[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
FANNIE MAE AND FREDDIE MAC:
HOW GOVERNMENT HOUSING POLICY
FAILED HOMEOWNERS AND TAXPAYERS
AND LED TO THE FINANCIAL CRISIS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
MARCH 6, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-5
U.S. GOVERNMENT PRINTING OFFICE
80-871 WASHINGTON : 2013
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Capital Markets and Government Sponsored Enterprises
SCOTT GARRETT, New Jersey, Chairman
ROBERT HURT, Virginia, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
SPENCER BACHUS, Alabama BRAD SHERMAN, California
PETER T. KING, New York RUBEN HINOJOSA, Texas
EDWARD R. ROYCE, California STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan KEITH ELLISON, Minnesota
MICHAEL G. GRIMM, New York MELVIN L. WATT, North Carolina
STEVE STIVERS, Ohio BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida
ANN WAGNER, Missouri
C O N T E N T S
----------
Page
Hearing held on:
March 6, 2013................................................ 1
Appendix:
March 6, 2013................................................ 47
WITNESSES
Wednesday, March 6, 2013
Ligon, John L., Policy Analyst, Center for Data Analysis, the
Heritage Foundation............................................ 9
Rosner, Joshua, Managing Director, Graham Fisher & Co............ 10
Wachter, Susan M., Richard B. Worley Professor of Financial
Management, Professor of Real Estate and Finance, and Co-
Director, Institute for Urban Research, The Wharton School,
University of Pennsylvania..................................... 12
White, Lawrence J., Professor of Economics, Stern School of
Business, New York University.................................. 14
APPENDIX
Prepared statements:
Ligon, John L................................................ 48
Rosner, Joshua............................................... 62
Wachter, Susan M............................................. 72
White, Lawrence J............................................ 79
Additional Material Submitted for the Record
Bachus, Hon. Spencer:
Inserts from the Charlotte Observer.......................... 99
Letter to Hon. Barney Frank, dated September 28, 2006........ 102
Letter to GAO Comptroller General David M. Walker from Hon.
Spencer Bachus and Hon. Barney Frank, dated April 25, 2007. 103
GAO testimony before the U.S. Senate, dated December 4, 2008. 104
Garrett, Hon. Scott:
J.P. Morgan insert dated May 3, 2011......................... 128
Garrett, Hon. Scott, and Peters, Hon. Gary:
Letter to Hon. Scott Garrett and Hon. Carolyn Maloney from
NAFCU, dated March 5, 2013................................. 133
Maloney, Hon. Carolyn:
Fannie Mae update dated February 26, 2013.................... 136
Perlmutter, Hon. Ed:
Financial Times article dated September 9, 2008.............. 144
Peters, Hon. Gary:
Bipartisan Policy Center report entitled, ``Housing America's
Future: New Directions for National Policy,'' dated
February 2013.............................................. 145
FANNIE MAE AND FREDDIE MAC:
HOW GOVERNMENT HOUSING POLICY
FAILED HOMEOWNERS AND TAXPAYERS
AND LED TO THE FINANCIAL CRISIS
----------
Wednesday, March 6, 2013
U.S. House of Representatives,
Subcommittee on Capital Markets and
Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Scott Garrett
[chairman of the subcommittee] presiding.
Members present: Representatives Garrett, Hurt, Bachus,
Royce, Neugebauer, Bachmann, Westmoreland, Huizenga, Grimm,
Stivers, Mulvaney, Hultgren, Ross, Wagner; Maloney, Sherman,
Moore, Perlmutter, Scott, Himes, Peters, Ellison, Watt, Foster,
Carney, Sewell, and Kildee.
Ex officio present: Representative Waters.
Also present: Representative Miller.
Chairman Garrett. Good morning, everyone. Today's hearing
of the Capital Markets and Government Sponsored Enterprises
Subcommittee is now called to order. Today's hearing is
entitled, ``Fannie Mae and Freddie Mac: How Government Housing
Policy Failed Homeowners and Taxpayers and Led to the Financial
Crisis.''
Before we begin, without objection, I move that the Chair
can put the committee into a recess at any time. Without
objection, it is so ordered. Also note that we are starting
today, pretty close to on time, which is 10 a.m., and I
appreciate everyone being here despite the weather. We may
have--I was told that the votes may have been moved up. So we
will try to move things along expeditiously.
Again, I thank the panel. We will begin with opening
statements, and then go to the panel. So at this point, I yield
myself 4\1/2\ minutes for an opening statement.
So, today's hearing does what? It seeks to examine in
greater detail the role that Fannie Mae and Freddie Mac played
in facilitating the 2008 financial crisis. Over the last 4
years, there has been a great deal of discussion as to what the
main causes of the financial crisis were. However, I believe
there is one similar fundamental trait that connects every
analysis and that is bad mortgages. No matter what part of the
financial crisis is discussed, it always comes back to bad
mortgages.
Our friends on the other side of the aisle sometimes love
to discuss a wide variety of other reasons that they believe
led to this crisis, however, for each instance, the underlying
message is bad mortgages. Some of their favorite things to
highlight are: opaque and complicated derivatives; an
overreliance on incompetent credit rating agencies; off-balance
sheet and synthetic securitizations; procyclical accounting
standards; and greedy Wall Street banks.
However, all those things are symptoms and not the actual
disease. The disease was bad mortgages. The derivatives were
written on bad mortgages. The rating agencies were rating bad
mortgages. Securitization, the collateral of bad mortgages. The
accounting standard market, the market had bad mortgages.
Failing Wall Street banks were holding bad mortgages.
All of these symptoms led to the same disease: bad
mortgages. So we have to ask ourselves, how did this disease
infect the country? The evidence indicates the disease began
back in the 1990s with the adoption of the Affordable Housing
Goals for the Government-Sponsored Enterprises (GSEs) and the
Clinton Administration's push to rapidly expand homeownership
opportunities. And they did so by systematically reducing
underwriting standards.
In May of 2001, Michael Zimbalist, a global head of
investment strategy for J.P. Morgan's Asset Management
business, who had originally believed that the private sector
had underwritten a majority of the bad mortgages, wrote this to
his clients, ``In January of 2009, I wrote that the housing
crisis was mostly a consequence of the private sector. Why?
Because U.S. agencies appeared to be responsible for only 20
percent of the subprime, Alt-A and other mortgages. However,
over the last 2 years, analysts have dissected the housing
crisis in greater detail.
``And what emerges from new research is something quite
different. Government agencies now look to have guaranteed,
originated, and underwritten 60 percent of all non-traditional
mortgages for a total of $4.6 trillion. What's more, the
research asserts that the housing policies instituted in the
early 1990s were explicitly designed to require U.S. agencies
to make riskier loans with the ultimate goal of pushing private
sector banks to adopt the same standards. To be sure, private
sector banks and investors were responsible for taking the
bait. And they made terrible mistakes. But overall, what
emerges in an object lesson in well-meaning public policy gone
spectacularly wrong.''
So if my colleagues on the other side had taken the time
and done the same due diligence that Mr. Zimbalist and others
did to actually diagnose the appropriate causes of the
financial crisis, they may have seen the same thing. But
instead, they rushed forward with a 3,000-page Dodd-Frank Act
which basically included a liberal's wish list of policy
changes that have been pent up over the last 12 years, that had
absolutely nothing to do with the crisis. They are not the
issues that are strangling the economy, nor negatively
impacting job creation. Unfortunately most of Dodd-Frank only
dealt with the symptoms and not the actual disease, bad
mortgages.
Many of the interest groups that directly benefit from
large subsidization of the housing market continue to state
that Fannie and Freddie fell victim to the bad private market
participants. This is completely false. It was government
housing policy coupled with loose money from the Federal
Reserve, that caused the housing bubble. And those are the
areas where we must focus on first.
One of my esteemed panelists, Mr. Rosner, points out so
precisely and with many specific examples in his book,
``Reckless Endangerment,'' ``Fannie and Freddie systematically
reduced underwriting standards to meet government regulatory
requirements and to curry favor with the political class.
Fannie and Freddie are the essence of crony capitalism. And if
we recreate them in some form or fashion as so many in the
industry and across the aisle want to do, we are doomed to
repeat the same terrible outcomes that our Nation has
experienced over the last 4 years.''
An analysis that I read before said finally, ``As
regulators and politicians consider actions designed to
stabilize the financial system and the housing mortgage market,
reflection on the role that policy played in the collapse would
seem like a critical part of the process.''
I only hope so. And that is what we are about to do today.
With that, I yield back. And I yield to the gentlelady from New
York for 4 minutes.
Mrs. Maloney. Thank you. I thank you for calling this
hearing and I thank all the panelists for getting here. I
mentioned that Dr. White is from the great City and State of
New York. We are so pleased that you are here. And all of you,
getting here in the middle of a snowstorm, I applaud you.
We are here on really one of the most important issues the
subcommittee will be working on over the next 2 years. Many
economists believe that 25 percent of our overall economy is
housing and related industries. So getting this segment figured
out and stable and moving forward is critical to the economic
growth and security of our country.
I personally do not want to play the blame game. The title
of this hearing is very confrontational. I hope we can work
together in ways to find solutions and go forward. But since it
was raised, I do want to point out the findings from the
Financial Crisis Inquiry Report--this was an independent
report, the final report of the National Commission on the
Causes of the Financial and Economic Crisis in the United
States. They interviewed 700 people, had 19 days of public
hearings, and went through reams of materials from the private
and public sector.
And on page 323, in their conclusions they state, ``GSE
mortgage securities essentially maintained their value
throughout the crisis and did not contribute to the significant
financial firm losses that were central to the financial
crisis.''
Fannie and Freddie themselves have come out with a report
that I would like to place in the record on delinquent rates,
comparing their work with the private sector. And in this
report, the private sector had roughly 35 percent delinquency,
whereas Fannie and Freddie were roughly at 3 to 5 percent. So
anyway, I just wanted to put that into the record.
Chairman Garrett. Without objection, it is so ordered.
Mrs. Maloney. Okay, but now we are 4 years after the
financial crisis and the GSEs are still in conservatorship. The
hemorrhaging has stopped. The GSEs have even been profitable
over the last few quarters. But we all agree that the current
situation is not sustainable. There are a number of proposals
that have come forward. One from FHFA came out to combine
Fannie and Freddie, certain functions, and to standardize their
securitization platform. There are others from the Bipartisan
Policy Center.
I for one, look forward to reviewing them with my
colleagues, and I truly do believe if Mr. Garrett and I can
agree on anything, then we can get it passed in the entire
Congress and we can move forward. Homeownership has played a
critical role in the American Dream in our country. Nowhere in
the world are mortgage products like the 30-year fixed-rate
mortgage available without some form of government involvement.
And I believe we need to be mindful of that as we look forward
at the various plans.
We had roughly 70 years of a stable housing finance system
with credit available to new home buyers, lower-income
borrowers, and all types of borrowers in between. And I, for
one, do not want to see the 30-year fixed-rate mortgage
disappear. So while I agree that the current status is not
sustainable, I do believe that at the very least, the GSE
should return to what they did at their inception, be a source
of liquidity to the markets to ensure that issuers have the
cash to continue to lend in a prudent way to credit-worthy
borrowers.
So I look forward to moving forward toward solutions. And I
hope that we set a better tone for a path forward than the
title of this hearing represents. I yield back, and again I
welcome all of my colleagues and the witnesses.
Chairman Garrett. And I thank the gentlelady. We turn now
to the vice chairman of the subcommittee for 1\1/2\ minutes.
Mr. Hurt. Thank you, Mr. Chairman. Mr. Chairman, thank you
for holding today's subcommittee hearing on how Fannie Mae,
Freddie Mac, and Federal housing policy failed taxpayers and
helped to lead to the financial crisis of 2008. One thing that
I hear as I travel across my rural Virginia district, the 5th
District, is that Congress must end Washington bailouts. I
believe it is our responsibility to end the bailouts of Fannie
Mae and Freddie Mac and enact reforms that will protect the
American taxpayer and strengthen our housing finance system.
With almost $190 billion in taxpayer funds provided to
Fannie Mae and Freddie Mac to date, this has become, by far,
the costliest bailout of the financial crisis. As this
committee begins its work on housing finance reform, it is
important that we understand what caused these historic losses.
Before the housing market collapse precipitated a wider crisis,
Federal housing mandates required Fannie Mae and Freddie Mac to
buy riskier and riskier loans.
These aggressive actions by the GSEs, aided by their
implicit government backing, fed the housing bubble and
facilitated the explosion of the market share of subprime and
Alt-A mortgages. As Fannie Mae and Freddie Mac purchased and
securitized more of these loans, loan originators took this as
an incentive to write more subprime and Alt-A loans, regardless
of their quality.
As we all know, when the housing bubble burst, the American
taxpayers were left to foot the bill. And yet Dodd-Frank which
was sold to the American people as a reform of our financial
system, failed to address any of the problems with Fannie Mae
and Freddie Mac. Now is the time for Congress to act on this
issue. And I appreciate Chairman Hensarling and Chairman
Garrett's leadership in putting this committee on a path to
fundamentally reforming our Nation's housing finance system and
protecting the American homeowner and the American taxpayer.
I would like to thank our witnesses for appearing before
the subcommittee today. And I look forward to their testimony.
Thank you, Mr. Chairman. I yield back.
Chairman Garrett. And I thank you. I now recognize the
ranking member of the full Financial Services Committee, the
gentlelady from California, Ms. Waters, for 2 minutes.
Ms. Waters. Thank you very much, Mr. Chairman, for holding
this hearing today. It is very important. Nearly 5 years have
passed since this committee worked with the Republican
Administration to stop the losses at Fannie Mae and Freddie Mac
by strengthening their regulator and putting them into
conservatorship to prevent the collapse of the housing market.
At that time, this committee and others raised important
questions about what happened in the financial markets to
necessitate such extraordinary actions. Since then, a consensus
emerged that the 2008 crisis was the result of a complex mix of
factors including: credit rating agencies being paid to give
AAA ratings to toxic assets; securitization and reselling of
those assets to uninformed investors; and predatory loans
including the no-income, no-job, no-asset loans or NINJA loans.
It is overly simplistic and untrue to suggest that Fannie Mae
and Freddie Mac caused the financial crisis or were even the
leading cause of the crisis.
Every credible analysis, including the Financial Crisis
Inquiry Commission report, and a book by former FDIC Chairman
Sheila Bair, say otherwise. With that in mind, it is important
to note that the world is dramatically different today compared
with 2008. Freddie Mac reported a profit of $11 billion for
2012, and the total amount given to the GSEs net of repayments
continues to decline. The tourniquet to stop the bleeding
worked, providing legislators with time to consider how to
reform the housing market.
There are several comprehensive bipartisan reform proposals
that were introduced last Congress, none of which have yet had
a hearing before this committee. To each of our witnesses, I
hope that you will help guide our discussion about how to
actually reform the markets. For example, I would like to
discuss what reforms are needed to preserve stable market
products like 30-year fixed-rate loans, and how we can provide
liquidity at times of market distress. And how we can ensure
that all banks, including community banks and credit unions,
can participate in the secondary mortgage market.
I thank you, and I yield back the balance of my time.
Chairman Garrett. The gentlelady yields back. Mr. Royce for
1 minute.
Mr. Royce. Thank you Mr. Chairman. I remember very vividly
the Federal Reserve Chairman speaking with me, the warnings
that we were given on the inability of the Fed to regulate
Fannie and Freddie for systemic risk. I remember the questions
from those at the Fed on, why won't Congress allow us to
regulate Fannie and Freddie for systemic risk?
It was pretty clear at the time, with the housing goals
that we were putting in place with the requirement that of the
$1.7 trillion that existed in those portfolios, the percentage
of that which was subprime, this was the objective of Congress.
Zero downpayment loans. We were driving a policy and the one
request from the regulator was that they be able to regulate
the GSEs.
I had legislation before the House, and the Senate had
legislation on the Floor. And that legislation on the Senate
side was filibustered by Mr. Dodd and here we failed to pass it
on the House side as well. That would have allowed the
regulation for systemic risk. To deleverage those portfolios
that were leveraged at 100 to 1. Now, an implicit government
backstop created a level of moral hazard unseen anywhere else
in our capital markets and it astounds me that people would try
to pretend that in not listening to the regulators, that this
had nothing to do with the problem in the housing market. I
yield back, Mr. Chairman.
Chairman Garrett. I thank the gentleman. Mr. Peters is
recognized now for 2 minutes.
Mr. Peters. Thank you, Mr. Chairman, and good morning. And
I would like to thank our witnesses for being here today. I
would also like to thank Chairman Garrett and Ranking Member
Maloney for convening our first Capital Markets and Government
Sponsored Enterprises Subcommittee. And I would like to
additionally thank them for starting off by examining the role
of GSEs in our economy.
In addition to looking back at the collapse of the housing
market in 2007, which is a topic I think it is very safe to say
that we have already spent a great deal of time looking at, I
hope that today, we also look forward. Our housing market
continues to recover with improving home prices including
across much of the greater Detroit area that I represent.
Rental demand is increasing in many regions across the United
States. But the number of renters spending more than they can
afford is high and it is growing.
The government continues to support the vast majority of
mortgage financing, both for homeownership and rental housing.
Our economy cannot afford to have an outdated housing system.
We must look for ways to ensure our system can keep pace with
today's demands and the challenges of the imminent future.
For this reason we must look forward. And I hope that we
can spend a portion of our time here today examining not just
the role the GSEs played last decade, but what role our
government should play in the housing markets of the future.
Clearly, we need to put an end to taxpayer-funded bailouts. But
we must also ensure that responsible hardworking families can
still achieve the dream of homeownership.
Our status quo is unsustainable but completely eliminating
any government role in the mortgage market would likely
undermine the housing recovery and risk eliminating the 30-year
fixed-rate mortgage. Despite the housing collapse, responsible
homeownership can produce powerful economic, civic, and social
benefits that serve not just individual homeowners, but their
communities and our Nation as a whole.
I believe our committee has a real window of opportunity
this Congress to meaningfully engage in GSE reform on a
bipartisan basis. And I look forward to working with my
colleagues on both sides of the aisle on this critical issue. I
yield back.
Chairman Garrett. The gentleman yields back. Thank you. The
gentleman from Texas for 1 minute.
Mr. Neugebauer. Thank you, Mr. Chairman, for holding this
important hearing today. I think it is important to understand
the consequences of all of this policy. We have talked about
the huge losses that were accreted by these entities and the
fact that the taxpayers had to inject massive amounts of their
money into that.
But there is another victim in all of this and that is the
homeowners who did the right thing. The people who took out
mortgages, who bought homes, who could afford those and are
making their payments on it. What we realized is when we have
monetary policy or fiscal policy that creates these bubbles,
when the bubbles bust, it not only hurts the people who were a
part of the bubble, but also hurts some of the people on the
sidelines.
And so, I think one of the things that I am hopeful that we
can begin to work on is the fact that we make sure that history
does not repeat itself. We have to understand that
homeownership in America is about the opportunity to own a
home, but it is not an entitlement. And in some ways, the
government has turned homeownership into entitlement. We need
to make sure it is an opportunity. So, I will look forward to
our discussion today.
Chairman Garrett. Thank you. The gentleman yields back. Mr.
Scott for 2 minutes.
Mr. Scott. Thank you very much, Mr. Chairman. I think that
this is indeed an important hearing. But here is what we must
remember and this is for both Democrats and Republicans: As
Fannie and Freddie prepare to wind down and have private
lenders take on more responsibility in providing credit to the
U.S. housing market, Congress, both Democrats and Republicans,
must commit to ensure that Americans who require extra
assistance in obtaining a sound mortgage are able to do so.
We have to make sure that there is a willingness on the
part of the private market to fill the gap that will be left by
the absence of Fannie and Freddie. To do less than that is
meaningless. We can sit here and debate the merits or demerits
of Fannie and Freddie, but the problem remains. We must
remember that the GSEs were formed to increase liquidity in the
market, to provide long-term fixed-rate mortgages. This type of
option for potential homeowners is valuable, and is often
necessary in obtaining a mortgage that is sustainable, that is
sound, and is less likely to fall into foreclosure.
I have heard a lot of criticism about Fannie and Freddie.
But they, in fact, were created to fill a very important
purpose. And without Fannie and Freddie, millions of those who
own homes now would have not been able to do so. Because the
private market, the private sector, must be willing. That is a
fundamental issue we have to make sure happens.
Thank you, Mr. Chairman. If I have a moment? I guess I
don't.
Chairman Garrett. Thank you. The gentleman yields back.
Mrs. Bachmann is recognized for 1 minute.
Mrs. Bachmann. Thank you, Mr. Chairman. I thank you for
this hearing that finally admits the truth, that it was
government housing policy that failed homeowners. And as Mr.
Neugebauer said, it is truly the taxpayers and the homeowners
who lost in this issue.
And who lowered these lending standards? We know now it was
government policies. Why was it that we agreed to zero down
mortgages? Government policies. Who agreed to the so-called
``liar loans?'' It was government policies. And who pushed
Fannie and Freddie to buy more and more of these inferior
performing loans? It was government policies.
And why was no one in the lending chain ever willing to say
no, in a game that was destined for failure? We know now it was
because a lot of people made a lot of money selling inferior
products. And why? Because of the implied promise that if
anything went wrong, don't worry, the taxpayers would bail it
out and the taxpayers would pay.
This is a game that can never happen again. We have to
raise lending standards to what they were historically and we
will once again have a strong housing market. I yield back.
Chairman Garrett. Thank you. And for the last word on the
matter, Mrs. Wagner is recognized for 1 minute.
Mrs. Wagner. Thank you, Mr. Chairman, and I thank our
witnesses. At the signing ceremony for the Dodd-Frank Act in
July of 2010, President Obama proclaimed, ``Unless your
business model depends on cutting corners, or bilking your
customers, you have nothing to fear from reform.''
Unfortunately, the bill the President signed that day did
nothing to reform the two entities that cut the most corners,
bilked taxpayers out of billions of dollars, and were more
responsible than anybody or any institution for the financial
crisis of 2008. I am of course referring to Fannie Mae and
Freddie Mac, the government mortgage giants that for years
worked to drive down underwriting standards and increase
borrower leverage in the housing market. All under the guise, I
believe, of promoting homeownership. These policies created an
enormous housing bubble which inevitably crashed and in the
process, hurt the very families, real families who were
supposed to be helped, and instead stuck the taxpayers with the
bailout bill.
As our committee works to bring real and lasting reform to
the housing market, I hope that today's hearing serves as a
vivid reminder of where misguided government policies have
gotten us in the past.
I thank you, Mr. Chairman, for this hearing. I thank our
witnesses for being here today and I yield back my time.
Chairman Garrett. The gentlelady yields back. We now turn
to our esteemed panel. We again thank the panel for being with
us on this snowy day. We also remind those who have not been
here before that you will all be recognized for 5 minutes, and
your complete written statements will be made a part of the
record. The lights will come on green, yellow, and red; there
is 1 minute remaining at the yellow light.
And I will also remind you to please make sure that you
bring your microphone as close to you as you can when you
begin.
We will begin with Mr. Ligon from The Heritage Foundation,
and you are recognized now for 5 minutes.
STATEMENT OF JOHN L. LIGON, POLICY ANALYST, CENTER FOR DATA
ANALYSIS, THE HERITAGE FOUNDATION
Mr. Ligon. Good morning. My name is John Ligon, and I am a
policy analyst in the Center for Data Analysis at The Heritage
Foundation. The views I express in this testimony are my own
and should not be construed as representing any official
position of The Heritage Foundation.
I thank Chairman Scott Garrett, Ranking Member Carolyn
Maloney, and the rest of the subcommittee for the opportunity
to testify today. The focus of my testimony is that the Federal
housing policies related to the Government-Sponsored
Enterprises, Fannie Mae and Freddie Mac, have proven costly,
not only to the Federal taxpayer but also to the broader
financial system. We should recognize their failure and move
toward a mortgage market without the distortions of GSEs.
Allow me to offer several observations. First, Fannie Mae
and Freddie Mac are the ultimate guarantors of the U.S.
mortgage market. Fannie and Freddie own or guarantee
approximately half of all outstanding residential mortgages in
the United States, including a share of subprime mortgages.
Additionally, they finance about 60 percent of all new
mortgages.
These GSEs fall within Federal conservatorship. Their
combined agency debt, mortgage, and mortgage-related holdings
are directly guaranteed by the Federal Government. Their level
of debt is massive and has exploded over the last 40 years. In
1970, agency debt as a share of U.S. Treasury debt was 15
percent. And as of 2010, this share was 81 percent, a combined
$7.5 trillion.
This brings me to my second observation. Fannie Mae and
Freddie Mac have actually undermined the stability of the U.S.
financial system. Beginning in the 1990s, Fannie and Freddie
began relaxing credit standards for the mortgages they
purchased. In 1995, the Department of Housing and Urban
Development, HUD, established a target goal relating to the
homeownership rate among low-income groups which was eventually
set at 70 percent.
Then, in 1999, HUD directed Fannie Mae and Freddie Mac to
further relax their requirement standards for purchased
mortgage loans, including a move toward sub and non-prime loan
approval.
Starting in 2000, there was yet a further easing of
mortgage lending standards which stretched more broadly across
the private mortgage system.
The erosion of lending standards spread throughout the U.S.
mortgage market from 2000 to 2006, and severely weakened the
quality of holdings in the GSE's portfolios since a sizable
share of their mortgage back-holdings were securitized for non-
prime loans.
The total level of non-prime loans in the U.S. mortgage
market peaked at 48 percent of the overall market in 2006.
Looked at from the perspective of homeowners, between 2002 and
2008, there was a $1.5 trillion increase in household debt
attributable to existing homeowners borrowing against the
increased value of their homes.
By 2009, aggregate household debt increased $9.4 trillion
over the prior decade while home equity as a share of aggregate
household wealth decreased from 62 percent to 35 percent from
2005.
As a result, 39 percent of new defaults on home mortgages
occurred in households that had aggressively borrowed against
the rising value of their homes.
This brings me to my third and final observation. Ending
the present role of Fannie Mae and Freddie Mac would lead to a
more stable housing market. After more than 3 decades of
experience with boom-and-bust cycles, which have affected not
only household income and wealth, but also financial markets,
Federal policymakers should seriously reconsider the Federal
Government's role in shaping housing policy through Government-
Sponsored Enterprises.
These institutions distort the U.S. housing and mortgage
markets at substantial risk to taxpayers and households.
Eliminating the present role Fannie Mae and Freddie Mac
play would save taxpayers billions of dollars by eliminating
the tax, regulatory, and debt subsidy that has held mortgage
rates lower and induced U.S. households to take on more debt-
related consumption; many of these households end up
underwater.
In conclusion, Congress should consider beginning the
process of winding down the GSEs and housing finance market and
establish a market free from the distortions of this
institutional arrangement.
Thank you for your time. I welcome your subsequent
questions.
[The prepared statement of Mr. Ligon can be found on page
48 of the appendix.]
Chairman Garrett. And I thank you.
Next, Mr. Rosner, author of ``Reckless Endangerment.'' We
appreciate you being on the panel. You are recognized for 5
minutes.
STATEMENT OF JOSHUA ROSNER, MANAGING DIRECTOR, GRAHAM FISHER &
CO.
Mr. Rosner. Thank you, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee for inviting me to
testify on this important subject.
In July 2001, I authored a paper entitled, ``Housing in the
New Millennium: A Home Without Equity is Just a Rental with
Debt.'' The executive summary of that paper noted, ``There are
elements in place for the housing sector to continue to
experience growth well above GDP.'' But I noted, ``It appears
that a large portion of the housing sector's growth in the
1990s came from the easing of the credit underwriting process.
That easing included drastic reduction in minimum downpayments,
focused effort to target the low-income borrower, changes in
the appraisal process that have led to widespread over-
appraisal, over valuation problems.''
I concluded, ``If these trends remain in place, it is
likely that the home purchase boom of the past decade will
continue unabated,'' but warned, ``The virtuous cycle of
increasing homeownership due to greater leverage has the
potential to become a vicious cycle of lower home prices due to
an accelerating rate of foreclosures.''
In the mid-1990s, the GSEs were repurposed to direct social
policy through the mortgage markets. The combination of using
the GSEs as tools of social policy and falling interest rates
built the foundation of the housing bubble.
In early 1993, the Clinton Administration realized the GSEs
could be used to drive capital investment for housing and
community development and, as Susan Wachter noted in 2003,
``The goal of Federal chartering of Fannie Mae and Freddie Mac
is to achieve public policy objectives, including the promotion
of nationwide homeownership through the purchase and
securitization of mortgages.''
She went on to note that, ``Through lower mortgage and
downpayment rates that would not prevail but for the presence
of the GSEs, they expanded homeownership.''
In 1994, the Administration set out to raise the
homeownership rate from 65 to 70 percent by the year 2000 and
recognized this can be done almost entirely off-budget through
among others, Fannie Mae and Freddie Mac.
In 1994, the Administration created the national
homeownership strategy with the goal of using the GSEs to
provide low and no downpayment loans to low-income purchasers
even those ``the private mortgage market had deemed to be
uncreditworthy.''
Treasury Secretary Rubin recognized many of the risks
associated with increasing lending to the most at-risk
borrowers. Still, the Clinton Administration plans continued.
Reversing major trends, homeownership began to rise in
1995. In 1989, only 7 percent of home mortgages were made with
debt less than 10 percent down. By 1999, that number reached 50
percent.
While the GSEs were certainly a key driver of these
results, other government actions, including fraud and falling
interest rates also fueled the expansion.
By increasing investor confidence in low and no downpayment
mortgages, the GSEs seasoned the market, but they were surely
not the only culprits.
In 2001, after much lobbying, the Basel Committee
determined that private label securities should carry the same
risk ratings as correspondingly rated GSE products. This action
opened the floodgates to reckless, private label securitization
of the most toxic mortgage products.
Banks and investment banks, which had sought to reduce
their exposures to consumer lending, used their branch network
and third-party lenders to originate loans to distribute
through securitization.
By 2002, the private label securitization market was now at
ease with changes made in 2000 by the GSEs which had expanded
their purchase to include Alt-A and subprime mortgages as well
as private label mortgage securities.
Private issuers aggressively targeted borrowers with lower
downpayments, lower FICO scores, lower documentation, and
higher debt-to-income and higher loan-to-value. PLS activity
exploded.
Securitization rates skyrocketed. As the PLS market took
off, investment banks and third-party originator partners
created more and more risky products with the support of credit
rating agencies, their absurd analysis and the CDO market.
For the first few years, the GSEs avoided direct
competition with these lenders, but became the largest
purchasers of private label securities. By 2007, interest-only,
subprime, Alt-A, and negative amortization loans were 20
percent of the GSEs book of business.
By early 2006, it was clear that decreased funding for RMBS
could set off a downward spiral in credit availability that
could deprive individuals of homeownership and substantially
hurt the U.S. economy.
Now, on the GSEs, there is nothing specifically wrong with
the entities whose purpose it is to support liquidity in the
secondary mortgage market. In fact, there is a substantial need
for such a function.
The problem is the use of quasi-private institutions as
tools of social policy to drive housing subsidies to markets
through an off-balance sheet subsidy arbitraged by private
market participants.
The GSEs were no longer merely supporting liquidity in the
secondary market, as they had been created to do, their
purchase of almost 25 percent of private label securities
fostered distortive excess market liquidity.
Still, there is much to be lauded in the GSEs as they
existed prior to the 1990s. Some of those features are still in
place and provide value.
While there are proposals to replace the GSEs with
alternatives, those seem to transfer many of the subsidies the
GSEs receive to other private institutions. To merely replace
GSEs will result in significant loss of value of their
proprietary assets.
Understandably, the GSEs have become a politically charged
subject, but it is important to remember they had previously
been valuable tools of financial intermediation. Repairing
their failures, seeking repayment of $140 billion owed to U.S.
taxpayers, reducing risk to the taxpayer, eliminating implied
guarantees, preventing their use as tools of social policy,
eliminating investment portfolios and ensuring they provide
backstop liquidity rather than excess liquidity is an
achievable goal and would place them in their proper role as
countercyclical buffers in support of private mortgage markets.
Thank you.
[The prepared statement of Mr. Rosner can be found on page
62 of the appendix.]
Chairman Garrett. And I thank you for your testimony. Next,
Dr. Wachter from the Institute for Urban Research, among other
titles. You are recognized for 5 minutes.
STATEMENT OF SUSAN M. WACHTER, RICHARD B. WORLEY PROFESSOR OF
FINANCIAL MANAGEMENT, PROFESSOR OF REAL ESTATE AND FINANCE, AND
CO-DIRECTOR, INSTITUTE FOR URBAN RESEARCH, THE WHARTON SCHOOL,
UNIVERSITY OF PENNSYLVANIA
Ms. Wachter. Thank you, Chairman Garrett, Ranking Member
Maloney, and other distinguished members of the subcommittee. I
am honored by the invitation to testify at today's hearing.
Government has, in policy, failed homeowners and taxpayers
and it is important to understand why. The GSEs contributed to
the meltdown. The direct cause of the crisis was the
proliferation of poorly underwritten and risky mortgage
products.
The most risky products were funded through private label
securitization. We know now, but we did not know in real-time
to what extent the shift towards unsound lending was occurring.
Non-traditional and aggressive mortgages such as teaser
rate ARMs and interest-only mortgages proliferated in the years
2003 to 2006 changing from their role as niche products to
become nearly 50 percent of the origination market at the
height of the bubble.
In addition, the extent to which consolidated loan-to-value
ratios increased through second liens was not then, nor is it
known today. Non-agency, private label securitizers issued over
30 percent more mortgage-backed securities than the GSEs during
these years.
As private label securitization expanded, leverage to these
entities increased through financial derivatives and
synthetics, such as CDO, CDO-squared, and CDS.
The amount of the increasing leverage introduced by the
issuance of CDO, CDO-squared, and CDS was not known. The
deterioration in the quality of the underlying mortgages was
not known. The rise in prices enabled by the credit expansion
masked the increase in credit risk.
If borrowers were having trouble with payments, which they
were, homes could be sold and mortgages could be refinanced as
long as prices were rising.
But after 2006, when prices peaked and started to decline,
mortgage delinquencies, defaults, and foreclosures started
their inevitable upward course.
In the panic of mid-2007, private label security-issuing
entities imploded. The issuance of new private label securities
went from $1 trillion to effectively zero.
The U.S. economy faced the real threat of a second Great
Depression. The housing price decline of 30 percent, only now
being reversed, was due to this dynamic: an unknown, unsourced,
unidentified, unrecognized increase in leverage and
deterioration in the quality of leverage.
As I stated, the GSEs contributed to the crisis. The GSEs
were part of the irresponsible expansion of credit, but other
entities securitized the riskiest products.
There is, in fact, a simple way to measure the failure of
the GSEs relative to other entities. All we have to do is
examine default rates. The GSE's delinquency rates were and are
far below those of non-GSE securitized loans.
The distribution of mortgage failure is apparent in the
performance of mortgages underlying securitization, as shown in
Exhibit C, which I request be entered in the official record
along with the other exhibits in my testimony.
Failure of the GSE-securitized loans was one-fifth or less
of the failure of other entities' securitizations.
However, in a broad sense, the GSEs or their overseer had a
larger responsibility, which they did fail to fulfill. The
failure to identify credit and systemic risk in the markets in
which they operated was at the heart of the financial crisis.
No entity was looking out for the U.S. taxpayer.
We know from this crisis and from previous crises that
markets do not self-correct in the absence of arbitrage, in the
absence of security sales, pricing and trading of risk. For
this, we must have market standardization and transparency.
This role is an essential requirement for effective markets
and it requires a coordination platform for its realization.
This need not be performed by the GSEs or their regulator,
although such a role had been theirs in the stable decades
before the crisis.
The role is a necessary one. We can rebuild a resilient
housing finance system. We can provide an opportunity for
sustainable homeownership for future Americans.
But, in order to do so, we must understand and correct the
failures of the past. I thank you for the opportunity to
testify today and I welcome your questions.
[The prepared statement of Dr. Wachter can be found on page
72 of the appendix.]
Chairman Garrett. Thank you. Thank you for your testimony.
Dr. White, from our neck of the woods at NYU, you are
welcomed to the panel and you are recognized now for 5 minutes.
STATEMENT OF LAWRENCE J. WHITE, PROFESSOR OF ECONOMICS, STERN
SCHOOL OF BUSINESS, NEW YORK UNIVERSITY
Mr. White. Thank you, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee. I appreciate the
opportunity to testify today. I am pleased to be here on this
important topic. My name is Lawrence J. White. I am a professor
of economics at the NYU Stern School of Business.
As my statement makes clear, during 1986 to 1989, I was one
of the Board Members of the Federal Home Loan Bank Board and,
in that capacity I also served on the board of Freddie Mac.
When I left government service in August of 1989, I also
left the board of Freddie Mac. Now, in the interest of full
disclosure, I think I owe it to you to provide two more pieces
of information.
In 1997, Freddie Mac asked me to write an article on the
importance of capital for financial institutions. I wish they
had listened more closely.
It was published in the journal that they published at the
time, ``Secondary Mortgage Markets.'' That article is available
on my Web site, easily accessed. I am very proud of it. I said
all the right things. I was paid $5,000 for that article.
In 2004, Fannie Mae asked me to come into their Wisconsin
headquarters and talk to their advisory committee on the
importance of capital. Again, I wish they had listened more
closely.
I was paid $2,000 for that talk plus my transportation
expenses. I flew coach class both ways between New York City
and Washington, D.C. I took street-hail taxi cabs to and from
the airports. Full disclosure, ladies and gentleman.
All right, I want to talk a little bit about the financial
crisis. As Professor Wachter just indicated, in this process of
housing prices going up sharply, for reasons that I don't fully
understand, there was this boom. We now know it to have been a
bubble. It started around 1997.
And, as Professor Wachter just said, in that context,
mortgages--if you believe that housing prices are always going
to go up, mortgages are not going to be a problem because even
if a borrower loses his or her job, gets hit by a truck, or has
a serious illness, he or she can always sell the house at a
profit and satisfy the mortgage in that way.
Consequently, mortgage securities built on those mortgages
are never going to be a problem. And, consequently, the
traditional lending standards, the 20 percent downpayment, the
good credit history, the adequate income, the adequate
documentation; all of that goes out the window as well because
mortgages are never going to be a problem.
At the time, as Professor Wachter just said, we didn't
really understand these things, but looking back, you can
understand why this happens.
Now, why people got into this mindset that housing prices
would always go up, I don't really understand. That is not what
we teach at the Stern School of Business. I am sure that is not
what Professor Wachter and her colleagues teach at Wharton, but
it was so.
Flip your house, all the books, all the television
programs, they were real. Where were Fannie and Freddie in all
this? They were special enterprises as you know. Unfortunately,
among their specialness, they had inadequate capital.
They went into those lower quality mortgages somewhere in
the mid-1990s, and may have been responsible for a little bit
of the starting of the boom.
The boom went on primarily, as Professor Wachter just
pointed out, because of the private sector expansion of the
lower quality mortgages for the reasons I just described and
their securitization.
Then, Fannie and Freddie do go more deeply into lower
quality mortgages around 2003, 2004. There are just some
striking diagrams, figures at the end of my testimony that show
how from 2004 onward, those mortgages through 2008 are just
different from what preceded them.
Unfortunately, all good things must come to an end. Bubbles
will eventually burst. And, in 2006, prices started to go down.
Those mortgages can't survive even a stable environment rather
than--as well as a declining environment.
Foreclosures increase, the mortgage sector experiences
losses, Fannie and Freddie, being inadequately capitalized, not
enough capital, experience losses; Freddie for the first time
in 2007, Fannie for the first time since 1985.
The losses are so severe in 2008 that they are put into
conservatorship. The Treasury covers all their liabilities. At
the time, I wasn't so sure. Looking back, I think this was a
smart thing. It prevented the crisis from getting worse at the
time.
But Lehman goes into bankruptcy 1 week later and, then, the
thin capital levels across the financial sector really bite.
There are two important lessons from all of this.
First, beware of implicit guarantees, which is what
protected Fannie and Freddie. Beware of underpriced guarantees.
Indeed, beware of guarantees more generally.
And, second, the importance of good, rigorous, vigorous,
prudential regulation of systemic, large financial institutions
with high capital requirements at their heart, terrifically
important.
Thank you for the opportunity. I would be happy to respond
to questions.
[The prepared statement of Dr. White can be found on page
79 of the appendix.]
Chairman Garrett. Thank you for your testimony. Thank you
for your clarification on your travel arrangements and what
have you. I appreciate that as well for all the transparency.
Would that always be the case. Thank you.
I now recognize myself for 5 minutes for questions. And
just to start off with, I know Dr. Wachter made the comment
that no entity was looking out for the U.S. taxpayer.
I will just give a little response to that by saying that,
at least as the gentleman from California mentioned before,
some people within this entity were attempting to look out for
the U.S. taxpayers by putting some capital requirements and
other requirements onto the GSEs, but we were stymied, as he
indicated, across the aisle and in the Senate.
But I will start with Mr. Rosner. Can you go into a little
bit more detail as to the effect of the lower underwriting
standards, and maybe you can just play off of what Dr. Wachter
said, that GSEs were part of the problem, but the default rate
outside of the GSEs was higher?
What I heard there, and you can tell me if I am right or
wrong, is that with lower underwriting standards, maybe you get
the effect of, what, cherry-picking going on? Am I right or
wrong? I will just throw it to you.
Mr. Rosner. First of all, I think cherry-picking was a real
issue for a very long time. The GSEs would cherry-pick both the
private market and FHA for a long time. And that was one of the
market complaints about the Enterprises for a long time.
I would also point out that definitionally where the market
was--the private market was completely unfettered, the GSEs
did, in fact, still have some statutory limitations upon them
which constrained them somewhat.
That said, I think we have to also consider, as I said, the
large impact that their purchases of private label securities
had on the rest of the private label market because they were
the bid in the market when you are buying 25 percent and you
are adding comfort to the market.
In terms of the 2004 or the dating of the actual bubble, it
is interesting to note that what we think of as the bubble is
really 2004 onward. And, in reality, home prices peaked in the
fourth quarter of 2004, the first quarter of 2005.
All of the activity that we saw--
Ms. Wachter. That is not true.
Mr. White. Case-Shiller--
Mr. Rosner. The Case-Shiller--
Mr. White. 2006.
Mr. Rosner. If you look at the--I will show you the
numbers.
Mr. White. Okay.
Mr. Rosner. Anyway, 40 percent of all--
Mr. White. --two people can differ.
Mr. Rosner. Forty percent of all home sales between 2004
and 2007 were essentially second homes and investment
properties and the bulk of the rest of the remaining were
refinancings.
So the push for homeownership--the goals of increasing
homeownership really didn't have anything to do with the
bubble--
Ms. Wachter. Oh I see. I am sorry. You meant to say
homeownership rates--
Mr. Rosner. I am sorry. Right. I apologize. Homeownership
rates--I am sorry.
Chairman Garrett. Looks like we have three academics here.
Mr. White. These two people can agree.
Mr. Rosner. Peaked in the further quarter of 2004--
Ms. Wachter. Right.
Mr. Rosner. And so, all of the bubble period was really
refinancing, second home, and investment property speculation.
The GSE's purchase during those periods of large portions of
private-label securities fostered that speculation and access
liquidity unnecessarily.
And rampantly, I would also take a little bit of a
disagreement with the notion that nobody was trying to ensure
the safety and soundness. I remember very well--I was very
involved in spending time in Washington at the time--a very
weakened and hobbled regulator that was constantly neutered by
Congress, constantly neutered by the Administration, constantly
neutered by HUD performance goals, when it did try and take
actions for safety and soundness.
Chairman Garrett. Great. Thank you for that last point as
well. Let me just move down the aisle there then. Mr. Ligon, so
we have the subsidy for the GSEs. And the question is, who
benefits, and who is hurt by it? We heard part of the
explanation with regard to failure, the underwriting standards.
But who actually--does the homeowner benefit directly,
significantly from the subsidy, or are the other players; the
investors, the executives over there, the homebuilders, the
home sellers, that sort of thing? Who benefits and who is hurt
by this?
Mr. Ligon. The subsidy to Fannie Mae and Freddie Mac, in
particular, cost the taxpayer, in normal-market circumstances,
anywhere between roughly $7 billion to $20 billion annually.
Not all of that is going to be transferred down to the
borrower. There is a portion that is retained by the
shareholder. Some of it is retained down to the--or passed down
to the borrower.
In terms of interest rate terms, probably anywhere between
7 basis points and 25 basis points of a subsidy to home
borrowers.
Chairman Garrett. Okay. So a small percentage, only of 25
basis point goes to the homebuyer--homebuyer. So the rest--
Mr. Ligon. --given the tradeoff--
Chairman Garrett. At the same time, isn't what we are
seeing here that the price of houses is going up? So I guess
that benefits who, if the price of houses go up, the homebuyer
or somebody else?
Mr. Ligon. If home prices are going up, that benefits the
home buyers.
Chairman Garrett. The buyers are paying a higher amount.
Mr. Ligon. Homebuyers, yes.
Chairman Garrett. So wouldn't it be the home seller, and
the builder, and the REALTOR, and all those who benefit? So
those parts of the complex are benefiting. But the homebuyer
actually is put at a disadvantage, is he not, because his price
is higher, and he is only getting a marginal benefit. Would
that be fair to say?
Mr. Ligon. Yes, I would agree with that.
Chairman Garrett. Thank you. And with that, I now yield to
the gentlelady from New York for 5 minutes.
Mrs. Maloney. Professor Wachter, could you elaborate on
what would happen in the private market? Would the private
market be able to, or would they assume the volume of business
done by Fannie and Freddie? And what would the impact be on the
30-year mortgage loan, the cost of it? Would it be affordable?
Could you elaborate on that?
Ms. Wachter. Yes. Thank you for those questions. There are
two questions. First of all, what would happen to the 30-year,
fixed-rate mortgage in the absence of an entity that took on
the role of Fannie and Freddie? And the answer is that there
very likely would not be an option of a 30-year, fixed-rate
mortgage.
Throughout the world, the adjustable-rate mortgage is in
fact what prevails. There are only a few other economies with
sustainable--of course, we did not have a sustainable mortgage
system. But there are only a few other economies with a
sustainable, fixed-rate mortgage as part of the mortgage
system. And that includes Germany.
It is possible to have a 30-year, fixed-rate mortgage in a
sustainable system. But in order to do so, there needs to be an
entity that is overseeing and identifying risk. And other
countries can give us some insight into this.
But a banking system alone, there is no banking system with
a fixed-rate mortgage. Banking systems support the adjustable-
rate mortgage, and for good reason. We had a crisis in this
country, the savings-and-loan crisis, which occurred because
commercial banks and S&Ls were putting into their portfolio 30-
year, fixed-rate mortgages. That was not sustainable. It will
not be sustainable going forward. Therefore, in order to
protect American homeowners and taxpayers going forward, we
need to replace Fannie and Freddie with other entities that
will support the 30-year, fixed-rate mortgage.
Why is this? I think we can all agree the interest rates
have nowhere to go but up. If interest rates go from where they
are today, perhaps double, go from 3 percent to 6 percent, that
is equivalent to doubling mortgage payments. We would then put
mortgage borrowers in a payment shock, which could bring down
the entire economy, if we were only in our mortgage book of
nooses, if we were relying on adjustable-rate mortgages.
Fortunately, we are not, we have not, and hopefully, we will
not, going forward.
Mrs. Maloney. Could you comment on whether or not you
believe the private market can or would absorb the volume? You
mentioned that they wouldn't for the 30-year mortgage. Would a
15-year or a 5-year be replaced?
Ms. Wachter. I think that yes, it could very well be a 5-
year. It could also be a 1-year, adjustable-rate mortgage. Of
course, in any of those cases, it would be very subject to
interest rate risk.
There is no possibility--I think industry experts will
confirm this--for the trillions of dollars that are supported
today by the Fannie-Freddie entities to be taken over, at this
point, by individual banking institutions.
There is no likelihood at this point of entities stepping
up to do this. That doesn't mean that we can rely on Fannie and
Freddie going forward. It means that we must have a path to an
alternative going forward.
Mrs. Maloney. Could you discuss the differences between the
single-family portfolio and the multi-family portfolio? Do the
single-family and multi-family books of business need to be
treated in the same way or a different way? How would they be
treated in reform, going forward?
Ms. Wachter. Thank you. I apologize. We should note that
the multi-family portfolio is doing quite well in both Fannie
and Freddie. We should also note that the bipartisan commission
has come out in support of the multi-family functions
continuing with government support. This is their position.
There is a lack of clarity going forward as to whether
multi-family and single-family should be supported by the same
entity or a different entity, that is, whether they should be
separate or not. There are arguments pro and con on that. But
certainly, the need for information, for standards, and for
monitoring is important on both the multi-family and the
single-family.
And also, the issues of affordability are extremely
important, not only on the single-family, but also on the
multi-family, as rents continue to increase across America.
Mrs. Maloney. Dr. White, can you name any country in the
world that has a mortgage product like the 30-year, fixed-rate
mortgage, that does not have some form of government support?
Mr. White. International comparisons are not my strongest
suit.
Mrs. Maloney. So then, you agree with the professor?
Mr. White. --on this. However, thank you for asking. First,
despite the absence of securitization over the past few years,
generally, the jumbo market, which isn't supported by any
guarantee, has been able to support a 30-year fixed-rate
mortgage.
Second, and Professor Wachter is certainly right, that too
much 30-year paper in depository institutions is just a recipe
for disaster. I can show you the scars from my almost 3 years
on the Federal Home Loan Bank Board about that.
But there are large financial institutions. They are called
``insurance companies,'' they are called ``life insurance
companies,'' they are called ``pension funds,'' that have long-
lived obligations that ought to be interested in matching those
obligations with long-lived assets, 30-year fixed-rate
mortgages.
And doing more things like helping deal with prepayment
risk, and having reasonable prepayment fees in structure can
help expand the market for 30-year, fixed-rate paper.
Chairman Garrett. Great. Thank you very much for that
answer. I will now turn to our vice chairman of the
subcommittee, Mr. Hurt, who is recognized for 5 minutes.
Mr. Hurt. Thank you, Mr. Chairman. Thank you again for
holding this hearing. Obviously, it strikes me that as we try
to figure out what the future of housing finance is, we need to
understand the past. And the testimony here is very helpful.
It also strikes me that what I have heard, and what I have
learned in studying this, is that clearly, relaxed underwriting
policies contributed to the crisis. The implicit government
guarantee, that contributed.
These are policies that come out of Washington and create,
it strikes me, the moral hazard that leads to taxpayers being
hurt, having to bail out these entities to the tune of $190
billion. And it also obviously hurts the homeowner and the
marketplace generally.
And I guess my question is, as we look to the future--and I
think that there are many on this panel, if not most, who would
like to see the private sector come back into the secondary
mortgage market. I guess as we look back over the history of
this crisis--well, the history of housing finance over the last
10, 15 years, I guess my question would be directed to Mr.
Ligon and Mr. Rosner.
What is the effect of the implied guarantee, and the
relaxed underwriting standards? What effect has that had on the
private marketplace? What is the effect of that?
And if the GSEs had behaved differently in entering the
subprime mortgage market, would that have prevented--is there a
theory that says that we could have avoided and prevented the
crisis in 2008? I will start with Mr. Ligon.
Mr. Ligon. Most of those questions I will defer to Mr.
Rosner. What I would say is to the extent that the guarantees
had an effect on interest rates, there is research showing that
there is little correlation between interest rates and prices.
So removing that subsidy shouldn't have a huge effect going
forward on the housing market and the economy. On the other
questions, I will defer to Mr. Rosner.
Mr. Rosner. Yes. Look, I don't think that the crisis itself
would necessarily have been avoided were it not for the GSEs. I
think that they certainly accelerated, exacerbated the issues.
There were a lot of borrowers, though, who might not have
qualified for a GSE loan in the first place, but were able to
re-fi ahead of the crisis into one with appreciation, et
cetera. And I think that does need to be considered, because
that ends up also becoming the chance for further refinancing
into riskier products down the road, which occurred.
I think that we are overcomplicating something which is
quite simple. If there are borrower classes that we feel need
to have a subsidy behind them, that is an acceptable--I think a
rightful purpose of government. Do it on balance sheet.
That shouldn't be expected to be delivered through the
markets, because definitionally, it ends up distorting an
arbitrage. And by the way, the subsidies end up arbed away, not
to the benefit of the borrower.
So I think that is one of the things we should consider. I
think it was--look, there was a conflict. There was a perfect
storm. There was the falling interest rates, was a reality of
this, and a major backdrop of this. And it accelerated
behaviors that otherwise might not have occurred, along with
the implied government guarantee, and the push to expand
homeownership beyond reasonable levels. And I think that is
also very important.
The leverage that was in the system--and Professor Wachter
is right--the leverage in the securities--which I wrote about
extensively in 2006, warning we were going to have a CDO and
MBS market meltdown that was going to bring the housing market
with it--were part of it.
But also, the leverage of increasing homeownership rates in
borrower classes that probably couldn't be sustained is
something that, frankly, if you will see in the footnotes,
Secretary Rubin warned about in, I think it was 1998, if the
Administration pushed forward.
Mr. Hurt. Got it. Thank you. I yield back the balance of my
time.
Chairman Garrett. The gentleman yields back. The gentleman
from California is recognized.
Mr. Sherman. I have a few preliminary comments. First,
almost no one in this country saw, in 2007, where we would be
in 2008. The few who did sold Countrywide stocks short, and
they are billionaires.
Now, a few others had an inkling, had a fear, had some
anxiety, maybe made a comment. But if you didn't bet your house
on Countrywide going bankrupt, you weren't sure that this
thing--I see Mr. Rosner believes otherwise.
I am applying this to only 99 percent. There may have been
a few people who knew that we were headed for disaster, but
didn't bet on it. I think there are one or two people who
actually bet on this happening. And they are billionaires
today.
Looking back on it, it is pretty obvious. I saw one of the
most interesting charts, which shows median home price compared
to median family income. And if you had looked at that chart on
the first day of 2007, you would have sold your Countrywide
stock short. But nobody--I didn't look at that then. I looked
at it afterwards.
Everybody who bought mortgages in 2007 lost money, even if
they were buying the primest of the prime, because even if you
have the best underwriting standards in the world, some people
get divorced, some people get ill, some people lose their job.
And in the real-estate market of 2006, that meant they sold
their house at a big profit. The divorce lawyers fought over
the profit, and the bank got paid. That same thing happens in
2010, and it is a short sale at best.
Next, we needed better prudential regulation of the GSEs.
Mr. Royce pointed out that he had a bill.
I should point out that Richard Baker had a bill. We passed
it through this committee. We passed it through this House.
Chairman Oxley describes what happened to that bill. He says
that it ``got the digital salute from the White House.'' He has
failed to inform us which digit.
And I am not saying that bill would have solved everything.
Even those of us who voted for the bill didn't realize just how
big a cliff we were headed off. But this House and this
committee knew that we needed better prudential regulation.
I will disagree with our chairman on one criticism of Dodd-
Frank, and that is, I don't think it was a rushed process. It
certainly didn't seem rushed while I was in this room.
We haven't commented on the credit rating agencies. They
are the ones that gave Triple-A to Alt-A. They got paid by the
bond issuers. They gave the bonds that were being issued a very
high rating. Dodd-Frank gives the SEC the tools and the mandate
to do something about this. And the SEC, of course, hasn't.
There is a lot of comparison here of the GSEs to the
private market. What is the ratio of the default rate of the
private label versus the GSEs? I believe it was Dr. White, but
it might have been Dr. Wachter, who said it was 5 to 1?
Ms. Wachter. I have that in Exhibit 6. And I have the
foreclosure rates for Fannie and Freddie, which were never
higher than 2 percent. They are closer to 1--these are
foreclosure rates--1 percent per quarter. Whereas, they were--
Mr. Sherman. One percent per quarter?
Ms. Wachter. Per quarter. Whereas, they were 5 percent to 7
percent per quarter for private-label securities.
Mr. Sherman. Now, when you say ``private label,'' that
includes both the private subprime and the private prime?
Ms. Wachter. Correct.
Mr. Sherman. Wow. So you have the private label doing a
very bad job of underwriting. You have the private sector
credit union--credit rating agencies--doing an extremely bad
job of evaluating the risk. You have private investors and
banks doing a terrible job of evaluating the risk, and buying
these CDOs. And some of our biggest banks needed bailouts as a
result.
And we are here to see why the GSEs didn't get it right.
The whole world didn't get it right. I believe this is a
question that has somewhat been answered. But not only do we
have 30-year mortgages here in this country, but they are
freely pre-payable.
If we didn't have those elements, 30-year, fixed--has my
time expired?
Chairman Garrett. Indeed, it has.
Mr. Sherman. Indeed, it has. I will submit additional
questions for the record. Thank you.
Chairman Garrett. We turn now to--and this may be the last
question, depending on when votes are, before we come back from
votes. The gentleman from Alabama is recognized for 5 minutes.
Mr. Bachus. Thank you, Mr. Chairman. I would like unanimous
consent to introduce a report that Chairman Frank and I called
for in April of 2007, when we warned of the increasing
foreclosures and the subprime lending. One thing we actually
specifically asked for an investigation of, is what role has
been played in the rise in subprime lending and risk-based loan
practicing by alternative or exotic mortgages, including
interest-only, high-loan-to-value, no documentation--
Chairman Garrett. Without objection, it is so ordered.
Mr. Bachus. Thank you. I yield my time to the gentlelady
from Missouri, Mrs. Wagner.
Mrs. Wagner. Thank you very much. I thank the gentleman
from Alabama, for yielding his time.
Mr. Rosner, one of the things we have heard from Fannie and
Freddie defenders since the crisis is that the GSEs were
basically innocent bystanders, as underwriting standards
deteriorated over the last couple of decades. And that in the
mid-2000s, they were only trying to ``catch up'' with what the
private sector was doing.
I know in your book, which we have spoken about, ``Reckless
Endangerment,'' you seem to refute that argument, saying in the
prologue, ``Fannie Mae led the way in relaxing loan
underwriting standards, a shift that was quickly followed by
private lenders.''
Then in chapter 4, you describe Fannie Mae's 1994 trillion-
dollar commitment to be ``spent on affordable housing goals.''
This was 14 years before the financial crisis and way
before anyone had ever heard of NINJA, or Alt-A, or no-doc
loans. I am just wondering, what came first here, the chicken
or the egg? Were Fannie and Freddie the ones that led the
charge to decrease underwriting standards, or were they
innocent bystanders as things went haywire?
Mr. Rosner. As you point out, they did lead the charge. And
frankly, it is not just the easing of underwriting standards. I
think it is very important to remember that it is easing of
underwriting standards and reductions of downpayments.
And that is critically important, because the foreclosure
rates would be significantly lower nationally if people had
equity in their homes as home prices were falling. And the GSEs
again, led the way to lower downpayments.
In fact, the subprime industry--I was on the sell side in
the space for the 1990s. And there was a subprime industry. It
disappeared in 1998 and 1999 because of the Russian debt
crisis.
But at that point, subprime was defined by the borrower,
not by the product. And for the most part, the borrower was
self-employed, or had a ding in their credit history. But they
were required to bring more equity to the table in terms of a
downpayment to get the mortgage. So it really was the GSEs in
the market. It really was the GSEs making the rest of the
market comfortable with concepts of lower downpayments, eased
underwriting standards, lending to borrowers who historically
would not have met underwriting standards.
Remember, Beneficial and Household, two of the original
subprime lenders in this country, which existed since the
1950s, were subprime lenders to non-traditional borrowers, but
again, required significant amount of equities be brought to
the table on those products.
We ended up with the GSEs offering low downpayment loans to
lower and lower-quality borrowers.
Mrs. Wagner. Let me ask you on that point, can you trace
these activities of the GSEs back to the 1992 Act that created
affordable housing goals for the GSE?
Mr. Rosner. Yes. There is absolutely a piece of it that
goes back to the 1992 Act in terms of affordable--in terms of
the goals. But also in terms of the safety and soundness
problems, and in terms of the cronyism that ultimately led to
this, right?
Again, it is not even just the GSEs per se, in terms of the
role, as a provider of liquidity--not excess liquidity,
liquidity to the secondary mortgage market. It is the special
ties to government that created all of the perversions that
ensued.
Mrs. Wagner. We had Ed Pinto here from AEI who spoke with
us in the past week. And he noted in a post-crisis study that
in 1990, 1 in 200 mortgages in the United States had
downpayments of less than 3 percent. In 1999, that number was 1
in 10. And by 2006, that number was 1 in 2.5 downpayments of 3
percent. That is a dramatic increase in borrowing throughout
the financial system.
What role did GSEs play in increasing borrower leverage,
and how did that cause or exacerbate this crisis? And I know
our time is limited.
Mr. Rosner. Again, the GSEs did lead the way in lowering
downpayment. That was one of the concerns that I really
highlighted in the 2001 report, ``Home Without Equity is a
Rental with Debt,'' and one of the reasons that it became clear
that we were going for an increasing leveraged system.
And while that posed opportunities for growth well in
excess of GDP, it ultimately would come at the risk of a
vicious spiral downward in home prices on the other side.
Mrs. Wagner. I thank you.
Chairman Garrett. The gentlelady yields back. The
gentlelady from Wisconsin, Ms. Moore, is now recognized for 5
minutes.
Ms. Moore. Thank you, Mr. Chairman. I believe my colleague,
Mrs. Wagner, had a very interesting line of questioning. And I
guess I would like to follow up on that. She asked you if the--
first of all, let me back up and say that I am a little
distressed about the name of this hearing, ``Fannie Mae and
Freddie Mac: How Government Housing Policy Failed Homeowners
and Taxpayers and Led to the Financial Crisis.''
Would I be wrong to say that it is just government housing
policy that led to the financial crisis, and that there are no
other bad actors out there in the private sector? Is this a
misleading title for this hearing? Maybe I will ask Dr. Wachter
and Mr. White that question. Just yes or no?
Chairman Garrett. --or gentlelady, is this a rose by any
other name?
Ms. Moore. Is that misleading? Are we just to assume that
it is government housing policy and the GSEs that led to the
meltdown Is that--
Ms. Wachter. I don't think there is anybody on this panel
who would agree that it is Fannie and Freddie Mac who are the
primary cause of the meltdown.
Ms. Moore. Okay. All right. Good. Thank you.
Mr. White. Can I add something?
Ms. Moore. Yes, Dr. White.
Mr. White. Again, we have this bubble. The bubble bursts.
If you look at the value of mortgages in 2006, and the value of
mortgages in 2012, there was about a $7 trillion meltdown.
Nobody likes $7 trillion of loss. But that turns out to be
roughly the same amount as the tech bubble bursting.
Ms. Moore. All right. I am reclaiming my time, because I
will give you another chance to answer some other questions. I
guess the point that I am making is that we are talking about
government housing policies that led to this problem.
Did the government--did the GSEs have anything to do with
the faulty appraisals, the criminal appraisals, I would say,
that were involved in the meltdown? Did they actually
underwrite these loans where people didn't bring in--these
NINJA loans? Did the GSEs give Triple-A ratings to these
mortgage-backed securities, and CDS's?
I am not trying to say that the GSEs are totally innocent
here, but I guess what I am saying is, are there no other bad
actors here other than the government policy that said that you
ought to try to give more loans to low- and moderate-income
borrowers?
And by the way, that suggestion may have come about to the
historians of the panel, because we found, as in the case of
Milwaukee, Wisconsin, that there were a lot of moderate-income
people, minorities, who qualified for loans, who were given
subprime loans simply because they were Black or Hispanic, and
led into higher, riskier loans because of that kind of
prejudice.
So were the government policies--there are plenty of good
loans out there if you would give them an opportunity. So I
guess I want to hear what Dr. White and Dr. Wachter say about
that.
Mr. White. All right. As I had said earlier, once you are
in this mindset of housing prices are always going to go up,
then deterioration of underwriting standards, along with all
those sorts of things that--
Ms. Moore. But did the GSEs cause deterioration?
Mr. White. They are part of it, but they are not the whole
story. The other part is the extent to which there were
households who were defrauded, put into inappropriate loans. I
am going to have to use a technical term in economics here. The
people who were responsible ought to burn in hell.
Ms. Moore. And it is right, because--I sort of resent the
implication that it was low-income Black people, and so on,
that--and trying to serve good borrowers. And the GSEs that
caused the problem, that there were no other bad actors in the
private underwriting, and appraisal, and--
Dr. Wachter, take the last 10 seconds.
Ms. Wachter. It was definitely not the Community
Reinvestment Act. It was not affordable housing goals that
created this crisis.
I think--and I think Dr. White and Mr. Rosner will agree
with me--homeownership, as Mr. Rosner pointed out, peaked in
2004. Minority homeownership peaked in 2004, and low-income
homeownership peaked in 2004.
The worst years of the crisis were after that: 2004; 2005;
and 2006. This was not about support for low-income
homeownership. This was not about support for undoing the years
of discrimination against minorities where household wealth
could be built up in sustainable homeownership.
This was not the Community Reinvestment Act, which was a
1990s phenomenon. This was not affordable housing goals. I
think what we heard from Mr. Rosner and Dr. White is that there
was some kind of ``in the ether'' change that allowed the
private sector to take these concepts well.
Indeed, the private sector did take these concepts, and
they did in fact lead to FHA going from a market share of,
what, about 10 percent to 3 percent, squeezing FHA down to 3
percent. And also, Fannie and Freddie lost their market share
as well in this period.
Ms. Moore. Mr. Chairman, thank you for your indulgence.
Chairman Garrett. The gentlelady yields back. The gentleman
from Texas is recognized.
Mr. Neugebauer. Thank you, Mr. Chairman. Just kind of a
follow-up here. There was some question about the title of this
hearing. It says, ``Fannie Mae and Freddie Mac: How Government
Housing Policy Failed Homeowners and Taxpayers and Led to the
Financial Crisis.''
Mr. Ligon, is that a fair assessment?
Mr. Ligon. It is a very fair assessment. Without Fannie and
Freddie, it is entirely likely that the vast expansion of
mortgage finance could not have taken place. GSEs were always
backed by the Federal Government.
And they have continued to extend their mortgage holdings
at all quality levels, including a dangerous increase in risky
holdings. That entirely weakened the entire financial position.
And that, in turn, required even more government support, and
at the end of the day, a substantial amount of taxpayer--
Mr. Neugebauer. Thank you. I don't mean to cut you off. I
have a couple of questions.
Mr. Rosner, just your reflection on the title of the
hearing?
Mr. Rosner. Again, I think the GSEs are really seizing the
market. I think while we could say that they didn't make the
worst loans, I think it is sort of disingenuous to suggest that
their purchase of large portions of the private label market
were meaningless and had no impact on the market.
Mr. Neugebauer. In fact, it validated it. Isn't that
correct?
Mr. Rosner. That is exactly right.
Mr. Neugebauer. Yes, it was a validation. While they are
not a rating agency, the fact that they would buy that paper,
and they were AAA-rated, was a validation. They thought that
was a legitimate--
Mr. Rosner. And I think that is a point, when it was raised
before, they were, in fact, putting their AAA rating on these
securities through the purchase.
Mr. Neugebauer. And they were actually buying paper that
they couldn't actually underwrite themselves.
Mr. Rosner. Right. And to be fair in that regard, had they
been kept to their original goal of having portfolios only for
liquidity purposes rather than speculative purposes, the
impacts would have been greatly diminished.
Mr. Neugebauer. I want to move to another topic here
because I think one of my colleagues mentioned that we need to
talk about moving forward. And moving forward, housing finance
is an important part of our economy. Financing is an important
part of our economy. We finance cars, we finance houses, we
finance small businesses.
Not all of those transactions have to have a Federal nexus
to be completed in the marketplace. And so moving forward,
there are a number of plans out there that folks are bringing
and I am glad to see all of the people who have a stake in this
bringing these proposals forward. We welcome those.
From your perspective, is there a necessity for a Federal
nexus in housing finance across-the-board in this country?
Mr. Rosner. Across-the-board, as in, outside of very
defined borrower classes explicitly done by the government?
Mr. Neugebauer. Yes.
Mr. Rosner. Other than potentially as a well pricing,
monoline insurer, no.
Mr. Neugebauer. Because one of the things I find since I
have been to Congress is that government doesn't know how to
price risk. We have a flood insurance program that is
underwater. No pun intended. We just heard a report the other
day that FHA is now underwater because they have not been
pricing.
And so the question is, if we have a structure there, how
can we be assured that government is getting compensated for
that risk?
Mr. Rosner. Especially when government policy, more broadly
in this area relative to any other area of lending that the
government supports, incents leverage more than equity. And so
part of the reason for a 30-year mortgage, or part of the value
and part of the reason that we saw it distorted in this crisis,
was the mortgage interest deduction, the ability to maximize
leverage.
And so we are still not thinking in terms of any of the
proposals that are out there. How do we help borrowers go back
to the traditional notion of home-ownership where, at about the
age of household formation, you take out a mortgage. Thirty
years later at about the age of retirement, you have a mortgage
burning party and you retire with what is your single largest
retirement--wealth transfer asset.
That is the proper role and that is what conveyed all of
the social benefits of homeownership. Housing policies have
been, in the past 15 years, inverted against that.
Mr. Neugebauer. And I think you make an extremely good
point there. I have been in the housing business for a number
of years. We encourage people for homeownership. It is a way of
saving for the future, building a nest egg.
But what we want to make sure is that we are not creating,
as I said in my opening statement, these policies where it
blows up and a lot of these people who just got to retirement
found out that instead of having equity in their house, or that
they were going to have a greater asset value, their nest egg
actually shrank because of the housing policy.
And so what we want is a sustainable housing market and a
sustainable housing finance system in this country.
Thank you, and I yield back, Mr. Chairman.
Chairman Garrett. The gentleman yields back. The last
panelist will be the gentleman from Colorado and then, after
that, we will go into recess. And we will be back in at noon.
Mr. Perlmutter?
Mr. Perlmutter. I want to thank the chairman and the panel
for this hearing today, for livening up what is a rather gray
and gloomy day outside. And I really do appreciate the chairman
bringing this because it always gets my blood going.
Because a crash on Wall Street, the failure of Fannie Mae
and Freddie Mac, an abysmal response to Hurricane Katrina, and
a misguided war in Iraq have one thing in common: the Bush
Administration.
And it is no coincidence that Fannie Mae and Freddie Mac
did well before the Bush Administration and are making billions
of dollars now. It was the abuse and misuse of Fannie Mae and
Freddie Mac by the Bush Administration that led to the failure
of the housing market.
So the title to today's hearing should be, ``Fannie Mae and
Freddie Mac: How the Bush Administration Housing Policy Failed
Homeowners and Taxpayers and Led to the Financial Crisis.'' And
this is what I really appreciate, Mr. Chairman.
I never thought I was going to get a chance to read the
article which quotes a former chairman of the committee, Mr.
Oxley. But on September 9, 2008, Chairman Oxley was interviewed
by the Financial Times.
He was upset, and he said, ``The dominant theme has been
that Congress let the Government-Sponsored Enterprises morph
into a creature that eventually threatened the U.S. financial
system. Mike Oxley will have none of it.
``Instead, the Ohio Republican who headed the House
Financial Services Committee until his retirement after midterm
elections last year blames the mess on ideologues within the
White House as well as Alan Greenspan, former Chairman of the
Federal Reserve.
``Oxley fumes about the criticism of his House colleagues
that they didn't do anything. He says, `All the hand-wringing
and bed-wetting is going on without remembering how the House
stepped up on this to reform the GSEs.' He says, `What did we
get from the White House? We got a one-finger salute.'''
So this is a situation. And Professor White, I was
looking--or maybe it was Professor Wachter's report, but there
is an Exhibit A to somebody's report.
Ms. Wachter. Mine, yes.
Mr. Perlmutter. Which definitely shows the bulge in
purchases that were made between 2004 and 2007, which is when
the no doc loans and the no downpayment loans were purchased
and proliferated across the country.
And it was in this period of time, it wasn't during the
Clinton Administration, it wasn't during the prior Bush
Administration, it wasn't during the Reagan Administration that
we had this; it was just in this period of time.
So Dr. Wachter, I have made a lot of statements because I
just feel like there was been a lot of revisionist history
going on here. This is an abuse of Fannie Mae and Freddie Mac
during this period of time that I think led to what became a
big housing crash and a crash on Wall Street.
How do you respond to that?
Ms. Wachter. Let me describe exhibit A. It shows almost
perfect correlation between the market share of non-traditional
mortgage products and private label securitization. It shows
that these doubled in the years 2003 through 2007.
It shows that they were at very moderate and very low
levels from 1990. Non-traditional mortgages, from 1990 through
2000, were niche products. In 2002, 2003, and 2004 is when,
starting in December of 2003, when these non-traditional, very
risky products gained market share, along with private label
securities--
Mr. Perlmutter. And I want to jump on something Dr. White
said. There was a belief, or at least a sales job, that housing
prices only go up.
And in this period of time, and one of the reasons we have
not placed Fannie Mae and Freddie Mac into liquidation, we have
just placed them in a conservatorship, is because we
repatriated a lot of money from China, from Saudi Arabia, and
from Europe by, in effect, selling Fannie Mae and Freddie Mac
bonds on the premise that housing prices only go up.
Are you familiar with that at all?
Mr. White. I know that there were substantial non-U.S.
purchases, central banks of other countries, important
financial institutions buying the Fannie and Freddie
obligations.
That indeed was one of the contributing factors to the
Treasury's decision to put them into conservatorship rather
than a receivership, something that might involve liquidation.
They needed to provide the reassurance to the non-U.S.
purchasers that they were going to be kept whole. That is
correct.
Mr. Perlmutter. Thank you. And I would ask to put the
article from September 9, 2008, into the record, Mr. Chairman.
Chairman Garrett. Actually, I think that may have been done
once already during this hearing. I assume it will be brought
up repeatedly. And so, without objection, and also, before the
gentleman from Colorado leaves--
Mr. Perlmutter. Yes, sir.
Chairman Garrett. --without objection, I would also--since
you are the only person here who could object--like to put into
the record a statement from HUD's affordable housing goals
during not Bush's Administration but during the Clinton
Administration.
And I will share it with you before I put it in the
record--which says, ``Because the GSEs have a funding advantage
over other market participants, they have the ability to under-
price their competitors and increase their market share.
``This advantage could allow the GSEs to eventually play a
significant role in the subprime market and the line,
therefore, between what today is considered a subprime loan
versus a prime loan will likely deteriorate, making expansion
by the GSEs look more like an increase in the prime market.
``So the difference between the prime and the subprime
market will become less clear. And this melding of markets will
occur even if many of the underlying characteristics of the
subprime borrowers in the markets, i.e., non-GSEs, evaluation
of the risk posed by these borrowers remains unchanged.''
Again, this was during the Clinton Administration in the
year 2000 by HUD's affordable lending goals.
Mr. Perlmutter. And to my friend, the chairman, I have no
objection to the introduction, just the conclusions you draw
from these things.
Chairman Garrett. I am just reading what they said back in
2000. So with that, the committee stands in recess and, again,
we will try to reconvene right at noon.
[recess]
Chairman Garrett. The committee will reconvene at this
point and I thank the Members for coming back so promptly.
Before we proceed, without objection, I ask unanimous
consent to enter into the record a letter from the National
Association of Federal Credit Unions with regard to today's
hearing.
Without objection, it is so ordered.
We will now turn to the gentleman from California, Mr.
Royce, for 5 minutes.
Mr. Royce. Thank you, Mr. Chairman.
Let me start with Mr. Rosner with a point here, nobody has
pointed out that if the GSEs were not playing in the market
during 2004 and 2007, they would have been able to provide
liquidity to the market as they are chartered to do in the
aftermath.
So in a way, this was so countercyclical by moving to a
position where they were leveraged 100 to 1, $1.7 trillion or
so in the portfolios.
You had a situation where it was almost guaranteed and this
was the fear of the Fed, because I remember the chairman
conveying this to us, that if it started in the housing market,
it would collapse the financial system. This is why they wanted
regulation for systemic risk.
But the other aspect of this that I think nobody attributed
to it at the time, and I wanted to ask you about now, is that--
so instead, when everything collapses, they then have no
capital, they then back away because of insolvency, so it is
also the other side of that coin that hits us at exactly that
moment.
Could you comment on that?
Mr. Rosner. Absolutely. I totally agree and that is one of
the areas of failing that I think needs to be considered. It is
under-considered and as we think about ways forward, which I
think is very important, we need to make sure that whatever we
replace them with is able to be countercyclical rather than
procyclical and has the capital base to do exactly that or
provide the functions of providing liquidity to the secondary
mortgage market at the time that the market needs it because
they did not provide excess liquidity; they underpriced that
liquidity and put themselves at risk.
Mr. Royce. Let me also make another observation because I
think your analysis has been the most inclusive of any that I
have seen, including your explanation of the Basal standards
and how that also contributed to this.
The one element of this that I think we haven't spent
enough emphasis on because I do think that the setting of
interest rates by the central bank at negative real interest
rates 4 years running helped create the bubble to begin with.
But what was so unusual here was that we set in place a moral
hazard situation with the GSEs like no other.
Other countries had the same problem because their Fed had
followed--Ben Bernanke was then head of the New York Fed,--I
went through the minutes at the time because we were arguing
that the interest rate was set too low and that was his
initiative, he pushed that and I think he got that very wrong.
But what really compounded this was the GSEs; that
collapsed the entire housing market, but on top of it, the
GSE's instruments, oddly enough, were also used for capital,
essentially by the banking systems.
So maybe you could comment on that and my thoughts about
those negative real interest rates which ran for that 4-year
cycle and the role that played.
Mr. Rosner. Obviously, that was one of the key drivers of
that 2004 to 2007 period, because at a point where
homeownership had already peaked, we saw the industry, both the
GSEs and private players, have every incentive to get every
last drop of juice that they could out of the system, squeezing
it for refinancing, for speculative purchase of second homes
and investment properties, frankly to the ultimate determent of
the public.
None of those features are likely to occur anytime soon--
the negative interest rate issue--in a going-forward system.
But I do think that it speaks to the need for us to consider
whether private enterprises securities should considered
capital for the banking system because it also complicated the
resolution, both of the banks that needed to be resolved and of
the enterprise.
Mr. Royce. Let me make one last point, and that was one of
the things that impressed me about your work was that you were
the first to recognize the accounting problems of the GSEs, at
least as far as I recall, and you were the first to identify
the peak that we hit. Ideas do have consequences and for the
members here, I would really suggest a re-read of your
testimony about the--how these different factors came together
to create the crisis because going forward, we are going to
have to do a lot of--we are going to have to overcompensate in
terms of--it is going to take us a long time to get out of this
because everything is overleveraged now and deleveraging is a
very painful thing for societies to go through.
But we have to learn the lessons in retrospect and that is
why I think this hearing is so important.
Mr. Chairman, thank you.
I yield back.
Chairman Garrett. The gentleman yields back. Thank you.
Mr. Scott from Georgia is recognized for 5 minutes.
Mr. Scott. I thank the chairman.
I stated my concern and great worry about this whole issue
in my opening statement. But last year in this very committee,
we witnessed a strategy whereby the majority of some of our
Republican friends attempted to pass piecemeal legislation to
accelerate the dismantling of the GSEs without clearly
identifying what should replace it. What is the alternative?
And this is especially true. I don't think sometimes we gather
the magnitude of what we are talking about here.
These GSEs, Fannie and Freddie, accounted for 90 percent of
the new mortgages in the last recordable year, I think around
2008. That is a significant void, and I just think it is the
height of irresponsibility for us to do this without some good
discussion as to what is going to take its place? Should
anything take its place? What impact will this have? We can
talk about the bad things about Fannie and Freddie all we want,
but still, that void is out there.
And so I would like to ask this panel if each of you might
be able to comment, especially you, Dr. Wachter, because I
believe you hit the nail on the head, that should Congress even
begin to consider the future of our housing finance without
first taking a look to see what this would look like before we
throw the baby out with the bath.
What are the consequences of moving ahead without giving
any thought to what will take the place of this gigantic void?
Would you comment on that, Dr. Wachter? Because I think you
were right when you said and raised doubts, everybody says the
private sector is not going to be able to accomplish this. And
those 30-year mortgages that you talk about will not continue
to be affordable.
So could we put some attention on this issue? What are we
going to do?
Ms. Wachter. I think the private sector itself would agree
that they, at this point, could not step in to replace Fannie,
Freddie, and FHA, which you are quite correct are 90 percent of
the market.
What we must do is set up a--we must move to a consensus
where there is a coordinated platform, an understood way of
going forward, we can't simply just dismantle Fannie and
Freddie. If we did, that would lead to the destruction of the
recovery. It would turn the recovery it into a disaster again,
housing prices would plummet, bringing down financial sector--
causing systemic risk and this time, we are out of solutions.
So it would be Great Depression 2.0 if we simply withdrew
Fannie and Freddie and FHA without an alternative in place.
Mr. Scott. And what might that alternative be? Is there an
alternative that can take the place of Fannie and Freddie?
Ms. Wachter. There is no alternative today, however, there
are beginnings of discussions of, and we have heard some
allusions on this panel, to some alternatives.
Mr. Rosner suggests a monoline-government backstopped and
that is a one possibility. The New York Fed has a utility
approach. The bipartisan commission has come out with an
insurance approach with again, a government backstop. I think
it is quite similar to the proposal that Larry White and his
team have come out with.
So there are a number of alternatives and I think this
first step is necessary is to build a consensus on the pros and
cons of these alternatives before we think of dismantling the
system which is keeping our economy afloat.
Mr. Scott. Mr. Ligon from the Heritage Foundation, do you
concur with what she just said?
Mr. Ligon. Any redesign of the mortgage market must enforce
competition between mortgage originations and the
securitization and also ensure property capital requirements
for all forms involved.
I think a big problem of what we have right now is that a
lot of the stuff is off balance and that there is a huge
finance subsidy to Fannie Mae and Freddie Mac doing business.
So--
Mr. Scott. But beyond that, you do agree that: one, the
private market cannot fill this void alone; and two, we do need
to replace it with something.
Mr. Ligon. No, I don't agree with that. I think that the
private market--there--you can make an argument that the
private market is crowded out right now because of Fannie Mae
and Freddie Mac and what they are doing.
So to say that the private market couldn't step in or
wouldn't step in is not necessarily the way I would put it.
Mr. Scott. All right, thank you, Mr. Ligon.
Ms. Wachter. If I may, I--
Chairman Garrett. The gentleman's time has expired--
Ms. Wachter. --is the private market itself would agree
that they would step in or could step in.
Chairman Garrett. Okay.
Mr. Mulvaney is recognized for 5 minutes.
Mr. Mulvaney. Thank you, Mr. Chairman.
Ordinarily, I sort of ignore the political blame game in
these meetings, but since my colleague from Colorado, who is
now no longer with us, was so effusive in his praise of the
Bush Administration, in an attempt to sort of bring a balanced
approach, Mr. Rosner, let me ask you a couple of quick
questions. Who is James Johnson?
Mr. Rosner. The former Chairman of Fannie Mae.
Mr. Mulvaney. Did he have any political ties?
Mr. Rosner. Significant political ties.
Mr. Mulvaney. With who?
Mr. Rosner. Both to the--well to Mondale, to the Clinton
Administration, and frankly to most of Congress.
Mr. Mulvaney. And I think he advised the Kerry
Administration or the Kerry political candidate?
Mr. Rosner. Absolutely.
Mr. Mulvaney. Who is Franklin Delano Raines?
Mr. Rosner. The former OMB Director who was also Chairman
of Fannie Mae.
Mr. Mulvaney. So, between 1991 and 2005, those were the two
CEOs of Fannie Mae, right?
Mr. Rosner. Correct.
Mr. Mulvaney. Did Mr. Raines have any political
connections?
Mr. Rosner. Absolutely.
Mr. Mulvaney. With what Administration is he most--
Mr. Rosner. The Clinton Administration.
Mr. Mulvaney. Thank you very much. So I think there is
probably plenty of blame to go around. Let's talk about what
actually happened, because I was reading Dr. Wachter's
testimony. She talked about the fact that the amount of
increasing leverage introduced by the issuers of CDO, CDO-
squared CDs was not known. Also, the deterioration of the
quality of the mortgages used as collateral for these
securities was not known. Is it so much they didn't know or
they didn't care? Mr. Rosner?
Mr. Rosner. First of all, it was known.
Mr. Mulvaney. Okay.
Mr. Rosner. The degree wasn't known, and this goes to a
point that I think was raised by Representative Scott, which I
would like to point out. Look, there are two separate issues
here involving the private market and the GSEs. We need to fix
securitization. Private label securitization, investors did not
have adequate information about the underlying collateral in
the pools. There was no standardization of reps. There was no
standardization of policing of servicing agreements. That needs
to happen before you can ever have the private markets come
back in any meaningful way.
I have been writing about this, screaming about this since
2006, and it is vitally important if we hope to have the
private markets come back.
Mr. Mulvaney. But to a certain extent, isn't it true that I
don't care about the risks if there is an implicit government
guarantee of the underlying collateral?
Mr. Rosner. I think there is a whole host of issues. So,
yes that is true, but it is also true that if you are an
investment grade chartered investor, you have the ability to
say at almost--you are almost implored into the view that if I
am--if I buy this and it fails, I won't get in trouble because
everyone else ended up in this trade. And if I miss out on the
outside returns of buying this highly risky AAA or AA rated
security, I will get pegged by my investors.
There was also herd behavior that occurred. So, yes I think
you are right that you don't care as much, but I think there
are a number of reasons for that.
Mr. Mulvaney. Dr. Wachter, you go on to talk later in your
testimony about--that we know from this crisis and from
previous crises that markets do not sell correctly in the
absence of arbitrage, that is, in the absence of markets in
which securities sales can't price and trade risk. Would you at
least agree with me that implicit government guarantee
contributed to that lack of ability to price risk? There was no
risk in this market, was there?
Ms. Wachter. Yes, there was. There are private label
securities, and private label securities were held in
portfolio. AIG, for example, was creating CDS and those were
held in portfolio, Lehman and other entities were heavily held
private label securities, and they went under. The majority of
riskiest mortgages were held by private entities, and they
needed to be rescued by government. So the question of who
cared and who knew is a very difficult question, if I may go
back to that.
Some people did know and they didn't care, in part because
they were making a lot of fees. And I think that we totally
agree on that, and your point being that Fannie and Freddie had
implicit subsidies, but these were not subsidies that were an
implicit guarantee. This implicit guarantee was not used for
the most poorly underwritten, the riskiest mortgages that ended
up defaulting at a 30 percent rate.
Mr. Mulvaney. Mr. Ligon, let's talk a little bit about who
benefited from these policies. I enjoyed your testimony, and I
am trying to get a feel for the distribution of benefit. We
spent a lot of money on this, the taxpayers did, over the
course of the last several years. If you look back to the
beginning of the--let's say the Johnson Administration to the
early 1990's, who benefited most from the policies that this
government put forward? The shareholders and the officers of
Fannie Mae and Freddie Mac, taxpayers, or homeowners?
Mr. Ligon. I am not sure how exactly to comment on that. I
don't know a lot about the profits and the upsides to--
Mr. Mulvaney. Mr. Rosner, did you--
Mr. Rosner. Yes, absolutely, it was the management of the
company. It was the shareholders who had the good fortune to
own it at the right time. And in retrospect, it certainly
wasn't many of the homeowners who ended up trapped in homes
that they couldn't afford. Again, I think it is to some degree
helpful to remember that none of these issues are necessarily
implicit to the purpose of a government-sponsored entity, to
provide liquidity to the secondary mortgage market, as much as
it is a problem with the way they were distorted, manipulated,
moved and ultimately run.
Mr. Mulvaney. Thank you, Mr. Chairman.
Chairman Garrett. The gentleman yields back. And we are
cognizant of the fact that may happen if a new system is
created, and allow for those problems to occur again. Mr.
Peters is now recognized for 5 minutes.
Mr. Peters. Thank you, Mr. Chairman, and I ask unanimous
consent to enter into the record a letter from the National
Association of Federal Credit Unions, and also the report from
the Bipartisan Policy Center entitled, ``Housing America's
Future: New Directions for National Policy.''
Chairman Garrett. Without objection, it is so ordered.
Mr. Peters. Thank you, Mr. Chairman. And I would like to
reference briefly the report from the Bipartisan Policy Center,
which I have just entered into the record. They released the
report last week, and it made some recommendations on the
future. I want to focus on the future of housing finance. And
the report was adopted by what I think was a very impressive
list of bipartisan folks, former Senators, Governors, Cabinet
Secretaries, and others who called for the future of the
mortgage market, and for there to be a diminished role of
government in that mortgage market, nevertheless to be some
role for the government in stabilizing it.
I would just like to ask a question of each of the
panelists, if we could start with Mr. Ligon. Do you see any
role for government in the mortgage market? And if so, what
role do you see government playing in housing finance 10 years
from now?
Mr. Ligon. To the extent that there is a role for the
Federal Government in housing policy and subsidizing housing
and homeownership, it should be much smaller in scale, and very
minimal.
Mr. Peters. What would it be?
Mr. Ligon. Definitely not guaranteeing loans through Fannie
Mae and Freddie Mac, or an institution like the GSEs.
Mr. Peters. Mr. Rosner?
Mr. Rosner. Going forward, the government's role should be
explicitly backstopping those segments of the market that all
of you decide should be backstopped. And that private be
private. That it be a fully private--whether it is the GSEs and
they survive, or otherwise. There needs to be a function to
provide--or provide a backstop of liquidity to the secondary
mortgage market, and I think that is important. But it needs to
be fully private with no implicit or explicit government
guarantee, so that markets can price effectively.
And to the degree that there is any government role, it
should be more along the lines of the VA loan program, where
you define a borrower class and the government provides direct
subsidies, and let the markets price private risk privately
without government interference.
Mr. Peters. Dr. Wachter?
Ms. Wachter. There needs to be a role for government or a
government-like entity in documenting risk. As we have heard
from others, the problem of mispricing of risk was really a
base cause of the problem. The underpricing of risk occurred
across-the-board. But in any case, we did not have
documentation of the creation of credit risk either of the
private label securitization or indeed Fannie/Freddie's loans
to the degree that second liens were not understood. The loan
to value ratios increasing was not known, not recognized, not
understood. So that role of documentation of risk is number
one.
Number two, at this point, I think there is no doubt that
there needs to be a government backstop, that needs to be
explicitly priced. Number three, there needs to be private
capital at risk and overseeing that market, setting up a
platform to bring these parties together has to be the role of
a cooperative utility and the government has to have an
accountability behind this to make sure that the data standards
are in fact in place.
We can over time move to a system where there is a utility
approach where the government is stepping back. That could
happen. But for now, I think it is quite clear that we
absolutely need a government guarantee in place, even though
hopefully we can bring more private capital at risk over time.
Mr. Peters. Dr. White?
Mr. White. There is, I think, a fair degree of agreement
here. First, for sure, an FHA that is focused on low- and
moderate-income households sees it as its mission on budget,
and expected that there is going to be a subsidy element to
pursue this socially worthwhile effort of encouraging low- and
moderate-income households who are close to the edge of, ``Do I
buy? Do I rent?'' to become homeowners. It is absolutely
worthwhile.
In the current housing environment, with a lot of
uncertainty, there does still need to be a government element,
but over the longer run, I believe that the private sector is
capable. Again, we have to make sure that the natural buyers of
long-life paper, like insurance companies, like pension funds,
are not discouraged from doing that. And again, I think
prepayment fees have to be part of the story. I think the
private sector, some expansion by depositories, a lot more
expansion by insurance companies and pension funds.
I think that there can be a largely private, focused FHA on
low- and moderate-income households, and the Fed will always be
there as a backstop if things really do fall apart, as we have
seen. The Fed is ready to step in and buy more mortgage
securities. I think that kind of system is what the long run
looks like.
Chairman Garrett. I thank the gentleman and the gentleman
yields back. The gentleman from Illinois is recognized for 5
minutes.
Mr. Hultgren. Thank you, Chairman Garrett. Thank you all
for being here today. Following up on a couple of points that
my colleagues have brought up, I do have a few questions. I am
going to address the first one to Dr. White. I wonder if you
could comment briefly, I do have a couple of follow-up
questions as well, but besides lower borrowing rates as a
result of their implicit government guarantee, what other
competitive advantages do Freddie and Fannie enjoy? My
understanding is an estimated 40 basis point subsidy on GSE
debt existed before the crisis. Would some of these other
advantages add to that?
Mr. White. It was primarily that they could borrow at 40
basis points--two-fifths of a percentage point, less--they--
their rating, to the extent you want to believe ratings, were
of--on a standalone basis AA-minus, but they were able actually
to borrow in the markets at better than AAA rates, and that
roughly translated to 40 basis points, two-fifths of a
percentage point. Of that, about 25 basis points were passed
through in the form of lower mortgage rates on conforming
mortgages, about a quarter of a percentage point advantage.
And why did the financial markets do this? Because they
perceived these guys as special, and it turns out the
perception was correct. Now, in addition to that borrowing
advantage, they had lower capital requirements for holding
mortgages, only 2.5 percent, as compared with 4 percent for a
depository institution, or at least 4 percent. And especially
on their mortgage guarantees, they had to hold only 0.45
percent to cover the credit risk on the mortgage guarantee that
a depository was expected to cover with 4 percent capital.
So they had a major capital--much lower capital
requirement, and again at the end of the day, that is what did
them in. They did not have enough capital to cover the riskier
portfolio--it is unclear whether it was even enough for the
safe portfolio of the 1980s and early 1990s, but for sure it
was not enough for the riskier portfolio that they had as of
2008.
Mr. Hultgren. Thank you. Let me--let's see, Mr. Rosner, you
are nodding your head. I wondered if you would agree with some
of those competitive advantages with the subsidy question? And
just wondering, those benefits--that competitive advantage and
benefits, were any of those passed on to homeowners?
Mr. Rosner. Yes. I think as Professor White pointed out,
some of it was passed on in lower rates. And other than that,
no, most of them were retained. You also have to remember that
the special relationship was further fostered by the fact that
they weren't required to file with the SEC as other companies
were, and they were tax exempt. Not the securities, the
companies. So all of this led to the perception of them as
being government-guaranteed entities all along. If I could, I
would just make a quick point, transparency and liquidity led
prices and value to converge. And one of the problems that has
been absent in the mortgage market, the private label market,
less important in the GSE market because there was an
assumption that they were government guaranteed, is that price
and value were always able to stay separate, because there was
just not enough information. There was asymmetry of
information, which really fostered the worst elements of the
crisis. And so anything we do going forward, needs to repair
that.
Mr. Hultgren. Let me talk about going forward. And I just
have about a minute left, but Congress does want to continue to
subsidize the mortgage market, if we choose to continue to help
homebuyers, is there a better way? Mr. Rosner, you talked about
it a little bit, just helping us crystallize this. One of my
passions is, let's do the right thing, but let's not do any
harm either. And so, is a government guarantee in the secondary
market really the best way for homebuyers to see that subsidy?
Or is there something else we can do?
Mr. Rosner. No, I don't think the government guarantee of
the secondary mortgage market is either necessary or
beneficial. I think it puts us back on the same path. And part
of the problem I have with most of the proposals that have been
floating around is they really demonstrate that a rose by any
other name is still a rose. And most of the policy proposals
that we have seen frankly, are slightly different, but still
essentially the same. The BPC report preserves a lot of those
implicit guarantees. I am also a little bit concerned that it
was conceived of by many of the people who brought us the GSE
issue in the first place.
And being run by some of those same people, as opposed to
really coming in and saying, you know what? If we were to start
with a clean slate, what would it look like? And again, it
could include the GSEs, but you need to sever all of the
government ties and implied government support, and we are
still not really talking about that. We are rather talking
about taking many of those same advantages, flushing $140
billion that the Enterprises owe us, wiping out what value they
do have in data and systems, et cetera, and transferring many
of those same perverse benefits to new players.
Mr. Hultgren. My time has expired. Thank you very much, and
I yield back.
Chairman Garrett. The gentleman from Delaware?
Mr. Carney. Thank you very much, Mr. Chairman. Thank you
for having this hearing, and thank you for those of you coming
here on a snowy day for your testimony. It is been very
interesting, and I am more interested in the future than I am
in the past. I am more interested in what we should do to
answer your last question, Mr. Rosner, which is, what should we
do now? You said, what should we do if we could start from
scratch? We are not exactly starting from scratch. What should
we do, given where we are today? What we know happened? And
where should we go? I thought there was some agreement among
the three of you--Mr. Rosner, Dr. Wachter, and Dr. White--that
there should be a role of some continuation of something that
looks, maybe not similar, but has the same role in the second--
to create a secondary market. Is that an accurate read of what
you said? Or Mr. Rosner what you just said seemed to be
different than that? That there is still an appropriate role
for--
Mr. Rosner. Liquidity provider, but that doesn't mean that
it is government-owned, government-backstopped, or providing
government subsidies, okay? So it could be a true private
monoline, that prices credit--
Mr. Carney. So are the three of you--
Mr. Rosner. --on a countercyclical--
Mr. Carney. I assume, Mr. Ligon, you are not interested in
this? As I heard what you said, you don't think there is really
an appropriate role? That the private market can handle it?
Let me move on because my time is--are you familiar with
the Treasury Department's White Paper? The Administration's
White Paper on the various options? Could you comment on the
options, and what you think we ought to focus on, as we
Democrats and Republicans hopefully on this committee and in
this Congress try to address this issue going forward, and
answer Mr. Rosner's question. Dr. Wachter?
Ms. Wachter. Yes, I would be pleased to do so. There were
three alternatives put out on that White Paper. One was to have
an entity which could immediately move to support the private
sector if it collapsed. And my concern with that as a solution
is it takes time to stand up such an entity. It would take
months, a year, whatever. What do we do in the meantime? So I
do think we need to have an entity in place, which can in fact
act in moments of crisis--
Mr. Carney. So what should it look like?
Ms. Wachter. --so that--and if I may say, a crisis will
come unless there is standardization and the ability to price
and trade risk because there will be an underpricing race to
the bottom, just as we have seen. So what should that entity
look like? That entity at this point has to have, I believe, a
government backstop with private capital. Going forward, that
entity could be a monoline. Where I disagree is that monoline
if ``is purely private sector'' would need to be carefully
overseen by the Federal Government because the Federal
Government, the taxpayer, owns that risk.
And it needs to recognize that it owns that risk. If that
monoline goes under, it is the Federal taxpayer who will
support it.
Mr. Carney. Regardless of whether it is explicitly defined,
you don't believe in that?
Ms. Wachter. We are absolutely back to the GSEs if we have
a monoline, one monoline which is providing this, and that
fails, we are back to the GSEs, that will be rescued.
Mr. White. All right. As Dr. Wachter indicated, the
Administration report 2 years ago had three choices. All three
said there should be a clearly defined role for FHA, and I
absolutely agree. They also said, and Dr. Wachter just
reinforced that there has to be rigorous prudential regulation
of any entities where the Federal Government, if push came to
shove, would be on the hook. And again, strong, vigorous,
prudential regulation. Adequate capital requirements have to be
at the heart of that.
After that, there is this issue of, is a government
presence as an explicit backstop necessary? And again,
certainly in the current environment. There is so much
uncertainty out there. Half of the Dodd-Frank rules have not
been finalized. In the mortgage area, the QRM, the Qualified
Residential Mortgage rules, have yet to be finalized.
Mr. Carney. My time is running out. So were you familiar
with H.R. 1859, which is the Campbell-Peters bill, in the last
Congress? Could you comment on that approach, Dr. Wachter?
Ms. Wachter. Yes, it is an excellent approach.
Mr. Carney. Excellent approach. Thank you very much, I
yield back.
Chairman Garrett. The gentleman yields back. Without
objection, we will put 30 seconds on the clock for the
gentleman from Alabama for an additional question.
Mr. Bachus. Thank you. We talked about the Federal Reserve
and perhaps the low interest rates, but I want to sort of set
the record straight. I do recall that starting in 2005, I
think, the Fed became aware of the rise in prices, and I would
like you to comment. Did they not bump the interest rate up, I
think 17 consecutive times, from 2005 to 2007 and were
criticized for that?
Ms. Wachter. Yes, absolutely and I am glad you have raised
that. Because I was wondering whether I should step in.
Interest rates actually bottomed in 2004. The Fed started
pulling out money supply and interest rates started increasing
as of 2004. Interest rates across-the-board 10 years started
increasing in 2004, 2005, 2006. The worst years of the bubble.
The Fed started to pull money out. Interest rates started going
up.
Nonetheless, interest rates on private label securities
decreased in that period. There was a race to the bottom.
Despite the fact that the quality of the book of business
deteriorated substantially, interest rates, over Treasuries
collapsed. So there was a race to the bottom, a race to take on
risk by the private label securities, in part because the
information was not out there as how bad credit quality was
deteriorating.
Mr. Bachus. Thank you. Now, I am going to ask unanimous
consent to introduce three items. One is an article from June
6, 2006, in The Charlotte Observer that highlighted some of our
attempts to pass a subprime lending bill.
Chairman Garrett. Without objection, it is so ordered.
Mr. Bachus. The second is a letter I wrote the Honorable
Barney Frank on September 28th where we proposed, we had a
draft and he and I, which had a suitability standard, a yield
spread premium and points and figures trigger. A prohibition on
mandatory arbitration. A prohibition on prepayment penalties on
loans less than $75,000. All of those were drivers by, and the
right of an individual consumer to initiate private rights of
action to enforce the provisions of the law, which was pretty
radical in that day but it showed an alarm.
Chairman Garrett. Without objection, it is so ordered.
Mr. Bachus. And third, we requested--and I have referred to
this before--the GAO to do a study and talked about several
problems we saw, which came out in April 2007.
Chairman Garrett. Without objection, it is so ordered.
Mr. Bachus. And I will add that it shows really the
perverse effect of heavy lobbying by the industry, which
unfortunately retarded our efforts.
Chairman Garrett. Without objection, it is so ordered, and
those items will be entered into the record. I thank the
gentleman for each of those. At this point, I yield to the
gentlelady from California, the ranking member of the full
Financial Services Committee, for 5 minutes.
Ms. Waters. Thank you very much.
Mr. Chairman and Mr. Ranking Member, I know that quite a
bit of discussion has gone on during this hearing, and
unfortunately I couldn't be here for all of it. But I have an
early mission in this discussion about the future of the GSEs.
I am anxious for both sides of the aisle to recognize the need
and to come to grips with whether or not the private sector can
supply the need for mortgages in a way that we have been
accustomed to.
With nearly $10 billion of single family residential
mortgage debt outstanding, and with the Joint Center for
Housing Studies at Harvard University projecting one million
new households per year over the next decade, the question is,
do you think that bank portfolio lending can provide the
capital necessary to supply the U.S. market and maintain the
homeownership rates to which we have become accustomed?
If we can just agree, if both sides of the aisle can get an
agreement on this, then I think we can start down the road to
talking about what this perhaps private-public partnership can
be. But if we get stuck thinking that somehow we have to get
rid of these GSEs, and that somehow the private lenders can
take care of the mortgage needs, I think we are in trouble.
So what do you think about this? Is this something that you
think we need to pay special attention to and come to some
agreement on? And I guess that would be for Dr. Susan Wachter.
Ms. Wachter. I don't think that the $10 trillion can be
taken on by the banking system at this point. It is just a no-
starter, it won't, it cannot happen. And it is a recipe for
disaster for the overall economy to assume that we can just
pull Fannie and Freddie out and there will be funding for the
mortgage market going forward.
I think that the private sector itself would confirm that
they could not step up to the plate with that kind of funding
in mind. This is the largest debt backed in the world, book of
business. And there is no way that it can go to portfolios of
the banking system at this point and still have a 30-year
fixed-rate mortgage. That simply is, it is not, it cannot
happen. I don't think anyone could disagree with that. But I am
interested to hear what others say.
Ms. Waters. I suppose I can ask the other members of the
panel. Does anyone else think differently? Is there anyone on
this panel who believes that the private market can handle this
debt? This kind of mortgage lending?
Mr. Rosner. I would suggest that at this very moment, the
answer would be ``no.'' But as Professor White has pointed out,
the private market is a lot larger than bank balance sheets. It
is the capital markets. So we first have to set about to repair
the problems with securitization, to bring investors back. To
bring comfort back to increased transparency and disclosure.
In 1939, I guess, we created the Trust Indenture Act. I am
still trying to figure out why we haven't created something
similar for the ABS market.
Ms. Waters. Excuse me, are you suggesting that some of the
problems that we had with the subprime meltdown, those problems
must be cured before we take a look at what we do with the
GSEs?
Mr. Rosner. No, what I am suggesting is if you want the
private markets to play a significant role and fill any void
that Congress chooses to pull away from, you first need to make
sure that the mechanisms are in place for private capital to be
able to price risk.
Ms. Waters. So what you are saying is, you agree that there
is a role for both government and the private sector to play?
Mr. Rosner. I think there is a role for the government to
play because it is already in there and playing. I think the
goal should be, medium- and long-term, to pull the government
out of the market except where we explicitly backstop it on the
balance sheet. And we need to foster the ability of private
market to price risk. And we haven't done any of that.
The SECs had a Reg AB extension sitting in front of it for
2 years and did nothing to force the increased transparency
that investors deserve. That would help standardize and create
the transparency so that securitization markets, private
securitization markets could come back. You can't expect the
private markets to do anything, until they have clarity as to
what their contractural rights are--
Ms. Waters. Excuse me, if I may, we have allowed the
private markets to do a lot. Which finds us in the situation
that we are in today. And so my question really is whether or
not you think government has a significant role to play in
these GSEs? Can they be in partnership with the private sector
in order to do the kind of mortgage lending that we need? That
is really what the question is. It is not whether or not we
should wait to repair--
Mr. Rosner. In answer to that question, I think that we
should have the government explicitly focus on areas that it
wants to put loans on its balance sheet. And other than that,
there should be no implicit or partnership, I should say,
between the government and private markets. That was the basis
of the distortions that we have lived through.
Mr. White. I want to add one thing, Congresswoman. There
has been a lot of talk about a revival, not of Fannie and
Freddie, but a revival of some kind of government guarantee or
government backstop. And somehow that is linked to a 30-year
fixed-rate mortgage. And it is important to remember the
guarantee, the backstop would be on credit risk, not on
interest rate risk. But the 30-year fixed-rate mortgage and its
problems, is primarily one of interest rate risk and a
government guarantee doesn't really deal with that.
Now as Mr. Rosner just said, in the current environment
with a lot of uncertainties and a lot of just unresolved, what
are the rules? What is the information? There is clearly a
strong role for government, as well as a focused role for FHA
for dealing with the low- and moderate-income household
segments of the market.
But going forward, as the uncertainties are resolved, as
private sector, as insurance companies, as pension funds become
more comfortable with properly structured, lots of information,
30-year paper, I think that can be handled. That doesn't mean
eliminate FHA. FHA has a very valuable role to play. But it has
to be clear, it has to be defined, it has to be on balance
sheet. It shouldn't be implicit and foggy and hope for the
best. That is a big part of how we got to where we are today.
Chairman Garrett. The gentleman--
Mr. Rosner. The concept of a partnership between private
enterprise and government is, in and of itself, sort of a scary
concept.
Chairman Garrett. And on that scary concept, the
gentlelady's time has expired. We will--
Ms. Waters. I yield back.
Chairman Garrett. The gentlelady yields back. And we
yield--
Mr. Ellison. Do you need more time? I yield to the
gentlelady. Oh, okay, never mind.
Chairman Garrett. The gentleman is recognized for the final
5 minutes, and the last word.
Mr. Ellison. Thank you, Mr. Chairman, and thank you,
ranking member. And also let me thank the panel, you all have
been helpful to our deliberations as we figure out how to move
forward. One of the things that we are doing today, is not only
exclusively focusing on what to do next, which is what my
preference would be. But it is talking about what happened,
because I think many of us hope that there are at least some
lessons to be learned.
I just want to ask a question, Mr. Rosner, again, thank you
for your contribution. You were asked by one of my colleagues
earlier, ``If GSEs had behaved differently in a subprime
market, would that have prevented the crisis of 2008?'' Your
answer was, ``I don't think that the crisis itself would have
necessarily been avoided if not for the GSEs. I do think that
they accelerated and exacerbated those issues.''
And so we are here today, trying to make sure the record is
right. We have a hearing entitled, ``Fannie Mae and Freddie
Mac: How Government Housing Policy Failed Homeowners and
Taxpayers--and here I want to emphasize--``Led to the Financial
Crisis.'' Based on your response to Mr. Hurt, you do think that
Fannie and Freddie played a role. But I think it is accurate to
say that you don't agree that Fannie and Freddie's behavior led
to the crisis. Is that a fair statement?
Mr. Rosner. I would say that Fannie and Freddie's behavior
seasoned the markets, created the foundation on which the
crisis was able to occur. I would say separate housing policy
from the GSEs further and government housing policies--
Mr. Ellison. Okay.
Mr. Rosner. --did in fact lead to the crisis.
Mr. Ellison. It is interesting you would say that. Because
on the one hand, you very clearly said they didn't lead it, but
they exacerbated it. Now the statement you just gave me, made
me think that you are sort of arguing that they did lead it. So
I am not sure what you are saying.
Mr. Rosner. ``Led'' and ``become the ultimate cause of''
are two different things. And so again, the crisis, let's go
back to, one of the issues, I think the issue that a lot of us
are having is, how do you date the crisis? How do you bound it?
Did the crisis begin in 2004 and end in 2007, 2008, 2009?
Mr. Ellison. Excuse me Mr. Rosner--
Mr. Rosner. Or did the crisis begin before?
Mr. Ellison. They only give me 5 minutes, I am sorry.
Mr. Rosner. Sorry.
Mr. Ellison. I wish we could hear more. But I read your
book. And in your book you say, of all the partners in the
homeownership push, no industry contributed more to corruption
of the lending process than Wall Street. And then on another
page, you say, ``Wall Street had financed the questionable
mortgages before, of course, but it was during the manias
climactic period of 2005 to 2006 that these firms' activities
as the same primary enablers to the freewheeling lenders really
went wild. No longer were the firms simply supplying capital to
lenders trying to meet housing demand across America. Now Wall
Street was supplying money to companies making increasingly
poisonous loans to people with no ability to repay, and the
firms knew precisely what they were doing.''
Now again, we are in the very messy business of trying to
apportion blame and fault. And I think that, as I said, my
first comments were, that is unfortunate. But I didn't bring
this on you, Mr. Rosner. The committee chairman did by naming
the hearing as he did. And I just want the record to be clear,
you clearly are not trying to minimize the role of the GSEs.
You have made it clear. But if I may just be explicit one more
time, you don't contend that they led to it, not withstanding
other things that you do think, you don't contend that they led
to it?
Mr. Rosner. I don't contend--
Mr. Ellison. Can you give me a simple answer to that
question?
Mr. Rosner. I don't think it is a simple question.
Mr. Ellison. Okay, that is fair. I get it. In other words,
I will just let your words in the book and your comments on the
record today stand--
Mr. Rosner. ``Led to'' and ``caused'' are two different
things.
Mr. Ellison. And because my problem isn't with you, Mr.
Rosner, my problem is that we are, this is a serious problem
which should be approached in a bipartisan way, and it isn't.
And you are coming here to help us understand this crisis as
best you understand it. People are trying to use your words to
sort of make a particular point. I am trying to, I am giving
credit to what you said. You said they contributed. You said
they ended up playing a fatal role. But you also said they did
not lead to it. Isn't that right?
Mr. Rosner. So you accept that I contend that they played a
critical role?
Mr. Ellison. Yes.
Mr. Rosner. Then I will accept what you are suggesting.
Mr. Ellison. Okay, thank you. How much time--I am on the
yellow light. Let me just ask you this, if you could tell
Congress what they need to do, to make sure that ordinary
income people with good credit can get a 30-year mortgage, what
would you tell us we need to think about? Anybody who wants to
answer?
Ms. Wachter. We can't have a race to the bottom. You have
to have standards. We have to have information that allows
standards so that we can't have this stealth underwriting
crisis, brought about by Wall Street, happen again. We had
years of growing homeownership before the crisis. We can get
back on that path.
Mr. Ellison. Thank you.
Mr. White. ``Conforming'' and ``conventional'' are terms
that should be definitionally standard terms. And they became
constantly more and more distorted. I think that is really the
problem, once you set a standard, that standard can't creep
over time. And the markets need to understand that is the
standard, it is inviolable, and that is where it will stay.
Mr. Ellison. Let me thank all of the panelists and you, Mr.
Chairman, and the ranking member.
Chairman Garrett. The gentleman yields back. And with that,
let me just say, first of all, thank you to the panel. It is
important testimony that we received today. We heard unanimity
from both sides of the aisle that we need to go forward on this
issue of the mortgage housing market, to try to fix it.
Today's hearing was important in that regard, that before
you can solve a problem, before we can fix a problem, you have
to know what caused the problem. In order to go forward, you
have to know where you have been. And so, that was the point of
today's hearing. I think we heard significant testimony--
Mr. Bachus. Mr. Chairman?
Chairman Garrett. --out of that. The gentleman from
Alabama?
Mr. Bachus. Mr. Chairman, let me second that. I think
Shakespeare originated, ``the past is the prologue of the
future,'' in ``The Tempest.'' But this has been a very
educational panel, and I want to thank all of you. And I would
say that all our Members who didn't go through this crisis,
should read and I think by reading all four testimonies, we can
certainly get some guideposts for the future.
Mr. Ligon. Thank you, Congressman.
Chairman Garrett. I thought that you were going to suggest
that they all read Mr. Rosner's book to help support the sale
of that book.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And again, thank you all. Thank you to the ranking member
for staying with us through all of this and for her
participation as well. The hearing is adjourned.
[Whereupon, at 1:01 p.m., the hearing was adjourned.]
A P P E N D I X
March 6, 2013
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