurance policy on a loan, make it go to
foreclosure, when it could otherwise have been saved. Maybe Mr.
Sinks can speak to this.
It is my understanding that they have been trying to work
with servicers to do some kind of preclaim advance or a partial
payment that would tip the balance toward loan modifications.
It is very hard to know how that is working or how widespread
the take-up from the servicing industry has been on that
possibility.
Mrs. McCarthy of New York. We had a briefing this morning
by Moody's, and they brought up the same exact points that you
are bringing up. So the criticism has been out there. Mark
Zandi gave us a great briefing. If something is not working,
then obviously we have to try to fix it.
Mr. Sinks, do you have anything to add to that?
Mr. Sinks. I would add, we have done a great deal, the
mortgage insurance companies, in working with servicers, and in
certain cases, working directly with borrowers, to try to keep
people in their homes. As we reported earlier, our interests
are very much aligned with the servicer and the borrower, so it
is important that we do that. The programs have evolved over
the last couple of years. I think they got off to a relatively
slow start, but we are now seeing more and more programs where
the consumer's monthly payment is being reduced and that makes
a big difference in keeping them in their home. So we are
actively engaged there. I think there are 16 different programs
we are involved with.
In addition to that, I know many of the MI companies that
actually place people on site at the servicers such that those
loans that contain mortgage insurance are getting the attention
that they deserve, and we can work them as quickly as we
possibly can.
Mrs. McCarthy of New York. One of the things--I am sorry,
my time is up.
Chairman Kanjorski. I recognize the gentlelady from
Illinois, Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman, and thank you for
having this hearing.
Mr. Sinks, in your testimony, you say that PMI has saved
taxpayers billions of dollars. Do you think that we should
require PMI on all loans in excess of 70 percent loan to value?
Mr. Sinks. I wouldn't lock in necessarily on loan to value;
but I would tell you that we are prepared to go as deep as
necessary and as is prudent, as long as we can protect the
policyholders in our capital support. We certainly would
entertain that idea.
Mrs. Biggert. Some people say FHA's market share has
increased because the private mortgage insurers have pulled
back. Do you agree with that? Is this a reason for FHA's
increased market share?
Mr. Sinks. I think there are a variety of reasons for the
increase in market share. I think as the crisis developed in
2007 and 2008, we adjusted, ``we'' being the private mortgage
insurance companies, adjusted our underwriting criteria to
reflect the market conditions at that point in time. Since
then, as the market has started to recover a little bit, we
have adjusted those accordingly. So our underwriting guidelines
have adjusted as markets have changed.
But the other key reason why the FHA is getting the market
share they are, first and foremost, they generally have pricing
lower than we do. They have proposed, and I think it has been
approved in the House, that their pricing will increase, and
hopefully later this year that will happen. That will make the
private mortgage insurance companies much more competitive.
In addition, and it was alluded to earlier by members of
the panel, Fannie Mae and Freddie Mac have added adverse market
fees. They have loan level price adjustments to try to rebuild
their capital base that has made the conventional market less
competitive. So if a borrower looks at a monthly payment
between the FHA and the private execution, more often than not,
they are going to do FHA. It is just simply the borrower
picking the best execution for them.
Mrs. Biggert. Thank you.
Ms. Ratcliffe, in the aftermath of the financial crisis,
the government seems to have taken a dominant role in the
single family mortgage market. The Federal Reserve has invested
$125 million in mortgage-backed securities, Treasury has
injected $145 billion to Fannie and Freddie, and now the FHA
insures more than 20 percent of all new mortgages. In your
opinion, is it appropriate that the government commit such
extensive resources to support the housing market?
Ms. Ratcliffe. Is it appropriate to what they have done,
obviously it seems like in the heat of the moment, and the
crisis, certain steps had to be taken. Whether every single
investment and dollar put up, I think if I could turn your
question a little more to the future and answer a question that
has sort of been in the air here all day, whether going forward
there should be some place for government in the secondary
market.
Mrs. Biggert. I guess I would ask then, is that investment
sustainable over the long term?
Ms. Ratcliffe. The current level seems inappropriate and
unsustainable over the long term.
Mrs. Biggert. What strategies would you suggest then for
the private sector's role in the mortgage market?
Ms. Ratcliffe. The private sector ought to play as big a
role as it can while the mortgage industry can function to meet
the public policy goal. To some extent, that may require some
form of government support to build investor confidence and
create constant liquidity and ensure access to standardized
mortgage products, particularly the fixed-rate, long-term
amortizing mortgage that is the staple of the U.S. market.
But to the extent that the private sector, and mortgage
insurance is a perfect example of that, the first loss position
is on the private sector. They have skin in the game. They set
the standards and they know the customers and the borrowers and
the mortgage lenders. So the government role should be
minimized. What we have proposed are things like private
mortgage insurance, much more capital in front of whatever
would replace the GSEs, and something like an FDIC fund before
you even would touch a catastrophic government wrap.
Mrs. Biggert. Mr. Sinks, to go back and maybe play on that,
can you elaborate for us, you said, I think, that the mortgage
insurance industry is very well regulated by the State
insurance regulators. Are you concerned that there might be
inefficiencies and burdens of having to deal with the different
regulations and requirements among the States? Or do you still
think this is the best way to go?
Mr. Sinks. We still believe in the State regulatory model.
It has worked successfully, as we have said. It has worked in
good times and bad times. There are mortgage insurance
companies over time, going back to the 1980's, for instance,
that are no longer in the business because of regular steps,
and addressed the situation. It is kind of a sense that the
model works very well, and we don't need to fix it. If it is
not broke, don't fix it.
Mrs. Biggert. Thank you. I yield back.
Chairman Kanjorski. Thank you very much, Mrs. Biggert.
We have now run out of our first round of questions. I am
sure members would have additional questions if we allow it.
So, without objection, I am going to start a second round.
We have this bright, anxious, participating panel here, so why
not tap them.
My first question would be, looking to the future, how many
of you would recommend getting the government totally out of
the secondary market and out of the real estate market?
Okay, George Mason has one vote, and five to the contrary.
Let us start with you, Mr. Sanders. Why are you so
convinced that it is not advantageous for the entire American
economy to keep the real estate market relatively flat and not
highly cyclical that would cause this great fluctuation? Or do
you see that there would not be fluctuation, because if you do
an analysis from the late 1920's until 2004, 2005, the real
estate market has been a tremendously flat, stable market, and
it only bloated with the bubble right at the end. What are we
to think if we go to a total private market again, why should
we not be returning to the days prior to 1929 when it was a
very, very fluctuating market?
Mr. Sanders. Mr. Kanjorski, I have seen that same study by
Bob Schiller. What is misleading about that is that is a
national portfolio of housing. There have been regional bubbles
in housing markets all throughout time: Boston; Houston; and
Denver. That was the source of my quote in the New York Times
where I said don't put lower-income households in low-
downpayment mortgages. You are going to hurt them because
housing markets, by definition, can be bubblish.
Now, having said that, I would disagree with what Mr.
Taylor said. He said, Wall Street gone wild. I would say,
government gone wild. We went through a period where government
pushed housing over the cliff. And what did we get? We got a
bubble; we got a burst; and we have a lot of heartache and
pain. It almost crashed the banking industry and the private
mortgage insurance companies ratings are not as high as they
used to be. That is the downside of it.
Having said that, can't we at least begin to withdraw the
government support and go back and let the private mortgage
insurance companies or the banks take risks they think are
reasonable?
Chairman Kanjorski. I do not have any question with that.
Certainly we have to change the formula, perhaps how much
government involvement there is. But to listen to the purists'
argument, it is quite disturbing to me because you are
willingly putting at risk, it seems to me, the entire economy
of the United States since housing represents 25 percent of the
economy. If we stay in the state we are in right now, there is
literally little or no hope for recovery. That is a heck of a
price to test against an economic theory, free market concept.
I am glad you are able to make that price and argument, but
would you want us to tie all of the support funds that the
Federal Government supplies to your university based on that so
if you are wrong, your university gets wiped out?
Mr. Sanders. Absolutely, for the following reason: We are
the only country that has Freddie Mac, Fannie Mae, and this
extensive subsidization of the housing market. We got there
because of that. You are right, if we suddenly removed it, it
would be like a drug addict coming off of a heroin shot. We
would probably have a terrible time afterwards. We need sort of
a methadone period, where we withdraw it over time, say 3 to 5
years. But eventually, we have to let a target, let the private
sector make bets and pay the price if they are wrong.
Chairman Kanjorski. And I can understand that argument, but
how do you justify what happened when securitization by Fannie
and Freddie really substantially lessened in 2006, 2007, and
2008, and the private market of Wall Street took over, and the
descriptions Mr. Taylor made of these people being on all one
side of the transaction, getting their commissions and profit,
that occurred when Wall Street was doing the securitizations,
not when the government-sponsored agencies were doing it.
Mr. Sanders. Again, I have seen that argument made before.
Just using my hands because I don't have graphs, the housing
bubble did this; at this point, Freddie and Fannie pulled out
of the market and let the private sector come in. That is icing
on the cake. This market was bubbled and was overheated before
the private sector stepped in with the securitization, the
private label market you are talking about.
Mr. Taylor. That is not true.
Mr. Sanders. Yes, it is.
Mr. Taylor. Three years ago, FHA only had 3 percent market
share.
Mr. Sanders. We are talking Fannie and Freddie.
Mr. Taylor. Let's talk Fannie and Freddie. Mr. Chairman,
Fannie and Freddie in 2001 had $2.7 trillion worth of market
share of these mortgages. By 2003, they lost a trillion dollars
worth of market share to this so-called free market, it was
free to abuse and do whatever they wanted, a trillion dollars
of market share, that is when Freddie and Fannie got into this
both feet, arms, legs, the whole body. That is when they really
followed the market into this subprime abyss. But even then
they had limits, and they wouldn't take no-documentation loans
and they wouldn't do certain things that the market was still
doing and willing to do. So let's be clear. We were led down
this abyss, all of us, by a market gone wild.
It wasn't low-income people. You look at the people who are
in foreclosures, it is not just low-income people. It is all
sorts of income levels. They keep blaming low-income people. I
don't know what is going on with George Mason. It is simply not
what has happened in America to this housing bubble. It wasn't
created by low-income people. In fact, low-income people
originations amounted to less than 10 percent of all the
mortgages that were done in this malfeasant lending period. It
had very little to do with lending to low-income people.
Mr. Sinks. I would agree with what Mr. Taylor said here.
When Wall Street came in and it created or extended the
``exotic products'' and Fannie and Freddie started to lose
share, that is when they reacted. That goes to the private-
public ownership of Fannie and Freddie, which is a different
topic. But they were responding, trying to play to their
shareholders, and they grew their share; and, therefore,
accepted riskier loans dramatically.
The flip side of that, and it goes back to something I
spoke earlier about, is Wall Street patient capital, the answer
is flat out no because they have a profit motive. As Mr.
Garrett pointed out earlier with his charts, they disappeared
and now the government has 99 percent of it, or 83 percent,
whatever the right number is. So the pendulum swung completely
the other way. And to your point, Mr. Chairman, as much as we
want to see the FHA and the GSEs back off a little bit, we
wouldn't have a housing market today if they weren't there
because the private capital market sure isn't stepping in.
Ms. Goldberg. Mr. Chairman, in addition, it is important to
stop blaming the low-downpayment loan made to low- and
moderate-income people because I think there is a lot of
evidence that those loans done properly actually perform quite
well, and are very stable over time, at least when the economy
is not going whacko, because unemployment now is obviously
driving foreclosures at a level that it hasn't before.
I think it is important to be clear about what are the
kinds of loans that have caused this crisis, and what are the
kinds of loans that haven't, and not just say every loan with a
low downpayment is a bad loan that is destined to go back.
One other piece related to that, one of the critical roles
for the Federal Government and its involvement in the secondary
market and direction of the primary market is to make sure that
lending is done fairly so people, not just low- and moderate-
income people, people of color, families with kids, women,
people with disabilities, that they have access to mortgage
credit in a fair and equitable manner, and in a safe and sound
basis, which if we go a little ways back in history, we know is
not the case with a market left to its own devices. So in terms
of that kind of equity, and how we make sure people are treated
fairly and have fair access, the government has a really
critical role to play as well.
Chairman Kanjorski. I really need an explanation for the
record and that is why I have encouraged you all to go back to
what caused this thing. I am firmly convinced that we need to
find some way of defining some of the important causes we agree
upon. Apparently, here on this panel, we have five witnesses
who would agree this is not all of the government's fault, and
one witness who says the solution to this would be going back
totally to a free market system. Now this panel and the
Congress has to write new rules and regulations and decisions
need to be made as to whether we have a secondary market. And
if so, who is responsible to encourage it, what kind of
subsidization should be made for housing, if any, and should we
get involved at all? It seems to me we cannot get back to that
unless we get more uniform agreement as to what some of the
basic causes for the crash were. And then leading off that,
what are some of the solutions or cures we can put in place to
prevent some of these things.
One question, because we just recently passed the
Regulatory Reform Act, do you think we have totally failed in
doing the right thing there and we should have done nothing?
Mr. Sanders. The Regulatory Reform Act?
Chairman Kanjorski. The Dodd-Frank bill.
Mr. Sanders. It is all about systemic risk, etc. We don't
know what is going to be in the new agency that has been formed
up that is going to moderate the markets. And it didn't mention
Fannie and Freddie. Congressman Frank says we are going to do
this. I say to my friend, Mr. Taylor, and I gave this
presentation in front of Mr. Frank, I said we have pumped $8
trillion in money, guarantees and loans into this mortgage
market prior to the private sector getting involved. That is
bubblish. By the way, I am not saying that the private sector
didn't make some mistakes. Absolutely, there were. But what I
am saying is, without the public sector's prodding into housing
so heavily, we may not have seen that. Would the market have
responded that way had they thought there wasn't this huge
demand for it? Because remember, I took it out of my testimony
for Mr. Taylor. I wish I had put it in. Take a look at the
housing prices in cities. In some major cities, housing prices
quadrupled during this bubble period. How do we get affordable
housing people into those? There is only one way to do it, 3
percent down. And again, I understand that. But that is
bubblish.
Chairman Kanjorski. But we were all worried about the
tulips.
Mr. Sanders. You are absolutely right. The private sector
screwed up.
Chairman Kanjorski. I would like to go on, but I have to
let Mr. Garrett have some of the time.
Mr. Garrett?
Mr. Garrett. So the last exchange was I guess interesting
and telling that here we are, ending in July, and we still
don't know what was the underlying cause, at least have a
consensus on what was the underlying cause of the economic
morass we were just in. Why that is curious and maybe a little
ironic is several weeks ago, we just passed a 2,300 page bill
fixing the problem. When we were in this room and I was sitting
over there and it was the first day of the first joint
conference committee, House and Senate conference committee,
and we were ready to start voting on the bill and I asked, may
I have a show of hands of anyone in the room who actually has
read all 2,300 pages. No one raised their hand on the
committee. So what you had was no one actually having read the
bill. And as we have seen in this last few minute dialogue, we
still don't have a consensus as to what was the cause of it. We
have a commission that is out there that is going to be coming
up with their interpretation, after exhaustive studies and
talking to experts like you and others to tell us what the
cause was. That, I understand, is not going to get back to us
until some time at the end of the year. But here we are already
implementing a bill, 2,300 pages, and to what end. A couple of
you already made the comment that what we need is certainty,
and we need to get capital back into the marketplace.
In the last week or so, it was reported in the Wall Street
Journal that Ford was trying to get more capital into the
system. And how did that work for them, as Dr. Phil would say.
Not too well. It wasn't because of anything that Ford did, it
wasn't because of anything that the private markets did, it was
all because of this ill-conceived, not thought out what the
ramifications of the bill is, and those are not my words, I am
sort of paraphrasing Senator Dodd when he said we have see how
this bill passes before we see how it all plays out.
We saw how it played out with Ford. Thank goodness Mary
Shapiro was able to come back and fix that situation in a band-
aid sort of approach for 6 months. Think about how much
uncertainty there is there. Think of with the SEC, we don't
even know how many regulations that they have to promulgate. I
know someone is saying it is 95 regulations, somebody else says
it is 102 regulations at the SEC. We don't know how many
regulations they have to promulgate. How can anyone say we have
just brought certainty to the marketplace?
We have brought uncertainty into the marketplace, and that
is just going to be a detriment for a time to come for your
industries and the rest.
I think what all of us want, whether it is the free markets
or otherwise, is proper allocation of capital. That is the best
way for any economy to perform, is if you have the proper
allocation of capital. You have had a misallocation when the
government encourages to go in one way when it shouldn't. I
will concede with Mr. Taylor and others that there were
mistakes made all of the way around, private sector, public
sector, individuals, investors, and the like. But you have to,
I think, agree that a lot of this was prompted by government
activity.
I think Ms. Goldberg was saying it is not the low-income
loans and what-have-you, and I think some of the documentation
sort of points that out. But you have to see what the
government did on this to encourage the high income. Remember
what the Federal Reserve up in Boston said several years ago
just prior to the collapse, they published a report that says,
what, that when you do the underwriting, you no longer have to
look at traditional valuations, you no longer have to look at
income sources, you can consider welfare payments as a proper
source of income in the consideration of developing risk
assessment and the like.
They were talking about low-income loans in the urban
areas, but what happened right after that or some time after
that, they said if you don't have to look at those for low-
income loans, okay, because there are no longer the traditional
values that banks used to use, you would probably say should we
be looking at welfare payments as a proper source of income for
a bank loan, you would say probably not. But the Federal
Reserve of Boston was saying it was okay to consider it. So if
it is okay for the Federal Reserve of Boston to do it on that
loan, then you had Bear Stearns and others come out on the
private sector saying, hey, we must be able to do it on the
middle income and the upper income levels as well. And that
then skewed the marketplaces.
Ms. Goldberg, you talked a little bit about the downpayment
aspects and what-have-you. Is the percentage of downpayment an
appropriate indicator of risk?
Ms. Goldberg. Sir, if I can take a second and speak to your
previous point briefly, one thing on welfare payments, it is
often true that people who get welfare don't have the income to
support a mortgage, but it is a steady stream of income. And I
am not familiar with the Federal Reserve of Boston's paper on
this topic, but I suspect that is what they were getting at. I
don't think you would find community advocates suggesting that
should be the only underwriting criteria. I think we all want
to see that loans are underwritten, looking at the borrower's
ability to repay the loan. So it is not just are you getting
welfare as a criterion for deciding whether you are eligible or
should be eligible for a loan or not. There are a lot of
factors that go into it.
Several panelists have spoken, what we saw in the
unregulated part of the private market was risk layering with
lots of different loan features that together contributed to
tremendous risk, loans that were not sustainable, and were not
underwritten to the borrower's ability to repay.
Having said that, I forgot what your question was.
Mr. Garrett. Is downpayment an appropriate indicator of
risk? Although now, you say that welfare payments may be
appropriate.
Ms. Goldberg. I will say that I don't believe my
organization has a position on the level of downpayment that
ought to be required. But I think we would say that we think it
is a good idea for people to have a downpayment and to have, as
a borrower, some skin in the game. However, just like with
high-income people and lower-income people, that should not be
the only factor that is evaluated in deciding whether someone
is a good credit risk, and whether the loan product that is
being offered to them is the appropriate product for them.
Mr. Garrett. Do you have an answer?
Ms. Rodamaker. When we talk about the downpayment, that is
absolutely one aspect that we use of underwriting. We have gone
through and we study every loss, every foreclosure, everything
that happens in our mortgage market. The most common cause of
foreclosure in our market is divorce, and you can't use that in
underwriting.
Mr. Garrett. This is not the committee that deals with
that.
Ms. Rodamaker. Right. When a couple comes in and applies
for a mortgage, they are happy. When they start making
payments, maybe that is when they become unhappy.
Chairman Kanjorski. So all we have to do is outlaw divorce.
That is the solution.
Mr. Garrett. Just a technical question, Mr. Sinks.
When the person comes in and makes their application to the
bank, to your colleague to your left, you are doing all of your
underwriting and then paperwork, if she is hooked up with one
of your clients and they are doing that, what percentage of the
cases that she will be sending, applications that will be
coming in for PMI, are accepted on average and what percentage
are not? Or is it accepted all of the time with just a higher
premium?
Mr. Sinks. I will speak on behalf of MGIC because I don't
know the industry statistics, but historically, we would have
rejected the application probably 2 or 3 percent of the time.
In this environment, because we are so cautious, that number is
closer to 25 percent.
Mr. Garrett. But normally it is 2 or 3 percent?
Mr. Sinks. Yes. As you came through the 1990's and 2000
decade, it would be 2 to 3 percent. As the market changed, and
we had to adjust our underwriting guidelines accordingly, it is
probably in the neighborhood of 25 percent. The primary reason
for that is because of concerns over valuations. It is not the
credit score. You can verify income and things like that. It is
really about the value of the property; is that appraisal good.
And in certain markets, in Iowa, it is just fine. But in other
markets, we still have concerns about those. I would expect
that over a period of time to revert to the mean.
Mr. Garrett. I will close, I know a couple of you made the
comment as for the need of additional information and
uniformity in regulation, and your suggestion was along the
line with what the GSE has done in the past. Rest assured, the
Frank-Dodd bill takes care of all that. We now have an Office
of Financial Research that will get every single piece of
information that anyone can possibly conceive of in that
agency, and they will be a new systemic risk regulator all unto
themselves.
So every bit of information that you have ever been looking
for, and any information as far as uniformity will come from
them and the CFPA, because ultimately, there is no limitation
on their power of information and there is no limitation as far
as their power for setting some of the standards you need and
inasmuch as these are consumer financial products, we have just
created everything you need in this bill. So I will close where
I began. We don't understand what caused the problem, but we
have solved it.
Chairman Kanjorski. I guess that office will be able to
tell us just who is going to get divorced.
The gentlelady from New York, Mrs. McCarthy.
Mrs. McCarthy of New York. Thank you, Mr. Chairman, for
having a second round. I wish we always had more time to have
an open debate. I always feel bad for the witnesses--5 minutes.
You travel from all over, and you get 5 minutes. It is not
enough for some of us. We would like to go back and forth with
questions.
Again, I am going to go basically back to the Moody's
report that we got this morning. We might not have solved all
of the problems, but going back when we started doing the
financial reform, the goal was certainly not to put anybody out
of business, but obviously there had to be some rules and
regulations. I always said if I could legislate morality, we
wouldn't be dealing with a lot of the things that we are doing,
mainly because so many of these corporations knew what they
were doing. They had been warned by their inner controls, and
they ignored it because the money was so good coming in. Having
said that, I have absolutely no qualms that what we did was the
right thing. Is it perfect, there is no such thing as a perfect
bill coming out of Congress. I don't care if you are Republican
or Democrat, it just doesn't happen. That means we do
corrections as we go along. This committee spent a year-and-a-
half going section by section by section, and working hard
trying to get it right. I am not going to speak about the
Senate. I didn't agree with a lot of things that the Senate
did. With that being said, I certainly think that we have put
Wall Street and some of the financial industry on notice. We
are going to be watching you.
For anyone who was planning on retiring, or those of us who
actually grew up with parents who came from the Depression and
saved so that I would be ready for my retirement, to see that
wiped out when I did nothing wrong, and millions of other
people in the same boat; and yes, the homeowners. And I agree,
going back in 2002, 2003, 2004, this subcommittee, with a
Republican chairman, saw that the subprime and the unlicensed
mortgage brokers, what they were doing in this country was
wrong. We had a good bipartisan bill that I believe could have
possibly prevented a lot of things that happened in the housing
market. And it came out of this committee with a good vote. It
was never allowed on the Floor.
Everybody wants to blame this side of the aisle, believe
me, we tried and a number of Republicans tried back then. With
that being said, and we solved those problems with unlicensed
subprime mortgage brokers going from State to State, they are
not going to be able to do that any more. And I think that is a
good thing.
With that being said, and again, I also know we are going
to have hearings in September on Freddie and Fannie, basically
going a little deeper on exactly what went wrong, and we have a
lot of information on that already. But I want to go back to
why this hearing is being held. Again, I apologize if it was
talked about during the 20 minutes I was gone. If any of you
have any ideas about the regulatory or legislation changes that
must occur for the private mortgage insurance market to be able
to play a larger role in the repair of our housing market,
because again that is what we are going to be dealing with, I
would certainly take your comments.
Mr. Sinks. I will give the first shot. To make us more
competitive and bring more private capital or more private
exposure, and kind of bring that chart that Mr. Garrett had
back into balance, the first thing we need to do is get the FHA
prices back in line and commensurate with the risk that they
are taking on. They are underpriced from where the private
industry is right now. They have new pricing proposed. We know
that we expect it to happen. That will clearly expand the pie,
if you will, for the private mortgage insurance sector.
In addition to that, they are planning on loan dollar
limits that are a little higher than they should be, we
believe. Those dollar limits need to be adjusted. And finally,
as I alluded to earlier, the conventional market which is
Freddie and Fannie, they have a series of fees on their loans
as they attempt to rebuild their capital base that make the
private execution versus an FHA execution less competitive.
What it comes down to is when you add in the FHA having lower
prices, and the fees that the GSEs have on the conventional
side, when the consumer gets a piece of paper in front of them
that says which is the lowest mortgage payment every month, it
is, far and away, the FHA these days.
The private mortgage insurance industry, as we alluded to
earlier, has been able to raise billions of dollars worth of
capital, and we have the capacity to do it. We are ready,
willing, and able as an entire industry. And each company is
ready, willing, and able. We just can't compete in the market
with that kind of pricing, and we can't control that pricing.
So that would be the primary influence on what we need.
Mrs. McCarthy of New York. Just to follow through, and I
don't remember who mentioned it when I was listening to the
testimony, the appraisals, the appraisals of homes going back a
number of years ago. I used to have the real estate people
coming in and saying, what is going on here? I had a woman who
basically came in, she was buying a home that she certainly
couldn't afford and the house was appraised much, much higher
than what it was ever worth. And there was no money down. One
of the new exotic pieces to get people to buy homes. She
herself backed out. She wouldn't be part of it because she
thought it was fraudulent. How do we get the appraisals to be
honest? You bring three appraisals in, and I saw that with my
son and daughter-in-law. One was the top end, which nobody in
the neighborhood had; their house was not any better, if
anything, it wasn't updated as some of the other houses. And
then a really, really low price. I know everybody goes high,
low, and then in the middle. But how do you know you are
getting a good appraisal because, you are the insurance, do you
use different appraisers?
Mr. Sinks. Yes, we do. We have an approved list of
appraisers. This is an issue that has been around certainly
since the private mortgage insurance industry has been around.
As I said earlier, you can verify income, verify FICOs, but
that appraisal is the great unknown. It plays havoc when the
market is rising. When you see California double in value over
a period of time, or it can have an impact when values are
dropping. When you look at Detroit and you see values dropping
and someone is trying to buy a home, and what is that house
really worth?
I think what needs to be done is, most importantly, it
needs to be done locally. You need to have trust in people who
are in those local markets and truly understand it. In addition
to that, you have to have some other checks and balances,
whether it is automatic valuation models and things like that
might not be the exact answer, but it gives you a
reasonableness check on what that appraised value should be.
Mr. Taylor. First and foremost, in FIRREA you mandated
there be independence between appraisers and financial
institutions, and that never happened. Countrywide had their
own appraisal shop. Citi, a number of these financial
institutions owned the appraisal units. Yes, the guy who ran
the mortgage department didn't oversee the appraisers, but they
worked for the same company. There has to be independence in
those businesses, so there is an arm's length transaction.
Furthermore, there has to be the independence so you can
make an appraisal and the lender simply doesn't turn around and
never do business with you again. There has to be a process
that allows for fairness, mediation, and oversight that
protects the appraisers from giving honest appraisals.
Finally, it has to be in person. These automatic valuations
have proven not to be very effective. Yes, they work some of
the time, but they don't work a lot of the time. We used to
have people come into the house, look at what was going on in
that house, not just sit in front of a computer and theorize
what the value might be.
One of the biggest overlooked groups in this crisis, this
foreclosure crisis, was the appraisal industry. And a lot of
the ones who tried to stand up and be independent, they are
gone because businesses, banks, stopped doing business with
them until they got appraisers who did what they said. You
absolutely must fix this. I think in the financial reform bill,
there is language that allows oversight for this to happen, and
it is critical going forward that we really address this
problem.
Ms. Goldberg. If I can add one note to that, I completely
agree about the need for additional oversight. I want to
caution you that while I also agree appraisals in many cases
helped to fuel the rise of housing prices in a way that didn't
make sense, and bore no relationship to reality, appraisals can
also work on the opposite end, to harm neighborhoods where
property values are undervalued, underpriced.
One of the footnotes in my testimony, I give some of the
history of the appraisal industry predating FHA and applying to
FHA where appraisers were actually trained that you could judge
the value of the neighborhood based on who lived there. And
there was a listing of different racial and ethnic groups
according to whether they helped inflate property values or
sustain property valuation, or whether they diminished property
values. While those standards have been dropped from the
industry, the effect of that really institutionalized kind of
racial approach to valuing property. It is not really erased
from the industry, and we need to make sure that kind of
discrimination is not happening in appraisals, as well as the
artificial inflating of the property values at the other end of
the scale.
Mrs. McCarthy of New York. Thank you, Mr. Chairman. I thank
all of you for coming in and enlightening us.
Chairman Kanjorski. Now the gentleman from Illinois, Mr.
Manzullo.
Mr. Manzullo. Thank you. Can anybody on the panel advise me
if private mortgage insurance had anything to do with the
collapse of the real estate market?
Mr. Sinks. The literal collapse of the market?
Mr. Manzullo. Yes. Did you do anything wrong in your
industry, Mr. Sinks?
Mr. Sinks. Sure, we did. I think we are one participant
amongst many. We were talking earlier about perhaps we haven't
figured out exactly what went wrong. I think fundamentally,
what went wrong was that basic principles of risk management
were done away with. There was no fear in the market. People
had different motivations, whether it be the government wanting
to house all of America, whether it wanted to be Wall Street to
make a buck as quick as they possibly could. I think everybody
who was in that food chain from borrower to servicer, and
investor at the end, played some role.
Mr. Manzullo. The big problem is that the Fed has always
had the authority to do two things: number one, govern
instruments; and number two, determine the underwriting
standards. At least as to those banks that the Fed covered. It
wasn't until October of last year that the Fed came out with a
written rule that said, voila, you had to have written proof of
your earnings. Whenever MI was purchased, if this is within the
purview of your knowledge, Mr. Sinks, how far did MI go? Did
you actually look at closing statements? Or you just got an
order to provide insurance based upon salary and the value of
the property?
Mr. Sinks. We did look at the documents. We do underwrite
the file and provide the second set of eyes. What happened, I
think in a sense was that as the market expanded, as Freddie
and Fannie took on a greater role, they expanded the
underwriting criteria under which they would buy loans. The old
idea of 38 percent--
Mr. Manzullo. Did that influence your issuance of mortgage
insurance?
Mr. Sinks. Yes, it did. The reason it did was because
competitively, and we touched on it earlier, what happened was
there was an expectation within the lending community, which is
our customer base, that if Freddie and Fannie had underwriting
guidelines, and I am going to use an example of 45 percent debt
to income ratio, then private mortgage insurance, you need to
play in that game. For us to remain competitive in that
environment and be able to participate in the market, we
stretched our underwriting guidelines. We reviewed the file,
but we allowed the guidelines to expand due to competitive
pressures.
Mr. Manzullo. Let me go to a second area. On the
appraisers, we have heard horror stories from many lenders back
home. I remember reading in the Post some time ago where an
appraiser from Richmond came to appraise a townhouse, or a
stand-alone house in Alexandria, Virginia. And we are getting
people from Chicago who are driving to Rockford, Illinois, 80
miles to the west, who know absolutely nothing, nothing, I
mean, nothing about Rockford, that are giving appraisals. And
the Realtors are scratching their heads and saying: Where did
these guys come from? They came from Chicago.
The home valuation code of conduct, we had the hearings on
that. I looked at that. I have been through probably a thousand
real estate closings myself as a private attorney. In fact, I
started practicing before RESPA, and we actually had more
honest closings before RESPA. There are eight people at HUD
working day and night on trying to revise RESPA at any given
time.
Now you have a situation where you have an out-of-town
appraiser come in, and he doesn't know the fact that there are
rumors that the highway may be expanded in front of the house,
or he reads the newspaper and hears about the city council
which may exercise powers of condemnation and taking a parcel
of property, he knows nothing at all about the locality, and
yet he is presumed to be dishonest simply because he is local.
That is going to really hurt the real estate recovery as far as
I am concerned. John, you are nodding your head. It may be the
first thing you and I agree with in a long time. Do you agree
with that?
Mr. Taylor. The second thing, actually. The lack of
government oversight in the Fed to put out rules that
prohibited these practices.
Mr. Manzullo. There you are, John.
Mr. Taylor. Yes, I totally agree. It is all about local and
having that person who really knows the property, and it is all
about that person having the independence from not being overly
influenced by the broker or the lender.
You do that, build that, which is what you supposedly built
with FIRREA when you created this separation, and we will clean
up this mess with the appraisers, notwithstanding Debbie's
comments about making sure that it is not done in a
discriminatory fashion.
Mr. Manzullo. The mess is done now. The Realtor goes out
there. It is not hard nowadays to get comparables. When I
started practicing law, no one had heard about the Internet.
You had to research it the old-fashioned way at the courthouse.
And that was always interesting because in Illinois, we had the
green sheets. The green sheets would tell you which portion of
that real estate was actually attributed to personal property.
Mr. Chairman, I wanted to bring that up because I just
don't think when the GSEs and FHA adopted the HBCCs by reasons
of Attorney General Cuomo somehow forcing them to do that, that
is going to help in the real estate recovery; do you agree with
that, John?
Mr. Taylor. I don't know about Attorney General Cuomo being
the one who forced them into that position, but I agree that we
need local. These appraisal management companies I think are
not a good model to get accurate appraisals. We need inside;
somebody needs to go into the house, and somebody needs to know
the neighborhood and know what is going on. I think that will
get us back to sane, accurate valuations.
Mr. Manzullo. Do the rest of you agree with Mr. Taylor's
statement?
Good. On that note, I will end.
Chairman Kanjorski. Thank you.
If I may comment, the regulatory reform bill contained
about 200 to 300 pages of revolutionary ideas about appraisals
and how we handle them. And the bill did not take 18 months; it
took 6 or 7 years of bringing that about.
I think we are going to go on for another hour-and-a-half.
No, Mr. Garrett has reined me in. I got carried away. A lot of
times when we get down to a few members, we get extended
questioning periods. I appreciate the response and the back-
and-forth nature of the panel. I was hoping we could get
everybody to join hands and say we agree on everything, but we
probably have failed. We will try that next time, or we will
come down hard on the universities again.
Mr. Sanders. If I may make one closing remark on my behalf,
Mr. Garrett asked the question, and I wanted to provide some
clarity on it. At one point, believe it or not, I was an
advocate for Fannie, Freddie, and the FHA. Unfortunately,
something happened at the beginning of the last decade. Freddie
and Fannie were the gold standard for underwriting, 20 percent
down, we don't need private mortgage insurance for 20 percent
down. Everybody believed Freddie and Fannie was right on
target. FHA was small.
A question for you: What happened? Why did Freddie and
Fannie balloon in size and why did the FHA balloon in size? I
think if you are trying to look at a source of what happened in
the housing market, why not look at that?
Chairman Kanjorski. I don't blame the Bush Administration
for selling real estate at any price.
I think Mrs. McCarthy put her hands on it. We can sit here
forever and blame one political party or another political
party, or one Congress or another Congress, or one President or
another President. The reality is, I would hope we can get to a
common understanding of what happened because until you
identify a problem, it is hard to come up with a solution, and
we really do have on both sides of the aisle a gross
disagreement on what really fundamentally caused this problem.
I am hoping when the Commission gets done, we will come
closer together on that issue. Regardless of what happened and
what did cause it, it is not going to cure a thing. The future
is going to cure something, and I think we should take on the
rewriting of what happens to lessen the opportunity. We will
never stop risk and we will never stop ridiculousness in a free
market society, and we should not, but we can do things to
improve it.
The one impression that I may have left that I want to
remove, I think the mortgage insurance market has played a very
good role in real estate in the United States. But we have to
recognize that for 2 decades after the Great Depression, it
disappeared. And sometimes market situations will not cause it
to come about and come back when there is such a tremendous
disruption.
I really do believe Fannie and Freddie fulfilled a great
function in our society in the period from the war on until we
lost control of them for one reason or another and they went
overboard. But they are manmade institutions and therefore
correctable and lend themselves to solutions or something
similar to an enforced solution.
I think what is important, if we can bring the temperature
down and get serious, and I am inviting my friends on the right
side to join us in that, and I don't mean right side, it is on
my right. What disturbs me the most, and I will shut up after
that, is that we have been through a real trauma in the country
and the average family has been through a real trauma, and at
this point, there is a lot of fear in those families and they
are looking for more level heads to prevail. Sometimes we in
the Congress do not provide the right image for that level
head. I am hoping now we can get down to being levelheaded. If
we can, we can solve this problem. I think we are on our way to
the solution to the problem. I am absolutely convinced of that.
The faster it happens, the better off we are.
I agree with Mr. Zandi. And the fact he work for Moody's
and was a Republican and supported Mr. McCain for President,
that may be good. Because he did that, he probably should be
more reliable to my friends on the other side. Notice I didn't
say ``right.'' He basically said we are not going to really
resolve this problem on real estate until we resolve the
unemployment problem.
Conversely, the real estate problem is going to stabilize
the whole economy for a pretty good picture into the future. I
tend to agree with that. So I say regardless of what side of
the aisle we are on, let's get on with the work.
Let me say, thank you all very much. I was a little
annoying and snippy to all of you. I didn't intend to do that,
to be that way. I was trying to extract out of you some good
comments, and we certainly got some. Mr. Sanders, you and I
sparred very well. I appreciate that, with a good sport.
Mr. Sanders. Mr. Kanjorski, after today's panel, I am
changing my name to George Mason.
Chairman Kanjorski. I had a much stronger comment than
that, but I did not use it. Thank you all very much. We hope
you still make your planes and trips back. You have done a
great service. It is one of the elements that we are going to
take up as we are going through the reformations of the GSEs
and other problems of establishing a better focus for real
estate in the country. Thank you very much.
The Chair notes that some members may have additional
questions for this panel which they may wish to submit in
writing. Without objection, the record will remain open for 30
days for members to submit written questions to today's
participants and to place their responses in the record.
Before we adjourn, the following will be made a part of the
record: a letter from Essence Guaranty to Secretaries Geithner
and Donovan regarding reform of the housing finance system.
Without objection, it is so ordered.
The panel is dismissed, and this hearing is adjourned.
[Whereupon, at 4:35 p.m., the hearing was adjourned.]
A P P E N D I X
July 29, 2010
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